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Draft Rules



PIN 1 Application and General Provisions

PIN 1.1 Application

PIN 1.1.1

The Prudential Rules for Insurers apply to every Insurer.

PIN 1.1.1 Guidance

1. An Insurer is defined in the Glossary as a Person carrying on, within the DIFC, one or more of the Licensed Services constituting Insurance Business.
2. A Person will not be granted a Licence authorising it to carry on one or both of the Licensed Services constituting Insurance Business unless, amongst other things that Person is either:
a. a limited liability company incorporated under Article 7(1) of Part 2 of the DIFC Companies Law 2003, including a Protected Cell Company; or
b. a Body Corporate incorporated with limited liability under the laws of a jurisdiction other than the DIFC.
3. This Chapter establishes basic provisions applicable to Insurers, including the activities, other than Insurance Business, that an Insurer may carry on. This Chapter also prescribes the Classes of Business into which Insurance Business must be allocated.
4. The Prudential Rules apply in relation to all activities of an Insurer, whether carried on within the DIFC or elsewhere.

PIN 1.2 Restrictions

PIN 1.2.1

(1) An Insurer must ensure that it does not effect or carry out a contract of Long-Term Insurance in or from the DIFC unless such a contract is a contract of reinsurance.
(2) An Insurer which is a DIFC incorporated Insurer must ensure that it does not effect or carry out a Contract of Insurance with a natural Person, in or from the DIFC or from a Branch outside the DIFC, unless the contract is:
(a) a contract of General Insurance effected or carried out collectively with the Members of a Partnership or other unincorporated association, where the insured interest is held in common by the Members of the Partnership or incorporated association; or
(b) a contract of reinsurance effected or carried out with Lloyd's Underwriters.
(3) An Insurer which is not a DIFC incorporated Insurer must ensure that it does not effect or carry out a Contract of Insurance with a natural Person through a Branch in the DIFC unless the contract is:
(a) a contract of General Insurance effected or carried out collectively with the Members of a Partnership or other unincorporated association, where the insured interest is held in common by the Members of the Partnership or incorporated association; or
(b) a contract of reinsurance effected or carried out with Lloyd's Underwriters.
(4) An Insurer which is a DIFC incorporated Insurer must ensure that it does not carry on, in or from the DIFC, both Long-Term Insurance business and General Insurance Business unless:
(a) such business is in accordance with (1) and (2); and
(b) the General Insurance Business is restricted to Class 1 or Class 2 or both.
(5) An Insurer which is not a DIFC incorporated Insurer must ensure that it does not carry on through a Branch in the DIFC both Long-Term Insurance business and General Insurance Business unless:
(a) such business is in accordance with (1) and (3); and
(b) the General Insurance Business is restricted to Class 1 or Class 2 or both.
(6) An Insurer which is a Protected Cell Company must ensure that, when it carries on Insurance Business in accordance with (1)-(5) as applicable, such business is attributable to a particular Cell of that Insurer.

PIN 1.2.2

An Insurer must not, subject to rule 1.2.3, carry on any activity other than Insurance Business unless it is an activity directly ancillary to such business. For the purposes of this rule the business of asset management is not an activity directly ancillary to Insurance Business.

PIN 1.2.2 Guidance

The following activities will normally be considered directly ancillary to Insurance Business carried on by an Insurer:

a. Investing, reinvesting or trading in Securities for the Insurer's own account, that of its Subsidiary, its Holding Company, or any Subsidiary of its Holding Company;
b. Investing includes the activity of entering into and carrying out, in accordance with the provisions of the Law regulating Islamic Financial Business, transactions of the following types referred to in sub-section 12(2) of that Law:
i. transactions of Mudaraba or of Quard Hassan, where the Insurer is the institution with respect to the transaction; and
ii. transactions of Musharaka, where the Insurer is the customer with respect to the Transaction.
c. Rendering other services Related to Insurance Business operations including, but not limited to, actuarial, risk assessment, loss prevention, safety engineering, data processing, accounting, claims handling, loss assessment, appraisal and collection services;
d. Acting as agent for another Insurer in respect of Contracts of Insurance on which both Insurers participate;
e. Establishment of Subsidiaries or Associates engaged or organised to engage exclusively in one or more of the businesses specified above; and
f. Any other business activity determined in writing by the Regulatory Authority to be reasonably ancillary to an Insurance Business.

PIN 1.2.3

(1) An Insurer may manage assets of a pension fund solely for the benefit of:
(a) its Employees or officers;
(b) its Employees or officers and Employees or officers of its Subsidiary or Holding Company or a Subsidiary of its Holding Company; or
(c) the dependants of those Employees or officers.
(2) For the purposes of (1), the term "employees or officers" includes former Employees or officers.

PIN 1.3 Classification of insurance business

PIN 1.3.1

(1) The Classes of General Insurance Business are as set out in Appl.
(2) The Classes of Long-Term Insurance business are as set out in App2.

PIN 1.3.2

An Insurer must, in its own records, classify all insurance contracts effected by it as Insurer and all reinsurance contracts entered into by it as cedant, according to the Class of Business to which the contracts relate.

PIN 1.3.3

Where a contract relates to more than one Class of Business, the Insurer must record separately the portions of the contract that relate to each Class of Business, except that immaterial portions need not be separately recorded.

PIN 1.3.3 Guidance

A portion of a Contract of Insurance, insuring a risk of a Class of Business other than the principal Class of Business to which the contract relates, will not normally be regarded as material if the interest that it insures is both Related and Subsidiary to the principal interest or interests insured under the contract, and constitutes less than 10 per cent of the Gross Written Premium under the contract.

PIN 2 Management and Control of Risk

PIN 2.1 Introduction

PIN 2.1.1

This Chapter applies to every Insurer.

PIN 2.1.1 Guidance

1. All Authorised Firms are subject to the provisions of GEN. This Chapter expands on the relevant requirements of GEN as those provisions apply in the context of an Insurer.
2. App10 contains Guidance for Insurers in respect of specific areas of risk management that are of particular relevance to Insurers.

PIN 2.2 Risk management

PIN 2.2.1

An Insurer's risk management and control systems must:

(1) be appropriate to the size, business mix and complexity of the Insurers operations; and
(2) address all material risks, financial and non-financial, to which the Insurer is likely to be exposed.

PIN 2.2.2

The risk management and control systems maintained by an Insurer must include:

(1) a written risk management strategy approved by senior management, which in the opinion of senior management addresses all material risks to which the Insurer is likely to be exposed;
(2) risk management policies and procedures that in the opinion of senior management are adequate to identify, manage, monitor and report on the material risks to which the Insurer is exposed; and
(3) clearly identified managerial responsibilities and controls, designed to ensure that the policies and procedures established for risk management are adhered to at all times.

PIN 2.2.3

Subject to rule 2.2.4, where an Insurer is a Member of a Group, the Insurer must take reasonable actions to ensure that the Group as a whole complies with the requirements of rule 2.2.1 and 2.2.2 as though the Group as a whole were an Insurer.

PIN 2.2.4

Rule 2.2.3 does not apply in respect of a Group where the Insurer is not the Holding Company and where the Holding Company of the Group is:

(1) another Insurer; or
(2) a Subsidiary of another Holding Company.

PIN 2.2.4 Guidance

The effect of rule 2.2.4 is to avoid duplication arising from complex Group structures. If an Insurer is a Member of a Group whose Holding Company is another Insurer, the first Insurer need not apply rule 2.2.3 in respect of that Group, because the Insurer that is the Holding Company is already required to apply that rule. Where an Insurer is a Member of two or more Groups that are also sub-groups of a single Group, the Insurer may consider that single Group as a whole for the purposes of this section. An Insurer that is a Holding Company is however still required to apply rule 2.2.3 in respect of any Group of which the Insurer is the Holding Company.

PIN 2.3 Management of particular risks

PIN 2.3.1

An Insurer must develop, implement and maintain a risk management and control system to identify and address balance sheet and Market Risk, including but not limited to:

(1) reserving risk;
(2) Investment risk (including risks associated with the use of derivatives);
(3) Underwriting risk;
(4) claims management risk;
(5) product design and pricing risk; and
(6) liquidity management risk.

PIN 2.3.2

An Insurer must develop, implement and maintain a risk management and control system to identify and address credit quality risk.

PIN 2.3.3

An Insurer must develop, implement and maintain a risk management and control system to identify and address the non-financial or operational risk of that Insurer, including but not limited to:

(1) technology risk (including process risks);
(2) reputational risk;
(3) fraud and other fiduciary risks;
(4) compliance risk;
(5) outsourcing risk;
(6) business continuity planning risks
(7) legal risk; and
(8) key Person risk.

PIN 2.3.4

An Insurer must develop, implement and maintain a risk management and control system to identify and address reinsurance risk. Reinsurance risk refers to risks associated with the Insurer's use of reinsurance arrangements as cedant.

PIN 2.3.5

Without limiting the generality of rule 2.3.4, an Insurer's risk management and control system in respect of its use of reinsurance arrangements must include the development, implementation and maintenance of a written reinsurance management strategy, appropriate to the size and complexity of the operations of the Insurer, defining and documenting the Insurer's objectives and strategy in respect of reinsurance arrangements.

PIN 2.3.6

An Insurer must develop, implement and maintain a risk management and control system to identify and address Group Risk, including but not limited to:

(1) risks associated with:
(a) its relationship with other Members of its Group; and
(b) the activities and adequacy of funding of other Members of its Group; and
(2) risks associated with any Associates that the Insurer has.

PIN 2.3.7

For the purposes of rule 2.3.6, an Insurer may:

(1) take into account:
(a) its position within the Group,
(b) the materiality of the risk to which it is exposed because of its membership of the Group, and
(c) the access that it has to the systems and controls of other Members of its Group and any information produced by them or by Associates; and
(2) consider together Groups whose Holding Companies are all Members of the same Group, except for any Group of which the Insurer is the Holding Company.

PIN 2.3.7 Guidance

The effect of sub-Rule 2.3.7(2) is that, where an Insurer is a Member of two or more Groups that are also sub-Groups of a single Group, the Insurer may consider that Group as a whole for the purposes of this section. An Insurer that is a Holding Company is however still required to give specific consideration to the risks to which it is exposed as Holding Company.

PIN 2.4 Record-keeping

PIN 2.4.1

An Insurer must maintain records adequate to enable it to:

(1) fulfil its obligations under Contracts of Insurance effected by it; and
(2) demonstrate that it complies with the Prudential Rules for Insurers.

PIN 3 Long-Term Insurance Business

PIN 3.1 Introduction

PIN 3.1.1 Introduction

This Chapter applies to all Insurers

PIN 3.1.1 Guidance

1. This Chapter sets out requirements in respect of Long-Term Insurance business. An Insurer is required to maintain a separate fund in respect of Long-Term Insurance business or to subject itself to the same restrictions as apply to a Long-Term Insurance Fund.
2. Sub-Rule 1.2.4(1) provides that Long-Term Insurance business conducted by Insurers is limited to reinsurance.

PIN 3.2 Establishment of Long-Term Insurance funds

PIN 3.2.1

An Insurer that is required, under the provisions of section 3.3, to establish or maintain a Long-Term Insurance Fund in respect of a part of its business must identify separately in its books and records the assets, liabilities, revenues and expenses attributable to that business. Those assets, liabilities, revenues and expenses must be recorded separately and accounted for as a Long-Term Insurance Fund.

PIN 3.2.2

Where an Insurer that is not a Protected Cell Company carries on Long-Term Insurance business that, under the provisions of section 3.3, must be attributed to a Long-Term Insurance Fund, it must either:

(1) establish one or more Long-Term Insurance Funds; or
(2) notify the Regulatory Authority in writing that the Insurer is deemed to constitute a single, Long-Term Insurance Fund.

PIN 3.2.3

When an Insurer that is a Protected Cell Company carries on, through a Cell, Long-Term Insurance Business that, under the provisions of section 3.3, must be attributed to a Long-Term Insurance Fund, it must either:

(1) establish, in respect of that Cell, one or more Long-Term Insurance Funds; or
(2) notify the Regulatory Authority in writing that the Cell is deemed to constitute a single, Long-Term Insurance Fund.

PIN 3.2.3 Guidance

Because of the prohibition set out in Sub-Rule 1.2.1(6), Insurance Business of an Insurer that is a Protected Cell Company can only carried out through its Cells.

PIN 3.2.4

An Insurer that is not a DIFC Incorporated Insurer, that is subject to a regulatory requirement in another jurisdiction to arrange its affairs in a manner that is equivalent or substantially equivalent to the maintenance of a Long-Term Insurance Fund required by this section, may make a written application to the Regulatory Authority for that arrangement of its affairs to be deemed for the purposes of these rules to constitute a Long-Term Insurance Fund. If the Regulatory Authority approves that application, it must inform the Insurer in writing, and must State in its notice to the Insurer the manner in which the arrangement will be deemed for the purpose of these rules to constitute a Long-Term Insurance Fund.

PIN 3.2.5

An Insurer, or a Cell of an Insurer, that is deemed in accordance with sub-Rule 3.2.2(2) or sub-Rule 3.2.3(2) to constitute a single Long-Term Insurance Fund, shall be treated for all purposes relating to these rules as though the Insurer had established a Long-Term Insurance Fund to which all of the assets and liabilities of the Insurer or of the Cell are attributed.

PIN 3.3 Attribution of contracts to a fund

PIN 3.3.1

All contracts of Long-Term Insurance effected by a DIFC Incorporated Insurer must be attributed to a Long-Term Insurance Fund.

PIN 3.3.2

All contracts of Long-Term Insurance effected by an Insurer that is not a DIFC Incorporated Insurer through an establishment in the DIFC must be attributed to a Long-Term Insurance Fund.

PIN 3.3.3

Except as allowed in rule 3.3.4, an Insurer may not attribute General Insurance contracts to a Long-Term Insurance Fund.

PIN 3.3.4

An Insurer may attribute insurance contracts in General Insurance Class 1 or Class 2 to a Long-Term Insurance Fund.

PIN 3.4 Segregation of assets and liabilities

PIN 3.4.1

All assets, liabilities, revenues and expenses in respect of a Contract of Insurance that is attributed to a Long-Term Insurance Fund must be recorded as assets, liabilities, revenues and expenses of that Long-Term Insurance Fund.

PIN 3.4.2

An Insurer may at any time attribute any of its assets to a Long-Term Insurance Fund, that were not previously attributed to such a Long-Term Insurance Fund.

PIN 3.4.2 Guidance

A Transaction described in rule 3.4.2 is sometimes described as a transfer of capital into the Long-Term Insurance Fund.

PIN 3.4.3

All revenues and expenses arising by way of earnings, revaluation or other change to the assets and liabilities of a Long-Term Insurance Fund must be recorded as revenues and expenses, or movements in capital, of that Long-Term Insurance Fund.

PIN 3.4.4

An Insurer which is required to maintain a Long-Term Insurance Fund must maintain adequate accounting and other records to identify the contracts and the assets, liabilities, revenues and expenses attributable to the Long-Term Insurance Fund.

PIN 3.5

PIN 3.5.1

Except as provided in this section, assets that are attributable to a Long-Term Insurance Fund must be applied only for the purposes of the business attributed to the Long-Term Insurance Fund.

PIN 3.5.2

Assets attributable to a Long-Term Insurance Fund may not be transferred so as to be available for other purposes of the Insurer except:

(1) where the transfer constitutes appropriation of a surplus determined in accordance with section 7.3, provided that the transfer is performed within four months of the Reference Date of the actuarial investigation referred to in that Rule;
(2) where the transfer constitutes a payment of dividend or Return of capital, in accordance with rule 3.5.4;
(3) where the transfer is made in Exchange for other assets at fair value;
(4) where the transfer constitutes reimbursement of expenditure borne on behalf of the Long-Term Insurance Fund, and in respect of expenses attributable to the Long-Term Insurance Fund; or
(5) where the transfer constitutes reattribution of assets attributed to the Long-Term Insurance Fund in error.

PIN 3.5.3

Assets attributable to a Long-Term Insurance Fund must not be distributed by way of dividend or by way of Return of capital, except by an Insurer or a Cell that is deemed to constitute a single Long-Term Insurance Fund.

PIN 3.5.4

A dividend or Return of capital by an Insurer or a Cell that is deemed to constitute a single Long-Term Insurance Fund may only be made where the dividend or Return of capital constitutes appropriation of a surplus determined in accordance with section 7.3, and:

(1) if the payment is made within four months of the Reference Date of the actuarial investigation determining that surplus, the payment does not cause the total aggregate amount of the dividends or returns of capital made by the Insurer or the Cell since that Reference Date to exceed the amount of that surplus; or
(2) if the payment is made more than four months after the Reference Date of the actuarial investigation determining that surplus, the payment does not cause the total aggregate amount of the dividends or returns of capital made by the Insurer or the Cell since that Reference Date to exceed 50 per cent of the amount of that surplus.

PIN 3.5.5

Assets attributable to a Long-Term Insurance Fund must not be lent or otherwise made available for use for any other purposes of the Insurer or any purposes of any party Related to the Insurer.

PIN 3.5.6

An Insurer may not enter into any arrangement, whether or not described as a contract of reinsurance, whereby a Long-Term Insurance Fund of the Insurer stands in the same relation to the Insurer as though the Insurer were the reinsurer in a contract of reinsurance in which the Long-Term Insurance Fund is the cedant.

PIN 3.5.6 Guidance

Rule 3.5.6 operates to prohibit reinsurance between Long Term Insurance Funds of the same Insurer, as well as arrangements of the nature of internal contracts of reinsurance where the cession Transaction is attributed to a Long-Term Insurance Fund but the corresponding reinsurance acceptance Transaction is not.

PIN 4 Capital Adequacy

PIN 4.1 Introduction

PIN 4.1.1

This Chapter applies to all Insurers.

PIN 4.1.1 Guidance

1. The amount of capital is fundamental to the financial health of any insurance Undertaking and therefore to the protection of its policyholders. All Insurers are therefore required to maintain a minimum level of Capital Resources in accordance with this Chapter.
2. This Chapter establishes minimum required levels of Capital Resources applicable to Insurers of different types. Section 4.2 establishes provisions that are applicable to all Insurers, wherever they are incorporated and of whatever type they are. Section 4.3 establishes Minimum Capital Requirements in respect of Insurers other than Protected Cell Companies, and section 4.4 establishes equivalent requirements in respect of Protected Cell Companies. Additional provisions are established by section 4.5, in respect of Insurers carrying on Insurance Business of Class 7, by section 4.6, in respect of Insurers maintaining Long-Term Insurance Funds, and by section 4.7, in respect of Insurers that are not DIFC Incorporated Insurers.
3. The Regulatory Authority has the power under the Regulatory Law to act if it believes that any requirement of this Chapter is breached, or that it may be breached in the future.

PIN 4.1.2

For the purposes of this Chapter, assets and liabilities must be valued in accordance with Chapter 5.

PIN 4.1.3

In this Chapter and in the Appendices referred to in this Chapter, references to ratings are made according to the rating hierarchy (AAA, AA, etc) of Standard & Poor's. Where, for the purposes of a provision of this Chapter or of an Appendix, an Insurer uses ratings from a Rating Agency other than Standard & Poor's, the Insurer must apply that provision as though the Standard & Poor's rating referred to in the provision were replaced by the rating from that other Rating Agency that is equivalent to the Standard & Poor's rating.

PIN 4.1.4

An Insurer must not, for the purposes of this Chapter or the Appendices referred to in this Chapter, use ratings provided by any Rating Agency other than Standard & Poor's, Moody's, AM Best, and Fitch Ratings, except where the Regulatory Authority has given written approval to the Insurer for the use of ratings provided by that other Rating Agency.

PIN 4.2 Basic requirement

PIN 4.2.1

This section applies to all Insurers.

PIN 4.2.2

An Insurer must always have Capital Resources that are, in the opinion of its Directors formed on reasonable assumptions, adequate for the conduct of its business, taking into consideration the size of the Insurer and the mix and complexity of its business.

PIN 4.2.3

Systems and controls maintained by Directors for the purposes of rule 4.2.2 must include analysis of realistic scenarios relevant to the circumstances of the Insurer and the effects that the occurrences of those scenarios would have on the Capital Requirements of the Insurer and on its Capital Resources.

PIN 4.2.3 Guidance

Because an Insurer is required to maintain adequate Capital Resources at all times, its systems and controls need to enable the Directors to determine and monitor the Capital Requirements of the Insurer and the Capital Resources that it has available, and to identify occurrences where the Capital Resources fall short of the Capital Requirements or may fall short in the future. An Insurer is not required to measure the precise amount of its Capital Resources and its Capital Requirements on a daily basis. However an Insurer should be in a position to demonstrate its capital adequacy at any time if asked to do so by the Regulatory Authority.

PIN 4.3 Minimum Capital Requirement for Insurers that are not protected Cell companies

PIN 4.3.1

This section applies only to Insurers that are not Protected Cell Companies.

PIN 4.3.2

An Insurer that is not a Protected Cell Company must always have Adjusted Capital Resources equal to or higher than the amount of its Minimum Capital Requirement.

PIN 4.3.3

An Insurer's Adjusted Capital Resources must be calculated in accordance with App3.

PIN 4.3.4

An Insurers Minimum Capital Requirement must be calculated in accordance with App4.

PIN 4.4 Minimum Capital Requirement for Insurers that are protected Cell companies

PIN 4.4.1

This section applies only to Insurers that are Protected Cell Companies.

PIN 4.4.2

An Insurer that is a Protected Cell Company must ensure that at all times the Insurer has Adjusted Non-Cellular Capital Resources equal to or higher than the amount of the Minimum Non-Cellular Capital Requirement.

PIN 4.4.3

An Insurer that is a Protected Cell Company must ensure that at all times, in respect of each of its Cells, the Insurer has Adjusted Cellular Capital Resources equal to or higher than the amount of the Minimum Cellular Capital Requirement in respect of that Cell.

PIN 4.4.4

The Adjusted Non-Cellular Capital Resources in respect of an Insurer that is a Protected Cell Company must be calculated in accordance with App5.

PIN 4.4.5

The Minimum Non-Cellular Capital Requirement in respect of an Insurer that is a Protected Cell Company must be calculated in accordance with App6.

PIN 4.4.6

The Adjusted Cellular Capital Resources in respect of a Cell must be calculated in accordance with App5.

PIN 4.4.7

The Minimum Cellular Capital Requirement in respect of a Cell must be calculated in accordance with App6.

PIN 4.5 Insurers that undertake. credit and surety insurance business

PIN 4.5.1

This section applies only to Insurers that undertake Insurance Business in Class 7.

PIN 4.5.2

An Insurer that undertakes Insurance Business in Class 7 must calculate a Class 7 Capital Requirement in respect of that business.

PIN 4.5.3

An Insurer that is a Protected Cell Company that undertakes Insurance Business in Class 7 must calculate a Class 7 Capital Requirement in respect of every Cell to which such business is attributable.

PIN 4.5.4

The Class 7 Capital Requirement must be calculated in accordance with principles notified to the Insurer by the Regulatory Authority.

PIN 4.5.5

An Insurer intending to undertake Insurance Business in Class 7 must notify the Regulatory Authority in writing before commencing to undertake such business.

PIN 4.6 Insurers that undertake Long-Term Insurance business

PIN 4.6.1

Subject to rule 4.6.2, this section applies only to Insurers that undertake Long-Term Insurance Business through a Long-Term Insurance Fund.

PIN 4.6.2

This section does not apply to either:

(1) an Insurer that is deemed to constitute a single Long-Term Insurance Fund in accordance with sub-Rule 3.2.2(2); or
(2) an Insurer that is a Protected Cell Company in respect of a Cell that is deemed to constitute a single Long-Term Insurance Fund in accordance with sub-Rule 3.2.3(2).

