When calculating the Incurred But Not Reported (IBNR) provisions the following should be considered:

1. There shall be sufficient data available with the Company to facilitate the IBNR calculation. The Company's management shall be responsible to certify the completeness, appropriateness and accuracy of the insurance data to be used for the calculation of the IBNR.
    
2. The Company will use actuarial methods that are applicable depending on size, scale and complexity of business. The Actuary shall provide adequate explanation to the methods adopted and the methods should be consistent from year to year. In case the Actuary decides to change the methods previously adopted and this methodology change has a material impact on results, sufficient explanation on the reason and impact needs to be provided to the Authority. The Authority reserves the right to ask for additional explanation and information for the change in methods adopted.

Estimation of Incurred But Not Reported provisions (IBNR)

1. These instructions are relevant to determination of IBNR provisions for direct insurance and facultative reinsurance accepted business. Estimation of IBNR provisions on treaty accepted and Excess of Loss accepted business may require other methods more appropriate to the nature of the portfolio and its claims development pattern. Likewise, estimation of IBNR provisions for specialized business such as credit guarantee insurance may require other methods more appropriate to the nature of the business.
    
2. In these instructions, the term IBNR covers both provisions for claims not yet reported (Incurred But Not Yet Reported or IBNYR) as well as incomplete provisions for reported claims (Incurred But Not Enough Reported or IBNER). It is not necessary to establish separate provisions for IBNYR and for IBNER so long as the method(s) used will take into account both elements.
    
3. The method stated in these instructions is the “preferred method” and is generally suitable to estimate the IBNR provision. If the Actuary considers the method stated in these instructions to be not suitable, he should set out the reasons for such conclusion and provide justification for the alternative method(s) proposed to be used, being considered more appropriate. Where the method(s) used is not one of the well-known methods, the Actuary should also describe the method(s) and the underlying assumptions in that method(s).
    
4. All mathematical methods of estimation are based on a set of assumptions. So, the validity of the assumptions underlying the method proposed to be used should be fully set out and validated sufficiently to lend credibility to the exercise.
    
5. Calculation of the provision for IBNR should be done separately for each year of occurrence or year of underwriting and the figures should be aggregated to arrive at the total amount to be provided.
    
6. The calculation of the ALAE provision can be included with the loss provision, but when calculated separately the same level of detail in terms of method(s) used, validation of assumptions, estimation by year, etc. as described above for loss provisions should be done for the ALAE provisions. The calculation of the ULAE provision is generally done with simpler, yet actuarially sound, methods.

Examination and validation of basic data

1. The Actuary should apply such checks as practically possible to assess the quality and completeness of the data to improve the accuracy of the IBNR provision estimates.
    
2. Data should be examined separately for each of the classes set out in the instruction notes. If data of any class is aggregated with data for another class, care should be taken to see that the two classes are homogeneous in nature.
    
3. The Actuary should examine the changes in underwriting policy over the period of observation and in particular, the changes made in current underwriting policy. The impact of such changes on the claims development pattern and claims ratio should be estimated if appropriate.
    
4. The Actuary should examine the development of premium written over recent years. If the average level of deductible has undergone material change over the recent years, its impact on the claims development pattern should be taken into account.
    
5. The compilation of data on an underwriting period basis instead of a period of occurrence (accident period) basis may be proposed in some cases. Where this basis is followed the Actuary should support the reason for change of basis on objective reasons.

Claims handling

1. A detailed review of the claims handling practices should be conducted. Where material changes are identified, their impact on the claims development pattern should be taken into account.
    
2. Each claim is to be recognized upon occurrence of the insured event. The way this is implemented in practice may differ from one company to another, but it should include various claim transactions and reserves for the estimated liability on a case by case basis (case reserves). The impact of inadequate provision for claims on claims development can be significant and should be taken into account.
    
