Host Rob Chaplin and colleague Caroline Jaffer provide “The Standard Formula” listeners with an overview of prudential solvency regimes in five Middle East jurisdictions — the United Arab Emirates, Saudi Arabia, Qatar, Bahrain and Oman — during the fifth edition of the podcast's yearlong review of global insurance regimes. We discuss the regulatory frameworks and market conditions in each region and explore why the Middle East is expected to grow significantly as an insurance hub over the coming years, thanks in part to “financial free zones,” which operate with a significant degree of regulatory and legal independence from state-level authorities.
Episode Summary
The Middle East insurance market is expected to grow significantly as a hub over the next several years, with predicted growth of almost 29% by 2028. In the fifth episode of Skadden's yearlong podcast series on global prudential solvency requirements, host Robert Chaplin and colleague Caroline Jaffer explore the regulatory landscape in the UAE, Saudi Arabia, Qatar, Bahrain and Oman. During the discussion, Mr. Chaplin and Ms. Jaffer explore the state of the Middle East insurance sector, including “financial free zones,” capital requirements, solvency margins and the growing influence of international standards in the region's evolving insurance markets.
Key Points
- ‘Financial Free Zones’: Such zones operate with a significant degree of regulatory and legal independence from state-level authorities, allowing them to create and enforce their own set of regulations and legal standards. The Abu Dhabi General Market, the Dubai International Financial Center and the Qatar Financial Center are all examples of financial free zones.
- Regulatory Convergence: Many Middle Eastern jurisdictions are aligning with international standards, such as those of the International Association of Insurance Supervisors (IAIS), with regulators across the region becoming IAIS members.
- Saudi Arabia's Vision 2030: The Saudi Arabian insurance market is recognized as one of the strongest globally and plays a crucial role in the Kingdom's strategy to diversify its revenue sources away from oil. As part of its Vision 2030 initiative, the Saudi government aims to raise the amount of gross written premiums as a percentage of the non-oil GDP to 2.4% by 2025 and further to 4.3% by 2030.
Voiceover (00:01):
From Skadden, the Standard Formula is a Solvency II podcast for UK and European insurance professionals. Join us as Skadden Partner Robert Chaplin leads conversations with industry practitioners and explores Solvency II developments that matter to you.
Rob Chaplin (00:21):
Welcome back to the Standard Formula Podcast. Today we'll be discussing the Prudential Solvency Regime in the Middle East, a crucial topic for anyone involved in the insurance [00:00:30] industry. This episode is the fifth in our new year-long podcast series on global prudential solvency requirements, which will form the basis of our forthcoming publication, The Encyclopedia of Prudential Solvency.
(00:44):
The Middle East is an exciting place to be in today's insurance market. It's expected that the Gulf Corporation Council, or GCC, insurance market will grow significantly over the coming years. One estimate suggests that the market will reach 44 [00:01:00] billion US dollars in 2028, up by about 29% as compared to the size of the market in 2023. The jurisdictions that we will shortly discuss are primarily civil law jurisdictions of which the official language is Arabic. That said, English is commonly used in a business context and local regulations often, but not always, have up-to-date English versions of laws and regulations.
(01:28):
A notable feature of some [00:01:30] jurisdictions in this region is the establishment of “financial free zones,” such as the Abu Dhabi General Market, the Dubai International Financial Center, and the Qatar Financial Center, which are all financial services free zones, amongst others. These financial free zones operate with a significant degree of regulatory and legal independence from the local state-level authorities. This autonomy allows them to create and enforce their own set of regulations and legal standards, [00:02:00] which can differ substantially from those of surrounding mainland jurisdictions. Many financial free zones have gone a step further, by establishing their own judicial systems. The courts often apply common law as a framework, which is a departure from the civil law and Sharia-based systems prevalent across the mainland legal systems in the region. The adoption of a common law framework in free zone courts, and sometimes English law as a law of last resort, aims [00:02:30] to provide an environment which can be particularly attractive to international investors and businesses.
