1. 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.
    
2. With respect to the whole portfolio of assets, the Company 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.
    
3. 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.
    
4. Assets held to cover the technical provisions shall also be invested in a manner appropriate to the nature and duration of the insurance and reinsurance liabilities. Those assets shall be invested in the best interest of all policyholders and beneficiaries taking into account any disclosed policy objective.
    
5. Wherever possible, the Company must use ‘mark-to-market' to measure the value of the investments.
    
   1. 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.
       
   2. 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 midmarket price is material, the Company must consider making adjustments or establishing reserves.
          
6. 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:
    
   1. 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.
          
   2. The Company's senior management must ensure that the Investment Committee, or its equivalent in the governance structure of Foreign Insurance Companies, 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.
       
   3. 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.
       
   4. The Company must use generally accepted valuation methodologies for particular products where these are available.
       
   5. The Company must establish formal change control procedures, hold a secure copy of the model, and periodically use that model to check valuations.
       
   6. 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.
       
   7. 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.
       
   8. 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.
          
   9. 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.

1. The policy on overall investment strategy shall cover, at least, the following elements:
    
   1. The investment objectives, both at Company and fund-specific levels;
   2. The risk and liability profiles of the Company;
   3. The strategic asset allocation, i.e., the long-term asset mix for the main investment categories, and their respective limits;
   4. The extent to which the holding of certain types of assets is restricted or disallowed, such as illiquid or highly volatile assets; and
   5. An overall policy on the usage of derivatives and structured products.
       
2. The Company should have in place a Board of Directors (BOD) level Investment Committee. The Investment Committee should have its own charter, investment policy and guidelines approved by the BOD. The Investment Committee can act as a management committee with members of the Investment Committee being elected by the Board of Directors. Members can be executive directors, executive management or members of any of the committees established by the Board of Directors. At a minimum, the Investment Committee shall be responsible for:
    
   1. Establishing the investment strategy and policy for approval by the Board of Directors;
   2. Setting the investment guidelines;
   3. Reviewing / monitoring the investments;
   4. In conjunction with the Audit Committee, determining the scope of the rigorous audit procedures that include full coverage of the investment activities to ensure timely identification of internal control weaknesses and operating system deficiencies; and
   5. Assisting the Board of Directors in its evaluation of the adequacy and efficiency of the investment policies, procedures, practices and controls applied in the day-today management of its business through an audit report (either independent internal or external) that is to be submitted to the Audit Committee.
       
3. Senior management is responsible for managing and reviewing the investment policies of the Company and reporting the same to the Investment Committee. The function of senior management with the responsibility of executing the investment policy is to:
    
   1. Manage and review the investment policies of the Company and reporting the same to the Investment Committee;
   2. Ensure proper implementation of investment policies, procedures, practices and controls approved by the Investment Committee are applied in the day-to-day management of its business in accordance with the established levels of risk appetite;
   3. Provide timely and regular reporting to the Investment Committee of the Company's investment activities;
   4. Establish adequate internal controls to ensure that assets are managed in accordance with approved investment policies, and in compliance with legal, accounting and relevant risk management requirements. These controls shall ensure that investment procedures are documented and subject to effective oversight; and
   5. Ensure adequate segregation of duties between execution, recording, authorization, reconciliation and related assurance activities.
       
4. The Company shall establish adequate internal controls to ensure that assets are managed in accordance with approved investment policies, and in compliance with legal, accounting and relevant risk management requirements. These controls shall ensure that investment procedures are documented and subject to effective oversight. There shall be in place adequate segregation of duties between execution, recording, authorization, reconciliation and related assurance.
    
5. The Company shall have in place audit procedures that include full coverage of the investment activities to ensure timely identification of internal control weaknesses and operating system deficiencies. If the audit is performed internally, it shall be independent and shall report to the Audit Committee, or its equivalent in the governance structure of Foreign Insurance Companies.
    
