PINS 1 - General provisions

6. PINS 1 introduces a number of key terms and concepts including Insurance Business. It requires Insurers to classify Contracts of Insurance they write by reference to the categories of insurance identified in Schedules 1 and 2.

7. A feature of the leading international insurance regimes is a restriction on insurers combining different kinds of insurance business, and on the combination of insurance and non-insurance business. Such requirements are directed at limiting ‘internal-contagion’ risk. This is the risk that losses or liabilities from one activity might deplete or divert financial resources held to meet liabilities from another activity. PINS, therefore, prohibits Insurers from carrying on both General and Long-Term Insurance Business and requires Insurers to limit non-insurance activities to those that are directly connected with, or carried on for the purposes of, insurance business; guidance explains which activities will normally be considered to be directly connected.

8. PINS 1 also contains guidance as to the more limited extent to which the PINS regime will apply to branches of entities established outside the AIFC. The term AIFC-Incorporated Insurer is used to refer to an Insurer that is incorporated as a legal entity under the laws of the AIFC and thus excludes branches of legal entities incorporated outside the AIFC. PINS 1.5 sets out the core obligations of Insurers by reference to the various chapters of PINS. A number of these obligations are limited to AIFC-Incorporated Insurers.

PINS 2 - Systems and Controls

9. Authorised Persons are already required by GEN 5 to have certain risk management systems and controls. However, PINS 2 contains additional risk management requirements that will apply to all Insurers.

10. PINS 2 requires an Insurer to establish and maintain a risk management functi on and an actuarial function. Insurers are also required to appoint Approved Individuals to the new Controlled Functions of Risk Officer and Internal Auditor. Certain Insurers are also required to appoint an Approved Individual to the Controlled Function of Approved Actuary. The rules in GEN 2.2 relating to Controlled and Designated Functions should be referred to for more information relating to the appointment of Approved Individuals.

PINS 3 - Risk Management Strategy

1.PINS 3 requires an Insurer to establish and maintain a risk management strategy. This should be clearly defined and well documented, and take into account the Insurer’s overall business strategy and its business activities. This strategy contains a number of important components including a Risk Management Policy setting out how all relevant and material categories of financial and non-financi al risk are monitored, measured and managed, both in the Insurer’s business strategy and its day-to-day operations. Schedule 3 sets out in detail what the AFSA would expect to find covered in an Insurer’s Risk Management Policy. An Insurer is also required to prepare a Risk Tolerance Statement which sets out its overall quantitative and qualitative risk tolerance levels.

2.An Insurer’s Risk Management Strategy must be approved by its Governing Body. Any deviation from it must also be approved by its Governing Body and notified to the AFSA.

PINS 4 - Own Risk and Solvency Assessment (ORSA)

13. A feature of the leading international regimes is a requirement that insurers perform an own risk and solvency assessment (ORSA) regularly to assess the adequacy of its risk management and current, and likely future, solvency position.

14. PINS 4 contains a requirement that every AIFC-Incorporated Insurer (i.e. an Insurer which is not a branch) must conduct an ORSA annually (or with greater frequency if preferred by the AFSA), and that such ORSA must be appropriate to the nature, scale and complexity of the insurer’s business. PINS then sets out a detailed explanation of what an ORSA is, its contents, and the matters to which an insurer must have regard in conducting an ORSA. An AIFC-Incorporated Insurer is required to prepare a report after it conducts its ORSA, which is to be reviewed and approved by the insurer’s Governing Body.

PINS 5 - Capital adequacy requirements

15. The amount of capital available to an insurer is fundamental to its financial strength. It provides a buffer against losses that have not been anticipated and, in the event of problems, enables the insurer to continue operating while those problems are addressed or resolved. In this way, the maintenance of adequate capital resources can engender confidence on the part of policyholders, creditors and the market more generally in the financial soundness and stability of the insurer. PINS 5 accordingly requires an AIFC-Incorporated Insurer to calculate its qualifying capital resources (referred to as its Eligible Capital) on an ongoing basis and to monitor the extent to which its Eligible Capital exceeds two benchmarks referred to as the Minimum Capital Requirement (MCR) and the Prescribed Capital Requirement (PCR).