PIN 4.6.3

An Insurer that undertakes Long-Term Insurance Business through a Long-Term Insurance Fund must ensure that at all times, in respect of each Long-Term Insurance Fund maintained by it, the Insurer has Adjusted Fund Capital Resources equal to or higher than the amount of the Minimum Fund Capital Requirement in respect of that Long-Term Insurance Fund.

PIN 4.6.4

The Adjusted Fund Capital Resources in respect of a Long-Term Insurance Fund maintained by an Insurer must be calculated in accordance with App7.

PIN 4.6.5

The Minimum Fund Capital Requirement in respect of a Long-Term Insurance Fund maintained by an Insurer must be calculated in accordance with App8.

PIN 4.7 Availability of assets of Insurers incorporated outside the DIFC

PIN 4.7.1

This section applies only to Insurers that are not DIFC Incorporated Insurers.

PIN 4.7.1 Guidance

The provisions in this section require an Insurer to have assets, of a minimum quality, available to meet its gross Insurance Liabilities arising from its DIFC Insurance Business plus a margin. Although the Insurer is required to cover its Insurance Liabilities gross of reinsurance, an Insurer still has benefit of its reinsurance arrangements because assets may include amounts receivable from reinsurers in respect of gross Insurance Liabilities (including amounts potentially receivable from reinsurers in respect of the exposures reflected in the Insurer's Premium Liability). No credit, however, may be taken in respect of a reinsurer that is Rated worse than BBB.

PIN 4.7.2

An Insurer that is not a DIFC incorporated Insurer must always have assets, of a type referred to in rule 4.7.3, that are available to meet Insurance Liabilities of the Insurer arising in respect of operations conducted by the Insurer in the DIFC, at least equal to the sum of the following:

(1) the sum of the Default Risk Component and the Investment Volatility Risk Component in respect of those assets, calculated according to the methods set out in sections A4.4 and A4.5 respectively, applying those methods so far as concerns those assets only;
(2) Insurance Liabilities of the Insurer in respect of its DIFC Insurance Business;
(3) the amount determined by applying, in respect of any DIFC Insurance Business of the Insurer that is Class 7 Insurance Business, the principles referred to in rule 4.5.4, taking no account of any reinsurance contracts entered into by the Insurer as cedant in respect of that business; and
(4) the Insurers DIFC Business Risk Capital Requirement, calculated in accordance with App9.

PIN 4.7.2 Guidance

1. Assets are not normally available to meet Insurance Liabilities of an Insurer arising in respect of operations conducted by the Insurer in the DIFC, if those assets are required to meet liabilities of the Insurer in jurisdictions other than the DIFC, except where those liabilities are also Insurance Liabilities of the Insurer arising in respect of operations conducted by the Insurer in the DIFC.
2. Assets are not normally available to meet Insurance Liabilities of an Insurer arising in respect of operations conducted by the Insurer in the DIFC, if those assets are required, under the laws of any jurisdiction, to be located in a jurisdiction other than the DIFC, except where the assets are required to be located in that jurisdiction to meet, or as Collateral against, either:
a. liabilities that are Insurance Liabilities of the Insurer arising in respect of operations conducted by the Insurer in the DIFC; or
b. liabilities that may arise in the future and that would, if they arose, be Insurance Liabilities of the Insurer arising in respect of operations conducted by the Insurer in the DIFC.

PIN 4.7.3

The assets available to an Insurer for the purposes of rule 4.7.2 may comprise any combination of the following types of asset:

(1) bonds Rated 'BBB' or better;
(2) equities, listed on an Approved Stock Exchange;
(3) reinsurance recoverable in respect of General Insurance Liabilities referred to in sub-Rule 4.7.2(2), where the reinsurer is Rated 'BBB' or better; and
(4) land and buildings.

PIN 4.7.4

An Insurer subject to this section must demonstrate to the satisfaction of the Regulatory Authority that the Insurer complies with rule 4.7.2, when the Regulatory Authority requests it by written notice to do so.

PIN 4.8 Failure to comply with this chapter

PIN 4.8.1

An Insurer that becomes aware that it does not comply with this Chapter:

(1) must immediately notify the Regulatory Authority in writing;
(2) must not effect any Contracts of Insurance through an establishment in the DIFC until the Regulatory Authority has given it written permission to recommence business;
(3) must not, if the Insurer is a DIFC Incorporated Insurer, effect any Contracts of Insurance until the Regulatory Authority has given it written permission to recommence business; and
(4) must not make any distribution of profits or surplus however called or described, or Return of capital, without the written permission of the Regulatory Authority.

PIN 4.8.2

An Insurer that believes that it may not be in compliance with this Chapter or may not continue to comply with this Chapter in the future must immediately provide the Regulatory Authority with a written statement of:

(1) the reasons for the Insurer's belief that it may not be in compliance or may not continue to comply; and
(2) the action that the Insurer is taking to avoid non-compliance.

PIN 4.8.3

An Insurer to which rule 4.8.2 applies must not make any distribution of profits or surplus however called or described, or Return of capital, without the written permission of the Regulatory Authority.

PIN 4.9 Limitations on distributions by insurers

PIN 4.9.1

No Insurer may make any distribution of profits or surplus however called or described, or Return of capital, if such distribution or Return would cause the Insurer to fail to comply with any provision of this Chapter.

PIN 5 Measurement of Assets and Liabilities of Insurers

PIN 5.1 General provisions

PIN 5.1.1

This Chapter applies to all Insurers.

PIN 5.1.1 Guidance

1. This Chapter establishes a set of principles for the consistent measurement of the assets and liabilities of Insurers for the purposes of reporting under Chapter 6 and for determining compliance with Chapter 4.
2. This Chapter is not intended to establish a basis of accounting for general purpose financial statements of Insurers. This Chapter does not prevent Insurers from adopting measurements of assets and liabilities that might be considered excessively prudent if adopted in the Insurer's general purpose financial statements. Insurers are not however expected to mislead the Regulatory Authority as to the financial position or financial performance of the Insurer.

PIN 5.1.2

Subject to Rules 5.1.3, 5.1.4, 5.1.5 and 5.1.6, an Insurer must recognise and measure its assets and liabilities in accordance with so many of sections 5.2, 5.3, 5.4 and 5.5 as apply to the Insurer.

PIN 5.1.3

An Insurer may measure the value of an asset at less than the value determined in accordance with this Chapter.

PIN 5.1.4

An Insurer may measure the value of a liability at more than the value determined in accordance with this Chapter.

PIN 5.1.5

An Insurer may use approximate methods to measure an asset or a liability, where the result obtained by the use of that approximate method would not be materially different from the result obtained by applying a measurement method prescribed in this Chapter.

PIN 5.1.6

Notwithstanding any other provision of this Chapter, the Regulatory Authority may, by written notice, direct an Insurer to measure an asset or a liability in accordance with principles specified by the Regulatory Authority in that written notice.

PIN 5.2 Basic principles of Recognition and measurement

PIN 5.2.1

Except where this Chapter provides otherwise, the assets and liabilities of an Insurer must be recognised in accordance with a basis of accounting set out in rule 5.2.2, and the values attributed to those assets and liabilities must be measured in accordance with that basis of accounting.

PIN 5.2.1 Guidance

The exceptions provided in this Chapter relate to the following:

a. specific rules in respect of certain assets and liabilities, intended to achieve a regulatory objective not achieved by application of some or any of the bases of accounting set out in rule 5.2.2;
b. assets and liabilities that are not dealt with in some or any of the bases of accounting set out in rule 5.2.2; and
c. the overriding power of the Regulatory Authority, set out in rule 5.1.6, to require an Insurer to adopt a particular measurement for a specific asset or liability.

PIN 5.2.2

The basis of accounting adopted by an Insurer for the purposes of rule 5.2.1 may be any system of generally accepted accounting practice specified by the Regulatory Authority in the Auditing and Accounting Law or legislation made under it.

PIN 5.2.3

An Insurer must, at the time it obtains its authorisation to carry on Insurance Business, inform the Regulatory Authority in writing which of the bases of accounting set out in rule 5.2.2 it adopts for the purpose of rule 5.2.1. An Insurer may not change the basis of accounting that it adopts, without the written approval of the Regulatory Authority.

PIN 5.2.4

Where the valuation of an asset or liability is dependent upon the adoption of assumptions, or the adoption of a calculation method, any change in the assumptions or methods adopted must be reflected immediately in the value attributed to the asset or liability concerned. The Recognition of the effects of changes in assumptions or methods may not be deferred to future Financial Periods.

PIN 5.3 Recognition and measurement of insurance assets and liabilities in respect of General Insurance

PIN 5.3.1

This section applies to assets and liabilities in respect of General Insurance contracts.

PIN 5.3.2

Premiums in respect of direct insurance contracts, facultative reinsurance contracts and non-proportional treaty reinsurance contracts entered into by an Insurer as Insurer must be treated as receivable from the date of entering into the insurance contract.

PIN 5.3.3

Premiums in respect of proportional treaty reinsurance contracts entered into by an Insurer as Insurer must be treated as receivable in accordance with the pattern of the cedant entering into the underlying insurance contracts.

PIN 5.3.4

Premiums in respect of facultative reinsurance contracts and non-proportional treaty contracts entered into by an Insurer as cedant must be treated as payable from the date of entering into the reinsurance contract.

PIN 5.3.5

Premiums in respect of proportional treaty reinsurance contracts entered into by an Insurer as cedant must be treated as payable in accordance with the pattern of entering into the underlying insurance contracts.

PIN 5.3.6

Expenses incurred in respect of insurance contracts entered into by an Insurer must be treated as payable at the time the contracts are entered into.

PIN 5.3.7

An Insurer must treat as a liability the value of future claim payments and associated direct and indirect settlement costs, arising from future events insured under policies that are in force as at the Solvency Reference Date.

PIN 5.3.7 Guidance

The liability referred to in rule 5.3.7 is commonly represented by Insurers as two separate provisions, the unearned premium provision and the premium deficiency provision. The sum of the two provisions is sometimes referred to as the unexpired risk reserve, though this term is also sometimes used to describe the premium deficiency provision alone.

PIN 5.3.8

An Insurer must treat as a liability the value of future claims payments and associated direct and indirect settlement costs, arising from insured events that have occurred as at the Solvency Reference Date.

PIN 5.3.8 Guidance

The liability referred to in rule 5.3.8 is commonly referred to as the liability for outstanding claims. Some Insurers represent this liability as three separate provisions, being the liability in respect of reported claims, the liability in respect of claims incurred but not reported, and the liability in respect of settlement costs (also known as loss adjustment expenses).

PIN 5.3.9

An Insurer must treat as an asset the value of reinsurance and other recoveries expected to be received in respect of claims referred to in Rules 5.3.7 and 5.3.8.

PIN 5.3.10

Where this Section requires an Insurer to recognise as a liability the value of expected future payments, that liability must be measured as the net present value of those expected future payments.

PIN 5.3.11

Where this Section requires an Insurer to recognise as an asset the value of expected future receipts, that asset must be measured as the net present value of those expected future receipts.

PIN 5.3.12

Rules 5.3.10 and 5.3.11 do not require an Insurer to obtain a valuation by an Actuary of the assets and liabilities referred to in those Rules, at a Solvency Reference Date other than the Insurer's Annual Reporting Date.

PIN 5.3.12 Guidance

An Insurer is also required to provide a periodic report on its General Insurance Liabilities and associated assets, prepared by an Actuary. The relevant provisions are contained in Chapter 7.

PIN 5.4

PIN 5.4.1

The Regulatory Authority may specify actuarial principles to be used by an Insurer in measuring assets and liabilities.

PIN 5.4.2

For the purposes of determining the net present value of expected future payments in accordance with rule 5.3.10, an Insurer must use as a discount rate the gross redemption yield, as at the Solvency Reference Date, of a portfolio of AAA-Rated sovereign risk Securities with a similar expected payment profile to the liability being measured.

PIN 5.4.3

For the purposes of determining the net present value of expected future receipts in accordance with rule 5.3.11, an Insurer must use as a discount rate the gross redemption yield, as at the Solvency Reference Date, of a portfolio of AAA-Rated sovereign risk Securities with a similar expected payment profile to the asset being measured.

PIN 5.4.3 Guidance

1. Where an Insurer's Insurance Business includes more than one Class of Business, the Insurer will normally be expected to establish payment profiles separately for each material Class of Business.
2. Where the expected payment profile of assets or liabilities cannot be matched - for example, because the duration is too long - the Insurer should assume a discount rate regarded as consistent with the intention of this Section.

PIN 5.5 Recognition and measurement of assets and liabilities in respect of long-term insurance

PIN 5.5.1

This section applies to assets and liabilities in respect of Long-Term Insurance contracts.

PIN 5.5.1 Guidance

Sub-Rule 1.2.1(1) provides that Long-Term Insurance Business conducted by Insurers is limited to reinsurance.

PIN 5.5.2

Premiums in respect of reinsurance contracts entered into by an Insurer as Insurer must be treated as receivable from the date on which the premium on the underlying insurance contract is due and receivable by the cedant.

PIN 5.5.3

Premiums in respect of reinsurance contracts entered into by an Insurer as cedant must be treated as payable from the date on which the premium on the underlying insurance contract is due and receivable by the cedant.

PIN 5.5.4

Expenses incurred in respect of insurance contracts entered into by an Insurer must be treated as payable:

(1) in the case of expenses directly Related to the premiums in respect of the contract, at the same time as the premium is treated as receivable; and
(2) in the case of expenses not directly Related to the premiums in respect of the contract, at the time the contract is entered into.

PIN 5.5.5

An Insurer must treat as a liability the amount of Policy Benefits that are due for payment on or before the Solvency Reference Date.

PIN 5.5.6

An Insurer must treat as a liability the net value of future Policy Benefits under policies that are in force as at the Solvency Reference Date, taking into account all prospective liabilities as determined by the policy conditions for each existing contract, and taking credit for premiums payable after the Solvency Reference Date.

PIN 5.5.7

In measuring the liability referred to in rule 5.5.6, the Insurer must:

(1) use actuarial principles;
(2) make proper provision for all liabilities on prudent assumptions that include appropriate margins for adverse deviation of the relevant factors; and
(3) take specifically into account:
(a) all guaranteed Policy Benefits, including guaranteed surrender values;
(b) vested, declared or allotted bonuses to which policy holders are already either collectively or individually contractually entitled;
(c) all Options available to the policy holder under the terms of the contract;
(d) discretionary Charges and deductions from Policy Benefits, in so far as they do not exceed the reasonable expectations of policy holders;
(e) expenses, including commissions; and
(f) any rights under contracts of reinsurance in respect of Long-Term Insurance Business.

PIN 5.5.8

The Regulatory Authority may specify actuarial principles to be followed by Insurers in measuring the liability referred to in rule 5.5.6.

PIN 5.5.9

Rule 5.5.6 does not require an Insurer to obtain a valuation by an Actuary of the liability referred to in that rule, at a Solvency Reference Date other than the Insurers annual Reporting Date.

PIN 5.5.8 Guidance

An Insurer is also required to provide a periodic report on its Long-Term Insurance Liabilities, prepared by an Actuary, including an actuarial investigation of the financial condition of its Long-Term Insurance Business. The relevant provisions are set out in section 7.3.

PIN 5.6 Value of Investments in subsidiaries and Associates that are subject to minimum capital requirements

PIN 5.6.1

This section applies to all Insurers.

PIN 5.6.2

Where an Insurer has an Investment in a Subsidiary or in an Associate that is subject to a regulatory requirement in the jurisdiction in which it is incorporated, obliging the Subsidiary or Associate to maintain a Minimum Capital Requirement or its equivalent, the value of the Insurer's Investment in the Subsidiary or Associate must be reduced by the Insurer's proportionate share of the amount of that Minimum Capital Requirement or its equivalent.

PIN 5.6.3

In rule 5.6.2, the Insurer's proportionate share of the Subsidiary's or Associate's Minimum Capital Requirement or equivalent means the amount of the Subsidiary's or Associate's Minimum Capital Requirement or equivalent, multiplied by the proportion of the Subsidiary's or Associate's total ownership rights or, if the proportion is greater, of its voting rights that is held by the Insurer.

PIN 6 Financial and other Reporting by Insurers

PIN 6.1 Introduction

PIN 6.1.1

This Chapter applies to all Insurers.

PIN 6.1.1 Guidance

This Chapter sets out requirements for reporting by Insurers to the Regulatory Authority, including requirements for audit of the Annual Statutory Return. The Quarterly Statutory Return is not subject to audit.

PIN 6.2 Annual statutory return

PIN 6.2.1

An Insurer must, at the end of each Financial Period, prepare an Annual Statutory Return, comprising the following statements, together with any explanatory notes:

(1) a balance sheet as at the Reporting Date;
(2) a profit and loss account for the Financial Period;
(3) ... [specific statements]; and
(4) a statement by Directors.

PIN 6.2.2

The form and content of the statements comprising the Annual Statutory Return is set out in App [11].

PIN 6.2.3

Where an Insurer includes in its Annual Statutory Return a value for General Insurance Liabilities or for assets associated with those liabilities which is inconsistent with the amount referred to in sub-Rule 7.2.4(2), the Insurer must notify the Regulatory Authority in writing of;

(1) the reasons for not including in its Annual Statutory Return the value of General Insurance Liabilities or of Associated assets as reported by the Actuary; and
(2) details of the alternative assumptions and methodologies used for determining the value of General Insurance Liabilities or of Associated assets.

PIN 6.2.3 Guidance

Assets that are associated with Insurance Liabilities will predominantly be reinsurance recoveries, which are reported as assets in accordance with widely accepted accounting practice. Assets representing salvage or subrogation recoveries may also be associated with Insurance Liabilities.

PIN 6.2.4

Where an Insurer includes in its Annual Statutory Return a value for Long-Term Insurance Liabilities which is inconsistent with the amount referred to in sub-Rule 7.3.6(2), the Insurer must notify the Regulatory Authority in writing of;

(1) the reasons for not including in its Annual Statutory Return the value of Long-Term Insurance Liabilities as reported by the Actuary; and
(2) details of the alternative assumptions and methods used by the Insurer for determining the value of Long-Term Insurance Liabilities.

PIN 6.3 Quarterly statutory return

PIN 6.3.1

An Insurer must, at the end of March, June, September and December in each year, prepare a Quarterly Statutory Return in respect of the period of three months then ended, comprising the following statements, together with any explanatory notes:

(1) a balance sheet as at the end of the period referred to in this Rule;
(2) ... [specific statements]; and
(3) a statement by Directors.

PIN 6.3.2

The form and content of the statements comprising the Quarterly Statutory Return is set out in App[12].

PIN 6.4 Audit of annual statutory return

PIN 6.4.1

Subject to rule 6.4.2, the Annual Statutory Return of every Insurer must be audited in accordance with International Statements on Auditing relevant to the audit of the Annual Statutory Return, by a Person who is:

(1) qualified in accordance with the Audit and Accounting Law; and
(2) not disapproved by the Regulatory Authority in accordance with rule 6.4.4.

PIN 6.4.2

The statements in the Annual Statutory Return that are subject to audit are set out in App[11].

PIN 6.4.3

Each Insurer must, on appointing an auditor for the purposes of auditing the Annual Statutory Return, notify the Regulatory Authority of the appointment.

PIN 6.4.4

The Regulatory Authority may, if it does not believe that an auditor appointed by an Insurer possesses the necessary skills and experience to conduct the audit of the Annual Statutory Return, notify the Insurer in writing that another auditor, having the qualifications set out in rule 6.4.1, must be appointed for the purposes of auditing the Annual Statutory Return.

PIN 6.4.5

The report of the auditor on the Annual Statutory Return must be made in writing to the Directors of the Insurer and to the Regulatory Authority and must State whether, in the opinion of the auditor:

(1) the Annual Statutory Return has been prepared in accordance with this Chapter;
(2) the statements in the Annual Statutory Return present fairly, in accordance with the basis of preparation prescribed in this Chapter, the financial position of the Insurer as at the Reporting Date and financial performance of the Insurer during the Financial Period ended on that date, and the other information required to be presented; and
(3) the statements in the Annual Statutory Return are in accordance with the books and records of the Insurer.

PIN 6.5 Filing of accounts with the Regulatory Authority

PIN 6.5.1

The Annual Statutory Return, accompanied by the auditors report on the Annual Statutory Return, and any actuarial report prepared as at the Reporting Date in accordance with section 7.2 or 7.3, must be filed in writing by the Insurer with the Regulatory Authority, within four months of the Insurer's Reporting Date.

PIN 6.5.2

The statement of Directors in the Annual Statutory Return must be signed by the following officers:

(1) two Directors of the Insurer; and
(2) If the Insurer is not a DIFC Incorporated Insurer, the [local representative] of the Insurer appointed in accordance with AUT.

PIN 6.5.2 Guidance

The effect of rule 6.5.2 for an Insurer that is not a DIFC Incorporated Insurer is that the [local representative] must sign the statement by Directors whether or not he is a director; and the report must also be signed by sufficient Directors to ensure that the requirements of sub-Rule 6.5.2 (1)are complied with.

PIN 6.5.3

The auditor's report and any actuarial report filed with the Annual Statutory Return must be signed by the auditor or the Actuary preparing that report.

PIN 6.5.4

The Quarterly Statutory Return must be filed in writing by the Insurer with the Regulatory Authority within two months of the end of each period in respect of which the Insurer is required to prepare a Quarterly Statutory Return.

PIN 6.5.5

The statement of Directors in the Quarterly Statutory Return must be signed by the following officers:

(1) if the Insurer is a DIFC Incorporated Insurer, one Director of the Insurer; or
(2) if the Insurer is not a DIFC Incorporated Insurer, the [local representative] of the Insurer appointed in accordance with AUT and, if that Person is not a Director, one Director of the Insurer.

PIN 6.5.6

If within 24 months of the date that an Annual Statutory Return or Quarterly Statutory Return is filed with the Regulatory Authority, the Regulatory Authority notifies the Insurer that that document appears to be inaccurate or incomplete, the Insurer must consider the matter and within one month of the date of notification it must correct any inaccuracies and make good any omissions and Deposit the relevant parts of the documents again.

PIN 6.5.7

An Insurer must file, at the same time as every Annual Statutory Return of that Insurer or as soon as practicable thereafter, any report on the affairs of the Insurer submitted to the shareholders or policy holders of the Insurer in respect of the Financial Period to which the Annual Statutory Return relates.

PIN 6.5.7 Guidance

Because of the effect of GEN, a document that is required by these Rules to be submitted in writing may be submitted electronically, without the need for printed copies. Where a document is required to be signed, an Insurer may submit an electronic image of the signed document. Insurers that submit signed documents electronically should still retain the original signed documents for a reasonable period. Insurers are, like all Authorised Firms, required by GEN to retain adequate records in relation to regulatory matters.

PIN 7 Actuaries

PIN 7.1 Introduction

PIN 7.1 Guidance

This Chapter requires an Insurer to provide the Regulatory Authority with a report by an Actuary in respect of its Insurance Liabilities and assets arising in respect of those liabilities (that is, assets which are contingent on the existence and amount of the liabilities, such as reinsurance, salvage and subrogation recoveries). Separate provisions apply in respect of reports on General Insurance Business and Long-Term Insurance Business.

PIN 7.2 The requirement for an actuarial report on General Insurance business

PIN 7.2.1

Subject to rule 7.2.2, this section applies to Insurers conducting General Insurance Business.

PIN 7.2.2

Where an Insurer attributes general Insurance Business to a Long-Term Insurance Fund in accordance with rule 3.3.4, this section does not apply to that business.

PIN 7.2.3

Every Insurer must provide to the Regulatory Authority as at each Reporting Date a written report relating to its General Insurance Business, prepared by an Actuary who has the qualifications set out in section 7.5.

