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Dubai Financial Services Authority (DFSA): Contents

Dubai Financial Services Authority (DFSA)
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Prudential — Insurance Business Module (PIN) [VER15/01-18]
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  • PIN App8 Calculation of Minimum Fund Capital Requirement

    • PIN A8.1 Purpose and general provisions

      • PIN A8.1.1

        This appendix applies to all InsurersG to which PIN section 4.6 applies.

        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

        • PIN A8.1.1 Guidance

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

          Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

    • PIN A8.2 Minimum fund capital requirement

      • PIN A8.2.1

        Subject to PIN Rule A8.2.3, an InsurerG must calculate the Minimum Fund Capital RequirementG in respect of each Long-Term Insurance FundG maintained by it, according to the formula:

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

        where:

        Term Definition
        MFCR Minimum Fund Capital RequirementG 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;
        LIRC Long-Term InsuranceG risk component in respect of the fund; and
        AMRC Asset management risk component in respect of the fund.

        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

      • PIN A8.2.2

        The methods of calculation of the components referred to in PIN Rule A8.2.1 are set out in sections PIN A8.4, PIN A8.5, PIN A8.6, PIN A8.7, PIN A8.8, PIN A8.9, PIN A8.10 and PIN A8.11.


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

      • PIN A8.2.3

        The Minimum Fund Capital RequirementG in respect of a Long-Term Insurance FundG must always be equal to or higher than $5,000,000.


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]
        [Amended] RM46/2007 (Made 5th July 2007). [VER6/07-07]

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

      • PIN A8.3.1

        Subject to PIN Rule A8.3.2, an InsurerG must calculate those components of the Minimum Fund Capital RequirementG in respect of a Long-Term Insurance FundG , that are relevant to assets, in respect of every asset that is attributable to the Long-Term Insurance FundG .


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

      • PIN A8.3.2

        Where an InsurerG arranges its affairs such that Invested AssetsG attributable to a Long-Term Insurance FundG are held in a RelatedG entity, the InsurerG may, with the written approval of the DFSAG , calculate components of the Minimum Fund Capital RequirementG by reference to the interest of the Long-Term Insurance FundG in the assets that are held by the RelatedG entity, instead of by reference to the interest that the Long-Term Insurance FundG has in that RelatedG entity. In that case this appendix shall be interpreted as though the assets (representing the Long-Term Insurance Fund'sG interest) held by the RelatedG entity were held directly by the Long-Term Insurance FundG .

        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

        • PIN A8.3.2 Guidance

          The effect of PIN Rule A8.3.2 is to provide flexibility for InsurersG whose investments are managed on a pooled basis within a GroupG , or which establish specialist SubsidiariesG to manage their investments. While the Insurer'sG asset in such cases is a balance with, or investment in, a RelatedG entity, this rule permits the InsurerG to 'look through' the corporate arrangement and apply this appendix to the assets of the RelatedG entity as though they were the Insurer'sG own. This flexibility extends to Invested AssetsG attributable to Long-Term Insurance FundsG , though this provision does not provide any exemption from PIN section 3.4 in respect of segregation of assets.


          Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

    • PIN A8.4 Default risk component

      • PIN A8.4 Guidance

        The purpose of the default risk component is to require an InsurerG 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 InsurersG that are not Protected Cell CompaniesG , is set out in PIN section A4.4. The provisions in this section apply the relevant provisions of PIN section A4.4 to each Long-Term Insurance FundG that an InsurerG maintains.


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

      • PIN A8.4.1

        An InsurerG must calculate the default risk component in respect of a Long-Term Insurance FundG 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 PIN A8.4.2 and PIN A8.4.3:

        (a) assets that are Invested AssetsG : the table set out in PIN Rule A4.4.1(a); and
        (b) assets that are not Invested AssetsG : the table set out in PIN Rule A4.4.1(b).

        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

      • PIN A8.4.2

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


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

      • PIN A8.4.3

        Notwithstanding anything else in this section:

        (a) 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
        (b) no default risk component must be calculated in respect of assets excluded from Adjusted Fund Capital ResourcesG in accordance with Rules PIN A7.4.2(d), PIN A7.4.2(e), PIN A7.4.2(f), PIN A7.4.2(h), or PIN A7.4.2(i).

        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

    • PIN A8.5 Investment volatility risk component

      • PIN A8.5 Guidance

        The purpose of the investment volatility risk component is to require an InsurerG to set aside capital to cover the risk of deterioration in the values of Invested AssetsG . The basic calculation model for this component, as it applies to InsurersG that are not Protected Cell CompaniesG , is set out in PIN section A4.5. The provisions in this section apply the relevant provisions of PIN section A4.5 to each Long-Term Insurance FundG that an InsurerG maintains.


