Authorities must take solvency margin requirements seriously

Safety and protection are the prime motives behind any decision to insure. In the process of buying insurance at the most competitive terms, clients often look for absolute peace of mind, but at times they fail to ask a key question will the insurance company they are keeping their trust with be solvent enough to pay when there is a major catastrophe in the future?

A standard precaution that some of the big corporate clients and government entities in the region resort to, before concluding huge insurance programme, is to insist on a letter from the insurer, certifying that the programme has been reinsured with companies enjoying a sound security rating.

What one fails to gauge, however, is, that the reinsurers are not a party to the basic contract the insurance policy. The client should be more concerned about the solvency of his own insurance company rather than a third party with whom he has no contact or valid contract.

No means to verify solvency

Even large and experienced contracting companies have to submit a performance bond usually for a sum amounting to 10 per cent of the contract value before the client binds a contract with them. This is to ensure that in the unlikely event of the contractor being unable to complete the contract as stipulated, there will be some cushion to fall back upon.

Do buyers in the region have any means to know that their insurers are solvent not only at the time when they conclude the deals but also throughout the period of their contracts? Alternatively, can the clients take satisfaction that the authorities in their countries are keeping a close watch on the financial soundness and stability of financial service providers operating in their jurisdiction? The answer unfortunately, is not affirmative and reassuring.

Solvency margin requirements (SMR) have been major concerns for insurance companies all over the world, especially those operating in a regulated environment, but SMR is likely to acquire new dimensions with Solvency II the new regulation being implemented by European Union for the insurance and reinsurance companies in Europe.

In assessing capital requirements under Solvency II, insurers should demonstrate that they have identified and measured the risks embedded in their businesses; and that they have the means to manage and meet the inherent challenges.

Challenges for insurers

An insurance company is constantly faced with challenges arising from credit risk (for the technical provision of capital for underwriting), operational risk (including how companies manage their assets and liabilities) and market risk (including price volatility), but the authorities in the region are not monitoring whether the financial movers of the economy are managing these risks effectively.

While SMR were always strictly monitored by the appointed regulators in the United States and Europe, they are now being implemented in most of the Asian countries too. The SMR criteria were introduced to Japan in 1996.

Since 2000, the Insurance Regulatory and Development Authority is monitoring the SMR of Indian insurance companies. China enacted its first insurer solvency regulation to protect the interests of policyholders two years ago.

Even a tiny country such as Sri Lanka has got a regulatory body in the form of Insurance Board of Sri Lanka, which introduced solvency margins and the definitions of admissible assets in 2004.

Wake-up call for authorities

But for Oman National Insurance Co, which wound up its operations in 2001, this region has, admittedly, not witnessed the insolvency of any insurance companies. Past performance, however, is no guarantee for future stability.

With the increase in risks arising from the economic boom in the region, combined with the liberalisation of insurance products and premium rates, it will be in the interest of general public if SMR is taken more seriously by authorities in the region.

In some of the countries such as Saudi Arabia, where new regulations are being implemented by the Saudi Arabian Monetary Agency (Sama), insurance companies will be more closely monitored by the regulators.

According to the Cooperative Insurance Companies Control Law promulgated by the Royal Decree, Sama is even authorised to issue a cease-and-desist order to companies that fall short of solvency margin requirements. It is high time the other countries in the region woke up.

The writer is the deputy general manager of Al Rajhi Company for Cooperative Insurance, Riyadh. The views expressed here are his own and not necessarily subscribed to by his employers.