(02:36):
We're enormously grateful to our good friends at Clyde & Co in the UAE for their review of the script for this podcast. Joining me today is my colleague Caroline Jaffer. Caroline, it's great to have you here to speak about this important topic.
(02:52):
Caroline, let's look first at the rules in the UAE.
Caroline Jaffer (02:57):
Thanks, Rob. The United Arab Emirates, or UAE, [00:03:00] is a federation of seven emirates. Abu Dhabi, Dubai, Ras Al Khaimah, Sharjah, Ajman, Um Al Quwain, and Fujairah. In 2021, the UAE Insurance Authority and the UAE Central Bank merged. This new consolidated authority, the Central Bank, has regulatory oversight over banking, insurance, and other financial services. The UAE Central Bank is a member of the International Association of Insurance Supervisors, or the IAIS.
(03:26):
There are more than 50 free zones in the UAE which have been designed to attract investment [00:03:30] into the country into their designated sectors by, for example, permitting 100% foreign ownership. Two financial free zones have been established for the financial services sector, being the Abu Dhabi Global Market, or ADGM, and the Dubai Financial Center, or the DIFC.
Rob Chaplin (03:46):
What is insurance regulation like in the UAE, Caroline?
Caroline Jaffer (03:50):
A key statutory instrument covering the insurance regime in the UAE, often in the DIFC and the ADGM, is Federal Law No. 48 of 2023 [00:04:00] on regulating insurance activities, or the Insurance Law. It is worth noting that Article 22 of the Insurance Law excludes the application of insurance law in respect to companies operating within the financial free zones.
(04:12):
Insurance companies in the UAE, other than those in the financial free zones, must either be established as a public joint stock company in the state or a branch of a foreign insurance company. They must be authorized by the UAE Central Bank. UAE insurance risks outside of the financial free zones must be insured [00:04:30] by locally-licensed insurers. However, Article 12-2 of the Insurance Law provides that UAE insurers may reinsure their business with reinsurers located in the UAE or outside of the state.
Rob Chaplin (04:41):
Caroline, how about the prudential requirements for insurers?
Caroline Jaffer (04:45):
The prudential requirements for insurance companies are primarily set out in the financial regulations. These provide for a minimum subscribed and paid-up capital of not less than 100 million dirhams, or $22 million, and 250 [00:05:00] million dirhams, or $86 million, for a reinsurance company, which have minimum capital requirements.
(05:07):
Foreign companies setting up local branches must also submit a guarantee from a locally-licensed bank in the UAE in favor of the Central Bank. The guarantee amount is equivalent to the minimum capital requirements applicable to a locally-incorporated insurance company and therefore should be at least 100 million dirhams, or 22 million US dollars, if the branch is engaged in insurance activities. Then at least 250 million [00:05:30] dirhams, or 86 million US dollars, if it is engaged in reinsurance activities.
(05:35):
Both foreign and domestic insurers operating in the UAE must comply with sovereignty capital requirements and maintain the minimum guarantee fund. The sovereignty capital requirement comprises the funds that an insurer must maintain to cover its projected operations in the forthcoming 12-month period, taking into account the quantifiable risks to which the insurer is exposed. The minimum guarantee fund is an amount that is equal to one-third of the solvency capital requirement or the amount [00:06:00] determined by the board, whichever is greater. For branches of foreign insurers, the solvency capital requirement is calculated at the UAE level, i.e. with regard to the business underwritten by the branch. For local insurance companies with foreign branches and/or subsidiaries, this is calculated on a group-wide basis.
Rob Chaplin (06:16):
Caroline, what's the solvency margin?
Caroline Jaffer (06:20):
Insurers are required to maintain the solvency margin, which comprises the largest of, one, the minimum capital requirement. Two, the solvency capital requirement. And [00:06:30] three, the minimum guarantee. The solvency margin must be maintained in owned funds. Owned funds consist of the sum of basic owned funds and ancillary owned funds. Basic owned funds are defined as the excess of admissible assets over liabilities surplus, which shall be reduced by the amount of treasury shares held by the insurer and subordinated liabilities group-level debt in a holding company with the prior approval of the regulator.
