Regional regulators are implementing enhanced insurance regulations and guidelines not only to deal with the expansion in scope and type of risk covered by insurers. Picture used for illustratrive purposes only. Image Credit: Supplied

Dubai: The recent regulatory changes taking shape in the insurance industry in the Gulf Cooperation Council Countries (GCC) are expected to strengthen the fundamentals of the industry as its size has nearly tripled through 2006-13, with insurance premiums increasing to $18.4 billion from $6.4 billion, according to global credit rating agency Moody’s

In the recent years insurance markets in the GCC have grown quickly and often aggressively, with varying degrees of sophistication. Fierce pricing competition has led to several players determining premiums based on competitor rates, rather than true risk-based underwriting. This has driven volatility in underwriting results and hindered sustainable growth.

In response to the rapid growth rate and boom in the region’s insurance sector, a range of regulatory measures are being introduced within the GCC insurance industry. “These regulatory changes will improve the credit profile of the region’s insurance market and aid market stability and transparency by strengthening several aspects such as capital requirements, asset quality and reserve adequacy,” said Mohammad Ali Londe, an analyst at Moody’s.

To deal with the expansion in scope and type of risk covered by insurers and to address often poorly-performing markets, regional regulators are implementing enhanced insurance regulations and guidelines. These reforms generally address risk based capital (RBC) and minimum asset liability management (ALM) standards, pricing adequacy, corporate governance and transparency and introduce mandatory covers.

“We expect that the new regulations will lead to greater stability within the GCC insurance marketplace. Most of these regulations are evolutionary by way of market consultation, which should help in the market’s understanding and acceptance of these,” Harshani Kotuwegedara, Associate Analyst at Moody’s.


New regulations

In the UAE, the UAE Insurance Authority’s Draft Combined Regulations of 2013 stipulate the minimum capital requirement to be no less than one-third of the solvency margin, which in itself is computed based on a solvency template provided by the regulator and covers underwriting, market and liquidity, credit and operational risk measures. In Oman, insurers may need to prepare for mandatory enterprise risk management (ERM) standards and principles.

Additionally, some jurisdictions are imposing rules on the types of business being written, for example composite insurers in the UAE have until August 2015 to segregate life and non-life into separate undertakings. Another example is the Oman Capital Market Authority (CMA) imposing a segregated entity setup for conventional and takaful operations.

“Overall, we expect these capital-centred regulatory changes to encourage insurers to focus on ensuring effective use of capital, leading to improving underwriting quality and possibly reduce pricing volatility. The increased operating stringencies and implied additional costs of monitoring, managing and reporting may also encourage consolidation amongst some smaller market players, potentially reducing competitive pressures and aiding market stability,” said Londe.

In many cases, the high capital buffers held by GCC insurers coupled with the current low interest rate environment has encouraged investment in riskier asset classes, such as real estate and equities. These investments are often highly illiquid, leading to asset/liability mismatches.

Some of the proposed regulations set out specific guidance on asset distribution and allocation limits, investment-related risks, the domiciling of investments and the use of derivatives in a bid to deal with this. Regulations that encourage a reduction in asset class concentration as well as encourage broader geographic asset diversification will improve overall asset quality.

Some of the regional regulators are also strengthening technical reserve calculations by requiring periodic assessments by authorised actuaries and the submissions of calculations to regulators. A similar focus on ALM has been proposed by regulators in Saudi Arabia, Qatar, UAE and Bahrain. “We expect the requirement for actuarial-led reserve setting, monitoring and reporting to enhance reserve adequacy and encourage insurers to more accurately set premium rates and become increasingly selective in the risks they underwrite,” said Londe.