PIN 7.2.4

This report must provide details in respect of each Class of Business, of:

(1) significant aspects of the recent experience of the Insurer;
(2) the Actuary's estimate of the value of General Insurance Liabilities and of assets arising in respect of those liabilities, determined in accordance with Chapter 5;
(3) where there has been a change in the assumptions or in valuation method from that adopted at the previous valuation, the effect of these changes on the General Insurance Liabilities and assets arising in respect of those liabilities, as at the Reporting Date;
(4) the adequacy and appropriateness of data made available to the Actuary by the Insurer;
(5) procedures undertaken by the Actuary to assess the reliability of the data;
(6) the model or models used by the Actuary;
(7) the assumptions used by the Actuary in the valuation process;
(8) the approach taken to estimate the variability of the estimate; and
(9) the nature and findings of sensitivity analyses undertaken.

PIN 7.3 The requirement for an actuarial investigation of and report on Long-Term Insurance business

PIN 7.3.1

This section applies to Insurers conducting Long-Term Insurance business, in respect of each Long-Term Insurance Fund maintained or deemed to be maintained by the Insurer.

PIN 7.3.2

Every Insurer must arrange for an actuarial investigation of the assets and liabilities of every Long-Term Insurance Fund maintained or deemed to be maintained by it, including a determination of surplus in each such fund, to be performed as at a Reference Date which must be not more than one year later than the date of establishment of the Long-Term Insurance Fund or the previous Reference Date (if later).

PIN 7.3.3

An investigation of the type set out in rule 7.3.2 must in any case be performed as at every Reporting Date of the Insurer.

PIN 7.3.4

An actuarial investigation under this section must be performed by an Actuary who has the qualifications set out in section 7.5, and must be conducted according to principles approved by the Regulatory Authority.

PIN 7.3.4 Guidance

Principles set out in professional standards issued by a professional actuarial body that is a full Member of the International Actuarial Association will normally be approved by the Regulatory Authority for the purposes of rule 7.3.4, to the extent that they do not conflict with the provisions of this Chapter.

PIN 7.3.5

When an Insurer arranges for an actuarial investigation under this section, the Insurer must provide to the Regulatory Authority a written report prepared by the Actuary conducting the actuarial investigation, not later than four months from the Reference Date of the actuarial investigation.

PIN 7.3.6

This report must provide details of, in respect of each Class Of Business:

(1) significant aspects of the recent experience of the Insurer;
(2) the Actuary's estimate of the value of Long-Term Insurance Liabilities, determined in accordance with Chapter 5;
(3) where there has been a change in the assumptions or in valuation method from that adopted at the previous valuation, the effect of these changes on the Long-Term Insurance Liabilities as at the Reference Date;
(4) a determination of the value of surplus in the Long-Term Insurance Fund, before any distribution of such surplus;
(5) the assumptions used by the Actuary in the valuation process;
(6) the adequacy and appropriateness of data made available to the Actuary by the Insurer;
(7) procedures undertaken by the Actuary to assess the reliability of the data;
(8) the model or models used by the Actuary;
(9) the approach taken to estimate the variability of the estimate; and
(10) the sensitivity analyses undertaken.

PIN 7.4 Additional provisions relating to the report

PIN 7.4.1

When appointing an Actuary to prepare a report under section 7.2 or 7.3, an Insurer must ensure that the contract of appointment includes the following provisions:

(1) the contract must require the Actuary to prepare his report in accordance with the provisions of section 7.2 or 7.3 as the case may be;
(2) the contract must require the Actuary to prepare the report using assumptions and methods that are, in the opinion of the Actuary, appropriate for the purposes of the report;
(3) the contract must require the Actuary to deliver the report to the Insurer's Directors within such time as to give the Directors a reasonable opportunity to consider and use the report in preparing the Insurer's Annual Statutory Return for the Financial Period ended on the Reporting Date;
(4) the contract must require and permit the Actuary to address the Directors of the Insurer if the Actuary believes that there is a matter relating to the financial position or operations of the Insurer that should be brought to the attention of the directors; and
(5) the contract must require and permit the Actuary to address the Regulatory Authority if the Actuary believes that a matter brought to the attention of the Directors of the Insurer is not adequately dealt with by bringing it to the attention of the Directors.

PIN 7.4.2

An Insurer that has appointed an Actuary to provide a report under section 7.2 or 7.3 must make arrangements to enable the Actuary to undertake his functions, and in particular must:

(1) keep the Actuary informed of the Insurer's business and other plans;
(2) ensure that the Actuary is fully informed of the Prudential Rules for Insurers applicable to the Insurer, as well as any other information that the Regulatory Authority has provided to the Insurer that may assist the Actuary in performing his duties; and
(3) ensure that the Actuary has access at appropriate times to all relevant data and people which the Actuary reasonably believes is necessary to fulfil his obligations to the Insurer in respect of this Chapter.

PIN 7.4.3

The Insurer must submit the reports referred to in section 7.2 and section 7.3 to the Regulatory Authority, at the same time as it submits its Annual Statutory Return for the Financial Period ended on the Reporting Date.

PIN 7.4.4

Where an Insurer is not a DIFC incorporated Insurer, a report prepared under section 7.2 or 7.3 must deal separately with the DIFC Insurance Business of the Insurer, and the Insurance Business of the Insurer as a whole.

PIN 7.4.5

Abbreviated details may be provided in a report prepared under the requirements of this Chapter in respect of a Class of Business that is not material.

PIN 7.4.5 Guidance

For the purposes of rule 7.4.5, a Class of Business that accounts for less than ten per cent of the Insurer's Net Written Premium in the Financial Period ended on the Reporting Date and that accounts for less than ten per cent of the Insurer's Insurance Liabilities as at the Reporting Date, will normally be considered immaterial.

PIN 7.5 Qualifications of the actuary

PIN 7.5.1

An Actuary appointed to provide an actuarial report under this Chapter must:

(1) have experience in the determination of liabilities in the Classes of Business dealt with in the actuarial report; and
(2) have the required skill and experience to perform his functions under, the DIFC regulatory system.

PIN 7.5.1 Guidance

The rules do not require an Insurer to use the same Actuary for all reports. An Insurer may provide separate reports, prepared by more than one Actuary, where the Insurer undertakes different Classes of Business, provided that each Actuary is appropriately qualified for the Classes of Business on which he reports. Similarly, an Insurer may appoint different Actuaries, each appropriately qualified, to provide reports in respect of Insurance Business conducted in or in respect of different geographical locations, for example DIFC Insurance Business and other Insurance Business.

PIN 7.5.2

An Insurer must notify the Regulatory Authority in writing of the name, professional qualifications and relevant experience of each Person that the Insurer proposes to appoint to provide an actuarial report under this Chapter.

PIN 7.5.3

The Regulatory Authority may, if it does not believe that the Actuary proposed by the Insurer possesses the qualifications set out in rule 7.5.1, notify the Insurer in writing that another Actuary must be appointed.

PIN 8 Consolidated Supervision

PIN 8.1 Introduction

PIN 8.1.1

This Chapter applies to all Insurers, except for rule 8.4.1 which applies only to DIFC Incorporated Insurers.

PIN 8.1.1 Guidance

1. An Insurer is exposed to risks through the relationships that it has with other insurance and non-insurance companies. This Chapter requires an Insurer to provide the Regulatory Authority periodically with information relating to the structure and financial position of any Group that it is a Member of, to assess significant Related party transactions, and to notify certain transactions. Provisions in respect of management of Group Risk are contained in Chapter 2.
2. An Insurer is also subject to separate reporting requirements in respect of changes in the structure of Groups that it is a Member of. Those requirements are set out in [SUP].

PIN 8.1.2

In this Chapter, the term 'surplus' means:

(1) in the case of an Insurer that is not a Protected Cell Company, the Insurer's Adjusted Capital Resources; and
(2) in the case of an Insurer that is a Protected Cell Company, the Insurer's Adjusted Cellular Capital Resources in respect of the Cell to which the Transaction relates, where the Transaction relates to a Cell, and otherwise the Insurer's Adjusted Non-Cellular Capital Resources.

PIN 8.1.3

In this Chapter, a series of Connected transactions between an Insurer and a Related party, or between an Insurer and parties who are Related to each other, is deemed to constitute a single Transaction.

PIN 8.2 Adequacy of Capital Resources of the group

PIN 8.2.1

The Regulatory Authority may, by written notice, require an Insurer to provide the Regulatory Authority with a statement of the consolidated financial position of any Group of which the Insurer is a Member, made up as at a date specified by the Regulatory Authority in that notice and in accordance with principles stated by the Regulatory Authority in the notice.

PIN 8.2.2

An Insurer receiving a notice under rule 8.2.1 shall have not less than three months to comply with the notice.

PIN 8.2.2 Guidance

An Insurer will normally be permitted to comply with a notice given under rule 8.2.1 by presenting a copy of a statement relating to the Group specified in the notice, made tip in compliance with an equivalent or substantially equivalent regulatory requirement to which the

Insurer or a Subsidiary or Associate of the Insurer is subject in a jurisdiction other than the DIFC. If that statement is not in English, the Insurer will be required to provide a certified translation of the statement into English.

PIN 8.3 Transactions within a group

PIN 8.3.1

This section applies to all Insurers in respect of all transactions that are material.

PIN 8.3.1 Guidance

A single Transaction or series of Connected transactions that constitute a sale, purchase, Exchange, loan or extension of credit Investment or guarantee involving one-half of one percent (0.5%) or less of surplus as at the end of the Financial Period immediately preceding the effective date of the Transaction will not normally be considered material for the purposes of this section.

PIN 8.3.2

Transactions entered into by an Insurer with Related entities must comply with the following conditions:

(1) the terms of the transactions must be fair and reasonable; and
(2) the books, accounts and records of the Insurer must clearly and accurately disclose the nature and details of the transactions including any accounting information necessary to support the fairness and reasonableness of the terms and conditions of the transactions.

PIN 8.4 Significant transactions other than Group transactions

PIN 8.4.1

An Insurer must not enter into a Transaction of the type described in this rule unless the Directors of the Insurer are satisfied following reasonable enquiry that the Transaction does not adversely affect the interests of policyholders. The transactions to be considered are:

(1) a sale, purchase, Exchange, loan or extension of credit, guarantee or Investment where the amount of the Transaction, as at the end of the Financial Period immediately preceding the Transaction, equals or exceeds three per cent of the Insurer's surplus;
(2) a loan or extension of credit to any Person who is not Related to the Insurer, where the Insurer makes the loan or extension of credit with the agreement or understanding that the proceeds of the Transaction, in whole or in substantial part, are to be used to make loans or extensions of credit to purchase assets of, or to make Investments in, any Related party of the Insurer making the loans or extensions of credit, where the amount of the Transaction, as at the end of the Financial Period immediately preceding the Transaction, equals or exceeds three per cent of the Insurer's surplus;
(3) a reinsurance agreement or modification to a reinsurance agreement in which the reinsurance premium or a change in the Insurer's liabilities equals or exceeds five per cent of the Insurer's surplus;
(4) a reinsurance agreement or modification to a reinsurance agreement involving the transfer of assets from an Insurer to a Person not Related to the Insurer, if an agreement or understanding exists between the Insurer and that Person that any portion of the assets will be transferred to one or more other persons Related to the Insurer and the reinsurance premium or a change in the Insurers liabilities equals or exceeds five per cent of the Insurer's surplus; and
(5) any management agreement, service contract or cost-sharing arrangement.

PIN 8.4.2

An Insurer must report to the Regulatory Authority all dividends and other distributions to shareholders within fifteen business days following the declaration of the dividend or distribution.

PIN 8.4.3

An Insurer that is a Takaful Insurer must report to the Regulatory Authority all distributions of profit or surplus (however called or described) to policyholders within fifteen business days of the date of declaration of the distribution.

PIN 8.4.4

An Insurer must notify the Regulatory Authority in writing within thirty days if the Insurer makes an Investment in a Body Corporate to which it is Related, if the total Investment in the Related Body Corporate by the Insurer and other Bodies Corporate to which the Insurer is Related exceeds ten per cent of the body corporate's paid-up capital or voting rights.

PIN App1 Classes of General Insurance Business

PIN A.1 Classes of General Insurance business

PIN A.1.1

The following are the Classes of Business For General Insurance:

Class 1 - Accident

Effecting or Carrying Out Contracts of Insurance providing fixed pecuniary benefits or benefits in the nature of indemnity (or a combination of both) against risks of the Person insured:

(a) sustaining injury as the result of an accident or of an accident of a specified Class, or
(b) dying as the result of an accident or of an accident of a specified Class, or
(c) becoming incapacitated in consequence of disease or of disease of a specified Class,
inclusive of contracts relating to industrial injury and occupational disease.

Class 2 - Sickness

Effecting or Carrying Out Contracts of Insurance providing fixed pecuniary benefits or benefits in the nature of indemnity (or a combination of the two) against risks of loss to the persons insured attributable to sickness or infirmity.

Class 3 - Land vehicles

Effecting or Carrying Out Contracts of Insurance against loss of or damage to vehicles used on land, including motor vehicles but excluding railway rolling stock.

Class 4 - Marine, Aviation and Transport

Effecting or carrying out contracts of insurance:

(a) against loss of or damage to railway rolling stock;
(b) upon aircraft or upon the machinery, tackle, furniture or equipment of aircraft;
(c) upon vessels used on the sea or on inland water, or upon the machinery, tackle, furniture or equipment of such vessels; or
(d) against loss of or damage to merchandise, baggage and all other goods in transit, irrespective of the form of transport.

Class 5 - Fire and other Property damage

Effecting or Carrying Out Contracts of Insurance against loss of or damage to Property (other than Property to which Classes 3 and 4 above relate) due to fire, explosion, storm, natural forces other than storm, nuclear energy, land subsidence, hail, frost or any event (such as theft).

Class 6 - Liability

Effecting or Carrying Out Contracts of Insurance against risks of the persons insured incurring liabilities to third parties, including risks of damage arising out of or in connection with the use of motor vehicles on land, aircraft and vessels on the sea or on inland water, including third-party risks and carrier's liability.

Class 7 - Credit and Suretyship

Effecting or carrying out:

(a) Contracts of Insurance against risks of loss to the persons insured arising from the insolvency of debtors of theirs or from the failure (otherwise than through insolvency) of debtors of theirs to pay their debts when due;
(b) Contracts of Insurance against risks of loss to the persons insured arising from their having to perform contracts of guarantee entered into by them; or
(c) contracts for fidelity bonds, performance bonds, administration bonds, bail bonds or customs bonds or similar contracts of guarantee.

Class 8 - Other

Effecting or carrying out contracts of General Insurance of any kind not included in Classes 1 to 7, and including, without limitation, contracts of insurance:

(a) against risks of loss to the persons insured attributable to interruptions of the carrying on of business carried on by them or to reduction of the scope of business so carried on;
(b) against risks of loss to the persons insured attributable to their incurring unforeseen expense;
(c) against risks of loss to the persons insured attributable to their incurring legal expenses (including costs of litigation); and
(d) providing assistance (whether in cash or in kind) for persons who get into difficulties, whether while travelling, while away from home, while away from their permanent residence, or otherwise.

PIN App2 Classes of Long-Term Insurance Business

PIN A2.1 Classes of Long-Term Insurance business

PIN A2.1.1

The following are the Classes of Business for Long-Term Insurance:

Class I - Life and annuity

Effecting or Carrying Out Contracts of Insurance on human life or contracts to pay annuities on human life, but excluding (in each case) contracts within Class III.

Class II - Marriage and birth

Effecting or Carrying Out Contracts of Insurance to provide a sum on marriage or on the birth of a child, being contracts expressed to be in effect for a period of more than one year.

Class III - Linked Long term

Effecting or Carrying Out Contracts of Insurance on human life or contracts to pay annuities on human life where the benefits are wholly or partly to be determined by reference to the value of, or the income from, Property of any description (whether or not specified in the contracts) or by reference to fluctuations in, or in an index of, the value of Property of any description (whether or not so specified).

Class IV - Permanent health

Effecting or Carrying Out Contracts of Insurance providing specified benefits against risks of persons becoming incapacitated in consequence of sustaining injury as a result of an accident or of an accident of a specified Class or of sickness or infirmity, being contracts that -

(a) are expressed to be in effect for a period of not less than five years, or until the normal retirement age for the persons concerned, or without limit of time; and
(b) either are not expressed to be terminable by the Insurer, or are expressed to be so terminable only in special circumstances mentioned in the contract.

Class V - Tontines

Effecting or carrying out tontines.

Class VI - Capital redemption

Effecting or carrying out contracts (other than contracts in Class I) to provide a capital sum at the end of a term.

Class VII - Pension fund management

Effecting or carrying out:

(a) pension fund management contracts; or
(b) contracts of the kind mentioned in (a) that are combined with Contracts of Insurance covering either conservation of capital or payment of a minimum interest.

PIN App3 Calculation of Adjusted Capital Resources

PIN A3.1 Purpose and general provisions

PIN A3.1.1

This Appendix applies to all Insurers to which Section 4.3 applies.

PIN A3.1.1 Guidance

1. This Appendix sets out the manner in which an Insurer that is not a Protected Cell Company is required to calculate its Adjusted Capital Resources. The equivalent provisions for Insurers that are Protected Cell Companies are set out in App5.
2. The Adjusted Capital Resources are calculated by making adjustments to the Insurer's equity as at the Solvency Reference Date.

PIN A3.2 Adjusted capital resources

PIN A3.2.1

An Insurer must calculate its Adjusted Capital Resources according to the formula:

ACR = AE - HCA

where:

ACR means the Insurer's Adjusted Capital Resources;
AE means the Insurer's adjusted equity; and
HCA means the Insurer's hybrid capital adjustment.

PIN A3.2.2

Adjusted equity is calculated as set out in section A3.4. The hybrid capital adjustment is set out in section A3.5.

PIN A3.3 Base capital

PIN A3.3 Guidance

The commencement point for calculating an Insurer's adjusted equity is the Insurer's base capital.

PIN A3.3.1

Subject to Rules A3.3.3, A3.3.4 and A3.3.5, an Insurer's base capital consists of the following capital Instruments and equity reserves of the Insurer:

(1) paid-up ordinary shares;
(2) general reserves;
(3) in the Insurance Fund of a Takaful Insurer, amounts provided from the Owners Equity by loan to the Insurance Fund and not repaid as at the Solvency Reference Date;
(4) retained earnings;
(5) current year's earnings after tax; and
(6) Hybrid capital (as defined in rule A3.5.1).

PIN A3.3.2

Where an Insurer is not a DIFC Incorporated Insurer, base capital may include capital Instruments and equity reserves that are approved in writing by the Regulatory Authority as equivalent to the capital Instruments and equity reserves described in rule A3.3.1.

PIN A3.3.3

Owners' Equity in a Takaful Insurer other than amounts referred to in sub-Rule A3.3.1(3) must be classified as hybrid capital for the purposes of this section if:

(1) under the constitutional documents of the Insurer or the terms of insurance contracts or both, participation in the surpluses and losses of Takaful business is limited to the policyholders of the Insurer; and
(2) the Owner's Equity is available for loan to the Insurance Fund of the Insurer.

PIN A3.3.4

Hybrid capital having a term to maturity of less than five years may only be included in base capital with the written consent of the Regulatory Authority.

PIN A3.4 Adjusted equity

PIN A3.4.1

An Insurer must calculate its adjusted equity by adding items to and deducting them from its base capital, as set out in this section.

PIN A3.4.1 Guidance

The purpose of these adjustments is to provide a consistent basis for the determination of the Insurer's Adjusted Capital Resources and to exclude from those resources assets that may not be readily realisable for the purposes of meeting Insurance Liabilities of the Insurer.

PIN A3.4.2

The following items must be added to base capital, to the extent that the Insurer has excluded them in determining its base capital:

(1) any minority interests in companies that are Subsidiaries of the Insurer; and
(2) any amount in respect of dividends to be paid by the Insurer in the form of Shares.

PIN A3.4.3

The following items must be deducted from base capital, to the extent that the Insurer has not excluded them in determining its base capital, or has added them to base capital under rule A3.4.2:

(1) any amounts in respect of appropriations to be made from profit in respect of the Financial Period most recently ended, including dividends, distributions by Takaful Insurers of surplus, bonuses, pensions and welfare Charges that are determined on the basis of the profit of that Financial Period, whether or not the amounts have been approved by the Insurer for payment;
(2) Owners' Equity in a Takaful Insurer that does not, under the constitutional documents of the Insurer or the terms of insurance contracts or both, participate in the surpluses and losses of Takaful business;
(3) the amount of any Investment by the Insurer or by a Subsidiary of the Insurer, in the Insurer's own shares;
(4) the amount of any tax liability that would be attributable to unrealised gains on Investments, if those gains were realised;
(5) the amount of deferred acquisition costs;
(6) the amount of any deferred tax asset;
(7) the amount of any asset representing the value of in-force Long-Term Insurance business of the Insurer;
(8) the amount of any goodwill, patents, service rights, brands and any other intangible items;
(9) the amount of any Zakah or charity fund of a Takaful Insurer;
(10) the amount of any Class 7 Capital Requirement to which the Insurer is subject;
(11) the amount of any operating assets, including inventories, plant and equipment, and vehicles; and
(12) the amount of any other assets that may not be applied to meet Insurance Liabilities of the Insurer.

PIN A3.4.4

Sub-rule A3.4.3(12) does not require an Insurer to exclude assets attributable to a Long-Term Insurance Fund maintained by the Insurer.

PIN A3.5 Hybrid capital adjustment

PIN A3.5 Guidance

1. This section acts to limit hybrid capital to 15% of an Insurer's adjusted equity.
2. The purpose of the hybrid capital adjustment is to limit the extent to which an Insurer may rely for its Adjusted Capital Resources on Instruments that do not or may not constitute permanent capital of the Insurer. Such Instruments include share capital contributed by a Holding Company, where the Holding Company's Investment is financed by debt rather than by its own capital.

PIN A3.5.1

Hybrid capital includes the following items:

(1) subordinated debt;
(2) preference shares;
(3) Owners' Equity in a Takaful Insurer, of the type described in rule A3.3.3; and
(4) ordinary Shares issued by an Insurer to a Holding Company whose own paid-up ordinary share capital, taken together with its general reserves, is lower than that of the Insurer.

PIN A3.5.2

Subject to rule A3.5.3, an Insurer must calculate its hybrid capital adjustment as the amount by which the total amount of hybrid capital exceeds 15% of adjusted equity.

PIN A3.5.3

The Regulatory Authority may at its discretion and on the application of an Insurer, permit that Insurer to apply rule A3.5.2 as though the figure of 15% was replaced with a higher figure approved in writing by the Regulatory Authority. The approved figure may not be more than the actual percentage which the hybrid capital represents of adjusted equity, and may not in any case exceed 30%.

PIN App4 Calculation of Minimum Capital Requirement

PIN A4.1 Purpose and general provisions

PIN A4.1.1

This Appendix applies to all Insurers to which section 4.3 applies.

PIN A4.1.1 Guidance

1. This Appendix sets out the manner in which an Insurer that is not a Protected Cell Company is required to calculate its Minimum Capital Requirement. The equivalent provisions for Insurers that are Protected Cell Companies are set out in App6.
2. The Minimum Capital Requirement is calculated by determining individual components in respect of various specific risks that the Insurer is exposed to, and adding those components together to arrive at the Minimum Capital Requirement.

PIN A4.2 Minimum capital requirement

PIN A4.2.1

Subject to rule A4.2.2, an Insurer must calculate its Minimum Capital Requirement according to the formula:

MCR = DRC + IVRC + OARC + OLRC + CRC + SFAC + URC + RRC + LIRC + AMRC

Where the following definitions apply:

Term Definition
MCR Insurer's Minimum Capital Requirement;
DCR Insurer's Default Risk Component;
IVRC Insurer's Investment Volatility Risk Component;
OARC Insurer's off-balance sheet asset risk component;
OLRC Insurer's off-balance sheet liability risk component;
CRC Insurer's Concentration Risk component;
SFAC Insurer's size factor adjustment component;
URC Insurer's Underwriting risk component;
RRC Insurer's reserving risk component;
LIRC Insurer's Long-Term Insurance risk component; and
AMRC Insurers asset management risk component.

