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  • Section (2) Regulations Pertinent to the Solvency Margin and Minimum Guarantee Fund – Takaful

    • Article (1) – Minimum Capital Requirement

      The Minimum Subscribed and Paid Up Capital of each Company should not be less than the following:

      1. AED 100 million for Takaful operators.
      2. AED 250 million for Re-Takaful operators.

    • Article (2) – Minimum Guarantee Fund

      1. The Minimum Guarantee Fund shall not be at any point in time less than (1/3) of the Solvency Capital Requirement.
         
      2. The Minimum Guarantee Fund shall be calculated based on a minimum amount of funds required to support each type of business written by the Company. The minimum funds for each type of business shall include an absolute minimum and a percentage of net earned premium or similar measure, whichever is greater, as determined by the Authority.

    • Article (3) – Group Capital Adequacy

      1. A Group consists of Takaful or Re-Takaful operators and any other regulated entities where the Group owns 100% of the companies' shares or a controlling interest (as per IFRS) of the companies' shares.
         
      2. The Group capital requirement is the sum of the capital requirements calculated on the consolidated Takaful operators/branches and capital requirements of other regulated entities.

    • Article (4) – Solvency Margin

      1. The solvency template developed by the Authority shall be based on following principles:

        a) The Solvency Capital Requirement shall be calculated on the presumption that the Company will pursue its business as a going concern.

        b) The Solvency Capital Requirement shall be calibrated so as to ensure that all quantifiable risks to which each Company is exposed are taken into account. It shall cover existing business, as well as the new business expected to be written over the following twelve (12) months. It shall correspond to the Value-at-Risk of the Basic Own Funds of a Company subject to a confidence level of 99.5 % over a one year period.

        c) The Solvency Capital Requirement should cover the following risks:
         
        1. 1) Underwriting risk;

        2. 2) Market and Liquidity (Investment) risk;

        3. 3) Credit risk; and

        4. 4) Operational risk.

        d) The Solvency Capital Requirement for the Company are the solvency level of all its Participants’ Risk Funds and Shareholders Funds. The solvency level for all Participants’ Risk Funds (PRF) shall be consistent with the overall risk profiles mentioned in subparagraph (c).

        e) The Solvency Capital Requirement for a Company is determined in accordance with the guidelines set above for Participants’ Risk Funds and Shareholders Funds, in addition to:
         
        1. 1) A reserve for Participants’ Risk Funds shall have adequate solvency resources to provide assurance that it could meet claims from the Takaful participants.

        2. 2) Adequate capital resources are maintained for shareholders to meet their financial and legal obligations. This is in addition to funds kept aside for meeting the requirements of deficiencies in PRFs.

        3. 3) The entire Shareholders’ Funds shall be made available to provide Qard Hasan in case of a deficit in the Participants’ Risk Funds.

        4. 4) The expected impact of fluctuations in the value of assets and liabilities must be carried out taking into account by the shareholders of the funds to cover the deficit in solvency calculations required for the risk involved.

        5. 5) The collected funds set aside by the shareholders to provide for the deficiency in solvency for the Participants’ Risk Funds shall take into consideration the foreseeable fluctuations in asset and liability valuations. The assets earmarked for Qard Hasan needs to be accounted for separately and be valued for solvency as per the guidelines on asset valuation detailed in Asset Valuation Instructions.

        6. 6) The right to receive repayment toward Qard Hasan provided to the Participants’ Risks Funds shall not be considered an asset toward calculating the shareholders solvency.

        f) If the Participants’ Investment Fund is relating to a Family linked investment fund, this fund shall not be taken into consideration in assessing the Solvency Capital Requirement of various Participants’ Risk Funds in a Company.
         
      2. The Company is required to calculate their Solvency Margin based on the solvency template developed, and amended from time to time, by the Authority.
         
      3. The Solvency Capital Requirement shall be calculated as follows:

        a) At the UAE level only for branches of foreign Takaful and Re-Takaful operators;

        b) At the group level for local Takaful and Re-Takaful operators having branches or subsidiaries outside the UAE; and

        c) At the UAE level only for all other Takaful and Re-Takaful operators.
         
