New solvency regime for insurance companies

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By amending the Solvency Regime, Securities and Exchange Commission of Pakistan (SECP) board approved Fit and Proper criteria for the appointment of Chief Executive Officer (CEO) and other officials of the insurance companies’ which requires prior permission of the commission to appoint senior management including public and private sector insurance companies. The SECP Chairman Muhammad Ali while addressing a press briefing on amended Solvency Regime said that Fit and Proper criteria will help in curtailing mismanagement and corruption by only allowing people with relevant experience to hold important positions in insurance sector.
Amended Solvency Regime
While informing about the amended Solvency Regime for the insurance companies he said that the amendments will strengthen the financial position of insurers over time and reduce the risk of volatility in the prices of certain assets, such as equities and properties, which threaten their solvency. The Policy Board of the SECP has approved the Solvency requirements for insurance companies, which would improve the liquidity position of the insurance companies and eventually protect the interests of policy holders.
Solvency is the ability of a business to have enough assets to over its liabilities, and the amendments call for insurance companies to manage their assets with different priority. The changes in the solvency regime calls for non-life insurance companies to increase the value of their admissible assets from Rs50 million by December 2011 to Rs100 million by December 2012, Rs125 million by December 2013 and by the end of year 2014 the net admissible assets have to be Rs150 million.
Limitation of Prior Rules
The solvency regime for the insurance industry was introduced in the year 2002 through SEC (insurance) Rules, 2002. it was felt that the rules then published had certain limitations such as a detailed solvency regime for life insurance companies as envisaged by the insurance Ordinance, 2000 and the admissibility of assets introduced in 2002 had awfully high limits for certain assets in the case of non-life insurers, while other assets commonly invested in, were not covered at all.
Under the current rules the life insurance companies need to have admissible assets of Rs75 million, however after the amendments the companies need to have admissible assets of Rs105 million by the end of 2012, they have to be Rs135 million by December 2013 and Rs165 million by the end of 2014.
The SECP officials said that currently the total insurance base in the country is worth Rs107 billion but the non-life segment was dominating at Rs59 billion. It is expected that the new solvency regime for the insurance companies will further strengthen the financial position of insurers over time and reduce the risk of volatility in the prices of certain assets, such as equities and properties, which threaten their solvency.
Considering these issues, in year 2006 a group of experts from relevant stakeholders including insurance Association of Pakistan, Pakistan Society of Actuaries, Pakistan Banks Association and SECP as the regulator, engaged in an exercise to analyse the provisions relating to solvency requirements for both life and non-life insurance companies.
Mandate of the Committee
The mandate of this committee was not only to recommend the rational solvency requirements, but also to examine the existing practices and policies of insurers with respect to the investment of their funds. The committee presented its recommendation relating to admissibility of assets, valuation of assets and liabilities, solvency requirements of life insurers, solvency requirements of non-life insurers, minimum valuation basis for life insurance, reporting on solvency by insurers and investment guidelines. These recommendations were approved by the commission earlier in 2010 for publishing in the official gazette and eliciting public opinion to be received in subsequent 30 days.
The SECP thoroughly reviewed the comments received on the draft amendments and the suggestions found to be consistent with the regulatory framework and the enabling provisions of the law, without prejudicing the rights and duties of any stakeholder, were suggested to be accommodated. It has been noted with satisfaction that while preparing these new provisions of Solvency, the SECP complied with the due process i.e. taking into consideration the stakeholders’ comments, engaging industry experts in the deliberations and seeking advice from the Legal experts. Accordingly, the amendments in the SEC (insurance) Rules, 2002 related to Solvency provisions were presented in the SEC Policy Board meeting held today and the same was approved by the Board for final promulgation.
The more substantive changes are to be implemented in a phased manner so as to allow the industry to implement these changes at a reasonable pace. The new regime is therefore not anticipated to cause any material difficulties to insurers, although the increases in absolute amounts and the introduction of life insurance solvency regime is likely to result in increasing the capital base by some new companies. There is, however, adequate time allowed for this increment.