PIN A4.2.2

The methods of calculation of the components referred to in rule A4.2.1 are set out in sections A4.4, A4.5, A4.6, A4.7, A4.8, A4.9, A4.1 0, A4.1 1, A4.12 and A4.13.

PIN A4.2.3

An Insurers Minimum Capital Requirement must always be equal to or higher than:

(1) in the case of a Class 1 Captive Insurer, 150,000 United States dollars;
(2) in the case of a Class 2 Captive Insurer, 250,000 United States dollars; and
(3) in the case of all other Insurers, 100,000,000 United States dollars.

PIN A4.3 Applicability of components to assets of the Insurer

PIN A4.3.1

Subject to rule A4.3.2, an Insurer must calculate those components of its Minimum Capital Requirement that are relevant to assets, in respect of every asset that is owned by the Insurer and that is available to meet the liabilities of the Insurer.

PIN A4.3.2

Where an Insurer arranges its affairs such that its Invested Assets are held in a Related entity, the Insurer may, with the written approval of the Regulatory Authority, calculate components of its Minimum Capital Requirement by reference to the Insurers interest in the assets that are held by the Related entity, instead of by reference to the interest that the Insurer has in that Related entity. In that case this Appendix shall be interpreted as though the assets (representing the Insurer's interest) held by the Related entity were held directly by the Insurer.

PIN A4.3.2 Guidance

The effect of rule A4.3.2 is to provide flexibility for Insurers whose Investments are managed on a pooled basis within a Group, or which establish specialist Subsidiaries to manage their Investments. While the Insurer's asset in such cases is a balance with, or Investment in, a Related entity, this rule permits the Insurer to 'look through' the corporate arrangement and apply this Appendix to the assets of the Related entity as though they were the Insurer's own.

PIN A4.4 Default risk component

PIN A4.4 Guidance

The purpose of the Default Risk Component is to require an Insurer to set aside capital to cover the risk that amounts receivable from Counterparties will not be received. The basic calculation model for this component, set out in A4.4.1, is modified by additional provisions that permit an Insurer to take account of the reduced default risk where an asset is covered by guarantees or Collateral, and impose additional capital Charges on assets that are encumbered. In addition, certain assets that are left out of account in calculating an Insurer's Adjusted Capital Resources are exempt from the Default Risk Component calculation. Excluding these assets from Adjusted Capital Resources already effectively imposes a 100% Capital Requirement.

PIN A4.4.1

An Insurer must calculate its Default Risk Component as the sum of the amounts obtained by multiplying the value of each asset of the Insurer with the percentage applicable to that asset, as set out in the tables contained in this rule and subject to the provisions of Rules A4.4.2, A4.4.5, A4.4.6 and A4.4.7.

(1) Assets that are Invested Assets

Asset %
(a) Bonds Rated 'AAA', issued by a Government or Government agency 0.0
(b) Bonds not included in (a), Rated 'A' or better 0.4
(c) Bonds Rated 'BBB' 3.3
(d) Bonds Rated 'BB' 7.5
(e) Bonds Rated 'B' 13.7
(f) Bonds Rated 'CCC' 20.2
(g) Other Rated bonds 30.0
(h) Secured loans - performing 2.0
(i) Secured loans - Non-Performing 14.0
(j) Loans to Directors of the Insurer or to Directors of Related parties, or to the dependent relatives of such directors 100.0
(k) Unsecured loans to Employees (except loans of less than $1,000) 100.0
(l) Other bonds and loans 50.0
(2) Assets that are not Invested Assets

Asset %
(a) Reinsurance recoverable from:  
  i. reinsurers Rated 'AAA' 0.5
  ii. reinsurers Rated 'AA' 1.2
  iii. reinsurers Rated 'A' 1.9
  iv. reinsurers Rated 'BBB' 4.7
  v. reinsurers Rated 'BB' 9.6
  vi. reinsurers Rated 'B' 23.8
  vii. reinsurers Rated 'CCC' 49.7
  viii. reinsurers Rated 'R' 50.0
  ix. other reinsurers 25.0
(b) Other assets 3.0

PIN A4.4.2

Reinsurance recoverable includes amounts recoverable in respect of outstanding claims and in respect of Premium Liabilities. Insurers may make reasonable approximations where it is not possible to identify exactly the reinsurers to which amounts recoverable relate (for example, in the case of recoveries in respect of Premium Liabilities and in respect of claims incurred but not reported).

PIN A4.4.3

Where an asset falls within more than one Category in table A4.4.1(1) or A4.4.1(2), the highest of the percentages applicable to that asset must be applied.

PIN A4.4.4

Where an asset has been explicitly, unconditionally and irrevocably guaranteed for its remaining term, by a guarantor with a rating of 'A' or better who is not Related to the Insurer, the Insurer may at its option use, in place of the relevant percentage in table A4.4.1(1) or A4.4.1(2), the percentage in those tables that would apply to a debt due from the guarantor.

PIN A4.4.5

Where an Insurer holds Collateral against an asset, and the Collateral consists of a Charge, mortgage or other Security interest in cash or in debt Securities whose Issuer has a rating of 'A' or above, the Insurer may at its option use, in place of the relevant percentage in table A4.4.1(1) or A4.4.1(2), the percentage in those tables that would apply to the Collateral.

PIN A4.4.6

The provisions of Rules A4.4.4 and A4.4.5 apply only to so much of the asset that is covered by the guarantee or the Collateral.

PIN A4.4.7

Notwithstanding anything else in this section:

(1) the amount included in the Default Risk Component in respect of any asset that is subject to a fixed or floating Charge, mortgage or other encumbrance must be 100% of the value of the asset to the extent of that Charge, mortgage or encumbrance. In the case of such assets, the percentages set out in the tables above must be applied only to the amount, if any, by which the value of the asset exceeds the amount of the Charge, mortgage or encumbrance; and
(2) no amount must be included in the Default Risk Component in respect of assets excluded from Adjusted Capital Resources in accordance with A3.4.3(5), A3.4.3(6), A3.4.3(7), A3.4.3(8), A3.4.3(l 1) or A3.4.3(12).

PIN A4.5 Investment volatility risk component

PIN A4.5 Guidance

The purpose of the Investment Volatility Risk Component is to require an Insurer to set aside capital to cover the risk of deterioration in the values of Invested Assets. Invested Assets that are linked to liabilities of Investment-Linked Insurance contracts are exempted from the calculation, since there is a direct correlation between the values of the assets and the values of the liabilities to which they are linked.

PIN A4.5.1

Subject to rule A4.5.2, an Insurer must calculate its Investment Volatility Risk Component as the sum of the amounts obtained by multiplying the value of each Invested Asset with the relevant percentage applicable to that asset as set out in the following table.

Asset %
(a) All bonds up to 1 year to maturity 1.0
(b) Bonds between 1 and 2 years to maturity 2.0
(c) Bonds between 2 and 5 years to maturity 4.0
(d) Bonds between 5 and 10 years to maturity 6.0
(e) All other bonds 8.0
(f) Equity shares 15.0
(g) Preference shares 6.0
(h) Land and buildings 18.0

PIN A4.5.2

No amount must be included in the calculation of the Investment Volatility Risk Component in respect of:

(1) Investments that are linked to liabilities of Investment-Linked Insurance contracts; or
(2) assets referred to in sub-Rule A4.4.7(2).

PIN A4.6 Off-balance sheet asset risk component

PIN A4.6 Guidance

The purpose of the Off-Balance Sheet Asset Risk Component is to require an Insurer to set aside capital to cover the risk of default and deterioration in value in respect of exposures that the Insurer has because it is a party to a Derivative contract.

PIN A4.6.1

An Insurer is required to calculate an off-balance sheet asset risk component, if the Insurer is, as at the Solvency Reference Date, a party to a Derivative contract, including a forward, future, swap, option or other similar contract, but not including:

(1) a put option serving as a guarantee;
(2) a foreign Exchange contract having an Original Maturity of 14 days or less; or
(3) an Instrument traded on a Futures or Options Exchange, which is subject to daily mark-to-market and margin payments.

PIN A4.6.2

An Insurer must calculate its off-balance sheet asset risk component as the sum of the amounts obtained by applying the calculations set out in rule A4.6.3 in respect of each Derivative contract entered into by the Insurer that meets the description in rule A4.6.1.

PIN A4.6.3

The amount in respect of a Derivative contract is obtained by calculating, for an asset equivalent amount as determined in rule A4.6.4, a Default Risk Component as set out in section A4.4 and an Investment Volatility Risk Component as set out in section A4.5, as though the asset equivalent amount were a debt obligation due from the Derivative Counterparty.

PIN A4.6.4

The asset equivalent amount in respect of a Derivative is calculated as the sum of the current mark-to-market Exposure of the Derivative (where this is positive) and the amount obtained by multiplying the notional principal amount of the Derivative by the factors specified in the following table, according to the nature and Residual Maturity of the Derivative.

Residual Maturity A B C D E
(a) Less than l year Nil 1.0% 6.0% 7.0% 10.0%
(b) 1 year or more, but less than 5 years 0.5% 5.0% 8.0% 7.0% 12.0%
(c) 5 years or more 1.5% 7.0% 10.0% 8.0% 15.0%

Where:

A means interest rate contracts;
B means foreign Exchange and gold contracts;
C means equity contracts;
D means precious metal contracts (other than gold); and
E means other contracts

PIN A4.7 Off-balance sheet liability risk component

PIN A4.7 Guidance

1. The purpose of the Off-balance Sheet Liability Risk Component is to require an Insurer to set aside capital to cover the risk that it will be required to perform on a guarantee, letter of credit or other credit substitute that it has entered into. Although such items are not liabilities of the Insurer as at the Solvency Reference Date, they have the capacity to crystallise as liabilities at a subsequent date and therefore to affect the Insurer's capital position.
2. Credit substitutes that are Contracts of Insurance are excluded from the calculation of this component, as they are subject to a separate Capital Requirement under section 4.5.

PIN A4.7.1

An Insurer must calculate an off-balance sheet liability risk component if the Insurer has issued guarantees, including put Options serving as guarantees, letters of credit or any other credit substitute (other than an insurance contract) in favour of another party, so that the Insurer is exposed to the risk of having to make payment on those Instruments should the guaranteed party default.

PIN A4.7.2

An Insurer must calculate its off-balance sheet liability risk component as the sum of the amounts obtained by applying the calculations set out in rule A4.7.3 in respect of each guarantee, letter of credit or other credit substitute.

PIN A4.7.3

The amount in respect of a guarantee, letter of credit or other credit substitute (other than an insurance contract) is obtained by calculating, for the nominal amount of the guarantee, letter of credit or other credit substitute, a Default Risk Component as set out in section A4.4 and an Investment Volatility Risk Component as set out in section A4.5, in respect of the obligation or asset over which the guarantee, letter of credit or other credit substitute is written, as though that obligation or asset were an obligation or asset of the Insurer.

PIN A4.8 Concentration Risk component

PIN A4.8 Guidance

The purpose of the Concentration Risk component is to require an Insurer to set aside capital to cover the sensitivity that it has to default or volatility in respect of assets and exposures to single Counterparties or groupings of Connected Counterparties, or single properties. The additional Capital Requirement applies to Investment exposures, including off-balance sheet exposures. It is calculated on the basis of the Insurer's total Exposure to the Counterparty, grouping of Connected Counterparties or Property, and operates on a sliding scale depending on the size of that Exposure relative to the Insurer's Adjusted Capital Resources. The total amount of the Concentration Risk component in respect of any asset is limited to 100% of the value of the asset, and certain assets that are left out of account in calculating an Insurer's Adjusted Capital Resources are excluded from the calculation.

PIN A4.8.1

An Insurer must calculate a Concentration Risk component if the Insurer has, as at the Solvency Reference Date, an Investment Exposure to a single Counterparty or (taken in the aggregate) to a grouping of two or more Counterparties who are Related to each other, or to a single Property, that exceeds 10% of the Insurer's Adjusted Capital Resources.

PIN A4.8.2

For the purposes of the calculation referred to in rule A4.8.1:

(1) 'investment exposure' means the aggregate value of all equity, bond or other Investments in or in respect of the Counterparty or grouping of Related Counterparties or Property in question, together with off-balance sheet exposures to the same Counterparty or grouping of Related Counterparties or Property that the Insurer has because it has issued guarantees, letters of credit or other credit substitutes (other than insurance contracts), or because it has entered into Derivative contracts, but excluding any assets excluded from base capital by reason of any of the sub-Rules referred to in sub-Rule A4.4.7(2); and
(2) 'AAA'-Rated Governments and Government agencies are not Counterparties.

PIN A4.8.3

An Insurer must calculate its Concentration Risk Component as the sum of the amounts obtained by applying to each Investment Exposure that exceeds 10% of the Insurer's Adjusted Capital Resources the relevant formula set out in the following table, subject to rule A4.8.4.

Exposure expressed as a percentage of adjusted capital resources Formula to determine Concentration Risk component
(a) Over 10 up to 25 20% of the amount by which the Investment Exposure exceeds 10% of Adjusted Capital Resources, up to a limit equivalent to 3% of Adjusted Capital Resources.
(b) Over 25 up to 50 3% of the amount of Adjusted Capital Resources, plus 40% of the amount by which the Investment Exposure exceeds 25% of Adjusted Capital Resources, up to a limit in total equivalent to 13% of Adjusted Capital Resources.
(c) Over 50 up to 75 13% of the amount of Adjusted Capital Resources, plus 60% of the amount by which the Investment Exposure exceeds 50% of Adjusted Capital Resources, up to a limit in total equivalent to 28% of Adjusted Capital Resources.
(d) Over 75 up to 100 28% of the amount of Adjusted Capital Resources, plus 80% of the amount by which the Investment Exposure exceeds 75% of Adjusted Capital Resources, up to a limit in total equivalent to 48% of Adjusted Capital Resources.
(e) Over 100 48% of the amount of Adjusted Capital Resources, plus 100% of the amount by which the Investment Exposure exceeds 100% of Adjusted Capital Resources.

PIN A4.8.4

If the amount included in the Concentration Risk component in respect of an Investment Exposure, aggregated with the sum of the amounts included in the Default Risk Component, Investment Volatility Risk Component and off-balance sheet asset risk component in respect of the assets and off-balance sheet exposures comprising that Investment Exposure, exceeds 100% of that Investment Exposure, the Concentration Risk component in respect of that Investment Exposure must be reduced so that the total of the three components in respect of that Investment Exposure is equal to 100% of that Investment Exposure.

PIN A4.9 Size factor component

PIN A4.9 Guidance

The effect of the size factor component is to provide a relatively higher Capital Requirement in respect of Insurers with smaller portfolios of Invested Assets. The calculation adjusts the aggregate of the Default Risk Component, Investment Volatility Risk Component and Concentration Risk component in respect of Invested Assets, by a factor that varies according to the total size of Invested Assets.

PIN A4.9.1

The base figure for the size factor component is determined by aggregating the following components:

(1) the Default Risk Component determined in accordance with section A4.4, so far only as concerns the Insurer's Invested Assets;
(2) the Investment Volatility Risk Component determined in accordance with section A4.5; and
(3) the Concentration Risk component determined in accordance with section A4.8, so far only as concerns the Insurers Invested Assets.

PIN A4.9.2

An Insurer must calculate its size factor component by multiplying the base figure determined in accordance with rule A4.9.1 by the factor derived by applying the following formula, where x represents the total Invested Assets expressed in millions of US dollars:

(1) If x ≤ 100, the factor is 1.5.
(2) If 100 < x ≤ 200, the factor is (1150 + 0.5(x-1 00))/x.
(3) If 200 < x ≤ 1,200, the factor is (200 - 0.2(x-200))/x.
(4) If x > 1,200, the factor is zero.

PIN A4.10 Underwriting risk component

PIN A4.10 Guidance

The purpose of the Underwriting risk component of the Minimum Capital Requirement is to require an Insurer to set aside capital to address the risk that the cost of claims will vary from the cost implicit in the premiums being charged. The basic calculation model set out in rule A4.10.2 applies different factors to the premium in respect of different Classes of Business, based on the different perceived risk of variability associated with each. The model is modified by additional provisions dealing with certain Classes of Business. This section also restricts the extent to which reinsurance may be taken into account when calculating the Underwriting risk component.

PIN A4.10.1

Subject to the other provisions of this section, an Insurer must calculate its Underwriting risk component as the sum of the amounts obtained by multiplying the Insurer's base premium, for each Class of Business, by the percentage factors set out in the following table.

Class of Business Percentage factor
  Direct insurance Proportional reinsurance Non-proportional and facultative reinsurance
(a) Classes 1 and 2 18 18 27
(b) Class 3 12 12 18
(c) Class 4 17 17 26
(d) Class 5 19 19 30
(e) Class 6 27 27 29
(f) Class 8 18 18 27

PIN A4.10.2

Where an Insurer underwrites Contracts of Insurance in Class I or Class 2, and those contracts constitute Long-Term Insurance contracts, the Insurer must not calculate an Underwriting risk component in respect of those contracts but must instead calculate a Long-Term Insurance risk component as set out in section 4.12.

PIN A4.10.3

The Regulatory Authority may, on written application by an Insurer Undertaking business in Class 2, give consent in writing to the use of percentages other than those stated in item A4.10.1(a), if the Regulatory Authority is satisfied that adequate mortality and morbidity information exists in respect of that business, to provide a reasonable basis for reliance on actuarial principles. The percentages that may be used must be those stated in the notice giving consent, but may not be lower than 12 per cent in the case of direct insurance and proportional reinsurance, and 18 per cent in the case of non-proportional or facultative reinsurance.

PIN A4.10.4

Where the Insurer's estimated net retention as at the Solvency Reference Date in respect of a Property catastrophe exceeds the sum of the amounts calculated in accordance with rule A4.1 0.1 in respect of Class 5, before taking account of this rule, the sum of those amounts must be replaced by the Insurer's estimated net retention in respect of a Property catastrophe when calculating the Underwriting risk component.

PIN A4.10.5

For the purposes of rule A4.10.4, the Insurer's net retention means the sum of claims expected to be paid, associated direct and indirect settlement costs and reinstatement premiums expected to be paid in respect of reinsurance recoveries resulting from those claims, less the sum of reinstatement premiums expected to be received and reinsurance and other recoveries expected to be received resulting from those claims, in the event of a Property catastrophe representing a Return period of not less than 100 years.

PIN A4.10.6

For the purposes of this section, and subject to rule A4.10.8, the Insurer's base premium means the higher of the two following amounts:

(1) the amount of the Insurer's Net Written Premium during the reference period; and
(2) 50 per cent of the amount of the Insurer's Gross Written Premium during the reference period.

PIN A4.10.7

In rule A4.10.6, the reference period means the Financial Period ending next before the Solvency Reference Date, except where the Insurer's forecast Net Written Premium, according to its business plan, for the Financial Period next after that Financial Period, is higher, in which case the reference period will be the second of the two Financial Periods and the Net Written Premium and Gross Written Premium used for the purposes of rule A4.10.6 must be the forecast Net Written Premium and Gross Written Premium for that Second Financial Period.

PIN A4.10.8

Where an Insurer enters, as Insurer or cedant, into a General Insurance contract of longer than twelve months' duration, the premium or reinsurance premium on that contract must not be included fully in the calculation of base premium in the Financial Year in which the contract was entered into, but must be apportioned over the duration of the contract by allocating to each Financial Period a fraction of the premium proportionate to the fraction of the contract period that falls into that Financial Period, or on a different basis approved in writing by the Regulatory Authority.

PIN A4.10.9

Where an Insurer enters as reinsurer into a finite risk reinsurance contract, the Underwriting risk component in respect of that contract, regardless of the Class of Business it relates to, must be 4 per cent of the base premium on the contract.

PIN A4.10.9 Guidance

Provisions in respect of Class 7 are contained in section 4.5.

PIN A4.11 Reserving risk component

PIN A4.11 Guidance

The purpose of the reserving risk component of the Minimum Capital Requirement is to require an Insurer to set aside capital to address the risk that the cost of claims will vary from the amounts recorded as liabilities in the Insurer's balance sheet. This calculation applies only to liabilities in respect of outstanding claims (the risk of deterioration in Premium Liability is addressed in the Underwriting risk component in section A4.10). The principles of the calculation are similar to those in section A4. 10.

PIN A4.11.1

Subject to the other provisions of this section, an Insurer must calculate its reserving risk component as the sum of the amounts obtained by multiplying the Insurers base claims reserve under Contracts of Insurance and reinsurance entered into by it, for each Class of Business, by the percentage factors set out in the following table.

Class of Business Percentage factor
  Direct insurance Proportional reinsurance Non-proportional and facultative reinsurance
(a) Classes 1 and 2 28 28 28
(b) Class 3 12 12 12
(c) Class 4 16 16 16
(d) Class 5 22 22 22
(e) Class 6 10 10 10
(f) Class 7 28 28 28

PIN A4.11.2

Where an Insurer underwrites Contracts of Insurance in Class 1 or Class 2, and those contracts constitute Long-Term Insurance contracts, the Insurer must not calculate a reserving risk component in respect of those contracts but must instead calculate a Long-Term Insurance risk component as set out in section A4.12.

PIN A4.11.3

The Regulatory Authority may, on written application by an Insurer Undertaking Insurance Business in Class 2, give consent in writing to the use of percentages other than those stated in item A4.1 1.1 (a), if the Regulatory Authority is satisfied that adequate mortality and morbidity information exists in respect of that business, to provide a reasonable basis for reliance on actuarial principles. The percentages that may be used must be those stated in the notice giving consent, but may not be lower than 5 per cent.

PIN A4.11.4

For the purposes of rule A4.1 1. 1, the Insurers base claims reserve means the higher of the following two amounts:

(1) the amount of the Insurer's provision for Gross Outstanding Claims, less the amount of reinsurance and other recoveries expected to be received in respect of that liability; and
(2) 50 per cent of the amount of the Insurer's provision for Gross Outstanding Claims.

PIN A4.11.5

Where an Insurer has entered as reinsurer into a finite risk reinsurance contract, the reserving risk component in respect of that contract, regardless of the Class of Business it relates to, must be 6 per cent of the base claims reserve on the contract.

PIN A4.11.5 Guidance

Provisions in respect of Class 7 are contained in section 4.5.

PIN A4.12 Long-Term Insurance risk component

PIN A4.12 Guidance

The purpose of the Long-Term Insurance risk component of the Minimum Capital Requirement is to require an Insurer to set aside capital to address the risk that the net present value of future Policy Benefits will vary from the amounts recorded as Long-Term Insurance Liabilities in the Insurer's balance sheet. The calculation model set out in rule A4.12.1 applies ratios to the Insurer's liability in respect of Long-Term Insurance business and to the capital at risk in respect of such business.

PIN A4.12.1

An Insurer must calculate its Long-Term Insurance risk component as the sum of the following five amounts:

(1) 5 per cent of the amount of provisions in respect of Long-Term Insurance business that is not Investment-Linked Insurance;
(2) 1.25% of the amount of provisions in respect of Long-Term Insurance business that is Investment-Linked Insurance, where the contracts are subject to a capital guarantee;
(3) 0.5% of the amount of provisions in respect of Long-Term Insurance Business that is Investment-Linked Insurance, where the contracts are not subject to a capital guarantee;
(4) 0.375% of the amount of capital at risk in respect of Long-Term Insurance contracts other than contracts described in sub-Rule (5); and
(5) 0.15% of the amount of capital at risk in respect of Long-Term Insurance contracts that provide for benefits payable only on death within a specified period, or are reinsurance contracts.