      4. For the purpose of solvency reporting, the Authority may:

        a) Determine the nature, scope and format of the information required for solvency, based on certain frequencies as follows:
         
        1. 1) On an annual basis;

        2. 2) On a quarterly basis;

        3. 3) Upon occurrence of predefined events; and

        4. 4) During enquiries regarding the situation of the Company.

        b) Obtain any information regarding contracts which are held by intermediaries or regarding contracts which are entered into with third parties; and

        c) Require information from external experts.

    • Article (5) – Risk Assessment and Evaluation of Solvency in Main Areas of Risk

      1. When assessing risks and solvency, the Company needs to take into account mainly the following risks: Underwriting Risk, Market and Liquidity (Investment) Risk, Credit Risk and Operational Risk.
         
      2. Further guidance on risk assessment and evaluation of solvency in main risk areas in Addendum (1) of the regulations herein shall be applied.

    • Article (6) – Risk Management System

      1. The Company shall have in place a documented risk management framework and strategy, risk management policies and procedures, and allocated responsibilities and controls.
         
      2. The Company shall establish a stress testing framework and policy.
         
      3. Further guidance on the risk management system and framework in Addendum (2) of the regulations herein shall be applied.

    • Article (7) – Own Funds

      1. Own Funds shall consist of the sum of Basic Own Funds and Ancillary Own Funds.
         
      2. Basic Own Funds shall consist of the following items:

        a) The excess of Admissible Assets over liabilities (surplus), which shall be reduced by the amount of Treasury shares held by the Company.

        b) Subordinated liabilities (group level debt in a holding company with the prior approval of the Authority).
         
      3.  Ancillary Own Funds shall consist of items other than Basic Own Funds which can be called up to absorb losses, with the prior approval of the Authority. Ancillary Own Funds may comprise the following items to the extent that they are not Basic Own Funds items:

        a) Unpaid share capital or initial fund that has not been called up;

        b) Letters of credit and guarantees; and

        c) Any other legally binding commitments receivable by the Company.
         
      4. In case of a Company with variable contributions, Ancillary Own Funds may also comprise any future claims which that Company may have against its members by way of a right to call for supplementary contribution, within the following twelve (12) months.
         
      5. Where an Ancillary Own Funds item has been paid in or called up, it shall be treated as an asset and cease to form part of Ancillary Own Funds items.
         
      6. At least 100% of the Minimum Capital Requirement should be met by the Basic Own Funds.
         
      7. At least 100% of the Solvency Capital Requirement and Minimum Guarantee Fund should be met by the Own Funds, which is calculated as the Basic Own Funds plus only 50% of the Ancillary Own Funds.

    • Article (8) – Maintenance of Solvency Margin

      1. The Company shall at all times comply with the requirements of the Solvency Margin, which means maintaining Own Funds as per Article (7) above for the largest of the following:

        a) Minimum Capital Requirement;

        b) Minimum Guarantee Fund; and

        c) Solvency Capital Requirement.
         
      2. The Company shall immediately report to the Authority the event of non-compliance with maintaining the Minimum Capital Requirement or Solvency Capital Requirement. In this case, the Company shall submit a realistic recovery plan to re-establish the level of Own Funds covering the Minimum Capital Requirement or Solvency Capital Requirement for approval by the Authority within thirty (30) days from the date of submitting the report. The recovery plan must achieve compliance with the Minimum Capital Requirement or Solvency Capital Requirement within six (6) months of the date of observation of non-compliance with the Minimum Capital Requirement or Solvency Capital Requirement.
         
      3. The Company shall immediately report to the Authority the event of non-compliance with maintaining the Minimum Guarantee Fund. In this case, the Company shall submit a realistic recovery plan to re-establish the level of Own Funds covering the Minimum Guarantee Fund for approval by the Authority within thirty (30) days from the date of submitting the report. The recovery plan must achieve compliance with the Minimum Guarantee Fund within three (3) months of the date of observation of non-compliance with the Minimum Guarantee Fund.
         
      4. In the event of non-compliance with either the Minimum Guarantee Fund or Solvency Capital Requirement, the Company shall submit a progress report to the Authority every thirty (30) days following the approval of the recovery plan and until such time that the recovery plan has been realized.
         