3. In addition to recognition of claims, which the Company follow to determine the provision to be made and the mechanism to review such provision, the Company has the responsibility toward having prompt and fair settlement related to the claims. The Company may sell or accept the collectable returns as a part of the settlement and include the practice of downsizing the claims provision in cases where there has been no movement in the claim over a certain period, which may be important factors in claims development.
    
4. The Company should consider that claim development patterns can be materially affected by the occurrence of unusual events over the period of observation such as:
    
   1. Individual large claims;
       
   2. Catastrophic events causing a large number of claims;
       
   3. Changes in Law affecting the incidence and size of claims;
       
   4. Impact of external factors on the average size of claims; and
       
   5. Judicial changes related to accrued compensation
        
5. When estimating IBNR after adjustment for reinsurers' share, note should be taken of any changes in reinsurance protections and changes in size of retentions over recent years.

Claims cost trends

1. In order to make adequate adjustment for trends, the following aspects should be studied:
    
   1. Composition of portfolio;
       
   2. External factors such as economic environment, inflation, changes in legal, political or social conditions;
       
   3. The underwriting policy of the Company; and
       
   4. Changes in the Company's claim settlement practices.
       
2. A significant indicator of claims experience trends is the frequency of claims occurrence and the average size per claim paid and per claim outstanding. These should be studied and any variations observed should be looked into.

Test of credibility

1. To ensure completeness of IBNR provision estimation, tests of credibility for the results produced should be applied including, evaluating the frequency of claims occurrence, ultimate incurred loss ratios, average cost per claim paid and per claim outstanding, etc.
    
2. It is generally inappropriate to accept any negative values for the IBNR provision in total. To avoid such a situation, estimation of IBNR should be made separately for each year of occurrence. Negative values of IBNR for any year can be allowed where it is actuarially justified based on the nature of the risk, claims practices and historic development trends. The actuary must include a detailed description of the reasons for including negative IBNR in total for any type of business. While negative IBNR in total for a type of business may be appropriate if actuarially justified and documented, the negative IBNR shall not be an Admissible Asset.
    
3. An essential check on the credibility of the estimation exercise is to see how the claims developed during the preceding twelve months as compared to the projection and estimation made last year. The outstanding claims provision and provision for IBNR made at the last Balance Sheet date should be compared with the aggregate of claims paid during the year, claims outstanding and the provision for IBNR at the end of the current year, for the years of occurrence up to and including the date of the last Balance Sheet.
    
4. When estimation methods produce less reliable results for the most recent years, the results for the more recent years may need to be revised based on the Actuary's knowledge of the business and the Company's portfolio.

Calculation of the Mathematical Reserve

1. The Mathematical Reserve is to be determined separately for each insurance contract by a prospective method of valuation in accordance with the instructions below.
    
2. The valuation method shall take into account all prospective contingencies under which any premiums (by the policyholder) or benefits (to the policyholder/beneficiary) may be payable under the policy, as determined by the policy conditions. The level of benefits takes into account the reasonable expectations of policyholders (with regard to bonuses, including terminal bonuses, if any) and any established practices of the Company for payment of benefits.
    
3. The estimated amount of liability under each policy shall be determined based on prudent assumptions of all relevant parameters and in line with global actuarial standards. The value of each such parameter shall be based on the Company's expected experience and shall include an appropriate margin for adverse deviations that may result in an increase in the amount of the mathematical reserve.
    
4. In case of a negative reserve, the Actuary shall set the amount of such mathematical reserve at zero, or to the guaranteed surrender value in case of such guaranteed surrender value deficiency reserve, as the case may be. For unit-linked business, the mathematical reserve may be negative, but the Actuary shall set the mathematical reserve to a level so that the sum of the mathematical reserve and the unit reserve is at least as large as the guaranteed surrender value.
    
5. The Actuary shall not make allowance for any future lapse, surrender, making paid-up or revival of a contract where such an allowance would result in a decrease in the liability in respect of that contract.
    
6. The Actuary shall take into account vested, declared or allotted bonuses or other forms of participation to which policyholders are already either collectively or individually contractually entitled.
    