(06:58):
Ancillary funds shall [00:07:00] consist of items other than basic co funds which can be called up to absorb losses with the prior approval of the regulator. Ancillary owned funds may comprise of the following items to the extent that they're not basic owned fund items. Unpaid share capital or initial fund that has not been called up. Letters of credit and guarantees, and any other legally-binding commitments receivable by the insurer. In the case of a company with variable contributions, ancillary owned funds may also comprise any [00:07:30] future claims which the insurer may have against its members by way of a right to call for supplementary contribution within the following 12 months.
Rob Chaplin (07:38):
Caroline, are there any requirements on the proportions of owned funds?
Caroline Jaffer (07:43):
At least 100% of the minimum capital requirement should be met by basic owned funds. And at least 100% of the solvency capital requirement in a minimum guarantee fund should be met by the owned funds, which is calculated as the basic owned funds plus only 50% of the ancillary [00:08:00] owned funds.
Rob Chaplin (08:01):
Are there any further requirements?
Caroline Jaffer (08:03):
The Insurance Law recognizes two types of insurance businesses, life insurance businesses and property and liability insurance businesses. While some existing insurance companies continue to operate on a composite basis, new insurance companies cannot operate across both categories. Each of these categories have fixed statutory deposit requirements. Life insurers must deposit four million dirhams, the equivalent to roughly one million US dollars, whereas property [00:08:30] and liability insurers must deposit six million dirhams, the equivalent of roughly 1.6 million US dollars.
(08:35):
Rob, are the financial free zones rules very different to the rules in the wider UAE?
Rob Chaplin (08:41):
Thanks, Caroline. The ADGM and the DIFC have their own regulators. The court systems in the ADGM and the DIFC operate on a common law framework, whereas onshore courts operate on the basis of civil law. As discussed earlier, the Insurance Law does not apply [00:09:00] in respective companies inside these financial free zones, as well as most other local civil and commercial legislation. As such, it's worth taking a closer look at the insurance regimes within those financial free zones.
(09:14):
Let's start with the ADGM. The ADGM was established in 2013 by Abu Dhabi Law No. 4 of 2013. The ADGM has its own legal system enforced by its own judicial system. The insurance [00:09:30] regulator in the ADGM is the Financial Services Regulatory Authority, or FSRA. The FSRA is a member of the IAIS. The key regulatory rulebook in respective insurance undertakings operating from within the ADGM is the Prudential Insurance Business Rulebook, or PIN. The PIN rules are applicable to all insurers with specific provisions for insurers that are cell companies, [00:10:00] distinguishing between insurers that undertake long-term insurance business and those that undertake other classes of insurance business. Furthermore, these rules are underpinned by guidance that provides contextual detail as to how the rules are enforced or applied in practice.
Caroline Jaffer (10:18):
Rob, what's the expectations for insurers?
Rob Chaplin (10:21):
Well, all insurers must have capital resources that are adequate for the conduct of their business, considering the size of the insurer, and the nature, [00:10:30] mix, and complexity of the risks it underwrites. This requirement is fundamental to the financial health of any insurer and the protection of its policyholders. Insurers are expected to develop internal capital models to support the self-assessment of capital adequacy and to withstand external and internal shocks.
(10:49):
Insurers that are not cell companies must always have adjusted capital resources, or ACR, equal to or higher than the amount of their minimum [00:11:00] capital requirement, or MCR. This is calculated by determining individual components in respect of various specific risks that the insurer is exposed to and adding those components together.
Caroline Jaffer (11:17):
Rob, how is the MCR calculated?
Rob Chaplin (11:17):
The MCR is a regulatory standard that ensures insurers maintain sufficient capital to cover their risks and obligations. The MCR is calculated by determining individual components in respect of 10 different [00:11:30] specific risks that the insurer is exposed and adding those components together to arrive at the MCR. These components include, amongst other things, the investment volatility risk component, the concentration risk component, and the underwriting risk component. Cell companies must ensure that they have non-cellular capital resources equal to or higher than the minimum non-cellular capital requirement. [00:12:00] Additionally, each cell within the cell company must have adjusted cellular capital resources equal to or higher than the minimum cellular capital requirement.