      5. In the event of non-compliance with the Minimum Capital Requirement, the Company shall submit progress reports based on the timing approved by the Authority until such time that the recovery plan has been realized.
         
      6. In the event of exceptional circumstances, the Authority may extend the recovery period by three (3) months, if appropriate.
         
      7. In the event that the Company is unable to re-establish the level of Own Funds or fails to show significant progress in re-establishing the level of Own Funds to meet the Solvency Margin within the period identified by the Authority, or in other exceptional circumstances at the discretion of the Authority, the Director General will raise the concern to the Board of the Authority to take the necessary actions in that regard as per the Law’s stipulations.

    • Article (9) – Reporting Requirements for Solvency

      1. The Company shall submit to the Authority the solvency template and related information on an annual basis in relation to solvency, including the validation certification of the solvency template by the Actuary and the External Auditor and endorsed by the Chairman of the Board of Directors and submit it to the Authority within a period not exceeding (4) months from the fiscal year end. The report should arrive at the Authority no later than (30) days prior to the invitation to the General Assembly.
         
      2. The Company shall submit to the Authority a report regarding the Solvency Capital Requirement certified by the Actuary on a quarterly basis, within a period of (45) days from the quarter end.

    • Article (10) – Reporting Requirements for Financial Condition Report

      1. When required by the Authority, the Company shall submit to the Authority a Financial Condition Report (FCR) which is certified by the Actuary and endorsed by the Chairman of the Board of Directors. The requirements of the FCR should include, but is not limited to, the following which could be required separately or as a single complete report:

        a) An actuarial certification of the Technical Provisions as per Section (3), Article (5) (Regulations Pertinent to the Basis of Calculating the Technical Provisions);

        b) A risk-based analysis of its investment portfolio, strategy and management process as per Section (1), Article (10) (Regulations Pertinent to the Basis of Investing the Rights of Participants – Takaful);

        c) An analysis of the Solvency Capital Requirement as per paragraph (1), Article (9) above;

        d) Evaluation of its Re-Takaful structure and management process;

        e) A risk-based analysis of the underwriting policies and procedures of the Company;

        f) Evaluation of the pricing policies and procedures of the Company; and

        g) Evaluation of the Enterprise Risk Management policies and procedures of the Company.

    • Article (11) – Limits for assets to be considered for Solvency

      The Admissible Assets to be considered towards the calculation of solvency shall be valued as follows:

      1. The admissible value of all the invested assets shall be restricted as per the limits defined in the Regulations Pertinent to the Basis of Investing the Rights of the Participants - Takaful.
         
      2. The admissible value of all other assets shall be as required by the Authority.

    • Article (12) – Addendums

      The Addendums attached to these regulations are an integral part of the regulations and are to be read along with the regulations.

      • Addendums to Section 2 Solvency Margin and Minimum Guarantee Fund - Takaful

        • Addendum (1)

          Risk Assessment and Evaluation of Solvency in Main Areas of Risk

          1. Underwriting Risk

            a) The Family Takaful underwriting risk module in the solvency template reflects the risk arising from insurance of persons’ and fund accumulation obligations, in relation to the perils covered and the processes used in the conduct of business. The module calculates the Solvency Capital Requirement for underwriting risks based on a factor of capital at risk and technical provisions adjusted for Re-Takaful.

            b) The Property and Liability Takaful underwriting risk reflects the risk arising from property and liability insurance obligations, in relation to the perils covered and the processes used in the conduct of business. The module calculates the Solvency Capital Requirement in the template based on a higher factor of gross contribution or technical provisions adjusted for Re-Takaful.
             