7. The Actuary shall take into account discretionary charges and deductions from Policy Benefits, in so far as they do not exceed the reasonable expectations of policyholders.
    
8. The Actuary shall take into account expenses, including commissions. The expenses shall take either implicit or explicit account of future increases considered likely in expenses for existing business based on prudent assumptions as to the future rates of changes in prices and earnings.
    
9. Consideration shall be given to the impact of selective withdrawals in the allowance for future expenses, particularly where the allowance is not assessed on a per policy basis.
    
10. Explicit allowance for future expenses is required for all contracts under which no future premiums are receivable where these are not provided by disclosed margins in the valuation rate of interest.
     
11. Proper provision must be made for claims handling expenses, directly or indirectly. This is particularly relevant to classes of business such as permanent health insurance where these expenses are likely to be significant.
     
12. Where a net premium method is used it is permissible to take credit for the difference between the gross premium and the valuation net premium in assessing the provision to be made for meeting the expenses likely to be incurred in the future in fulfilling the existing contracts, but only to the extent allowed by global actuarial standards.
     
13. The Actuary shall take into account any rights under contracts of reinsurance.
     
14. The Actuary shall take into account any other options that the policyholder has in respect of the policy, or by virtue of the contract, and that provision shall be made on prudent assumptions to cover any increase in liabilities caused by policyholders exercising options under their contracts. Treatment of options should be in line with global actuarial standards.
     
15. The provisions for unit-linked funds should be the unit value and depends on what the guarantees are in the product. So the provisions should be provided keeping in mind guaranteed return if any in addition to basing it on the future expected unit value.
     
16. The Actuary shall use one of the common methods which would be suitable for the size, nature and complexity of the business. Common methods like Gross Premium Method of valuation or retrospective method may be used if demonstrated to be at least as prudent. The Actuary shall give an explanation for the method adopted and the method shall be consistent from year to year. In case the Actuary decides to change the method being used from previous years, sufficient explanation to the same needs to be provided.
     
17. The method of calculation of the amount of liabilities and the assumptions for the valuation parameters shall not be subject to arbitrary discontinuities from one year to the next. The calculation of the net present value of payments is to be based on a portfolio of (AAA) rated sovereign risk securities with a similar expected payment profile to the liability being measured. In case the market yields for longer term durations are not available within UAE, in such a case US$ market yield of a (AAA) rated sovereign risk securities should be considered as a measure for AED longer term durations.
     
18. The determination of the amount of mathematical reserve shall take into account the nature and term of the assets representing those liabilities and the value placed upon them and shall include prudent provision against the effects of possible future changes in the value of assets on the ability of the Company to meet its obligations arising under policies as they arise.
     
19. Technical Provisions (including Mathematical Reserves) considered for Solvency purposes should not include unit-linked funds' reserves to the extent that it does not include the guaranteed portion of the insurance policies with the unit-linked funds.
     
20. Mortality Rates used must be conservative. The Actuary should provide reinsurance rates or refer to any published mortality table that is justifiable.
     
21. Sensitivity to assumptions used should be provided.
     
22. Persistency - Lapse analysis should be provided where applicable.
     
23. In the event of lack of clarity on specific assumptions not defined above for calculating the Mathematical Reserves, the Actuary can apply actuarial best practices but must provide justification and quote relevant actuarial standards in the valuation report.

Report of the Actuary on the Estimation of Reserves

The report of the Actuary should contain the following elements at a minimum. Some elements will be at an overall company level, and the others should be at the line of business or coverage level to document the analysis of the Actuary.

Name of Company:

Name of Actuary:

Insurance activity practiced by the company:

Section 1 - The Company and its business:

1. The premium scale of the Company and the classes of business it writes. Has the growth of premium income been steady and reasonable? Fluctuations in growth rates or high or low growth rates may be indicative of a change in the composition of business or changes in underwriting policy.
    