16. Schedule 4 sets out detailed rules for the calculation of Eligible Capital and identifies two types of capital (Tier 1 and Tier 2 Capital) that an AIFC-Incorporated Insurer is permitted to recognise and which it is obliged to hold in specified ratios. Schedule 5 sets out the calculation for the MCR relating to General Insurance Business and Long Term Insurance Business. Schedule 6 identifies a more detailed methodology for calculating the PCR which involves a highly sensitive analysis of the different types of risk engendered by the Insurer’s Insurance Business.

17. PINS 5.3 provides that an AIFC-Incorporated Insurer may be permitted by the AFSA under certain circumstances to use its own internal models to calculate either the whole or a component of the PCR. However, it should be noted that the AFSA does not initially anticipate accepting applications for permission to use internal models.

18. PISN 5.4 sets out the “solvency control levels” which place various obligations upon an Insurer should it become aware that its Eligible Capital has fallen below or close to either level. Guidance sets outs an indicative range of actions that AFSA may take on breach of either the MCR or the PCR.

19. Further provisions limit the circumstances in which an AIFC-Incorporated Insurer is permitted to reduce its Eligible Capital and require an AIFC-Incorporated Insurer to notify the AFSA of all dividends and other distributions to shareholders.

PINS 6 - Investment

20. PINS 6.1 requires Insurers (i.e. all Insurers including branches) to ensure that where they invest in assets they invest in assets that are secure, liquid, appropriately located and suitably diversified. Insurers are required to invest in a manner appropriate to their liabilities and only to invest in assets where they are able to assess and manage the risks involved. PINS 6.2 restricts Insurers from investing in certain high risk assets and PINS 6.3 requires Insurers to maintain written risk policies and procedures.

PINS 7 - Segregation of Long Term Insurance assets and liabilities

21. Because of the long-term nature of insurance liabilities for certain categories of insurance business, it is important that the capital and structure and assets of, for example, a life insurer are well matched against a realistic assessment of its liabilities. This is achieved in PINS 7 by requiring Insurers carrying on Long Term Insurance to segregate the insurance liabilities and matching assets of the various categories of Long Term Insurance and to establish a fund to which Long Term Insurance Contracts are attributed. The effect of this is that such assets may only be used to meet obligations to the policyholders with respect to which the fund has been established. Limitations are placed by PINS 7.4 upon the use of assets in a Long Term Insurance Fund.

PINS 8 - Valuation

22. PINS 8 sets out rules regarding matching of Insurers’ assets to liabilities, on the basis of a consistent and transparent economic valuation of those assets and liabilities. An economic valuation of assets and liabilities reflects the risk-adjusted present values of their cash flows. The basic principle of measurement that an insurer must adopt as the basis of its accounting is specified as the IFRS.

23. PINS 8.1 requires an Insurer to hold supporting assets of a value at least equal to the amount of its liabilities. PINS 8.2 sets out basic principles for the recognition and valuation of such assets and liabilities. PINS 8.3 identifies particular assets relating to General Insurance Business which require special treatment, namely premium liability, future claims payments and expected recoveries. PINS 8.4 takes a similar approach for certain Long Term Insurance assets and liabilities namely policy benefits due before the Solvency Reference Date (i.e. the date of measurement) and the net value of future policy benefits.

PINS 9 - Actuarial reporting

24. PINS 9 elaborates on the requirements for Insurers which are obliged to retain an Approved Actuary, requiring in particular that an Approved Actuary carry out annually an actuarial investigation to enable him to prepare a report about the insurer’s financial condition (a “financial condition report”) which is to be submitted to the AFSA annually at the time of the insurer’s annual regulatory return. The AFSA will also have a power to direct that financial condition reports more frequently than annually, and also to direct an insurer that the Approved Actuary is to carry out an investigation into any matter which the AFSA specifies.

25. PINS 7.2 requires Insurers not required to appoint an Approved Actuary to consider annually whether to commission an independent actuary to report on its business, and to commission such a report at least once every 3 years.

PINS 10 - Insurers that are members of Groups

26. An insurer is exposed to risks through the relationships that it has with other insurance and non-insurance companies in its group. Group membership can be a source of strength, but it can also be a source of weakness. PINS 10 contains additional requirements for Insurers that are members of a group to ensure that:

(i) the insurer is capitalised adequately to protect itself against the risks arising from its membership of the group, and is otherwise protected against those risks;

(ii) it can be properly supervised by the AFSA; (iii) it provides the AFSA with information about the structure and financial position of the group; and (iv) it assesses the effect of, and notifies the AFSA of, certain transactions within the group.