6. The Company shall consider the following, along with the supporting policies, procedures and infrastructure, when adopting internal controls:
    
   1. Identification of personnel who are responsible and accountable for all transactions involving sales and purchase of assets;
   2. Observations of restrictions on the empowerment of all parties to enter into any particular transaction. This will require close and regular communication with those responsible for compliance, legal and documentation issues in the Company;
   3. Agreement from all parties of a given transaction with the terms of the deal. Procedures for sending, receiving and matching confirmations shall be independent from the issuance and marketing functions of the insurance policies;
   4. Formal documentation is completed promptly;
   5. Positions are properly settled and reported, and any late payments or late receipts are identified;
   6. All transactions are carried out in conformity with prevailing market terms and conditions;
   7. Authority limits are strictly enforced and all breaches are reported and remedial actions are taken promptly;
   8. Independent checking of rates or prices and choice of rates shall not solely rely on dealers for rate/price information;
   9. Set out the process for recommending, approving, and implementing decisions; and
   10. Prescribe the frequency and format of reporting to relevant internal and external authorities.
        
7. Appropriate procedures shall be in place to enable the Company to monitor the interaction of its assets and liabilities to ensure that exposure to asset classes is contained within limits approved by the Company. The Company must define the exposure limits. The Company must ensure that the exposure limits are within the limits defined in paragraph (1) of Article (3). Procedures shall include testing of sensitivity to realistic scenarios that are relevant to the circumstances of the Company.
    
8. Appropriate procedures shall be in place to enable the Company to monitor the location of its assets and liabilities, so as to ensure that risk of localization mismatch is contained within limits approved by the Company. Procedures shall include testing of sensitivity to realistic scenarios, including political risk scenarios that are relevant to the circumstances of the Company.
    
9. The Company shall consider asset and liability risks on an integrated basis. Systems shall not consider only risks taken in isolation, but shall consider how even when individual risks are addressed, combinations of circumstances may still expose the Company to loss. This is of particular relevance where a single outcome is exposed to more than one risk.

1. Liquidity Risk
    
   1. The Company shall have access to sufficient liquidity to meet all cash outflow commitments to policyholders (and other creditors) as and when they fall due.
   2. The risk management system for liquidity risk will normally include at least the following:
       
      1. Procedures to identify and control the level of mismatch between expected asset and liability cash flows under normal and stressed operating conditions (using realistic scenarios relevant to the circumstances of the Company);
      2. Procedures to monitor the liquidity of assets;
      3. Procedures to identify and monitor commitments to meet liabilities including Insurance liabilities;
      4. Procedures to monitor the uncertainty of incidence, timing and magnitude of Insurance liabilities;
      5. Procedures to identify and monitor the level of liquid assets held by the Company; and
      6. Procedures to identify and monitor other sources of funding including reinsurance, borrowing capacity, lines of credit and the availability of intragroup funding, and to identify the need for such sources to be made available.
          
   3. When assessing its liquidity requirements the Company shall also consider the currency in which the assets and liabilities are denominated, and the locations in which those assets and liabilities are situated or payable.
       
   4. For the purposes of determining the adequacy of its overall financial resources, the Company must carry out appropriate stress testing and scenario analysis, including taking reasonable steps to identify an appropriate range of realistic adverse circumstances and events in which liquidity risk might occur or crystallize.
       
   5. The choice of scenarios that the Company uses will depend on the nature of its activities. For the purposes of testing liquidity risk, however, the Company shall normally consider scenarios based on varying degrees of stress and both Company-specific and market-wide difficulties.
       
   6. The Company shall review frequently the assumptions used in stress testing scenarios to gain assurance that they continue to be relevant.
       

2. Credit Risk

   The Company faces Credit risk whenever it is exposed to loss if another party fails to perform its financial obligations to the Company, including failing to perform them in a timely manner. This also includes the impact on investments of credit rating downgrades and widening of credit spreads. Credit exposures can increase the risk profile of a Company and adversely affect financial viability. Credit exposure includes both on-balance sheet and off-balance sheet exposures (including guarantees, derivative financial instruments and performance related obligations) to single and related counterparties.