(12:11):
Insurers that are not incorporated within the ADGM must always have assets available to meet their insurance liabilities. The assets non-ADGM insurers must maintain may comprise any of the following asset classes. Cash at bank or in-hand. Bonds rated triple-B or better. [00:12:30] Any equities listed on an approved exchange. And reinsurance recoverables where the reinsurer is rated triple-B or better.
Caroline Jaffer (12:40):
Rob, how are insurers' capital resources calculated to meet the MCR, IE the ACR?
Rob Chaplin (12:47):
Well, the ACR is the value of the insurers' adjusted equity less its hybrid capital adjustment, or HCA. The starting point of calculating an insurer's adjusted equity is the insurer's base capital. This includes [00:13:00] paid up ordinary shares, general reserves, retained earnings, current year's after tax earnings, and hybrid capital, amongst others.
(13:08):
Adjusted equity is calculated by adding and deducting specific items from the base capital. Additions may include minority interests in subsidiaries and amounts in respective dividends to be paid in the form of shares. Deductions include, amongst other things, appropriations from profit, investments in the insurer's own shares, tax liabilities on unrealized [00:13:30] gains, deferred acquisition costs, deferred tax assets, goodwill and other intangible items. The HCA limits the extent to which an insurer can rely on hybrid capital, such as subordinated debt and preference shares, for its ACR. The HCA is calculated as the amount by which the total hybrid capital exceeds 15% of adjusted equity, although this limit can be increased to a maximum of 30% with the FSRA's approval.
(13:59):
Caroline, [00:14:00] why don't you take us through the DIFC rules, please?
Caroline Jaffer (14:04):
Thank you, Rob. The DIFC was established in 2004 Federal Decree No. 35 2004. Like the IDGM, the DIFC has its own legal and court system. In defining the common law applicable within the DIFC, the DIFC courts may consider the common law of England and Wales, along with common law from other jurisdictions. The regulator in the DIFC is the Dubai Financial Services Authority, or DFSA. Like its counterpart in the ADGM, the DFSA [00:14:30] is a member of the IAIS.
(14:31):
The capital requirements in the DIFC are largely similar to those in the ADGM. That said, a DIFC insurer's MCR is subject to certain de minimis requirements depending on the insurer's classification. Most insurers, other than captives, have a minimum requirement of $10 million.
(14:49):
Let's turn to the Kingdom of Saudi Arabia.
Rob Chaplin (14:52):
Thanks, Caroline. The Saudi Arabian insurance market is recognized as one of the strongest globally and plays a [00:15:00] crucial role in the kingdom's strategy to diversify its revenue sources away from oil. As part of its Vision 2030 initiative, the Saudi government aims to raise the amount of gross written premiums as a percentage of the non-oil GDP to 2.4% by 2025, and further to 4.3% by 2030.
(15:24):
The Saudi Arabian insurance market has a substantial emphasis on health and motor insurance. [00:15:30] In recent years, the market has witnessed the introduction of several compulsory insurance types aimed at enhancing coverage and mitigating risks across various sectors. These mandatory insurances include third party motor insurance, health insurance, medical malpractice cover, oil pollution cover, and professional indemnity for various insurance service providers. The insurance marketplace has shown strong growth [00:16:00] over the last year, with a recent report indicating earnings increasing by 25% over the first six months of 2024, bringing it to 2.2 billion Saudi Arabian riyals, or 585 million US dollars.
(16:16):
Up until 2023, the insurance and reinsurance market in Saudi Arabia was primarily regulated by the Saudi Arabian Monetary Agency, or SAMA, and the Council of Health Insurance. As part [00:16:30] of wider regulatory reforms, the kingdom introduced a new unified insurance regulator, the Insurance Authority, or the IA. The establishment of the IA represents a significant shift in the regulatory landscape, centralizing the oversight of all insurance-related activities under a single authority. The IA is a member of the IAIS.