PIN A4.12.2

In rule A4.12.1:

(1) 'provisions in respect of Long-Term Insurance business' means the amount of Long-Term Insurance Liability in respect of the contracts concerned, except that the amount may not be less than 85% of the liability determined without taking reinsurance into account; and
(2) 'capital at risk' means the aggregate amount of sums assured on contracts of Long-Term Insurance issued by an Insurer, minus the aggregate amount of provisions in respect of those contracts. Where the contract is an annuity, the sum assured must be taken to be the present value of the annuity payments. The capital at risk must be determined separately for each contract, and where the capital at risk calculated for a contract is less than zero, the capital at risk for that contract must be taken as zero.

PIN A4.13 Asset management risk component

PIN A4.13 Guidance

This section requires an Insurer to set aside capital in respect of assets that it manages. The circumstances under which an Insurer may conduct asset management are restricted by Chapter 1.

PIN A4.13.1

An Insurer must calculate its asset management risk component as 0.5% of the market value of assets managed by it.

PIN A4.13.2

Assets that are recognised as assets of the Insurer in accordance with generally accepted accounting principles are not assets managed by it.

PIN App5 Calculation Of Adjusted Non-Cellular Capital Resources and Adjusted Cellular Capital Resources

PIN A5.1 Purpose and general provisions

PIN A5.1.1

This Appendix applies to all Insurers to which section 4.4 applies.

PIN A5.1.1 Guidance

1. This Appendix sets out the manner in which an Insurer that is a Protected Cell Company is required to calculate its Adjusted Non-Cellular Capital Resources and the Adjusted Cellular Capital Resources applicable to each Cell. The calculation is in each case analogous to that applicable to Insurers that are not Protected Cell Companies, so that (except where changes are necessary to reflect structural differences) the capital of each Cell, and of the non-cellular portion of the Insurer, is determined as though it was an Insurer subject to App3.
2. The Adjusted Non-Cellular Capital Resources and Adjusted Cellular Capital Resources are calculated by making adjustments to the non-cellular equity of the Insurer or cellular equity of the Cell, as at the Solvency Reference Date.
3. Provisions in respect of adjusted non-cellular Capital Resources are set out in sections A5.2 to A5.5. Provisions in respect of Adjusted Cellular Capital Resources are set out in sections A5.6 to A5. 10.

PIN A5.2 Adjusted non-cellular capital resources

PIN A5.2.1

An Insurer must calculate its Adjusted Non-Cellular Capital Resources according to the formula:

ANCR = ANE - HNCA

where:

ANCR means the Insurer's Adjusted Non-Cellular Capital Resources;
ANE means the Insurers adjusted non-cellular equity; and
HNCA means the Insurers hybrid non-cellular capital adjustment.

PIN A5.2.2

Adjusted non-cellular equity is calculated as set out in section A5.4. The hybrid non-cellular capital adjustment is set out in section A5.5

PIN A5.3 Base non-cellular capital

PIN A5.3 Guidance

The commencement point for calculating an Insurer's adjusted non-cellular equity is the Insurer's base non-cellular capital.

PIN A5.3.1

Subject to Rules A5.3.2 and A5.3.3, an Insurer's base non-cellular capital consists of the following capital Instruments and equity reserves of the Insurer:

(1) paid-up ordinary shares;
(2) general reserves;
(3) retained earnings;
(4) current year's earnings after tax; and
(5) hybrid non-cellular capital (as defined in rule A5.5.1).

PIN A5.3.2

All Cell Share Capital and any capital Instruments or equity reserves of the Insurer that are attributable to a Cell must be excluded from base non-cellular capital.

PIN A5.3.3

Hybrid non-cellular capital having a term to maturity of less than five years may only be included in base non-cellular capital with the written consent of the Regulatory Authority.

PIN A5.4 Adjusted non-cellular equity

PIN A5.4.1

An Insurer must calculate its adjusted non-cellular equity by adding items to and deducting them from its base non-cellular capital, as set out in this section.

PIN A5.4.1 Guidance

1. The purpose of these adjustments is to provide a consistent basis for the determination of the Insurer's Adjusted Non-Cellular Capital Resources and to exclude from those resources assets that may not be readily realisable for the purposes of meeting any Non-Cellular Liabilities of the Insurer.
2. A Takaful Insurer may not count as non-cellular capital amounts loaned to Insurance Funds that are attributable to Cells, as those amounts will be counted towards base cellular capital of the Cells concerned.

PIN A5.4.2

The following items must be added to base non-cellular capital, to the extent that the Insurer has excluded them in determining its base non-cellular capital:

(1) any minority interests in companies that are Subsidiaries of the Insurer, where the Insurer's interest in those companies constitutes a Non-Cellular Asset of the Insurer; and
(2) any amount in respect of dividends to be paid by the Insurer in the form of Shares other than Cell Shares.

PIN A5.4.3

The following items must be deducted from base non-cellular capital, to the extent that the Insurer has not excluded them in determining its base non-cellular capital, or has added them to base non-cellular capital under rule A5.4.2:

(1) any amounts in respect of appropriations to be made from profit in respect of the Financial Period most recently ended, including dividends, bonuses, pensions and welfare Charges that are determined on the basis of the profit of that Financial Period, whether or not the amounts have been approved by the Insurer for payment;
(2) Owners' Equity in a Takaful Insurer that does not, under the constitutional documents of the Insurer or the terms of insurance contracts or both, participate in the surpluses and losses of Takaful business;
(3) the amount of any Investment by the Insurer or by a Subsidiary of the Insurer, in the Insurer's own shares;
(4) the amount of any tax liability that would be attributable to unrealised gains on Investments, if those gains were realised;
(5) the amount of any deferred tax asset;
(6) the amount of any goodwill, patents, service rights, brands and any other intangible items;
(7) in a Takaful Insurer, the amount of any loan made from the Owner's Equity to an Insurance Fund that is attributable to a Cell, that has not been repaid as at the Solvency Reference Date;
(8) the amount of any Zakah or charity fund of a Takaful Insurer;
(9) the amount of any operating assets, including inventories, plant and equipment, and vehicles; and
(10) the amount of any other assets that may not be applied to meet Non-Cellular Liabilities of the Insurer.

PIN A5.5 Hybrid non-cellular capital adjustment

PIN A5.5 Guidance

1. This section acts to limit hybrid non-cellular capital to 15% of an Insurer's adjusted non-cellular equity.
2. The purpose of the hybrid non-cellular capital adjustment is to limit the extent to which an Insurer may rely for its Adjusted Non-Cellular Capital Resources on Instruments that do not or may not constitute permanent capital of the Insurer. Such Instruments include share capital contributed by a Holding Company, where the Holding Company's Investment is financed by debt rather than by its own capital.

PIN A5.5.1

Subject to rule A5.5.2, hybrid non-cellular capital includes the following items:

(1) subordinated debt;
(2) preference shares; and
(3) ordinary Shares issued by an Insurer to a Holding Company whose own paid-up ordinary share capital, taken together with its general reserves, is lower than that of the Insurer.

PIN A5.5.2

Hybrid non-Cellular capital excludes any Instrument that is attributable to a Cell.

PIN A5.5.3

Subject to rule A5.5.4, an Insurer must calculate its hybrid non-cellular capital adjustment as the amount by which the total amount of hybrid non-cellular capital exceeds 15% of adjusted non-cellular equity.

PIN A5.5.4

The Regulatory Authority may at its discretion and on the application of an Insurer, permit that Insurer to apply rule A5.5.3 as though the figure of 15% was replaced with a higher figure approved in writing by the Regulatory Authority. The approved figure may not be more than the actual percentage which the hybrid non-cellular capital represents of adjusted non-cellular equity, and may not in any case exceed 30%.

PIN A5.6 Adjusted cellular capital resources

PIN A5.6.1

An Insurer must calculate the Adjusted Cellular Capital Resources in respect of a Cell according to the formula:

ACCR = ACE +CCA - HCCA

where, in respect of that Cell:

ACCR means the Adjusted Cellular Capital Resources;
ACE means the adjusted cellular equity
CCA means the non-cellular capital adjustment; and
HCCA means the hybrid cellular capital adjustment.

PIN A5.6.2

Adjusted cellular equity is calculated as set out in section A5.8. The non-cellular capital adjustment is determined as set out in section A5.9. The hybrid non-cellular capital adjustment is set out in section A5.10.

PIN A5.7 Base cellular capital

PIN A5.7 Guidance

The commencement point for calculating the adjusted cellular equity in respect of a Cell is the base cellular capital in respect of that Cell.

PIN A5.7.1

Subject to Rules A5.7.3 and A5.7.4, the base cellular capital in respect of a Cell consists of the following capital Instruments and equity reserves that are attributable to that Cell:

(1) paid-up Cell Shares;
(2) general reserves;
(3) in the Insurance Fund of a Takaful Insurer, where the Insurance Fund is attributable to the Cell, amounts provided from the Owner's Equity by loan to the Insurance Fund and not repaid as at the Solvency Reference Date;
(4) retained earnings;
(5) current year's earnings after tax; and
(6) hybrid cellular capital (as defined in rule A5.10. 1).

PIN A5.7.2

Owners' Equity in a Takaful Insurer other than amounts referred to in sub-Rule A5.7.1(3) must be classified as hybrid capital for the purposes of this section if:

(1) under the constitutional documents of the Insurer or the terms of insurance contracts or both, participation in the surpluses and losses of Takaful business is limited to the policyholders of the Insurer; and
(2) the Owner's Equity is available for loan to the Insurance Fund of the Insurer.

PIN A5.7.3

Hybrid cellular capital having a term to maturity of less than five years may only be included in base cellular capital with the consent of the Regulatory Authority.

PIN A5.8 Adjusted cellular equity

PIN A5.8.1

An Insurer must calculate its adjusted cellular equity in respect of each Cell by adding items to and deducting them from the base cellular capital of that Cell, as set out in this section.

PIN A5.8.1 Guidance

The purpose of these adjustments is to provide a consistent basis for the determination of the Adjusted Cellular Capital Resources in respect of a Cell and to exclude from those resources assets that may not be readily realisable for the purposes of meeting any Cellular Liabilities of that Cell.

PIN A5.8.2

The following items must be added to base cellular capital, to the extent that the Insurer has excluded them in determining base cellular capital:

(1) any minority interests in companies that are Subsidiaries of the Insurer, where the Insurer's interest in those companies constitutes a Cellular Asset of that Cell; and
(2) any amount in respect of dividends to be paid by the Insurer in the form of Cell Shares of that Cell.

PIN A5.8.3

The following items must be deducted from base cellular capital, to the extent that the Insurer has not excluded them in. determining base cellular capital, or has added them to base cellular capital under rule A5.8.2:

(1) any amounts in respect of appropriations to be made from profit of the Cell in respect of the Financial Period most recently ended, including dividends, bonuses, pensions and welfare Charges that are determined on the basis of the profit of that Financial Period, whether or not the amounts have been approved by the Insurer for payment;
(2) Owners' Equity in a Takaful Insurer that does not, under the constitutional documents of the Insurer or the terms of insurance contracts or both, participate in the surpluses and losses of Takaful business;
(3) the amount of any Investment by the Insurer or by a Subsidiary of the Insurer, in the Insurer's own Shares, where that Investment or the Subsidiary concerned is a Cellular Asset;
(4) the amount of any tax liability that would be attributable to unrealised gains on Investments that are Cellular Assets, if those gains were realised;
(5) the amount of deferred acquisition costs that are Cellular Assets;
(6) the amount of any deferred tax asset that is a Cellular Asset;
(7) the amount of any Cellular Asset representing the value of in-force Long-Term Insurance business of the Insurer;
(8) the amount of any goodwill, patents, service rights, brands and any other intangible items that are Cellular Assets;
(9) the amount of any Zakah or charity fund of a Takaful Insurer;
(10) the amount of any Class 7 Capital Requirement to which the Insurer is subject in respect of Class 7 Insurance Business of the Cell;
(11) the amount of any operating assets, including inventories, plant and equipment, and vehicles, that are Cellular Assets; and
(12) the amount of any other Cellular Assets that may not be applied to meet Cellular Liabilities of that Cell.

PIN A5.8.4

Sub-Rule A5.8.3(12) does not require an Insurer to exclude Cellular Assets attributable to a Long-Term Insurance Fund maintained by the Insurer.

PIN A5.9 Non-cellular capital adjustment

PIN A5.9.1

Where an Insurer that is a Protected Cell Company is organised such that Non-Cellular Assets may be used to meet Cellular Liabilities of a Cell, the Insurer may determine a non-cellular capital adjustment in respect of that Cell.

PIN A5.9.1 Guidance

The purpose of the non-cellular capital adjustment is to permit an Insurer to allocate all or part of its Adjusted Non-Cellular Capital Resources to support the Adjusted Cellular Capital Resources of its Cells. The adjustment is limited to the amount of Adjusted Non-Cellular Capital Resources that could be made available to meet Cellular Liabilities.

PIN A5.9.2

The amount of the non-cellular capital adjustment in respect of a Cell is an amount selected by the Insurer, subject to the following constraints:

(1) the non-cellular capital adjustment in respect of a Cell must not be negative;
(2) the non-cellular capital adjustment in respect of a Cell must not exceed the amount that could be made available to meet the liabilities of that Cell in the event of insolvency of the Insurer, after taking into consideration all other potential calls on the Insurers Adjusted Non-Cellular Capital Resources; and
(3) the sum of the non-cellular capital adjustments in respect of all Cells must not exceed the amount that could be made available to meet the Cellular Liabilities in the event of insolvency of the Insurer, after taking into consideration all other potential calls on the Insurer's Adjusted Non-Cellular Capital Resources.

PIN A5.10 Hybrid cellular capital adjustment

PIN A5.10 Guidance

1. This section acts to limit hybrid cellular capital to 15% of an Insurer's adjusted cellular equity in respect of a Cell.
2. The purpose of the hybrid cellular capital adjustment is to limit the extent to which an Insurer may rely for its Adjusted Cellular Capital Resources in respect of a Cell on Instruments that do not or may not constitute permanent capital of that Cell. Such Instruments include share capital contributed by an investor where the investor's Investment in the Cell is financed by debt rather than by the investor's own capital.

PIN A5.10.1

Subject to rule A5.10.2, hybrid cellular capital includes the following items:

(1) subordinated debt;
(2) preference shares;
(3) Owners' Equity in a Takaful Insurer, of the type described in rule A5.7.2; and
(4) Cell Shares issued by an Cell to an inv4stor who stands in the position of a Holding Company in relation to the Cell, and whose own paid-up ordinary share capital, taken together with its general reserves, is lower than that of the Cell.

PIN A5.10.2

Hybrid cellular capital excludes any Instrument that is not attributable to a Cell.

PIN A5.10.3

Subject to rule A5.10.4, an Insurer must calculate the hybrid cellular capital adjustment in respect of a Cell as the amount by which the total amount of hybrid cellular capital exceeds 15% of adjusted non-cellular equity.

PIN A5.10.4

The Regulatory Authority may at its discretion and on the application of an Insurer, permit that Insurer to apply rule A5.10.3 as though the figure of 15% was replaced with a higher figure approved in writing by the Regulatory Authority. The approved figure may not be more than the actual percentage which the hybrid cellular capital represents of adjusted cellular equity, and may not in any case exceed 30%.

PIN App6 Calculation Of Minimum Non-Cellular Capital Requirement and Minimum Cellular Capital Requirement

PIN A6.1 Purpose and general provisions

PIN A6.1.1

This Appendix applies to all Insurers to which section 4.4 applies.

PIN A6.1.2

In this Appendix, the term 'segment' includes both:

(1) a Cell of a Protected Cell Company; and
(2) the portion of a Protected Cell Company that is not a Cell; and the term 'segmental' is construed accordingly.

PIN A6.1.2 Guidance

1. This Appendix sets out how an Insurer that is a Protected Cell Company is required to calculate its Minimum Non-Cellular Capital Requirement and the Minimum Cellular Capital Requirement applicable to each Cell.
2. The Minimum Non-Cellular Capital Requirement and the Minimum Cellular Capital Requirement are calculated on a basis that is analogous to the basis of calculation of the Minimum Capital Requirement for Insurers that are not Protected Cell Companies, as set out in App,4. This Appendix therefore incorporates references to the provisions of App4.
3. The calculation of the Minimum Non-Cellular Capital Requirement takes into account only Non-Cellular Assets and Non-Cellular Liabilities, while the Minimum Cellular Capital Requirement in respect of a Cell takes into account only Cellular Assets of that Cell and Cellular Liabilities of the same Cell.
4. The methods of calculation for the Minimum Non-Cellular Capital Requirement and the Minimum Cellular Capital Requirement in respect of a Cell are identical, so the term Minimum Segmental Capital Requirement is used to refer to both. Similarly, the term 'segment' is used in this Appendix to refer to both a Cell and the non-cellular part of an Insurer.

PIN A6.2 Minimum segmental capital requirement

PIN A6.2.1

Every Insurer must calculate its Minimum Non-Cellular Capital Requirement and the Minimum Cellular Capital Requirement applicable to each Cell, in accordance with this Appendix.

PIN A6.2.2

Subject to Rules A6.2.4, A6.2.5, and A6.2.6, an Insurer must calculate its Minimum Segmental Capital Requirement according to the formula:

MSCR = DRC + IVRC + OARC + OLRC + CRC + SFAC + URC + RRC + LIRC + AMRC

where:

Term Definition
MSCR Insurer's Minimum Segmental Capital Requirement;
IVRC Insurers Investment Volatility Risk Component in respect of that segment;
OLRC Insurer's off-balance sheet liability risk component in respect of that segment;
SFAC Insurer's size factor adjustment component in respect of that segment;
RRC Insurer's reserving risk component in respect of that segment;
AMRC Insurer's asset management risk component in respect of that segment.
DRC Insurer's Default Risk Component in respect of that segment;
OARC Insurers off-balance sheet asset risk component in respect of that segment;
CRC Insurers Concentration Risk component in respect of that segment;
URC Insurers Underwriting risk component in respect of that segment;
LIRC Insurer's Long-Term Insurance risk component in respect of that segment;

PIN A6.2.2 Guidance

Because of the provision in Chapter I that all Insurance Business of an Insurer that is a Protected Cell Company must be conducted through its Cells, the URC, RRC and LIRC components will apply only to Cells.

PIN A6.2.3

The methods of calculation of the components referred to in rule A6.2.2 are set out in sections A6.4, A6.5, A6.6, A6.7, A6.8, A6.9, A6.1 0, A6.1 1, A6.12 and A6.1 3.

PIN A6.2.4

An Insurer's Minimum Non-Cellular Capital Requirement must always be equal to or higher than 50,000 United States dollars.

PIN A6.2.5

The Minimum Cellular Capital Requirement in respect of a Cell must always be equal to or higher than 50,000 United States dollars.

PIN A6.2.6

Where the aggregate of the Minimum Segmental Capital Requirements of the segments of an Insurer, calculated in accordance with the formula set out in rule A6.2.2 is less than 250,000 United States dollars, the difference between that aggregate and 250,000 United States dollars must be added to the Minimum Non-Cellular Capital Requirement.

PIN A6.3 Applicability of components to assets of the Insurer

PIN A6.3.1

Subject to Rules A6.3.2 and A6.3.3, an Insurer must calculate those components of a Minimum Segmental Capital Requirement that are relevant to assets, in respect of every asset that is attributable to that segment and that is available to meet liabilities attributable to that segment.

PIN A6.3.2

Where an Insurer arranges its affairs such that Invested Assets attributable to a segment are held in a Related entity, the Insurer may, with the written approval of the Regulatory Authority, calculate components of the relevant Minimum Segmental Capital Requirement by reference to the Insurers interest in the assets that are held by the Related entity, instead of by reference to the interest that the Insurer has in that Related entity. In that case this Appendix shall be interpreted as though the assets (representing the Insurer's interest) held by the Related entity were held directly by the Insurer.

PIN A6.3.2 Guidance

The effect of rule A6.3.2 is to provide flexibility for Insurers whose Investments are managed on a pooled basis within a Group, or which establish specialist Subsidiaries to manage their Investments. While the Insurer's asset in such cases is a balance with, or Investment in, a Related entity, this rule permits the Insurer to 'look through' the corporate arrangement and apply this Appendix to the assets of the Related entity as though they were the Insurer's own.

PIN A6.3.3

Where an Insurer that is a Protected Cell Company arranges its affairs such that the Invested Assets of a segment are held in another segment of the same Insurer, the Insurer may, with the written approval of the Regulatory Authority, calculate relevant components of its Minimum Segmental Capital Requirement in respect of the first segment, by reference to the segment's interest in the assets that are held by the second segment, instead of by reference to the interest that the first segment has in the second segment. In that case this Appendix shall be interpreted as though the assets (representing the first segment's interest) held by the second segment were held directly by the first segment.

PIN A6.3.3 Guidance

1. The effect of rule A6.3.3 is to extend the flexibility given by A6.3.2 to cover situations where one segment of an Insurer uses another segment of the same Insurer as a specialist Investment entity.
2. Where rule A6.3.3 is applied, the Insurer still needs to calculate the Minimum Segmental Capital Requirement for the specialist Investment segment, in respect of the Invested Assets which the specialist Investment segment owns. Two segments would therefore be required to hold capital in respect of those Invested Assets.

PIN A6.4 Default risk component

PIN A6.4 Guidance

The purpose of the Default Risk Component is to require an Insurer to set aside capital to cover the risk that amounts receivable from Counterparties will not be received. The basic calculation model for this component, as it applies to Insurers that are not Protected Cell Companies, is set out in section A4.4. The provisions in this section apply this basic model to the segments of a Protected Cell Company.

PIN A6.4.1

An Insurer must calculate the Default Risk Component in respect of a segment as the sum of the amounts obtained by multiplying the value of each asset of the segment with the relevant percentage, in accordance with the following tables and subject to the provisions of Rules A6.4.2 and A6.4.3.

(1) Assets that are Invested Assets: the table set out in A4.4.1 (1)
(2) Assets that are not Invested Assets: the table set out in A4.4.1(2)

PIN A6.4.2

The provisions of Rules A4.4.2, A4.4.3, A4.4.4, A4.4.5, and A4.4.6 must be applied, mutatis mutandis, to assets of a segment as though references in those Rules to an Insurer were instead references to a segment.

PIN A6.4.3

Notwithstanding anything else in this section:

(1) the Default Risk Component in respect of any asset that is subject to a fixed or floating Charge, mortgage or other encumbrance must be 100% of the value of the asset to the extent of that Charge, mortgage or encumbrance. In the case of such assets, the percentages set out in the tables referred to above must be applied only to the amount, if any, by which the value of the asset exceeds the amount of the Charge, mortgage or encumbrance; and
(2) no Default Risk Component must be calculated in respect of assets excluded from Adjusted Cellular Capital Resources or Adjusted Non-Cellular Capital Resources in accordance with sub-rules A5.4.3(5), A5.4.3(6), A5.4.3(9), A5.4.3(l 0), A5.8.3(5), A5.8.3(6), A5.8.3(7), A5.8.3(8), A5.8.3(l 1) or A5.8.3(12).

PIN A6.5 Investment volatility risk component

PIN A6.5 Guidance

The purpose of the Investment Volatility Risk Component is to require an Insurer to set aside capital to cover the risk of deterioration in the values of Invested Assets. The basic calculation model for this component, as it applies to Insurers that are not Protected Cell Companies, is set out in section A4.5. The provisions in this section apply this basic model to the segments of a Protected Cell Company.

PIN A6.5.1

An Insurer must calculate the Investment Volatility Risk Component in respect of a segment as the sum of the amounts obtained by multiplying the value of each Invested Asset attributable to the segment with the relevant percentage, in accordance with the table set out in A4.5.1, but subject to the provisions of A4.5.2.

