Audits to ensure insurance firms in Dubai meet new standards

The highlight of recent years for the insurance sector has been the long-awaited arrival of new regulations that promise a broad overhaul of several key areas of the sector: auditing, the calculation of technical provisions, governance, asset valuation, increased policyholder rights, and solvency and provisioning regulations. Those elements are now core parts of the new system, and as a group these reforms are expected to improve standards and governance across the insurance landscape.

Implementation of these changes is currently scheduled to be phased-in over a three-year period that began in January 2016, although the UAE’s custom of long periods of preparation before laws are enforced could make the transition longer in reality.

Audits Upcoming

The UAE Insurance Authority (UAE IA) Decision No. 25 of 2014, concerning the Financial Regulations for Insurance Companies, and Decision No. 26 of 2014, concerning the Financial Regulations for Takaful Insurance, are the result of a long intensive process, including a draft issued in December 2013 for feedback. Investment caps will be implemented in stages in 2017 and 2018, with the rest of the reforms to follow a three-year schedule.

The first step will be to put in place enhanced auditing capacity. Each insurer must establish an audit committee and an internal auditing process. Internal auditing will oversee risk management and governance, and generate regular reports for audit committees. Regulatory compliance officers must be hired, alongside external auditors to review financial reporting. Record keeping and reporting obligations are also made clearer. For companies that are found undercapitalised after the audits, the expectation is that they will seek more capital or perhaps a strategic partner.

By January 2017, the next steps toward compliance with the new regulations include the calculation of technical provisions and enhancement of governance standards. While insurers currently do calculate provisions, the process will be more stringent from this point on, with detailed guidelines in areas such as how to account for unearned premium reserves, unexpired risk reserves, outstanding loss reserves, reserves incurred but not reported and loss adjustment expenses.

Insurers will be required to appoint an actuary registered with the UAE IA to review and approve the results, and annual reports submitted to the UAE IA must also bear an actuary’s signature of approval. The regulatory obligations for corporate governance include investment and risk management policies that are reviewed on an annual basis by a company’s board of directors.

Risk management frameworks in the UAE must factor risks from underwriting, market conditions, liquidity, credit and operations. A board-level investment committee is also required to oversee investments. The new standards also mandate quarterly reports to be delivered no later than 45 days after a quarter ends. In addition they also suggest that, for those insurers whose capital is insufficient after the insolvency audits are completed, a round of capital injections could be required.

Solvency Standards

The 2018 reforms include asset valuations done on a mark-to-market basis so that prices are based on the most recent market trends. In real estate portfolios, properties valued at Dh30m ($8.2m) or higher must be evaluated for pricing by more than one outside expert.

From this point on, annual stress tests of investment portfolios are required. The year 2018 is also the deadline to calculate a solvency margin using a process created by the UAE IA and to establish a minimum guarantee fund with at least one-third of the solvency capital requirement in it. This is in addition to minimum paid-up capital of Dh100m ($27.2m) for insurers and Dh250m ($68.1m) for reinsurers.