Caroline Jaffer (16:57):
Rob, what is insurance regulation in the kingdom like?
Rob Chaplin (16:59):
As is the case under [00:17:00] regimes in the region, Saudi incorporated insurers must currently be publicly listed joint stock companies and be licensed by the IA, although foreign branches are permitted. Insurers must also submit a renewal application every year. However, reinsurers are able to obtain a five-year license. Saudi insurers are not allowed to undertake any non-insurance business unless they are complementary and necessary.
(17:29):
In [00:17:30] general, Saudi risks must be insured domestically. However, Saudi insurers and insurance intermediaries are technically able to place and insure a Saudi risk outside the kingdom if they previously have sought and obtained permission to do so from the IA.
(17:48):
In November 2022, SAMA issued a circular entitled Reinsurance Session to the local reinsurance market, also known as the Circular. The Circular has stipulated that insurance [00:18:00] companies must, during the negotiation of any reinsurance treaty across all types of insurance business, provide a designated portion of these agreements to local reinsurers. As of the 1st of January 2025, the percentage of reinsurance treaties that insurance companies are obligated to seed to the local market is set at 30%.
Caroline Jaffer (18:23):
Rob, what are the expectations for insurers?
Rob Chaplin (18:26):
Saudi insurance law categorizes insurance into distinct types. [00:18:30] General, health, and protection. The Insurance Authority oversees and regulates all of these types. As part of their broader requirement to remain compliant with Sharia law, insurers must operate using the cooperative model and are required to distribute a share of the surplus every year to policyholders. This can be implemented by reducing the premiums for the subsequent year.
(18:54):
Saudi Prudential Regime has a fixed minimum capital requirement in legislation, which is 100 [00:19:00] million riyals, or 27 million US dollars, for insurers. And 200 million riyals, or 53 million US dollars, where a company is engaged in both insurance and reinsurance activities. These minimum requirements are reported to have risen in 2024 to 300 million riyals, or $80 million, for insurers.
(19:24):
In addition to the above, there are the following solvency margin requirements. For general and health [00:19:30] insurers, they are required to maintain a margin of solvency equivalent to the highest of the following three amounts. Minimum capital requirement, premium solvency margin, and claims solvency margin. The premium solvency margin will be used to calculate the solvency margin for the first three years of the company's registration.
Caroline Jaffer (19:51):
Rob, what are the premium solvency margin and claims solvency margin?
Rob Chaplin (19:56):
The premium solvency margin is calculated by dividing [00:20:00] gross premiums written into the different classes of insurance set out in the regulations, which include health, motor, fire, marine, aviation, entity, and reinsurance. Deducting the outwards reinsurance relating to the gross premiums determined as above, provided that in all cases, the net premiums written are not less than 50% of gross premiums written, multiplying the net premiums written for each category by relevant factors set out in the regulations, [00:20:30] and aggregating the result for each category to come out with the appropriate solvency margin.
(20:36):
The claims solvency margin is calculated by dividing average gross claims incurred over the three most recent financial periods into different classes of insurance as it's set out in the regulation. Deducting the outwards reinsurance relating to the gross claims as determined above, provided that in all cases, the net claims amount is not less than 50% [00:21:00] of the gross claims amount, multiplying the net claims as above for each category by the relevant factors set out in the regulations, and aggregating the result for each category to come out with the appropriate solvency margin.
Caroline Jaffer (21:14):
Rob, what is the solvency requirement then for protection insurance?
Rob Chaplin (21:18):
For protection and savings insurance, business insurers, the solvency margin is determined by taking the aggregate of the results arrived through the calculation described below. 4% of the [00:21:30] technical provisions for the protection and saving direct insurance category. Three-per-thousand of the capital at risk for individual policies after the deduction of reinsurance sessions, provided that the reinsurance amounts do not exceed 50% of the total capital at risk. One-per-thousand for the capital at risk for group policies after the deduction of reinsurance sessions, provided that the reinsurance amounts don't exceed [00:22:00] 50% of the total capital at risk. Technical provisions are defined in the regulations as insurance liabilities. That is, the value set aside to cover expected losses arising on the book of insurance policies and related financial obligations.