PIN A6.6 Off-balance sheet asset risk component

PIN A6.6 Guidance

The purpose of the off-balance sheet asset risk component is to require an Insurer to set aside capital to cover the risk of default and deterioration in value in respect of exposures that the Insurer has because it is a party to a Derivative contract. The provisions in this section apply the basic provisions of section A4.6 to the segments of a Protected Cell Company.

PIN A6.6.1

An Insurer is required to calculate an off-balance sheet asset risk component, if the Insurer is, as at the Solvency Reference Date, a party to a Derivative contract, including a forward, future, swap, option or other similar contract, but not including:

(1) a put option serving as a guarantee;
(2) a foreign Exchange contract having an Original Maturity of 14 days or less; or
(3) an Instrument traded on a Futures or Options Exchange, which is subject to daily mark-to-market and margin payments.

PIN A6.6.2

An Insurer must calculate the off-balance sheet asset risk component in respect of a segment as the sum of the amounts obtained by applying the calculations set out in rule A6.6.3 in respect of each Derivative contract entered into by the Insurer in respect of that segment that meets the description in rule A6.6.1.

PIN A6.6.3

The amount in respect of a Derivative contract is obtained by calculating, for an asset equivalent amount as determined in rule A6.6.4, a Default Risk Component as set out in section A6.4 and an Investment Volatility Risk Component as set out in section A6.5, as though the asset equivalent amount were a debt obligation due from the Derivative Counterparty.

PIN A6.6.4

The asset equivalent amount in respect of a Derivative is calculated as the sum of the current mark-to-market Exposure of the Derivative (where this is positive) and the amount obtained by multiplying the notional principal amount of the Derivative by the factors specified in the table set out in A4.6.4, according to the nature and Residual Maturity of the Derivative.

PIN A6.7 Off-balance sheet liability risk component

PIN A6.7 Guidance

1. The purpose of the off-balance sheet liability risk component is to require an Insurer to set aside capital to cover the risk that it will be required to perform on a guarantee, letter of credit or other credit substitute that it has entered into. Although such items are not liabilities of the Insurer as at the Solvency Reference Date, they have the capacity to crystallise as liabilities at a subsequent date and therefore to affect the Insurer's capital position. The provisions in this section apply the relevant provisions of section A4.7 to the segments of a Protected Cell Company.
2. Credit substitutes that are Contracts of Insurance are excluded from the calculation of this component, as they are subject to a separate Capital Requirement under section 4.5.

PIN A6.7.1

An Insurer must calculate an off-balance sheet liability risk component in respect of a segment if the Insurer has issued guarantees, including put Options serving as guarantees, letters of credit or any other credit substitute (other than an insurance contract) in favour of another party, so that the segment is exposed to the risk of having to make payment on those Instruments should the guaranteed party default.

PIN A6.7.2

An Insurer must calculate its off-balance sheet risk component as the sum of the amounts obtained by applying the calculations set out in rule A6.7.3 in respect of each guarantee, letter of credit or other credit substitute.

PIN A6.7.3

The amount in respect of a guarantee, letter of credit or other credit substitute (other than an insurance contract) is obtained by calculating, for the nominal amount of the guarantee, letter of credit or other credit substitute, a Default Risk Component as set out in section A6.4 and an Investment Volatility Risk Component as set out in section A6.5 in respect of the obligation or asset over which the guarantee, letter of credit or other credit substitute is written, as though that obligation or asset were an obligation or asset of the Insurer.

PIN A6.8 Concentration Risk component

PIN A6.8 Guidance

The purpose of the Concentration Risk component is to require an Insurer to set aside capital to cover the sensitivity that it has to default or volatility in respect of assets and exposures to single Counterparties or groupings of Connected Counterparties, or single properties. The provisions in this section apply the relevant provisions of section A4.8 to the segments of a Protected Cell Company.

PIN A6.8.1

An Insurer is required to calculate a Concentration Risk component in respect of a segment if the segment has, as at the Solvency Reference Date, an Investment Exposure to a single Counterparty or Group of Related Counterparties, or to a single Property, that exceeds 10% of the adjusted segmental Capital Resources.

PIN A6.8.2

For the purposes of the calculation referred to in rule A6.8.1:

(1) 'investment exposure' means the aggregate value of all equity, bond or other Investments in or in respect of the Counterparty or Group of Related parties or Property in question, together with off-balance sheet exposures to the same Counterparty or Group of Related Counterparties or Property that the Insurer has because it has issued guarantees, letters of credit or other credit substitutes (other than insurance contracts), or because it has entered into Derivative contracts, but excluding any assets excluded from base cellular capital or base non-cellular capital by reason of any of the sub-Rules referred to in sub-Rule A6.4.3(2);
(2) 'adjusted segmental capital resources' in respect of a segment means Adjusted Cellular Capital Resources in respect of that segment (where the segment is a Cell) or the Insurer's Adjusted Non-Cellular Capital Resources (where the segment is not a Cell); and
(3) 'AAA'-Rated Governments and Government agencies are not Counterparties.

PIN A6.8.3

An Insurer must calculate its Concentration Risk component in respect of a segment as the sum of the amounts obtained by multiplying each Investment Exposure of that segment that exceeds 10% of the adjusted segmental Capital Resources, by the relevant factor percentage set out in the table set out in A4.8, reading that table as though all references to Adjusted Capital Resources were references to adjusted segmental Capital Resources, and subject to rule A6.8.4.

PIN A6.8.4

If the Concentration Risk component in respect of an Investment Exposure of a segment, aggregated with the sum of the Default Risk, Investment Volatility Risk and off-balance sheet asset risk components (so far as concerns that segment), in respect of the assets and off-balance sheet exposures comprising that Investment Exposure, exceeds 100% of that Investment Exposure, the Concentration Risk component in respect of that Investment Exposure must be reduced so that the total of the three components in respect of that Investment Exposure is equal to 100% of that Investment Exposure.

PIN A6.9 Size factor component

PIN A6.9 Guidance

The effect of the size factor component is to provide a relatively higher Capital Requirement in respect of segments with smaller portfolios of Invested Assets. The provisions in this section apply the relevant provisions of section A4.9 to the segments of a Protected Cell Company.

PIN A6.9.1

The base figure for the size factor component is determined by aggregating the following components, for the segment:

(1) the aggregate of the default components determined in accordance with section A6.4, in respect of Invested Assets;
(2) the aggregate of the Investment Volatility Risk Component determined in accordance with section A6.5; and
(3) the aggregate of the Concentration Risk component determined in accordance with section A6.8.

PIN A6.9.2

An Insurer must calculate the size factor component in respect of a segment by multiplying the base figure for that segment as determined in accordance with rule A6.9.1 by the factor derived by applying the following formula, where x represents the total Invested Assets of the segment, expressed in millions of US dollars:

(1) If x ≤ 100, the factor is 1.5.
(2) If 100 ≤ x ≤ 200, the factor is (150 + 0.5(x-1 00))/x.
(3) If 200 ≤ x ≤ 1,200, the factor is (200 - 0.2(x-200))/x.
(4) If x > 1,200, the factor is zero.

PIN A6.10 Underwriting risk component

PIN A6.10 Guidance

1. The purpose of the Underwriting risk component is to require an Insurer to set aside capital to address the risk that the cost of claims will vary from the cost implicit in the premiums being charged. The provisions in this section apply the relevant provisions of section A4. 10 to the segments of a Protected Cell Company.
2. As Insurance Business in Protected Cell Companies may only be carried on through Cells, every Insurer will have an Underwriting risk component of zero in respect of its Minimum Non-Cellular Capital Requirement.

PIN A6.10.1

An Insurer must calculate the Underwriting risk component in respect of a segment according to the method set out in section A4.10, applied as though all references in that section to an Insurer were instead references to that segment.

PIN A6.11 Reserving risk component

PIN A6.11 Guidance

1. The purpose of the reserving risk component is to require an Insurer to set aside capital to address the risk that the cost of claims will vary from the amounts recorded as liabilities in the Insurer's balance sheet. This calculation applies only to liabilities in respect of outstanding claims (the risk of deterioration in Premium Liability is addressed in the Underwriting risk component in section A6.10). The provisions in this section apply the relevant provisions of section A4.11 to the segments of a Protected Cell Company.
2. As Insurance Business in Protected Cell Companies may only be carried on through Cells, every Insurer will have a reserving risk component of zero in respect of its Minimum Non-Cellular Capital Requirement.

PIN A6.11.1

An Insurer must calculate the reserving risk component in respect of a segment according to the method set out in section A4.1 1, applied as though all references in that section to an Insurer were instead references to that segment.

PIN A6.12 Long-Term Insurance risk component

PIN A6.12 Guidance

1. The purpose of the Long-Term Insurance risk component is to require an Insurer to set aside capital to address the risk that the net present value of future Policy Benefits will vary from the amounts recorded as Long-Term Insurance Liabilities in the Insurer's balance sheet. The provisions in this section apply the relevant provisions of section A4.12 to the segments of a Protected Cell Company.
2. As Insurance Business in Protected Cell Companies may only be carried on through Cells, every Insurer will have a Long-Term Insurance risk component of zero in respect of its Minimum Non-Cellular Capital Requirement.

PIN A6.12.1

An Insurer must calculate the Long-Term Insurance risk component in respect of a segment according to the method set out in section A4.12, applied as though all references in that section to an Insurer were instead references to that segment.

PIN A6.13 Asset management risk component

PIN A6.13 Guidance

This section requires an Insurer to set aside capital in respect of assets that it manages. This section applies the relevant provisions of section A4.13 to the segments of a Protected Cell Company.

PIN A6.14

An Insurer must calculate the asset management risk component in respect of a segment according to the method set out in section A4.13, applied as though all references in that section to an Insurer were instead references to that segment.

PIN App7 Calculation Of Adjusted Fund Capital Resources

PIN A7.1 Purpose and general provisions

PIN A7.1.1

This Appendix applies to all Insurers to which section 4.6 applies.

PIN A7.1.1 Guidance

1. This Appendix sets out the manner in which an Insurer is required to calculate the Adjusted Fund Capital Resources in respect of each Long-Term Insurance Fund it maintains. The calculation is analogous to that applicable to Insurers other than Protected Cell Companies, so that (except where changes are necessary to reflect structural differences) the capital of a Long-Term Insurance Fund is determined as though it was an Insurer subject to App3.
2. The Adjusted Fund Capital Resources are calculated by making adjustments to the equity of the fund, as at the Solvency Reference Date.

PIN A7.2 Adjusted fund capital resources

PIN A7.2.1

An Insurer must calculate the Adjusted Fund Capital Resources in respect of each Long-Term Insurance Fund maintained by it, according to the formula:

AFCR = AFE - FHCA,

where:

AFCR means the Adjusted Fund Capital Resources in respect of the fund;
AFE means the adjusted fund equity in respect of that fund; and
FHCA means the fund hybrid capital adjustment in respect of that fund.

PIN A7.2.1

Adjusted fund equity is calculated as set out in section A7.4. The fund hybrid capital adjustment is set out in section A7.5.

PIN A7.3 Base fund capital

PIN A7.3.1

The commencement point for calculating the adjusted fund equity in respect of a Long-Term Insurance Fund maintained by an Insurer, is the base fund capital.

PIN A7.3.2

Subject to Rules A7.3.3, A7.3.4 and A7.3.5, the base fund capital in respect of a Long-Term Insurance Fund must consist of the following capital Instruments and equity reserves of the Insurer, that are classified as capital Instruments and equity reserves of the fund:

(1) general reserves;
(2) retained earnings;
(3) amounts attributed to the Long-Term Insurance Fund by the Insurer in accordance with section 3.4.2;
(4) in the case of a Takaful Insurer, amounts provided from the Owner's Equity by loan to the Insurance Fund and not repaid as at the Solvency Reference Date;
(5) current year's earnings after tax; and
(6) hybrid capital (as defined in rule A7.5.1).

PIN A7.3.3

Where an Insurer is not a DIFC Incorporated Insurer, base capital may include capital Instruments and equity reserves that are approved in writing by the Regulatory Authority as equivalent to the capital Instruments and equity reserves described in rule A7.3.2.

PIN A7.3.4

Owners' Equity in a Takaful Insurer, that has not been transferred to the Insurance Fund must be classified as hybrid capital for the purposes of this section if:

(1) under the constitutional documents of the Insurer or the terms of insurance contracts or both, the owners do not participate in the surpluses and losses of Insurance Business; and
(2) the Owner's Equity is available for loan to the Insurance Fund maintained within the Long-Term Insurance Fund of the Insurer.

PIN A7.3.5

Hybrid capital having a term to maturity of less than five years may only be included in base fund capital with the written consent of the Regulatory Authority.

PIN A7.4 Adjusted fund equity

PIN A7.4.1

An Insurer must calculate its adjusted fund equity in respect of each Long-Term Insurance Fund as set out in this section.

PIN A7.4.1 Guidance

The purpose of these adjustments is to provide a consistent basis for the determination of the Insurer's Adjusted Fund Capital Resources and to exclude from those resources assets that may not be readily realisable for the purposes of meeting Insurance Liabilities of the Long-Term Insurance Fund.

PIN A7.4.2

The following items must be deducted from base fund capital, to the extent that the Insurer has not excluded them in determining its base fund capital:

(1) any amounts in respect of appropriations to be made from the Long-Term Insurance Fund in respect of the current year, including dividends, distributions by Takaful Insurers of surplus, bonuses, pensions and welfare Charges that are determined on the basis of the current years profit, whether or not the amounts have been approved by the Insurer for payment;
(2) the amount of any Investment by the Long-Term Insurance Fund or by a Subsidiary of the Long-Term Insurance Fund, in the Insurer's own capital;
(3) the amount of any tax liability that would be attributable to unrealised gains on Investments, if those gains were realised;
(4) the amount of deferred acquisition costs;
(5) the amount of any deferred tax asset;
(6) the amount of any goodwill, patents, service rights, brands and any other intangible items;
(7) the amount of any Zakah or charity fund of a Takaful Insurer, maintained within the Long-Term Insurance Fund;
(8) the amount of any operating assets, including inventories, plant and equipment, and vehicles; and
(9) the amount of any assets that may not be applied to meet Insurance Liabilities attributable to the Long-Term Insurance Fund (for example, assets that are subject to fixed or floating Charges, mortgages or other security).

PIN A7.5 Fund hybrid capital adjustment

PIN A7.5 Guidance

1. This section acts to limit hybrid capital to 15% of the adjusted fund equity in respect of a fund.
2. The purpose of the fund hybrid capital adjustment is to limit the extent to which an Insurer may rely for its Adjusted Fund Capital Resources in respect of any Long-Term Insurance Fund on Instruments that do not or may not constitute permanent capital of that fund.

PIN A7.5.1

Fund hybrid capital includes the following items:

(1) subordinated debt attributable to the fund; and
(2) Owners' Equity in a Takaful Insurer of the type described in rule A7.3.4.

PIN A7.5.2

Subject to rule A7.5.3, an Insurer must calculate its fund hybrid capital adjustment as the amount by which the total amount of hybrid capital exceeds 15% of adjusted fund equity.

PIN A7.5.3

The Regulatory Authority may at its discretion permit an Insurer to apply rule A7.5.2 as though the figure of 15% was replaced with a higher figure approved in writing by the Regulatory Authority. The approved figure may not be more than the actual percentage which the fund hybrid capital represents of adjusted fund equity, and may not in any case exceed 30%.

PIN App8 Calculation of Minimum Fund Capital Requirement

PIN A8.1 Purpose and general provisions

PIN A8.1.1

This Appendix applies to all Insurers to which section 4.6 applies.

PIN A8.1.1 Guidance

1. This Appendix sets out the manner in which an Insurer that conducts Long-Term Insurance business through a Long-Term Insurance Fund is required to calculate the Minimum Fund Capital Requirement in respect of each Long-Term Insurance Fund.
2. The Minimum Fund Capital Requirement is calculated on a basis that is analogous to the basis of calculation of the Minimum Capital Requirement for Insurers other than Protected Cell Companies, as set out in App4.
3. The effect therefore is as though each Long-Term Insurance Fund maintained by an Insurer were itself an Insurer that had to calculate a minimum Capital Requirement in accordance with App4. Consequently, this Appendix incorporates references to the provisions of App4.

PIN A8.2 Minimum fund capital requirement

PIN A8.2.1

Subject to rule A8.2.3, an Insurer must calculate the Minimum Find Capital Requirement in respect of each Long-Term Insurance Fund maintained by it, according to the formula:

MFCR = DRC + IVRC + OARC + OLRC + CRC + SFAC + LIRC + AMRC

where:

Term Definition
MFCR Minimum Fund Capital Requirement in respect of the fund;
DRC Default Risk Component in respect of that fund;
IVRC Investment Volatility Risk Component in respect of the fund;
OARC off-balance sheet asset risk component in respect of the fund;
OLRC off-balance sheet liability risk component in respect of the fund;
CRC concentration risk component in respect of the fund;
SFAC size factor adjustment component in respect of the fund;
LRRC Long-Term Insurance risk component in respect of the fund; and
AMRC asset management risk component in respect of the fund.

PIN A8.2.2

The methods of calculation of the components referred to in rule A8.2.1 are set out in sections A8.4, A8.5, A8.6, A8.7, A8.8, A8.9, A8.1 0 and A8.1 1.

PIN A8.2.3

The Minimum Fund Capital Requirement in respect of a Long-Term Insurance Fund must always be equal to or higher than 10,000,000 United States dollars.

PIN A8.3 Applicability of components to assets of the fund

PIN A8.3.1

Subject to rule A8.3.2, an Insurer must calculate those components of the Minimum Fund Capital Requirement in respect of a Long-Term Insurance Fund, that are relevant to assets, in respect of every asset that is attributable to the Long-Term Insurance Fund.

PIN A8.3.2

Where an Insurer arranges its affairs such that Invested Assets attributable to a Long-Term Insurance Fund are held in a Related entity, the Insurer may, with the written approval of the Regulatory Authority, calculate components of the Minimum Fund Capital Requirement by reference to the interest of the Long-Term Insurance Fund in the assets that are held by the Related entity, instead of by reference to the interest that the Long-Term Insurance Fund has in that Related Entity. In that case this Appendix shall be interpreted as though the assets (representing the Long-Term Insurance fund's interest) held by the Related entity were held directly by the Long-Term Insurance Fund.

PIN A8.3.2 Guidance

The effect of rule A8.3.2 is to provide flexibility for Insurers whose Investments are managed on a pooled basis within a Group, or which establish specialist Subsidiaries to manage their Investments. While the Insurer's asset in such cases is a balance with, or Investment in, a Related entity, this rule permits the Insurer to 'look through' the corporate arrangement and apply this Appendix to the assets of the Related entity as though they were the Insurer's own. This flexibility extends to Invested Assets attributable to Long-Term Insurance Funds, though this provision does not provide any exemption from section 3.4 in respect of segregation of assets.

PIN A8.4 Default risk component

PIN A8.4 Guidance

The purpose of the Default Risk Component is to require an Insurer to set aside capital to cover the risk that amounts receivable from Counterparties will not be received. The basic calculation model for this component, as it applies to Insurers that are not Protected Cell Companies, is set out in section A .4.4.. The provisions in this section apply the relevant provisions of section A4.4 to each Long-Term Insurance Fund that an Insurer maintains.

PIN A8.4.1

An Insure must calculate the Default Risk Component in respect of a Long-Term Insurance Fund as the sum of the amounts obtained by multiplying the value of each asset attributed to the fund with the relevant percentage, in accordance with the following tables and subject to the provisions of Rules A8.4.2 and A8.4.3:

(1) assets that are Invested Assets: the table set out in A4.4.1 (1); and
(2) assets that are not Invested Assets: the table set out in A4.4.1(2).

PIN A8.4.2

The provisions of Rules A4.4.2, A4.4.3, A.4.4.4, A4.4.5 and A4.4.6 must be applied, mutatis mutandis, to assets attributed to a Long-Term Insurance Fund as though references in those Rules to an Insurer were instead references to a Long-Term Insurance Fund.

PIN A8.4.3

Notwithstanding anything else in this section:

(1) the Default Risk Component in respect of any asset that is subject to a fixed or floating Charge, mortgage or other encumbrance must be 100% of the value of the asset to the extent of that Charge, mortgage or encumbrance. In the case of such assets, the percentages set out in the tables referred to above must be applied only to the amount, if any, by which the value of the asset exceeds the amount of the Charge, mortgage or encumbrance; and
(2) no Default Risk Component must be calculated in respect of assets excluded from Adjusted Fund Capital Resources in accordance with sub-Rules A7.4.2(4), A7.4.2(5), A7.4.2(6), A7.4.2(8), or A7.4.2(9).

PIN A8.5 Investment volatility risk component

PIN A8.5 Guidance

The purpose of the Investment Volatility Risk Component is to require an Insurer to set aside capital to cover the risk of deterioration in the values of Invested Assets. The basic calculation model for this component, as it applies to Insurers that are not Protected Cell Companies, is set out in section A4.5. The provisions in this section apply the relevant provisions of section A4.5 to each Long-Term Insurance Fund that an Insurer maintains.

PIN A8.5.1

An Insurer must calculate the Investment Volatility Risk Component in respect of a Long-Term Insurance Fund as the sum of the amounts obtained by multiplying the value of each Invested Asset attributable to the fund with the relevant percentage, in accordance with the table set out in A4.5.1, but subject to the provisions of A4.5.2.

PIN A8.6 Off-balance sheet asset risk component

PIN A8.6 Guidance

The purpose of the off-balance sheet asset risk component is to require an Insurer to set aside capital to cover the risk of default and deterioration in value in respect of exposures that the Insurer has because it is a party to a Derivative contract. The provisions in this section apply the relevant provisions of section A4.6 to each Long-Term Insurance Fund that an Insurer maintains.

PIN A8.6.1

An Insurer is required to calculate an off-balance sheet asset risk component in respect of a Long-Term Insurance Fund, if the Insurer is, as at the Solvency Reference Date, a party to a Derivative contract attributable to that fund, including a forward, future, swap, option or other similar contract, but not including:

(1) a put option serving as a guarantee;
(2) a foreign Exchange contract having an Original Maturity of 14 days or less; or
(3) an Instrument traded on a Futures or Options Exchange, which is subject to daily mark-to-market and margin payments.

PIN A8.6.2

An Insurer must calculate the off-balance sheet asset risk component in respect of a Long-Term Insurance Fund as the sum of the amounts obtained by applying the calculations set out in rule A8.6.3 in respect of each Derivative contract entered into by the Insurer and attributable to that fund, that meets the description in rule A8.6.1.

PIN A8.6.3

The amount in respect of a Derivative contract is obtained by calculating, for an asset equivalent amount as determined in rule A8.6.4, a Default Risk Component as set out in section A8.4 and an Investment Volatility Risk Component as set out in section A8.5, as though the asset equivalent amount were a debt obligation due from the Derivative Counterparty.

PIN A8.6.4

The asset equivalent amount in respect of a Derivative is calculated as the sum of the current mark-to-market Exposure of the Derivative (where this is positive) and the amount obtained by multiplying the notional principal amount of the Derivative by the factors specified in the table set out in A4.6.4 according to the nature and Residual Maturity of the Derivative.

PIN A8.7 Off-balance sheet liability risk component

PIN A8.7 Guidance

The purpose of the off-balance sheet liability risk component is to require an Insurer to set aside capital to cover the risk that it will be required to perform on a guarantee, letter of credit or other credit substitute that it has entered into. Although such items are not liabilities of the Insurer as at the Solvency Reference Date, they have the capacity to crystallise as liabilities at a subsequent date and therefore to affect the Insurer's capital position. The provisions in this section apply the relevant provisions of section A4.7 to each Long-Term Insurance Fund that an Insurer maintains.

