The investment portfolio shall consider the type of business carried out by the Company, in particular the nature, amount and duration of expected claim payments, in such a way as to secure the sufficiency, liquidity, security, quality, profitability and matching of its assets .
With respect to the whole portfolio of assets, Takaful operators shall only invest in assets and instruments whose risks can be properly identified, measured, monitored, managed, controlled and reported thereof, and appropriately take into account in the assessment of its overall solvency needs as detailed in the Solvency Margin and Minimum Guarantee Fund regulations.
All assets, in particular those covering the Minimum Capital Requirement, Solvency Capital Requirement and Minimum Guarantee Fund, shall be invested in such a manner as to ensure the security, quality, liquidity and profitability of the portfolio as a whole. In addition the localization of those assets shall be as such to ensure their availability.
Assets held to cover the technical provisions shall also be invested in a manner appropriate to the nature and duration of the Takaful and Re-Takaful liabilities. Those assets shall be invested in the best interest of all participants and beneficiaries taking into account any disclosed policy objective.
Wherever possible, the Company must use ‘mark-to-market’ to measure the value of the investments.
a) When using ‘mark-to-market’, the Company must use the more prudent side of bid/offer unless the Company is a significant market maker in a particular position type and it can close out at the mid-market price.
b) When calculating the current exposure value of a credit risk or exposure for counterparty credit risk purposes:
1) The Company must use the more prudent side of bid/offer or the mid-market price and the Company must be consistent in applying the basis it chooses; and
2) If the difference between the more prudent side of bid/offer and the mid-market price is material, the Company must consider making adjustments or establishing reserves.
When ‘mark-to-market’ is not possible, the Company must use ‘mark to model’ to measure the value of the investments. Marking to model is any valuation which has to be benchmarked, extrapolated or otherwise calculated from a market input as follows:
a) When the model used is developed by the Company, that model must be:
1) Based on appropriate assumptions which have been assessed and challenged by suitably qualified parties independent of the development process;
2) Independently tested, including validation of the mathematics, assumptions, and software implementation;
3) Independently certified by an Actuary; and
4) Developed or approved independently by the Investment Committee.
b) The Company’s senior management must ensure that the Investment Committee, or its equivalent in the governance structure of Foreign Takaful operators, is aware of the positions which are subject to the ‘mark-to-model’ valuation and understand the materiality of the uncertainty this creates in the reporting of the performance of the business of the Company and the risks to which it is subject.
c) The Company must source market inputs in line with market prices as far as possible and assess the appropriateness of the market inputs for the position being valued and the parameters of the model on a frequent basis.
d) The Company must use generally accepted valuation methodologies for particular products where these are available.
e) The Company must establish formal change control procedures, hold a secure copy of the model, and periodically use that model to check valuations.
f) The Company must ensure that its risk management function personnel are aware of the weaknesses of the models used and how best to reflect those in the valuation output.
g) The Company must periodically review the model to determine the accuracy of its performance. Examples of periodic review include assessing the continued appropriateness of the assumptions, analysis of profit and loss versus risk factors and comparison of actual close out values to model outputs.
h) The market valuation of the investment in real estate shall be performed as follows for the calculation of Admissible Assets:
1) One independent real estate firm shall perform the revaluation of the investment in real estate for investments worth less than AED 30 million.
2) Two independent real estate firms shall perform the revaluation of the investment in real estate for investment worth more than AED 30 million; the average of both valuations will be accounted for. If needed a third firm could be employed to perform the valuation in case the difference between the first two firms was more than 20% of the lowest valuation. Accordingly, the valuation will be calculated based on the average of the two firms negating the valuation with the largest of the three excluded.
3) The independent real estate firms should be a technical expert for valuation of investment in real estate.
4) The valuation of the real estate shall be performed by the Company at least annually or as required by the Authority.
5) The same independent real estate firm shall not be appointed for two consecutive periods to perform the valuation of the same estate. This restriction doesn’t apply to the government-based Land Department.
6) For real estate valuation purposes, the Company shall hire real estate firms accredited by at least two banks operating in the State or real estate experts licensed for this matter or the government-based Land Department.
i) The discounted cash flow valuation of the investment in real estate shall be performed as follows for the purpose of calculating the Solvency Margin requirements:
1) Estimate the value of annual rental income over the expected life of the property, not to exceed thirty (30) years.
2) The total rental income per year shall be reduced to account for a reasonable vacancy rate for similar properties.
3) The total rental income per year shall not be increased in future years for inflation.
4) The annual rental income shall be discounted at the current risk free rate to determine the total cash flow valuation.