Caroline Jaffer (22:18):
Rob, how can insurers meet their solvency margin requirements?
Rob Chaplin (22:22):
Insurers should value their assets for the purpose of calculating the solvency margin according to the regulations, which provide [00:22:30] that the percentage of those assets that are permissible, provided that the following are observed. The market value should not be exceeded in the valuation process, and all assets linked to the investment part of the protection and savings insurance policies shall be excluded. There's a maximum [inaudible 00:22:49] of 20% of the total asset's value in any one asset category. To give you an idea, the Saudi government development bonds and government bonds [00:23:00] held by A-rated countries can be held at 100%, whereas cash-in-hand can be held at 1%. Treasury stocks and personal loans are inadmissible.
(23:11):
Further, insurers that conduct general insurance business and protection and savings insurance business should consider the assets for each class of insurance separately. Assets obtained from the issuance of bonds or from the obtaining of loans can't be included in the solvency margin calculations without [00:23:30] the regulator's prior written approval.
(23:32):
Caroline, let's explore another major insurance hub in the region.
Caroline Jaffer (23:37):
Absolutely, Rob. Let's move to Qatar. As highlighted in our introduction, the insurance section in Qatar operates under two distinct jurisdictions, the laws of the state of Qatar, or the state, and the regulations of Qatar's free zone called the Qatar Financial Center, or the QFC. The two jurisdictions are subject to oversight by two different supervisory authorities. The insurance market [00:24:00] operating under the laws of the state overseen by the Qatar Central Bank, or the QCB. On the other hand, the QFC operates as a separate jurisdiction with its own set of regulations and is subject to oversight by the QFC Regulatory Authority, or the QFCRA.
(24:14):
The QFC was established to attract international business and investment by providing a business-friendly environment with a distinct legal and regulatory framework. Both the Qatar Central Bank, or the QCB, and the QFCRA are members of the IAIS.
Rob Chaplin (24:30):
[00:24:30] What is insurance regulation in Qatar like, Caroline?
Caroline Jaffer (24:33):
Well, Rob, the law of the Qatar Central Bank, Law No. 13 of 2012, or the 2012 rules, introduced new regulations relevant to the state's financial services regulatory regime. In addition, the QCB introduced executive instructions to insurers in 2017, or the Executive Instructions.
(24:51):
One significant change brought about by the 2012 rules is that the QCB is now responsible for the licensing and supervision of domestic insurers and branches [00:25:00] of foreign insurers, reinsurance companies, and insurance intermediaries outside of the QFC. As is the case in other countries in the region, Qatari insurance companies must be joint stock companies, and insurance agents must be Qatari nationals or wholly-owned Qatari entities. Additionally, only Qatari national insurers are permitted to insure assets within Qatar. New licenses for foreign insurers have been prohibited since 1971. The foreign investment law further restricts foreign investors' operations in the insurance sector requiring [00:25:30] approval from the Council of Ministers.
Rob Chaplin (25:32):
What are the expectations for insurers?
Caroline Jaffer (25:35):
The Executive Instructions set out a detailed set of protection requirements for insurers, as well as governance and risk management regulation, and the requirement to conduct an own risk and solvency assessment. The Executive Instructions provide that insurers shall consider prudential preventative requirements in the instructions. Namely, they shall at all times have adequate financial resources to support the nature and scale and complexity of their business and risk [00:26:00] profile to secure their ability to fulfill their obligations, and further ensure absence of any major risk where the insurer's liabilities are to be paid in a timely way.
(26:12):
They shall comply with the general framework for calculation of financial solvency requirements and for the capital requirements of insurers. They shall have regard to the definition of eligible capital for the purposes of implementation of such requirements. And also, some invested related requirements, as well as [00:26:30] the manner in which the insurer's assets and liabilities are assessed.
Rob Chaplin (26:34):
Caroline, how are the capital requirements calculated?