PIN A8.7.1

An Insurer must calculate an off-balance sheet liability risk component in respect of a Long-Term Insurance Fund if the Insurer has issued guarantees, including put Options serving as guarantees, letters of credit or any other credit substitute in favour of another party, so that the Long-Term Insurance Fund is exposed to the risk of having to make payment on those Instruments should the guaranteed party default.

PIN A8.7.2

An Insurer must calculate its off-balance sheet risk component as the sum of the amounts obtained by applying the calculations set out in rule A8.7.3 in respect of each guarantee, letter of credit or other credit substitute.

PIN A8.7.3

The amount in respect of a guarantee, letter of credit or other credit substitute is obtained by calculating, for the nominal amount of the guarantee, letter of credit or other credit substitute, a Default Risk Component as set out in section A8.4 and an Investment Volatility Risk Component as set out in section A8.5 in respect of the obligation or asset over which the guarantee, letter of credit or other credit substitute is written, as though that obligation or asset were an obligation or asset of the Insurer.

PIN A8.8 Concentration Risk component

PIN A8.8 Guidance

The purpose of the Concentration Risk component is to require an Insurer to set aside capital to cover the sensitivity that it has to default or volatility in respect of assets and exposures to single Counterparties or groupings of Connected Counterparties, or single properties. The provisions in this section apply the relevant provisions of section A4.8 to each Long-Term Insurance Fund that an Insurer maintains.

PIN A8.8.1

An Insurer is required to calculate a Concentration Risk component in respect of a Long-Term Insurance Fund if that fund has, as at the Solvency Reference Date, an Investment Exposure to a single Counterparty or Group of Related Counterparties, or to a single Property, that exceeds 10% of the Adjusted Fund Capital Resources.

PIN A8.8.2

For the purposes of the calculation referred to in rule A8.8.1:

(1) 'investment exposure' means the aggregate value of all equity, bond or other Investments in or in respect of the Counterparty or Group of Related parties or Property in question, together with off-balance sheet exposures to the same Counterparty or Group of Related Counterparties or Property that that fund has because the Insurer has issued guarantees, letters of credit or other credit substitutes (other than insurance contracts), or because it has entered into Derivative contracts, but excluding any assets excluded from base fund capital. in accordance with any of the sub-Rules referred to in sub-Rule A8.4.3(2); and
(2) 'AAA'-Rated Governments and Government agencies are not Counterparties.

PIN A8.8.3

An Insurer must calculate its Concentration Risk component in respect of a Long-Term Insurance Fund as the sum of the amounts obtained by multiplying each Investment Exposure of that fund that exceeds 10% of the adjusted segmental Capital Resources, by the relevant factor percentage set out in the table set out in A4.8, reading that table as though all references to Adjusted Capital Resources were references to Adjusted Fund Capital Resources, and subject to rule A8.8.4

PIN A8.8.4

If the Concentration Risk component in respect of an Investment Exposure of a Long-Term Insurance Fund, aggregated with the sum of the Default Risk, Investment Volatility Risk and off-balance sheet asset risk components (so far as concerns that fund), in respect of the assets and off-balance sheet exposures comprising that Investment Exposure, exceeds 100% of that Investment Exposure, the Concentration Risk component in respect of that Investment Exposure must be reduced so that the total of the three components in respect of that Investment Exposure is equal to 100% of that Investment Exposure.

PIN A8.9 Size factor component

PIN A8.9 Guidance

The effect of the size factor component is to provide a relatively higher Capital Requirement in respect of Long-Term Insurance Funds with smaller portfolios of Invested Assets. The provisions in this section apply the relevant provisions of section A 4.9 to each Long-Term Insurance Fund that an Insurer maintains.

PIN A8.9.1

The base figure for the size factor component is determined by aggregating the following components, for the Long-Term Insurance Fund:

(1) the aggregate of the default components determined in accordance with section A 8.4, in respect of Invested Assets;
(2) the aggregate of the Investment Volatility Risk Component determined in accordance with section A8.5; and
(3) the aggregate of the Concentration Risk component determined in accordance with section A 8.8.

PIN A8.9.2

An Insurer must calculate the size factor component in respect of Long-Term Insurance Fund by multiplying the base figure for that fund as determined in accordance with rule A8.9.1 by the factor derived by applying the following formula, where x represents the total Invested Assets attributable to that fund, expressed in millions of US dollars:

(1) If x ≤ 100, the factor is 1.5.
(2) If 100 ≤ x ≤ 200, the factor is (150 + 0.5(x-100))/x.
(3) If 200 ≤ x ≤ 1,200, the factor is (200 - 0.2(x-200))/x.
(4) If x > 1,200, the factor is zero.

PIN A8.10 Long-Term Insurance risk component

PIN A8.10 Guidance

The purpose of the Long-Term Insurance risk component is to require an Insurer to set aside capital to address the risk that the net present value of future Policy Benefits will vary from the amounts recorded as Long-Term Insurance Liabilities in the Insurer's balance sheet. The provisions in this section apply the relevant provisions of section A4.12 to each Long-Term Insurance Fund that an Insurer maintains.

PIN A8.10.1

An Insurer must calculate the Long-Term Insurance risk component in respect of a Long-Term Insurance Fund according to the method set out in section A4.12, applied as though all references in that section to an Insurer were instead references to that fund.

PIN A8.11 Asset management risk component

PIN A8.11 Guidance

This section requires an Insurer to set aside capital in respect of assets that it manages. The provisions in this section apply the relevant provisions of section A4.13 to each Long-Term Insurance Fund that an Insurer maintains.

PIN A8.11.1

An Insurer must calculate the asset management risk component in respect of a Long-Term Insurance Fund according to the method set out in section A4.13, applied as though all references in that section to an Insurer were instead references to that fund.

PIN App9 Calculation of DIFC Business Risk Capital Requirement

PIN A9.1 Purpose and general provisions

PIN A9.1.1

This Appendix applies to alt Insurers to which section 4.7 applies.

PIN A9.1.1 Guidance

1. This Appendix sets out the manner in which an Insurer that is not a DIFC Incorporated Insurer is required to calculate its DIFC Business Risk Capital Requirement. The basis of calculation is analogous to the basis of calculation of elements of the Minimum Capital Requirement for Insurers that are not Protected Cell Companies, as set out in App4.
2. The DIFC Business Risk Capital Requirement is calculated with reference to the insurance activities of the Insurer, carried out through its establishment in the DIFC, without deduction for reinsurances.

PIN A9.2 DIFC business risk capital requirement

PIN A9.2.1

An Insurer must calculate its DIFC Business Risk Capital Requirement as the sum of the Insurer's DIFC Underwriting risk component, the Insurers DIFC reserving risk component and the Insurers DIFC Long-Term Insurance risk component.

PIN A9.2.2

In calculating the DIFC Business Risk Capital Requirement:

(1) no account must be taken of Contracts of Insurance entered into by the Insurer as Insurer, other than through an establishment in the DIFC; and
(2) no account must be taken of contracts of reinsurance entered into by the Insurer as cedant, regardless of where those contracts of reinsurance were entered into.

PIN A9.3 DIFC Underwriting risk component

PIN A9.3 Guidance

The DIFC Underwriting risk component requires an Insurer to demonstrate the availability of capital to address the risk that the cost of claims on Contracts of Insurance entered into as Insurer through an establishment in the DIFC will vary from the cost implicit in the premiums being charged.

PIN A9.3.1

An Insurer must calculate its DIFC Underwriting risk component according to the method set out in section A4.1 0, subject to the modifications set out in sub-Rules A9.2.2(l) and A9.2.2(2).

PIN A9.4 DIFC reserving risk component

PIN A9.4 Guidance

The DIFC reserving risk component requires an Insurer to demonstrate the availability of capital to address the risk that the cost of claims in respect of contracts entered into as Insurer through an establishment in the DIFC will vary from the amounts recorded as liabilities in the Insurer's balance sheet.

PIN A9.4.1

An Insurer must calculate its DIFC reserving risk component according to the method set out in section A4.1 1, subject to the modifications set out in sub-Rules A9.2.2(l) and A9.2.2(2).

PIN A9.5 DIFC Long-Term Insurance risk component

PIN A9.5.1

An Insurer must calculate its DIFC Long-Term Insurance risk component according to the method set out in section A4.12, subject to the modifications set out in sub-Rules A9.2.2(l) and A9.2.2(2).

PIN App10 Management and Control of Risk

PIN A10.1 Introduction

PIN A10.1 Guidance

1. This Guidance relates to the rules on Management and Control of Risk contained in Chapter 2. It has been prepared to assist Directors of Insurers, their auditors, and others concerned in applying those rules.
2. The rules in Chapter 2 require an Insurer to address specific areas of risk, as well as maintain a generally sound risk management system. Insurers have some flexibility in their approach to these requirements.
3. This Appendix provides some general comment on the objectives of the rules, risk management and control mechanisms. It also provides specific comment on the following selected aspects of the five broad areas of risk identified in section 2.3, that are considered to be of particular relevance to Insurers:
a. Balance sheet and Market Risk components:
i. Reserving risk
ii. Investment risk (including risks associated with the use of derivatives)
iii. Underwriting risk
iv. Claims management risk
v. Product design and pricing risk
vi. Liquidity management risk
b. Credit quality risk
c. Non-financial or operational risk components:
i. Business continuity planning risk
ii. Outsourcing risk
d. Reinsurance risk
e. Group risk
4. It is not the purpose of this Appendix to provide Guidance in areas that are common to all or many Authorised Firms other than Insurers. The principal objective is to address areas that are of specific relevance to Insurers.
5. The procedures set out in this Appendix do not constitute a checklist of necessary procedures. An Insurer cannot assume that implementing all of the procedures set out in this Appendix will guarantee that the Insurer complies with the requirements to which it is subject.
6. Since this Appendix is not intended to be prescriptive or exhaustive, it cannot be regarded as a substitute for reading the rules themselves and taking professional advice. An Insurer should contact the Regulatory Authority if there are any areas which it would like to discuss further.

PIN A10.2 Objectives of the rules

PIN A10.2 Guidance

1. The objective of the rules contained in Chapter 2 is that Insurers should control their own risks through sound and prudent risk management systems, such as to minimise the likelihood that events, internal or external to the Insurer, cause the Insurer to fail financially or operationally.
2. The risk management systems required by the rules should be integrated with the operational processes of a business. Insurers are expected to instil a strong risk control culture throughout their operations, so that material risks and potential problems that emerge can be identified, managed and promptly resolved in the normal course of business operations. The absence of such a control culture is likely to be taken as evidence that more specific control objectives are unlikely to be attained.

PIN A10.3 Risk management systems

PIN A10.3 Guidance

1. The rules require an Insurer to develop, implement and maintain sound and prudent risk management control systems, appropriate to the size, business mix and complexity of the Insurer's operations. The responsibility for ensuring compliance lies with the Board and senior management of the Insurer.
2. The nature and extent of the systems and controls which an Insurer will need to maintain will depend upon a variety of factors including:
a. the nature, scale and complexity of its business;
b. the diversity of its operations, including geographical diversity;
c. the volume and size of its transactions; and
d. the degree of risk associated with each area of its operations.
3. To enable it to comply with its obligation to maintain appropriate systems and controls, an Insurer should regularly review its management of risk in the context of relevant environmental and operational factors and changes in those factors.
4. The rules lay down certain minimum processes and procedures that must be maintained by Insurers. These include a written risk management strategy, risk management policies and procedures, and allocated responsibilities and controls.
5. While the risk management systems of an Insurer must address all material risks, section 2.3 lays down specific requirements for an Insurer to maintain risk management systems in respect of the following areas:
a. Balance sheet and market risk;
b. Credit quality risk;
c. Non-financial or operational risk;
d. Reinsurance risk; and
e. Group Risk.
6. An Insurer should have regard to the need for adequate risk management systems at the level of any Group the Insurer is a Member of (subject to exemptions for Groups that are intermediate Groups or Groups that are headed by Insurers, in which case the Holding Company is already subject to the risk management requirements in its own right). The Insurer bears a responsibility to take reasonable actions to ensure that the Group as a whole complies with the risk management requirements of the rules. Although an Insurer may not be in a position to control the risk management systems of the Group, Group Risk management systems are likely to have a material impact on the Exposure of the Insurer to risks arising from its membership of the Group.
7. Further considerations in respect of Group Risk generally are contained in section A10.5.
8. The rules do not prohibit an Insurer from outsourcing its risk management systems. Where the Insurer is a Member of a Group, it may be practicable for some processes to be performed on a Group-wide basis. An Insurer would not normally outsource risk management systems outside the Group. However the Insurer remains responsible under the rules for the adequacy of its risk management systems, whether or not those processes are outsourced. Senior management cannot delegate their regulatory responsibility for ensuring that the Insurer's risk management systems are adequate. The fact that a system is partially or wholly outsourced would be a factor in the Insurer's assessment of whether the system was adequate. To decide whether any system is adequate, senior management would be expected to have assessed the design and operation of the system, including the design and the operations of controls over outsourcing decisions and monitoring. Because an Insurer must be in a position to demonstrate that it has complied with its regulatory requirements, adequate documentary evidence of these assessments should be maintained.
9. Further considerations in respect of outsourcing generally are contained in A 10. 13.

PIN A10.4 Control mechanisms

PIN A10.4 Guidance

1. An Insurer should have appropriate control mechanisms in place to ensure that the policies and procedures established for risk management are adhered to at all times.
2. Control mechanisms would normally include:
a. clearly defined management responsibilities;
b. adequate segregation of duties;
c. a risk committee or audit function to establish and maintain the control processes;
d. a system of approvals, limits, authorisations and reporting lines;
e. policies to document the Insurer's procedural controls;
f. activity controls for each division or department;
g. verifications of activities such as Underwriting, pricing and claims management, and reconciliations of relevant data;
h. reviews by Board, senior management and internal audit; and
i. physical controls.
3. The Directors should monitor the overall effectiveness of the Insurer's risk management and control systems. Depending on the size and complexity of operations of an Insurer, risk management systems may be monitored on an ongoing or periodic basis. At a minimum there should be periodic internal audits with results being reported directly to the Board and senior management.
4. Where deficiencies are identified as part of the monitoring process or internal audit, these should be reported in a timely manner to the appropriate management and addressed. Material deficiencies should be reported to the Board and senior management. A material deficiency can result not only from a single deficiency, but also from a number of small deficiencies that, when considered together, amount to a material deficiency.

PIN A10.5 Reserving risk

PIN A10.5 Guidance

1. Reserving risk is the risk that Insurance Liabilities recorded by the Insurer, net of reinsurance and other recoveries in respect of those liabilities, will be inadequate to meet the net amount payable when the Insurance Liabilities crystallise. Insurance Liabilities include the liability for claims incurred up to the reporting date, as well as the Premium Liability. In the case of General Insurance, reinsurance recoveries anticipated in respect of those liabilities are generally recognised as a separate asset. In the case of Long-Term Insurance, Insurance Liabilities include also the net value of future Policy Benefits and the effects of reinsurance arrangements are taken into account when these are estimated.
2. An Insurer's risk management and control system should therefore include a process for ongoing review and appraisal of the Insurance Liability valuation framework (i.e. assumptions made, reinsurance recoveries estimated etc). In conducting this review, consideration should be given to emerging pricing and claim payment trends.
3. An Insurer should maintain appropriate systems, controls and procedures to ensure that the provision for Insurance Liabilities is, at all times, sufficient to cover any liabilities that have been incurred, or are yet to be incurred on Contracts of Insurance accepted by the Insurer, as far as can be reasonably estimated.
4. Appropriate methods should be applied in estimating the provision for Insurance Liabilities, including provisions in respect of individual notified incurred claims. In determining a provision estimation method, managers may consider using alternative approaches before selecting those which may be regarded as most appropriate to the nature of the business.
5. Appropriate methods should be applied in estimating the amount of the asset in respect of reinsurance recoveries that are expected to arise on crystallisation of the gross Insurance Liabilities. The manner of estimating those assets should be consistent with the manner estimating the gross liabilities, except where there is a sound justification for doing otherwise.
6. Suitable systems and controls should be put in place to ensure that the selected approaches are applied accurately and on a consistent basis.
7. Procedures should be in place to review and monitor, on a regular basis, the out-turn of provisions made in previous years for Insurance Liabilities, both gross and net of reinsurance recoveries.
8. An Insurer is required by Chapter 7 to obtain an annual report by an Actuary on the valuation of its Insurance Liabilities and associated assets. The rules do not require the performance of an actuarial valuation at other times, however an Insurer should consider the use of Actuaries or other appropriately qualified and experienced loss reserving specialists to estimate Insurance Liabilities periodically through the year. The Insurer should in any case undertake periodic testing of its reserving processes and the level of its reserves, including continual reassessment of assumptions used, and testing the sensitivity of the valuation of Insurance Liabilities to stress arising from realistic scenarios relevant to the circumstances of the Insurer. Whether in-house or outside experts are used, appropriate procedures should be in place to ensure that the specialist selected possesses the appropriate level of skill and experience and has available the necessary information to carry out the estimation required.
9. Suitable controls should be in place to ensure that the data used in determining the Insurance Liabilities are extracted from the underlying records accurately and to the necessary level of detail. The level of detail should be sufficient to ensure that the data available to managers in their assessment of Insurance Liabilities covers the whole of its liabilities and exposures under insurance contracts.
10. Scenario testing should cover a period of several years into the future, particularly in the case of an Insurer carrying on Long-Term Insurance business.

PIN A10.6 Investment risk

PIN A10.6 Guidance

1. Investment risk refers to the possibility of an adverse movement in the value of an Insurer's on-balance sheet assets and/or certain off-balance sheet obligations. Investment risk derives from a number of sources including Market Risk (e.g. equity, interest rate and foreign Exchange risk), credit quality risk (dealt with separately in this Appendix), Investment Concentration Risk and asset and liability mismatch risk (e.g. in terms of currency, maturity, and location). Associated risks include political risk, e.g. the risk of inability to realise assets in a particular location, and the risk of correlation such that a single event has adverse impacts on both assets and liabilities. Investment risk includes risk associated with the use of Derivatives.
2. Suitable controls and management information systems should be in place to enable an Insurer to implement an appropriate Investment strategy.
3. Appropriate procedures should be in place to enable an Insurer to monitor the interaction of its assets and liabilities so as to ensure that Exposure to equity, interest rate and foreign Exchange risk is contained within limits approved by the Insurer. Procedures should include testing of sensitivity to realistic scenarios that are relevant to the circumstances of the Insurer.
4. Appropriate procedures should be in place to enable an Insurer to monitor the location of its assets and liabilities, so as to ensure that risk of localisation mismatch is contained ,within limits approved by the Insurer. Procedures should include testing of sensitivity to realistic scenarios, including political risk scenarios, that are relevant to the circumstances of the Insurer.
5. Insurers should remain alert to the need to consider asset and liability risks on an integrated basis. Systems should not consider only risks taken in isolation, but should consider how even when individual risks are addressed, combinations of circumstances may still expose an Insurer to loss. This is of particular relevance where a single outcome is exposed to more than one risk, for example where assets need to be available not only in a particular location but also in a specific currency.
6. Appropriate procedures should be in place for assessing the credit-worthiness of Counterparties to whom the Insurer is significantly exposed. Further Guidance in this area is provided in A 10. 11.
7. Appropriate procedures should be in place for setting prudent limits for the Insurer's aggregate Exposure to certain Categories of asset. Such limits should take account of the suitability of assets covering Insurance Liabilities. They may take account of the Insurer's other assets bearing in mind the possibility that such assets might in future be needed to meet Insurance Liabilities.
8. The Investment strategy should be reflected in clear terms of reference from the Insurer to its Investment managers, who should be qualified and competent to carry out their assigned task. The work of the Investment managers should be monitored sufficiently closely by management to ensure that the Insurer's strategy is being followed and that the systems are effective.
9. Insurers should ensure that controls over Derivatives and other complex Investment Instruments have been implemented and are adequate to ensure that risks are properly assessed, regularly reviewed in the light of changing market conditions and experience, and consistent with the overall Investment strategy decided upon and approved by the Insurer. In particular senior management and Directors of Insurers should:
a. fully understand the nature of Derivatives trading being undertaken by the organisation and the Related risks, and where relevant, are suitably qualified and competent to transact the range and type of transactions being undertaken and understand the nature of the exposures (including both Counterparty and market risk) which their use will create;
b. have documented clearly the objectives and policies for the use of Derivatives contracts, and monitor their use (including by way of compliance audits of Investment managers) to ensure their use is in line with those objectives and policies. Insurers should ensure policy is sufficiently clear and precise to ensure that new types of Instrument are not dealt in without due prior consideration. They should also define any associated limits on exposures or volumes that are considered appropriate;
c. have due regard to uncovered transactions in the context of the above controls so that in no circumstances is the Insurer's capital adequacy endangered. Systems should be adequate to prevent Exposure to unacceptable, exceptionally volatile risks and to monitor transactions with a frequency commensurate with volatility and risk. The systems should trigger a hedge or close out a Transaction whenever adverse movements or events threaten a significant worsening of the Insurer's capital adequacy position;
d. have ensured that those who have responsibility for the control of Derivatives Investment, are sufficiently independent of the day-to-day operators to ensure effective control;
e. be capable of analysing and monitoring the risk of all transactions undertaken by the Insurer individually and in aggregate (including interest rate risk, foreign Exchange risk, fraud, error, unauthorised access to information and other operational risks);
f. be provided regularly with appropriate statistics and information on the trading volumes of Derivatives contracts by type of product including regular reports of all off-balance sheet transactions, contingencies and commitments;
g. are satisfied that sufficient systems and controls relevant to Derivative products have been put in place, including independent agreement and reconciliation of positions, independent checking of prices, appropriate authorisation where dealing limits have been exceeded, etc; and
h. have tested adequately and approved valuation models which are used to value open positions and Derivative contracts, including controls preventing unauthorised programme amendments. Such models should include appropriate testing of the robustness of the portfolio in changing Investment conditions, using realistic scenarios relevant to the circumstances of the Insurer.

PIN A10.7 Underwriting risk

PIN A10.7 Guidance

1. Underwriting is the process by which an Insurer determines whether and under what conditions to accept a risk. Weaknesses in the controls and systems surrounding the Underwriting process can expose an Insurer to the risk of unexpected losses which may threaten the capital adequacy of the Insurer.
2. The risk management and control system for Underwriting risk should normally include at least the following policies and procedures:
a. clear identification and quantification of the Insurer's willingness and capacity to accept risk;
b. clear identification of the Classes and characteristics of Insurance Business that the Insurer is prepared to underwrite including:
i. geographical areas;
ii. the types of risk that may be underwritten; and
iii. criteria for the use of policy exclusions and reinsurance;
c. formal evaluation processes for the effective assessment of risks underwritten including:
i. criteria for assessing risk;
ii. methods for monitoring emerging experience;
iii. methods by which emerging experience is taken into account in updating the Underwriting process;
d. appropriate approval authorities and limits to those authorities that are definitive and specific (including controls surrounding any delegations that are given to intermediaries of the Insurer);
e. concentration limits; and
f. methods for monitoring compliance with Underwriting policies and procedures such as:
i. minimum standards of documentation;
ii. internal audit;
iii. peer review of policies underwritten;
iv. assessments of brokers' procedures and systems to ensure the quality of information provided to the Insurer is of a suitable standard; and
v. in the case of reinsurers, audits of ceding companies to ensure that reinsurance assumed is in accordance with treaties in place.