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

      • PIN A8.5.1

        An InsurerG must calculate the investment volatility risk component in respect of a Long-Term Insurance FundG as the sum of the amounts obtained by multiplying the value of each Invested AssetG attributable to the fund with the relevant percentage, in accordance with the table set out in PIN Rule A4.5.1, but subject to the provisions of PIN Rule A4.5.2.


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

    • 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 InsurerG to set aside capital to cover the risk of default and deterioration in value in respect of exposures that the InsurerG has because it is a party to a derivative contract. The provisions in this section apply the relevant provisions of PIN section A4.6 to each Long-Term Insurance FundG that an InsurerG maintains.


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

      • PIN A8.6.1

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

        (a) a put option serving as a guarantee;
        (b) a foreign exchange contract having an original maturity of 14 days or less; or
        (c) an instrument traded on a futures or options exchange, which is subject to daily mark-to-market and margin payments.

        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

      • PIN A8.6.2

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


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

      • PIN A8.6.3

        The amount in respect of a derivative contract is obtained by calculating, for an asset equivalent amount as determined in PIN Rule A8.6.4, a default risk component as set out in PIN section A8.4 and an investment volatility risk component as set out in PIN section A8.5, as though the asset equivalent amount were a debt obligation due from the derivative counterparty.


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

      • 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 PIN Rule A4.6.4 according to the nature and residual maturity of the derivative.


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

    • 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 InsurerG 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 InsurerG as at the Solvency Reference DateG , 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 PIN section A4.7 to each Long-Term Insurance FundG that an InsurerG maintains.


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

      • PIN A8.7.1

        An InsurerG must calculate an off-balance sheet liability risk component in respect of a Long-Term Insurance FundG if the InsurerG 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 FundG is exposed to the risk of having to make payment on those instruments should the guaranteed party default.


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

      • PIN A8.7.2

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


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

      • 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 PIN section A8.4 and an investment volatility risk component as set out in PIN 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 InsurerG .


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

    • PIN A8.8 Concentration risk component

      • PIN A8.8 Guidance

        The purpose of the concentration risk component is to require an InsurerG 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 PIN section A4.8 to each Long-Term Insurance FundG that an InsurerG maintains.


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

      • PIN A8.8.1

        An InsurerG is required to calculate a concentration risk component in respect of a Long-Term Insurance FundG if that fund has, as at the Solvency Reference DateG , an investment exposure to a single counterparty or group of RelatedG counterparties, or to a single property, that exceeds 10% of the Adjusted Fund Capital ResourcesG .


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

      • PIN A8.8.2

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

        (a) 'investment exposure' means the aggregate value of all equity, bond or other investments in or in respect of the counterparty or group of RelatedG parties or property in question, together with off-balance sheet exposures to the same counterparty or group of RelatedG counterparties or property that that fund has because the InsurerG 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 RulesG referred to in PIN Rule A8.4.3(b); and
        (b) 'AAA'-RatedG Governments and Government agencies are not counterparties.

        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

      • PIN A8.8.3

        An InsurerG must calculate its concentration risk component in respect of a Long-Term Insurance FundG 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 PIN Rule A4.8.3, reading that table as though all references to Adjusted Capital ResourcesG were references to Adjusted Fund Capital ResourcesG , and subject to PIN Rule A8.8.4


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

      • PIN A8.8.4

        If the concentration risk component in respect of an investment exposure of a Long-Term Insurance FundG , aggregated with the sum of the default risk component, investment volatility risk component and off-balance sheet asset risk component (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.


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

    • 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 FundsG with smaller portfolios of Invested AssetsG . The provisions in this section apply the relevant provisions of PIN section A4.9 to each Long-Term Insurance FundG that an InsurerG maintains.


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

      • PIN A8.9.1

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

        (a) the aggregate of the default components determined in accordance with PIN section A8.4, in respect of Invested AssetsG ;
        (b) the investment volatility risk component determined in accordance with PIN section A8.5; and
        (c) the concentration risk component determined in accordance with PIN section A8.8.

        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

      • PIN A8.9.2

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

        (a) if x ≤ 100, the factor is 1.5;
        (b) if 100 < x ≤ 200, the factor is (150 + 0.5(x–100))/x;
        (c) if 200 < x ≤ 1,200, the factor is (200 – 0.2(x–200))/x; and
        (d) if x > 1,200, the factor is zero.

        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

    • PIN A8.10 Long-term insurance risk component

      • PIN A8.10 Guidance

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


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

      • PIN A8.10.1

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


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

    • PIN A8.11 Asset management risk component

      • PIN A8.11 Guidance

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


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]

      • PIN A8.11.1

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


        Derived from DFSA RM06/2004 (Made 16th September 2004). [VER1/09-04]