Caroline Jaffer (26:38):
The eligible capital of a listed insurer other than a captive insurer incorporated in Qatar shall be higher than the risk-based capital requirements and the amount that the QCB may decide from time to time. The insurer's capital shall under no circumstances fall below 100 million Qatari riyals. Risk-based capital requirements of an insurer constitutes [00:27:00] the total amounts of its insurance risk requirements, investment risk requirements, and operational risk requirements, with each limb having detailed provisions on how these are calculated.
(27:10):
Insurance risk requirements are comprised of the total of four components. Insurance premium risk, outstanding claims risks, long-term insurance risks, and financial insurance concentration risks. Insurance registered as branches shall hold a minimum capital requirement to the amount that the QCB may decide from time to time, which under no circumstances shall [00:27:30] fall below 35 million Qatari riyals.
(27:33):
Qatari insurers must also comply with a solvency ratio requirement, or SRR. The SRR is an amount of capital no less than 150% of the minimum capital requirement. The Executive Instructions contain detailed provision on eligible capital, with tiering requirements written into tier one and tier two capital, with the insurer ensuring that its tier one capital exceeds 75% of the minimum capital requirements.
(27:57):
Rob, how about the QFC's rules?
Rob Chaplin (27:59):
The [00:28:00] QFCRA prohibits insurers from carrying out both long-term insurance business, for example in relation to life and annuity contracts and general insurance business, unless the scope of the general business is limited to categories, one, accident, or two, sickness. QFC insurers are also prohibited from carrying out any other non-insurance business unless those activities are directly connected with their primary insurance business. QFC insurers are also under an obligation to maintain a risk [00:28:30] management policy and to conduct an own risk and solvency assessment.
Caroline Jaffer (28:34):
Rob, is there a minimum capital requirement and solvency ratio requirements?
Rob Chaplin (28:39):
QFC insurers must maintain eligible capital that is at least equal to, but ideally higher than the minimum capital requirements, or MCR. The MCR is the higher of 36 million Qatari riyals, roughly equal to 10 million US dollars, and an insurer's risk-based capital requirement. If an [00:29:00] insurer's eligible capital falls below its MCR, then it must immediately inform the QFCRA and stop writing any new business.
(29:07):
QFC insurers must also comply with the solvency ratio requirement, or SRR. Similar to mainland Qatar, the SRR is an amount of capital no less than 150% of the risk-based capital requirement. The risk-based capital requirement is either calculated on the basis of an approved internal model or as the aggregate of the insurer's investment insurance [00:29:30] and operational risk requirements.
Caroline Jaffer (29:32):
Rob, how can insurers meet these requirements?
Rob Chaplin (29:35):
A key component of the Qatari capital requirements in the QFC is determining what capital an insurer has that qualifies as eligible capital, and goes towards establishing an insurer's compliance with their capital requirements. The QFC rules provide for two different tiers of capital that in aggregate become the insurer's eligible capital. The rules set out a number of characteristics of [00:30:00] tier one capital. Two notable ones being that tier one capital is fully paid up and available to absorb losses. In order to be included in an insurer's eligible capital, the amount of tier two capital can't exceed the amount of tier one capital.
(30:17):
Tier two capital is instruments that falls short of the characteristics required of tier one. Tier two, itself divided into upper tier two and lower tier two. The key difference [00:30:30] between upper and lower tier two is that only perpetual instruments may be included in upper tier two, whereas dated instruments are relegated to lower tier two. In order to be counted in an insurer's eligible capital, the amount of lower tier two capital can't exceed 50% of the amount of tier one capital. Where an insurer intends to rely on tier two instruments in its matrix of eligible capital, it must obtain an external [00:31:00] legal opinion concluding that the rules in the insurance business rules as they relate to tier two instruments have indeed been met.
(31:08):
Caroline, let's look at the Kingdom of Bahrain next.
Caroline Jaffer (31:11):
Thanks, Rob. Bahrain is an island nation whose name translates to "two seas." The kingdom's [inaudible 00:31:18] sectors grew by nearly 4% over the third quarter of 2024, with the financial and insurance sectors performing especially well, growing by nearly 6% over the same period. Bahrain's insurance [00:31:30] sector is subject to the regulatory area inside of the Central Bank of Bahrain, or the CBB, and the Ministry of Commerce and Agriculture. The CBB is a member of the IAIS.