PIN A10.8 Claims management risk

PIN A10.8 Guidance

1. Claims management is the process by which Insurers fulfil their contractual obligation to policyholders. An Insurer's duties when a claim is made under a Contract of Insurance may be summarised as:
a. verify the contractual obligation to pay the claim;
b. make an assessment of the amount and incidence of the claim liability, including loss adjustment expenses; and
c. manage the claim settlement process.
2. The risk management system for claims management risk should normally include at least the following policies and procedures:
a. clear definition and appropriate levels of delegations of authority;
b. clear claim settlement procedures, including claim determination and investigation procedures and the criteria for accepting or rejecting claims;
c. clear and objective loss estimation procedures (including estimation of( reinsurance, recoveries); and
d. methods for monitoring compliance with claims management processes and procedures such as:
i. minimum documentation standards;
ii. internal audit;
iii. peer review of claims paid;
iv. assessment of brokers' procedures and systems to ensure the quality of information provided to the Insurer is of a suitable standard; and
v. audits of ceding companies to ensure that the value of claims paid is in accordance with treaties in place.
3. In establishing and maintaining effective claims handling systems and procedures, senior management of Insurers should consider factors including the following:
a. Appropriate systems and controls should be in place to ensure that all liabilities or potential liabilities notified to the Insurer are recorded promptly and accurately. Accordingly, the systems and controls in place should ensure that a proper record is established for each notified claim;
b. Suitable systems should be in place to identify and quantify, for the key claims handling procedures, timeliness of processing, the effects of processing backlogs and the need for any corrective action;
c. Suitable controls should be maintained to ensure that estimates for reported claims and additional estimates based on statistical evidence are appropriately made on a consistent basis and are properly categorised;
d. Regular reviews of the actual outcome of the estimates made should be carried out to check for inconsistencies and to ensure that procedures remain appropriate. The reviews should include the use of statistical techniques to compare the estimates with the eventual cost of settling the claims, after deducting the amounts already paid at the time the estimates were made;
e. Appropriate systems and procedures should be in place to ensure that claim files without activity are reviewed on a regular basis;
f. Appropriate systems and procedures should be in place to assess the validity of notified claims by reference to the underlying Contracts of Insurance and reinsurance treaties;
g. Suitable systems and procedures should be in place to accommodate the use of suitable experts such as loss adjusters, lawyers, Actuaries, accountants etc. as and when appropriate, and to monitor their use; and
h. There should be suitable systems and procedures in place to identify and handle large or unusual claims, including systems to ensure that senior management are involved from the outset in the processing of claims that are significant because of their size or nature.

PIN A10.9 Product design and pricing risk

PIN A10.9 Guidance

1 The pricing of an insurance product involves the estimation of claims and costs arising from that product and the estimation of Investment income arising from the Investment of premium income attaching to the product. An Insurer may be exposed to significant loss where the claims, costs or Investment returns arising from the sale of a product are inaccurately calculated. This risk is particularly acute in the case of Long-Term Insurance, where the Insurer does not have the option to cancel an unprofitable policy, but is also relevant to General Insurance.
2 The risk management system for product design and pricing should normally include at least the following policies and procedures:
a. minimum requirements for documentation of pricing and design decisions;
b. clear identification of product lines that the Insurer is prepared to engage in or has chosen not to engage in;
c. clearly defined and appropriate levels of delegation for approval of all material aspects of product design and pricing;
d. processes for assessing specific risks, including risks arising from:
i. inflation;
ii. anti-selection (the tendency of poorer risks in a population to seek insurance while better risks self-insure);
iii. moral hazard (the tendency of insured persons to manage their own risk less effectively, in the knowledge that they are insured);
iv. changes in mortality and morbidity patterns;
v. technology changes;
vi. catastrophes, natural or man-made;
vii. legal decisions;
viii. changes in government policy; and
ix. Investment returns;
e. procedures for limiting risk through, for example, diversification, exclusions and reinsurance;
f. processes to ensure that policy documentation is adequately drafted to give effect to the proposed level of coverage under the product;
g. how emerging experience is to be reflected in price adjustments;
h. how the Insurer's product pricing responds to competitive pressures; and
i. methods for monitoring compliance with product design and pricing policies and procedures.

PIN A10.10 Liquidity management risk

PIN A10.10 Guidance

1. An Insurer should have access to sufficient liquidity to meet all cash outflow commitments to policyholders (and other creditors) as and when they fall due. The nature of insurance activities means that the timing and amount of cash outflows are uncertain. This uncertainty may affect the ability of an Insurer to meet its obligations to policyholders or may require Insurers to incur additional costs through, for example, raising additional funds at a premium on the market or through the sale of assets.
2. The risk management system for liquidity should normally include at least the following policies and procedures:
a. procedures to identify and control the level of mismatch between expected asset and liability cash flows under normal and stressed operating conditions (using realistic scenarios relevant to the circumstances of the Insurer);
b. procedures to monitor the liquidity and realisability of assets;
c. procedures to identify and monitor commitments to meet liabilities including Insurance Liabilities;
d. procedures to monitor the uncertainty of incidence, timing and magnitude of Insurance Liabilities;
e. procedures to identify and monitor the level of liquid assets held by the Insurer; and
f. procedures to identify and monitor other sources of funding including reinsurance, borrowing capacity, lines of credit and the availability of intra-group funding, and to identify the need for such sources to be made available.
3. When assessing its liquidity requirements an Insurer should also consider the currency in which the assets and liabilities are denominated, and the locations in which those assets and liabilities are situated or payable.

PIN A10.11 Credit quality risk

PIN A10.11 Guidance

1. Credit exposures can increase the risk profile of an Insurer and adversely affect financial viability. Credit Exposure includes both on-balance sheet and off-balance sheet exposures (including guarantees, Derivative financial Instruments and performance Related obligations) to single and Related Counterparties.
2. An Insurer's risk management system in respect of credit quality risk will normally be expected to include at least the following policies and procedures:
a. limits (where relevant, at both an individual and consolidated level) for credit exposures to:
i. single Counterparties and groupings of Counterparties that are Related to each other;
ii. entities to which the Insurer is Related;
iii. single industries; and
iv. single geographical locations;
b. processes to monitor and control credit exposures against pre-approved limits;
c. processes for identifying breaches of limits and for ensuring that breaches of limits are brought within the pre-approved limits within a set timeframe;
d. processes for reducing or cancelling limits to a particular Counterparty where the Counterparty is known to be experiencing problems;
e. processes for approving requests for temporary increases in limits;
f. processes to review credit exposures (at least annually but more frequently in cases where there is evidence of a deterioration in credit quality);
g. a management information system that is capable of aggregating exposures to any one Counterparty (or Group of Related counterparties), asset Class, industry or region in a timely manner; and
h. a process for reporting to the Board and senior management:
i. significant breaches of limits; and
ii. large exposures and other Credit Risk concentrations.
3. Further Guidance in respect of credit quality risk in respect of reinsurance Counterparties is contained at A10. 14.

PIN A10.12 Business continuity planning risk

PIN A10.12 Guidance

1. Disruptions in an Insurer's business can lead to unexpected losses of both a financial and non-financial nature (e.g. data, premises, reputation etc). Disruptions may occur as a result of events such as power failure, denial of access to premises or work areas, systems failure (computers, data, building and/or equipment), fire, fraud and loss of key staff.
2. An Insurer's risk management system in respect of business continuity planning risk will normally be expected to include at least the following policies and procedures:
a. processes for identifying:
i. events that may lead to a disruption in business continuity;
ii. the likelihood of those events occurring;
iii. the processes most at risk; and
iv. the consequences of those events.
b. a Business Continuity Plan (BCP) describing:
i. procedures to be followed if business continuity problems arise;
ii. detailed procedures for enacting the BCP, including manual processes, the activation of an off-site recovery site (if needed) and the person(s) responsible for activating the BCP;
iii. a communications strategy and contact information for relevant staff, suppliers, Regulators, market authorities (including exchanges), major Clients, the media and other key people;
iv. a schedule of critical systems covered by the BCP and the timeframe for restoring these systems;
v. the pre-assigned responsibilities of staff and procedures for training staff on all aspects of the BCP; and
vi. procedures for regular testing and review of the BCP.
c. procedures for backing up important data on a regular basis and storing the information off site.

PIN A10.13 Outsourcing risk

PIN A10.13 Guidance

1. Financial firms frequently decide to outsource aspects of their operations to other parties, Related or not. Outsourcing can bring significant benefits to a firm in terms of efficiency, cost reduction and risk management. However both the process of implementing outsourcing arrangements and the outsourcing relationship itself may expose a firm to additional risk. It is therefore important that firms take care to supervise the conduct of activities that are outsourced.
2. The activities of outsource contractors have the ability to undermine the risk management activities of Insurers. Insurers should take particular care if outsourcing activities such as Underwriting and claims management, where inappropriate performance of the functions can expose the Insurer to serious financial loss, for example through acceptance of inappropriate insurance risks, mis-pricing, failure to obtain appropriate reinsurance cover, or failure to detect invalid claims. These considerations apply to such arrangements as binding authorities and other agencies appointed by Insurers.
3. In negotiating a contract with an outsource contractor or in assessing an existing agreement, an Insurer should give consideration to matters relevant to risk management, including the following:
a. setting and monitoring of authority limits and referral requirements;
b. the identification and assessment of performance targets;
c. procedures for evaluation of performance against targets;
d. provisions for remedial action;
e. reporting requirements imposed on the outsource contractors (including both content and frequency of reports);
f. the ability of the Insurer and its risk management functions (for example, internal auditors), and its external auditors, to obtain access to the outsource contractors and their records;
g. protection of intellectual Property rights;
h. protection of customer and firm confidentiality;
i. the adequacy of any guarantees, indemnities or insurance cover that the outsource contractor agrees to put in place;
j. the ability of the outsource contractor to provide continuity of business; and
k. arrangements for change to the outsource contract or termination of the contract.
4 Insurers should take care to manage the risk that the sound and prudent management of the Insurer's business may be compromised by conflicting incentives in the outsource agreement. In particular, Insurers should consider whether the Remuneration structure creates any perverse incentives. For example, an outsource contractor with Underwriting authority may have an incentive to accept poorer quality business if Remuneration is based on Commission (especially if bonuses are given for volume) and Remuneration is not affected by the performance of the insurance contracts accepted.
5 Intra-group outsourcing may be perceived as subject to lower risks than using outsource contractors from outside a Group. However it is not risk-free and an Insurer must still assess the associated risks and make appropriate arrangements for their management.

PIN A10.14 Reinsurance risk

PIN A10.14 Guidance

1. Management of reinsurance risk relates to the selection, monitoring, review and control of reinsurance arrangements - that is, where some part of an Insurer's individual or aggregate insurance risks is ceded to other Insurers, whether by a direct Insurer to a reinsurer or by a reinsurer to other reinsurers.
2. An Insurer should inform the Regulatory Authority immediately if there is a likelihood of a problem arising with its reinsurance arrangements that is likely to materially detract from its current or future capacity to meet its obligations, and discuss with the Regulatory Authority its plans to redress this situation. Problems that might trigger such a situation could include the insolvency of a reinsurer with a significant share in the Insurer's programme, discovery of exposures without current reinsurance coverage, or exhaustion of reinsurance covers through multiple losses.
3. Each Insurer is required (by rule 2.3.5) to maintain a written reinsurance management strategy which must be appropriate to the size and complexity of operations of the Insurer and must define and document the Insurer's objectives and strategy for reinsurance management.
4. An Insurer' s reinsurance management strategy should, at a minimum, include the following elements:
a. systems for the selection of reinsurance brokers and other reinsurance advisers;
b. systems for selecting and monitoring reinsurance programmes;
c. clearly defined managerial responsibilities and controls;
d. clear methodologies for determining all aspects of a reinsurance programme, including:
i. identification and management of aggregations of risk exposure;
ii. selection of maximum probable loss factors;
iii. selection of realistic disaster scenarios, Return periods and geographical aggregation areas;
iv. identification and management of vertical and horizontal coverage of the reinsurance programme;
e. selection of participants on reinsurance contracts, including consideration of diversification and credit worthiness; and
f. systems for identifying credit exposures (actual and potential) to individual reinsurers or Groups of Connected reinsurers on programmes that are already in place.
5. Senior management should review an Insurer's reinsurance management systems on a regular basis. The review should cover:
a. the identification and recording of policies underwritten to which reinsurance is attached;
b. the identification of the dates when an obligation to pay reinsurance premiums arises;
c. the identification of losses triggering recoveries under reinsurance contracts;
d. management of the timing of payments to, and collections from, reinsurance counterparties;
e. the credit standing and capacity of reinsurance Counterparties to meet obligations to which they are subject as a result of claims incurred or to which they would become subject in the event of occurrence of losses;
f. any concentration of reinsurance arrangements with reinsurance Counterparties which would create large exposures or detract from diversification benefits in the event of occurrence of losses;
g. the extent of reliance on reinsurance with Related parties, and the accessibility of intra-group funding under a range of realistic conditions; and
h. the impact of any adverse trends in estimated Insurance Liabilities on the adequacy of the Insurer's reinsurance arrangements, and any implications for the capacity of the Insurer to meet its future policyholder obligations.
6. Procedures for assessing the credit standing of reinsurance Counterparties may include the following:
a. establishment of a Security committee with a specific brief to undertake the procedures;
b. obtaining appropriate advice from reinsurance brokers;
c. review of ratings published by ratings agencies;
d. monitoring of key performance indicators in reinsurers' published reports; and
e. consideration of general conditions in the relevant reinsurance market.

PIN A10.15 Group risk

PIN A10.15 Guidance

1. The senior management of an Insurer remain responsible for its regulatory compliance, including in any areas that are delegated or outsourced to other Group Members.
2. The overall governance, high-level controls and reporting lines within the Group should be clear so far as they affect the Insurer. An Insurer should not, for example, be subject to material control or influence from other Group Members that is exercised through informal or undocumented channels.
3. Reliance upon functions performed at a Group level (for example, Group Risk management, capital planning, liquidity, compliance) should be subject to approval and monitoring by senior management of the Insurer.
4. Where an Insurer relies upon functions that are performed at a Group level the protocols for the performance of those functions should be clear.
5. Senior management should set up and maintain systems and controls to identify and monitor the effect on the Insurer of its relationship with other Members of the Group and the activities of other Members of its Group. These systems and controls should include procedures to monitor the following matters:
a. changes in relationships between Group Members;
b. changes in the activities of Group Members;
c. conflicts of interest arising within the Group; and
d. events in the Group, particularly those that may affect the Insurer's own regulatory compliance (for example, failures of control or compliance in other Group Members).
6. The Insurer should have in place procedures to insulate the Insurer, so far as practicable, from potentially adverse effects of Group activities (for example: transfer pricing or 'fronting') or Group events, that may expose the Insurer to risk. Such procedures could include requirements for transactions with Group Members to be at arm's length, and for maintenance of 'chinese walls', and development of contingency plans.
7. Senior management should take reasonable steps to ensure that:
a. relevant Group Members are aware of the Insurer's Group Risk management and reporting obligations;
b. Group capital and Group Risk reporting requirements are complied with; and
c. information in respect of the Group provided to the Regulatory Authority is of appropriate quality.

Glossary

Except where stated otherwise, or the subject or context does not allow it, the expressions in the following table have the meanings specified.

Defined Term Definition
Actuary a Fellow, or the holder of an equivalent qualification or rank, of a professional actuarial body that is a full Member of the International Actuarial Association
Adjusted Capital Resources the meaning given in paragraph PIN A3.2.1
Adjusted Cellular Capital Resources the meaning given in paragraph PIN A5.6.1
Adjusted Fund Capital Resources the meaning given in paragraph PIN A7.2.1
Adjusted Non-Cellular Capital Resources the meaning given in paragraph PIN A5.2.1
Annual Statutory Return the meaning given in PIN 6.2.1
Approved Stock Exchange a stock Exchange designated as approved by a written notice from the Regulatory Authority, subject to any conditions that the Regulatory Authority may specify in that notice
Associate in respect of one entity, a second entity that has the capacity to exert significant influence over it, or over which the first entity has the capacity to exert significant influence
Authorised Firm the meaning given in Schedule 1 to the Regulatory Law
Cell the meaning given in Schedule 1 to the Companies Law
Cell Share the meaning given in Schedule 1 to the Companies Law
Cellular Assets the meaning given in Schedule 1 to the Companies Law
Cellular Dividend the meaning given in Schedule 1 to the Companies Law
Cellular Liabilities liabilities that may be settled by disposition of cellular assets
Class 1 Captive Insurer a DIFC Incorporated Insurer permitted under the conditions of its authorisation to effect and carry out Contracts of Insurance only in respect of risks Related to or arising out of the business or operations of entities to which it is Related, including for this purpose only contracts of reinsurance in respect of such risks insured by the cedant
Class 2 Captive Insurer a DIFC Incorporated Insurer required under the conditions of its authorisation to obtain at least 80 per cent of its Gross Written Premium in any year from Contracts of Insurance in respect of risks Related to or arising out of the business or operations of entities to which it is Related, including for this purpose only contracts of reinsurance in respect of such risks insured by the cedant
Class 7 Capital Requirement the amount calculated in accordance with PIN 4.5.4.
Class Of Business a classification of insurance contracts having similar characteristics, described in PIN App1 or PIN App2
Default Risk Component the meaning given in PIN A4.4.1
DIFC Business Risk Capital Requirement the meaning given in PIN A9.2.1.
DIFC Insurance Business Insurance business conducted through or Related to an establishment in the DIFC
DIFC Incorporated Insurer an Insurer that is a company incorporated under Part 2 of the Companies Law
Exempt Firm the meaning given in Schedule 1 to the Regulatory Law
Financial Period the meaning given in Schedule 1 to the Companies Law
Financial Services Prohibition the meaning given in Part 3 of the Regulatory Law.
General Insurance insurance other than Long-Term Insurance
General Insurance Liabilities liabilities of an Insurer arising under or associated with contracts of General Insurance entered into by it, as Insurer or cedant, including liabilities in respect of claims (whether or not incurred), acquisition costs and claims settlement costs
Gross Outstanding Claims in relation to an Insurer as at a date, the amount of the insurer's provision for claims incurred but not yet paid as at that date, including claims incurred but not yet reported and provision for direct and indirect claims settlement expenses in respect of those claims
Gross Written Premium
(a) in relation to a Contract of Insurance, the amount of premium payable by the insured in respect of that contract, excluding any excise taxes levied on premiums and receivable by the Insurer but without any deduction for commissions or other acquisition expenses;
(b) in relation to an Insurer during a period, the aggregate amount of Gross Written Premium in respect of insurance and reinsurance contracts entered into by the Insurer as Insurer during that period
Group a Holding Company and its subsidiaries. The Holding Company and each of the subsidiaries are Members of the group
Holding Company the meaning given in Schedule 1 to the Companies Law
Insurance Business either or both of the licensed services of entering into or Carrying Out Contracts of Insurance, including entering into (as reinsurer) or carrying out contracts of reinsurance
Insurance Fund in relation to a Takaful Insurer, the aggregate of the assets and liabilities of the Insurer that are attributed to the Takaful transactions of the Insurer and the amount of any assets designated by the Insurer as a capital transfer to the insurance fund; and includes the amount of any profit, surplus or Return (however called or described), less attributable expenses, arising on the Investment of such funds
Insurance Liabilities General Insurance Liabilities and Long-Term Insurance liabilities
Insurer a Person carrying on in the DIFC either or both of the following Licensed Services for which it has authorisation under its licence:
(a) effecting contracts of insurance; or
(b) carrying out contracts of insurance
Invested Assets any asset, right or interest of an Insurer that is held by the Insurer for the primary purpose of generating revenues or for directly providing funds to meet the Insurers cash outflows in the future
Investment-Linked Insurance contracts of insurance where the benefits are wholly or partly to be determined by reference to the value of, or the income from, Property of any description (whether or not specified in the contracts) or by reference to fluctuations in, or in an index of, the value of Property of any description (whether or not so specified)
Investment Volatility Risk Component the meaning given in PIN A4.5.1
Licensed Service the meaning given in Part 3 of the Regulatory Law
Lloyd's Underwriter an Underwriting Member of the Society established in the United Kingdom and known as Lloyd's
Long-Term Insurance contracts of insurance, expressed to be in force for more than one year, where under the terms of the Contracts of Insurance any of the following conditions exists:
(a) the payment of the whole or part of the benefits is dependent upon the termination or continuation of human life;
(b) the payment of any part of the premiums is dependent upon the termination or continuation of human life;
(c) the benefits under the contract include payment of a sum on marriage or on the birth of a child; or
(e) the contract is a Permanent Health Insurance contract
Long-Term Insurance Fund an administrative arrangement of the type referred meaning given in PIN 3.2.1
Long-Term Insurance Liabilities liabilities of a kind referred to in PIN 5.5.
Member see Group
Minimum Capital Requirement the meaning given in paragraph PIN A4.2.1
Minimum Cellular Requirement Capital the minimum segmental Capital Requirement in respect of a cell
Minimum Fund Capital Requirement the meaning given in paragraph PIN A8.2.1
Minimum Non-Cellular Capital Requirement the minimum segmental Capital Requirement in respect of that part of a protected Cell company that is not a cell
Minimum Segmental Capital Requirement the meaning given in paragraph PIN A6.2.2
Net Outstanding Claims in respect of an Insurer as at a date, Gross Outstanding Claims of the Insurer as at that date, less the amount of reinsurance and other recoveries expected to be received in respect of those claims
Net Written Premium in respect of an Insurer during a period, Gross Written Premium of the Insurer during that period less the amount of premium on reinsurance contracts entered into by the Insurer as cedant during the same period
Non-Cellular Assets the meaning given in Schedule 1 to the Companies Law
Non-Cellular Liabilities liabilities that may not be settled by disposition of cellular assets
Non-Performing in the case of loans and other financial Instruments to which a firm is exposed, having either of the following qualities:
(a) Contractual payments of interest or principal are 90 days or more past the date on which they were due and payable, and the current value of any Security held in respect of the loan or other financial Instrument is insufficient, after making allowance for expenses of realisation, to meet the total amount of principal and accrued interest; or
(b) having an enhanced risk of default, assessed on the basis of reasonable criteria.
If a loan or other financial Instrument has a regular payment schedule, the loan or other Instrument is 90 days past due when 90 calendar days have elapsed since the due date of a contractual payment that has not been met in full; and the total amount that is due but has not yet been paid is equivalent to at least 90 days' worth of contractual payments
Owner's Equity in relation to a Takaful Insurer, the amount of the assets, less the liabilities, of the Insurer that are not attributed to the Insurance Fund of the insurer
Permanent Health Insurance the meaning given in PIN A2.1.1
Policy Benefit an amount payable under an insurance contract as a result of the occurrence of an event insured under the contract
Premium Liability the liability referred to in PIN 5.3.7
Protected Cell Company the meaning given in Schedule 1 to the Companies Law
Prudential Rules For Insurers the rules in PIN.
Quarterly Statutory Return the meaning given in PIN 6.3.1
Rated in the case of an Instrument or a Counterparty, assigned a rating by a Rating Agency in respect of the Counterparty Credit Risk associated with the Instrument or counterparty
Rating Agency Standard & Poor's, Moody's, AM Best, Fitch Ratings or another agency approved in writing by the Regulatory Authority
Reference Date the date as at which an actuarial investigation is performed for the purposes of PIN 7.3
Related in respect of one entity, being in the position relative to that entity of:
a) a second entity that is a Subsidiary, Associate or Holding Company of the first entity;
b) a second entity that is a Subsidiary or Associate of the Holding Company of the first entity;
c) a Director or officer of the first entity or of an entity that is Related to the first entity by reason of (a) or (b) above;
d) the spouse or minor child of a natural Person referred to in c) above; or
e) a company that is a Subsidiary of or subject to significant influence by or from a natural Person referred to in c) or d) above
Reporting Date the date on which a financial period ends and as at which a financial report is made up
Secured secured by a Charge over real Property or financial instruments
Solvency Reference Date a date at which an insurer's compliance with the rules in PIN 4 is assessed
Subsidiary the meaning given in Schedule 1 to the Companies Law
Takaful the meaning given in Part 4 of the Law Regulating Islamic Financial Business
Takaful Insurer an Insurer, any part of whose Insurance Business consists of Takaful transactions