   The risk management system for credit risk will normally include at least the following:

   1. Credit Risk Limits (at the minimum as defined in Article (3) for credit exposures to:
      1. Single counterparties and groups of related counterparties;
      2. Entities to which the Company is related;
      3. Single industries; and
      4. Single geographic locations.
          
   2. Processes to monitor and control credit exposures against pre-approved limits.
       
   3. Processes for identifying breaches of limits and for ensuring that breaches of limits are brought within the pre-approved limits within a set timeframe.
       
   4. Processes for reducing or cancelling limits to a particular counterparty where the counterparty is known to be experiencing problems.
       
   5. Processes for approving requests for temporary increases in limits.
       
   6. Processes to review credit risk exposures (at least annually but more frequently in cases where there is evidence of deterioration in credit quality).
       
   7. A management information system that is capable of aggregating exposures to any one counterparty (or group of Related counterparties), asset class, industry or region in a timely manner.
       
   8. A process for reporting to the Board of Directors and senior management:
       
      1. Significant breaches of limits; and
      2. Large exposures and other credit risk concentrations.
          
3. Market Risk
    
   1. Market risk includes equity risk, foreign exchange (FX) risk, commodity risk and interest rate risk.
       
   2. The risk management system for market risk will normally include at least the following:
       
      1. Procedures to document its policy for market risk, including its risk appetite and how it identifies, measures, monitors and controls that risk;
          
      2. Procedures to document its asset and liability recognition policy. Documentation shall describe the systems and controls that it intends to use to comply with the policy; and
          
      3. Procedures to establish and maintain risk management systems to identify, measure, monitor and control market risk (in accordance with its market risk policy), and to take reasonable steps to establish systems adequate for that purpose.

1. Investment in derivatives must contribute to a reduction of investment risks or facilitate efficient portfolio management and such investments must be valued on a prudent basis, taking into account the underlying assets, and included in the valuation of the Company's assets. Investments in derivatives should be restricted to hedging purposes only. The Company must avoid excessive risk exposure to a single counterparty and to other derivative operations.
    
2. Prior to undertaking any derivative transactions, the Board of Directors of the Company is expected to ensure that:
    
   1. It understands the scope and nature of derivative activities to be undertaken;
       
   2. The derivative transactions are consistent with the investment and risk management policies of the Company;
       
   3. Approved policies, systems and procedures that are commensurate with the level and nature of derivative activities to be undertaken by the Company are in place and have been clearly communicated to all levels of staff concerned; and
       
   4. The Company has appropriate resources (e.g., competent, capable and qualified personnel), capacity and adequate infrastructure to effectively manage and monitor derivative positions.
       
3. The Company shall ensure that controls over derivatives and other investment instruments have been implemented and are adequate to ensure that risks are properly assessed, regularly reviewed in the light of changing market conditions and experience, and consistent with the overall investment strategy decided upon and approved by the Company.
    
4. The senior management of the Company shall put in place a written risk management policy, approved by the Board of Directors. In respect of derivative activities, the risk management policy shall cover the following primary components of risk management practices:
    
   1. The purpose for which derivatives may be used;
       
   2. The scope and types of permitted derivatives, including the risk tolerance level in respect of its derivative activities;
       
   3. Procedures for the proper authorization of any change in significant risk management policies or procedures;
       
   4. Procedures on authorization of new derivative products for use by the Company;
       
   5. Restrictions on counterparties with whom derivative transactions may be executed;
       
   6. Details on persons authorized to enter into derivative transactions and limits of authority;
       
   7. Clear lines of responsibility for the monitoring and management of the Company's derivative positions;
       
   8. Procedures for regular reporting to senior management and the Board of Directors on derivative activities; and
       
   9. A provision for periodic review by the Board of Directors and senior management of the Company's risk management policy to gauge its effectiveness in managing risk exposures and to ensure that the policy remains consistent with the Company's corporate strategies and financial and management capabilities, particularly in the light of changing circumstances.