(31:40):
Insurance capitals in Bahrain must ensure that their available capital does not fall below the minimum fund. The minimum fund requirement is fixed by the CBB, but certain de minimis standards are set depending on the particular classification of an insurer. For example, category one must maintain 300,000 Bahraini dinar, whereas category [00:32:00] two insurers must maintain 500,000 dinar. If an insurer's capital falls below this amount, they must inform the CBB and stop writing or renewing any contracts of insurance.
(32:10):
With the respect to capital requirements, Bahrain recognizes two tiers of capital, tier one and two. Features of tier one capital include paid up ordinary shares, perpetual and non-cumulative preference shares, and the share premium reserve. In general, tier one capital has to have the following characteristics. [00:32:30] It is able to absorb losses. It is permanent. It ranks for repayment upon winding up of all other debts and liabilities. And it has no fixed costs, that is there is no inescapable obligation to pay dividends or interest. Features of tier two capital include perpetual cumulative preference shares, perpetual subordinated debt, and any other similar limited life capital insurance within an original term of at least five years.
(32:59):
When assessing [00:33:00] the amount of capital an insurer has available, the CBB will aggregate the capital available from both tiers. However, any tier two capital exceeding tier one will not be counted. The minimum tier one requirement for Bahrainian insurers is five million dinar, equivalent to about 13.2 million US dollars. Bahrainian insurers are under heavy obligation to maintain an MCR of 10 million dinar, equivalent to around 26.5 million US dollars.
(33:28):
Let's take a look at the Sultanate of Oman.
Rob Chaplin (33:30):
[00:33:30] Thanks, Caroline. The Omani insurance market is growing rapidly. The domestic insurance market grew about 12% of the first half of 2023 to 866 million US dollars in premiums. The market is largely dominated by local insurers, with about 86% of the market covered by locally incorporated insurers. The Capital Market Authority, or the CMA, was the Omani regulatory authority tasked with regulating and supervising [00:34:00] insurance undertakings in Oman. The CMA was established by the Royal Decree 80 of 1998. The CMA was replaced by the Financial Services Authority, or FSA, by Royal Decree 20 of 2024. The FSA is a member of the IAIS.
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Like a number of its regional counterparts, the FSA has adopted a risk-based approach for calculating an insurer's capital requirements. Insurers in Oman are required to maintain their solvency margin [00:34:30] in order to distribute any dividends to their shareholders. The solvency margin is the percentage difference between an insurer's total available capital, or TAC, and their total required capital. The TAC is the greater of the statutory minimum amount, and the cumulative total of the primary capital and the complementary capital, less any goodwill or formation expenses.
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Primary capital includes such assets as paid up capital, accumulated profits [00:35:00] or losses, and any other sources FSA deems appropriate to include as primary capital. Complementary capital includes such assets as foreign exchange reserves, revaluation reserves, and any other sources, again, that the FSA deems appropriate to include as complementary capital. The difference between primary and complementary capital is that only 80% of the value of any complementary capital is included in calculating an insurer's total available [00:35:30] capital. The only exceptions to this are situations where, on including 80% of the complementary capital, the TAC is a negative figure. In such circumstances, an insurer is allowed to include 100% of their complementary capital in determining their TAC.
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The total required capital is the higher of the minimum solvency capital, the MSC, or the risk-based solvency capital. The MSC varies depending on the type of insurer. [00:36:00] The MSC for general insurers is four million Omani riyals, or 10.4 million US dollars. (For) life insurers (the MSC) is 1 million Omani riyals, or 2.6 million US dollars. For health insurers, is 2 million Omani riyals, or 5.2 million US dollars.
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That brings us to the end of this podcast for today. A marathon session, but we've covered an awful lot of ground. We very much look forward to welcoming you to the next episode of our [00:36:30] podcast, which will cover the United States. Thank you for listening today.
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