2. What is the underwriting policy of the Company in respect of:
    
   1. Selection of risks;
       
   2. Rates and deductibles; and
       
   3. Delegation of underwriting authority.
       
3. Has the underwriting policy remained stable over the past three years? Note any changes in key underwriting personnel and the impact on the underwriting policy of the Company
    
4. What is the claims processing and settlement policy of the Company in the matter of:
    
   1. First recognition of claim;
       
   2. Provision for claims where no information or inadequate information on facts are available;
       
   3. Periodicity of review of the provision for a claim;
       
   4. Negotiation of bodily injury claims relating to motor accidents;
       
   5. Processing and settlement of claims; and
       
   6. Pursuit of recovery or sale of salvage.
       
5. Has the claims processing and settlement policy remained the same over the past three years? Note any changes in key claims personnel and the impact on the claims settlement practice of the Company.
    
6. Has the Company experienced any cash flow or financial problems over the observation period? Note any effects on the Company's underwriting or claims settlement practices as a result of these problems.
    
7. Has the claims data been affected by catastrophic events such as earthquake, flood, windstorm, individual large claims, etc. or any significant changes in the business environment such as a severe economic recession that would have affected the business experience and impacted the claims figures?
    
8. Any changes in the general business and insurance industry conditions in matters such as legislative environment, competition, consumerism, levels of court awards, etc.? Note the impact of these changes.

Section 2 - The data

1. The data should be compiled separately for each class of insurance business as required by the insurance regulations. If not, comment on the reasons for variation.
    
2. Comment on the source of data and steps taken to ensure that the data is consistent, reliable, complete and in agreement with the financials.
    
3. Comment on the observed trends in the growth of premiums, frequency of loss occurrence, average cost per claim paid and per claim outstanding, speed of emergence of claims and speed of settlement. Also state how these have been taken into account in the selection process of assumptions used in the estimation of provisions.
    
4. Note any individually large claims that affect the claims development figures and how the estimation process was adapted as a result of these claims.
    
5. The estimation of provisions should be done pre- and post-adjusting for the reinsurance share (gross and net of reinsurance). A description of the process followed to determine the provisions post-adjusting for reinsurance share should be provided. Any material change in the reinsurance program, along with how the estimation process was adapted to adjust for the change should be provided. If data on a net of reinsurance basis is not readily available, it is up to the Actuary to work on the provision estimates on a gross basis and work on the estimate of provisions for the share of reinsurance ceded, if that is more easily possible.

Section 3 - The methods

1. Describe the methods used for estimation of provisions. If the methods used now are different from the methods used previously, state the reason(s) for change.
    
2. Document the assumptions underlying the methods and discuss to what extent the validity of the assumptions was verified.
    
3. Where the method(s) used is not commonly understood, explain the methodology and provide adequate working sheets to understand the calculations and results.
    
4. The review and the examination of the results should be executed using another method.

Section 4 - Evaluation of the results

1. Compare the prior estimated claim provisions (that were pending at the end of the previous year's estimate), with the paid claims in the subsequent year for each claim in order to test the accuracy of the prior estimates.
    
2. The difference between the claim reserves booked by the Company and the claim reserves estimated by the Actuary must be disclosed. If the Company estimates are lower than the estimates by the Actuary, then additional tests that were conducted to assess the accuracy of the estimates should be disclosed.

Section 5 - Overall results

Comment on calculated incurred claim ratios for the Company over the years. In particular, comment whether the claim ratios for the more recent years are logical and state how the estimation process was modified to achieve more credible results.

Section 6 - Attachments

The data collected from the database of the Company, the compiled cumulative figures, the calculation sheets and the final results should be attached to the report.

Section 7 - Certification

1. The Actuary should not put forward or certify any figures, which lack credibility, with serious reservations.
    
2. The Actuary should certify that he has checked the data to the best of his ability and is satisfied that they are consistent, reliable and complete and that the assumptions underlying the methods used for estimation of provisions are reasonable.
    
3. The report should be signed with date by the Actuary.