27. The effect of these provisions is broadly as follows. The structure of an insurer’s group is to be transparent with clear governance, controls and reporting lines, and such that it does not hinder the insurer’s stability and solvency. The AFSA has the power to direct that an insurer hold additional capital to cover risks arising because of the insurer’s group membership. Insurers are to ensure that any material transaction with another member of its group is entered into on an ‘arms-length’ basis and on fair and reasonable commercial terms. Certain transactions – such as inter-group loans, guarantees or investments – are not to be entered into unless the insurer’s Governing Body is satisfied that it does not adversely affect the interests of policyholders.

PINS 11 - Transfer of insurance business

28. Chapter 4 of the FSFR currently provides that the AFSA may provide by Rules that the transfer of a business of carrying on specified Regulated Activities by an Authorised Firm (“Relevant Transfer”) may only be made by an order of the AIFC Court or may be made by such an order if the transferor elects. PINS 11 provides that the transfer of insurance business can only be made by an order of the AIFC Court.

29. PINS 11 then sets out various requirements which will apply to application for an order of the AIFC Court effecting an Insurance Business Transfer. These include that a report (“the Scheme Report”) be prepared by an independent actuary. This report is to be put before the AIFC Court and, among other things, must contain: a rationale for the proposed relevant scheme; the categories of business to be transferred; and a confirmation that there will be no materially adverse consequences from the proposed transfer to the policyholders of either the transferor or transferee. Notification of the proposed transfer must also be given to all affected Policyholders.

PINS 12 - Insurers in run-off

30. PINS 15 applies to all AIFC-Incorporated Insurers along with Branches in respect of their AIFC Insurance Business and contains requirements that apply where such insurer has gone into “run-off”. This means that an Insurer has ceased to effect Contracts of Insurance in respect of the whole or a category of its Insurance Business.

31. Insurers that go into run-off will be required to notify the AFSA and provide a run- off plan complying with PINS 12.3, including an explanation of how, or the extent to which, all liabilities to policyholders will be met in full as they fall due. An Insurer in run-off will be required to notify the AFSA of certain contracts and be restricted from making certain distributions.

PINS 13 - Prudential returns

32. PINS 13 requires Insurers to prepare and submit to the AFSA the annual, biannual and quarterly prudential returns set out in Schedule 7 (Prudential returns by Insurers).

PINS 14 - Captive Insurers

33. PINS 14 applies only to Captive Insurers. A Captive Insurer is an Authorised Firm with a Licence to carry on Captive Insurance Business. Captive Insurance Business is defined as the business of effecting or carrying out Contracts of Insurance only for the business or operations of the Group to which the Captive Insurer belongs. Only an Authorised Firm which is incorporated under the laws of the AIFC may apply to the AFSA for a Licence to conduct Captive Insurance Business.

34. A Captive Insurer may take the form of a Protected Cell Company (PCC) - which is a form of legal entity that will be introduced under planned amendments to the Companies Regulations. PCCs consist of a core and one or more cells which are legally segregated for the purposes of insolvency law. A Captive Insurer incorporated as a PCC may maintain multiple cells, but requires the permission of the AFSA to creae a new cell.

35. The requirements of PINS apply to Captive Insurers either in full or with the modifications set out in PINS 14.3 to 14.14. The key modifications are as follows:

a. Systems and controls: A Captive Insurer is permitted to outsource its risk management and actuarial functions to a Captive Insurance Manager. This refers to an Authorised Person carrying on the new regulated activity of Captive Insurance Management.

b. Risk management: A Captive Insurer is required to maintain a Risk Management Strategy and conduct an ORSA in accordance with PINS 3. However, it may apply to the AFSA for a waiver of the requirement to conduct an ORSA.

c. Capital Adequacy: The requirements of PINS 5 apply to Captive Insurers save for a modified Capital Floor (the base requirement of the MCR) and modifications relating to the application of the capital requirements to PCCs.

Question:

Do you have any concerns relating to the proposed regulatory requirements to (re) insurance companies? If so, what are they, and how should they be addressed?