          2. Market and Liquidity (Investment) Risk

            The market risk shall reflect the risk arising from the level or volatility of market prices of financial instruments which have an impact upon the value of the assets and liabilities of the Company. It shall properly reflect the structural mismatch between assets and liabilities, in particular with respect to the duration thereof. In the template, the Solvency Capital Requirement for this module is calculated as a combination of the capital requirements for the following sub-modules:

            a) The sensitivity of the values of assets, liabilities and financial instruments to changes in the term structure of yield rates, or in the volatility of yield rates (yield rate risk);

            b) The sensitivity of the values of assets, liabilities and financial instruments to changes in the level or in the volatility of market prices of equities (equity risk);

            c) The sensitivity of the values of assets, liabilities and financial instruments to changes in the level or in the volatility of market prices of real estate (real estate risk);

            d) The sensitivity of the values of assets, liabilities and financial instruments to changes in the level or in the volatility of credit spreads over the risk-free yield rate term structure (spread risk); and

            e) Additional risks to a Company, either stemming from lack of diversification in the asset portfolio, or from large exposure to default risk by a single issuer of securities or a group of related issuers (concentration risk).
             
          3. Credit Risk

            The counterparty default risk module in the template reflects possible losses due to unexpected default, or deterioration in the credit standing of the counter-parties and debtors of the Company. The counterparty default risk covers reinsurance arrangements, securitizations and derivatives, cash at bank, cash equivalent, other deposits, unpaid but called up capital, guarantees, letter of credit and receivables from intermediaries and participant loans.
             
          4. Operational Risk

            The capital requirement for operational risk shall reflect operational risks to the extent they are not already reflected in other risk components. That requirement shall be calibrated to ensure that all quantifiable risks to which a Company is exposed are taken into account. The template calculates the capital based on a higher factor of earned contributions or technical provisions.

        • Addendum (2)

          1. Risk Management is defined as the process of identification, evaluation and economically effective mitigation of past, present or future events or their impact that cause a Company to deviate from its stated objectives whether positively or negatively. These events can impact both the asset and liability side of the Company’s balance sheet, the Company’s profit and loss account, its cash flows, its earning capacity, profitability, ability to continue as a going concern, reputation and its intellectual and technological capital.
             
          2. Risk management should be well integrated into the organizational structure and decision making processes and should include the following:

            a) A clear Risk Appetite set by the Board of Directors;

            b) An entity-wide assessment of risks across all risk types, including emerging risks; and

            c) Management information that is timely, consistent and accurate and used for internal and external reporting.
             
          3. The nature and extent of the systems and controls which a Company needs to maintain will depend upon a variety of factors including:

            a) The nature, size and complexity of its business;

            b) The diversity of its operations, including geographical diversity;

            c) Past experience and historical performance;

            d) The volume and size of its transactions; and

            e) The degree of risk associated with each area of its operations.
             
          4. The Company shall regularly review its management of risk in the context of relevant internal and external factors and changes in these factors.
             
          5. The risk management strategy shall cover not only the identification, assessment, control and monitoring of risks but also contingency plans to deal with risks should they materialize, or adverse developments in important areas of risk. This will be augmented by stress and scenario testing tailored to the risk characteristics of the Company including:

            a) The Company shall have in place an effective risk management framework consisting of strategies, processes and reporting procedures necessary to identify, measure, monitor, manage and report the risks on a continuous basis, at an individual and at an aggregated level, to which they are or could be exposed, as well as their interdependencies. The risk management system shall be effective and well integrated into the organizational structure and in the decision-making processes of the Company with proper consideration of the persons who effectively run the Company or have other key functions.

            b) The risk management system shall cover the risks to be included in the calculation of the Solvency Capital Requirement, namely:

            1. 1) Underwriting Risk;

            2. 2) Market and Liquidity (Investment) Risk;

            3. 3) Credit Risk; and

            4. 4) Operational Risk.

            c) Moreover it shall cover the risks which are not or not fully included in the calculation thereof. The risk management system shall cover at least the following areas:
             
            1. 1) Underwriting and reserving;

            2. 2) Asset–liability management;

            3. 3) Investment, in particular derivatives and similar commitments;

            4. 4) Liquidity and concentration risk management;

            5. 5) Operational risk management; and

            6. 6) Reinsurance and other risk-mitigation techniques.

            d) With regard to investment risk, the Company shall demonstrate that it complies with the “prudent person” principle in addition to adherence to Section (4) of these regulations (Determining the Company’s assets that meet the accrued insurance liabilities).

            e) The Company shall establish a risk management function which shall be structured in such a way as to facilitate the implementation of the risk management system.