1. The Company must establish comprehensive policies and procedures to govern the strategic investment policy of any outsourced insurance funds, establish an effective risk management system to monitor and continuously assess material risks, and for the insurance funds to be segregated and not co-mingled with other funds managed by the outsourced entity. The Company must regularly monitor the performance of the outsourced entity, at least quarterly, and take appropriate actions if the investment performance of the outsourced entity would adversely affect the investment returns to policyholders or their reasonable expectations cannot be achieved.
    
2. For this purpose, the Company must ensure that adequate expertise and resources are retained in-house to support the monitoring function of the outsourced entity. The Company must ensure that, under the terms of the contract, they regularly receive sufficient information to evaluate the compliance of the outsourced entity with the investment mandate. The Board of Directors of the Company shall continue to be accountable to manage the risks arising from the outsourcing arrangements. The Company shall also remain responsible for the fiduciary duty and professional aspects of the outsourced activity.

Risk Assessment and Evaluation of Solvency in Main Areas of Risk

1. Underwriting Risk
    
   1. The Life underwriting risk module in the solvency template reflects the risk arising from life insurance 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 reinsurance.
       
   2. The Non-Life 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 premium or technical provisions adjusted for reinsurance.
      
       

2. Market and Liquidity Risk (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:

    
   1. The sensitivity of the values of assets, liabilities and financial instruments to changes in the term structure of interest rates, or in the volatility of interest rates (interest rate risk);
       
   2. 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);
       
   3. 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);
       
   4. 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 interest rate term structure (spread risk); and
       
   5. 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 policyholder 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 premium or technical provisions.

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:
    
   1. A clear Risk Appetite set by the Board of Directors;
       
   2. An entity-wide assessment of risks across all risk types, including emerging risks; and
       
   3. 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:
    
   1. The nature, size and complexity of its business;
       
   2. The diversity of its operations, including geographical diversity;
       
   3. Past experience and historical performance;
       
   4. The volume and size of its transactions; and
       
   5. 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:
    
   1. 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 decisionmaking processes of the Company with proper consideration of the persons who effectively run the Company or have other key functions.
       
   2. The risk management system shall cover the risks to be included in the calculation of the Solvency Capital Requirement, namely:
       
      1. Underwriting Risk;
          
      2. Market and Liquidity (Investment) Risk;
          
      3. Credit Risk; and
          
      4. Operational Risk.
          
   3. 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. Underwriting and reserving;
          
      2. Asset-liability management;
          
      3. Investment, in particular derivatives and similar commitments;
          
      4. Liquidity and concentration risk management;
          
      5. Operational risk management; and
          
      6. Reinsurance and other risk-mitigation techniques.
          
   4. 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).
       
   5. 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.

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.

Measurement of Assets for the purpose of calculation of the solvency margin shall be as detailed below:

1. Investments in Non-Insurance Subsidiaries and Associates
    
   1. Valuation of investments in Subsidiaries and Associates that are listed securities must be on the closing market quotation or the latest available market quotation (whichever is lower).
       
   2. Valuation of investments in Subsidiaries and Associates that are not listed securities must be at economic or market value. A suitable valuation may be used to arrive at this value, but undertakings shall also consider the risks that arise from holding a balance sheet item, using assumptions that market participants would use in valuing the asset or liability.
       
   3. The International Accounting Standards Board's (IASBs) International Financial Reporting Standards (IFRS) related to "Fair Value Measurement" accounting is considered a suitable measure for true economic value. This proposes a ‘mark- to-market' approach or, if not possible, a ‘mark-to-model' approach for all participations, listed and unlisted, taking into account the guidance given by the IASB related to "The valuation of assets and liabilities for solvency assessment purposes". Where the holding is not material however, a Net Asset Value (NAV) approach may be used.
        
2. Real Estate Investments
    
   1. For Admissible Asset purposes, real estate assets such as land and buildings must be valued at market value as assessed by an independent qualified expert. The Company may elect to use book value where that value is less than market value, however where no proper valuation exists the Authority is to appoint an authorized independent real estate firm at the Company's expense and use the results of the valuation.
       
   2. The admissibility test is to be applied in total to both land and building in instances where the realizable value of the asset is dependent on both the land and the building.
       
   3. For solvency margin calculation purposes, real estate assets such as land and buildings must be valued on a ‘cash flow' basis.
        
3. Debt / Government Securities
    
   1. Government securities/bonds (both fixed and variable interest securities) must be valued at:
       
      1. In the case of listed securities, the closing market quotation or the latest available market quotation (whichever is lower);
          
      2. In the case of securities which are not transferable, the amount payable on surrender or redemption of such securities as at the date the security is being valued; and
          
      3. In any other case, the amount which would reasonably be paid by way of consideration for an immediate transfer or assignment thereof.
           
   2. Debt securities (both fixed and variable interest securities) not covered in subparagraph (a) above must be valued at:
       
      1. In the case of listed securities, the closing market quotation;
          
      2. In the case of securities which are not transferable, the amount payable on surrender or redemption of such securities as at the date the security is being valued; and
          
      3. In any other case, the amount which would reasonably be paid by way of consideration for an immediate transfer or assignment thereof.
           
4. Equity Shares
    
   1. Valuation of equity shares that are listed securities is based on the closing market quotation or the latest available market quotation (whichever is lower).
       
   2. Valuation of equity shares that are not listed securities must be valued at economic or market value. A suitable valuation may be used to arrive at this value, but undertakings shall also consider the risks that arise from holding such a balance sheet item, using assumptions that market participants would use in valuing the asset or liability.
       
   3. The IFRS related to "Fair Value Measurement" accounting is considered a suitable measure for true economic value. This proposes a ‘mark-to-market' or, if not possible, a ‘mark-to-model' approach for all participations, listed and unlisted, taking into account the guidance given by the IASB related to "The valuation of assets and liabilities for solvency assessment purposes". Where the holding is not material however, a Net Asset Value (NAV) approach may be used.
        

5. Traded Derivative Contract

   A traded derivative contract that is a listed security, for a share or a debenture must be valued at the closing market quotation, and otherwise at the amount which would reasonably be paid by way of consideration for an immediate transfer or assignment thereof.

6. Loans Secured by Insurance Policies Issued by the Company

   Valuation of a loan secured by an insurance policy issued by the Company must be as the amount of the loan but not exceeding the amount payable on a surrender of the policy as at the date the policy is being valued.

7. Other Assets
    
   1. Valuation of deposits and current account balances with approved financial institutions must be at their carrying value. The admissible value of these assets is their carrying value.
       
   2. The admissible value of any cash holding is its carrying value.
       
   3. Amounts due under contracts of insurance and reinsurance, including salvage and subrogation rights, must be valued at the amounts that can be expected to be recovered. The exceptions being:
       
      1. Advance commission paid to intermediaries which must be valued at nil, except in case of long term life insurance contracts, where advance commission paid should be valued at carrying value in its first year; and
          
      2. Amounts that pertain to a subsidiary or associate of the Company must be valued in accordance with subparagraph (1) above.
          
      3. Any debt should be valued depending on the exact nature of the debt and its recoverability. In any event and for all debtors, International Financial Reporting Standards related to the “impairment of assets” should be considered.
           
   4. For investments that are not specifically covered above, if the investment is due, or will become due, within twelve months from the date at which the investment is being valued (or would become so due if the company exercised some right), valuation should be based on the amount which can reasonably be expected to be recovered in respect of the investment, taking due account of any security held in respect thereof.
        
8. Total Invested Assets
    
   1. For the purposes of asset valuation regulations, 'Total Invested Assets' is defined as the sum of the assets in the categories listed in paragraph (1) of Article (3) of the Basis of Investing the Rights of the Policyholders in Section (1) of this regulation.
       
   2. The Total Invested Assets for the Property and Liability insurance business shall be segregated and maintained separately from the Total Invested Assets held for the Insurance of Persons and Fund Accumulation operations.