PIN 4 PIN 4 Capital Adequacy
PIN 4.1 PIN 4.1 Introduction
PIN 4.1.1 PIN 4.1.1
This chapter applies to all
PIN 4.1.1 Guidance1. The amount of capital is fundamental to the financial health of any insurance undertaking and therefore to the protection of its policyholders. All
Insurersare therefore required to maintain a minimum level of capital resources in accordance with this chapter.2. This chapter establishes minimum required levels of capital resources applicable to Insurersof different types. PIN section 4.2 establishes provisions that are applicable to all Insurers, wherever they are incorporated and of whatever type they are. PIN section 4.3 establishes Minimum Capital Requirementsin respect of Insurersother than Protected Cell Companies, and PIN section 4.4 establishes equivalent requirements in respect of Protected Cell Companies. Additional provisions are established by PIN section 4.6, in respect of Insurersmaintaining Long-Term Insurance Funds, and by PIN section 4.7, in respect of Insurersthat are not DIFC Incorporated Insurers.3. The DFSAhas the power under the Regulatory Law2004 to act if it believes that any requirement of this chapter is breached, or that it may be breached in the future.
For the purposes of this chapter, assets and liabilities must be valued in accordance with PIN chapter 5.
In this chapter and in the appendices referred to in this chapter, references to ratings are made according to the rating hierarchy (AAA, AA, etc) of Standard & Poor's. Where, for the purposes of a provision of this chapter or of an appendix, an
Insureruses ratings from a Rating Agencyother than Standard & Poor's, the Insurermust apply that provision as though the Standard & Poor's rating referred to in the provision were replaced by the rating from that other Rating Agencythat is equivalent to the Standard & Poor's rating.
Insurermust not, for the purposes of this chapter or the appendices referred to in this chapter, use ratings provided by any Rating Agencyother than Standard & Poor's, Moody's, AM Best, and Fitch Ratings, except where the DFSAhas given written approval to the Insurerfor the use of ratings provided by that other Rating Agency.
PIN 4.2 PIN 4.2 Basic requirement
This section applies to all
PIN 4.2.2 PIN 4.2.2
Insurermust always have capital resources that are, in the opinion of its directors formed on reasonable assumptions, adequate for the conduct of its business, taking into consideration the size of the Insurerand the mix and complexity of its business.
PIN 4.2.2 Guidance1. Where an
Insurereffects Direct Long-Term Insurancecontracts, PIN Rule 4.2.2 implies that the Insurermust also be able to fund and service its Long-Term Insurance Businessin the long term.2. To be able to demonstrate to the DFSAthat the Insurermeets the obligation of PIN Rule 4.2.2 on an on-going basis, the DFSAexpects the Insurerto develop internal capital models to support the self-assessment of capital adequacy. Those internal capital models should include mechanisms to estimate in a realistic manner the impact on the Insurer'scapital position of possible scenarios relevant to the Insurer'sbusiness. The results of scenario testing should be communicated to the appropriate levels of management within the Insurer. Insurersshould be able to demonstrate to the DFSAthat the Insurerhas adequate capital resources to withstand external and internal shocks to which they may plausibly be exposed.3. Compliance with quantitative capital requirements set out in the PIN Module does not guarantee compliance with PIN Rule 4.2.2.
PIN 4.2.3 PIN 4.2.3(1) Without limiting the generality of PIN Rule 4.2.2, an
Insurerthat effects Direct Long-Term Insurancecontracts must ensure that:(a) premiums for any Direct Long-Term Insurancecontracts it effects are sufficient at that time for the formation of technical provisions relating to future Policy Benefitsin accordance with the applicable valuation rules; and(b) each Long-Term Insurance Fundto which Direct Long-Term Insurancecontracts are attributed holds at all times Invested Assetsof appropriate safety, yield and marketability adequate to provide the future Policy Benefitsunder those contracts that are attributed to the Fund.(2) For the purposes of (1)(b), assets of the type described in PIN Rule A3.4.3 must be excluded.
PIN 4.2.3 Guidance1. PIN Rule 4.2.3(1)(a) applies at the time that a contract is effected. Circumstances may arise in which premiums subsequently prove to be inadequate. However, this does not create a breach of the requirement in that subparagraph. Neither does the fact that an individual contract might suffer a large loss.2. An
Insurershould be able to demonstrate that its procedures allow for prior assessment and periodic review of premium adequacy of Direct Long-Term Insurancecontracts that it writes. The assessment will consider the adequacy of premiums taking into account projected revenues and expenses in respect of the relevant contracts, including the likely impact of any discretionary features. In making this assessment, credit should not be taken for the impact of voluntary discontinuance (lapse, surrender of or making the contract paid-up) by the policyholder. The DFSAdoes not consider it appropriate for the projected profitability of Direct Long-Term Insurancecontracts to be dependent on 'lapse support'.3. PIN Rule 4.2.3(1)(a) generally prevents an Insurer from writing 'loss leader' Direct Long-Term Insuranceproducts. An Insurerthat wishes to conduct business on a loss-leader basis would need to apply for an appropriate waiver. Such an Insurerwould need to demonstrate that its resources are adequate to cover an appropriate level of technical provisions in respect of the contracts concerned, without detriment to its ability to comply with this Rulein respect of its other business.
PIN 4.2.4 PIN 4.2.4
Systems and controls maintained by directors for the purposes of PIN Rule 4.2.2 and PIN Rule 4.2.3 must include analysis of realistic scenarios relevant to the circumstances of the
Insurerand the effects that the occurrences of those scenarios would have on the capital requirements of the Insurerand on its capital resources.
PIN 4.2.4 Guidance
Insureris required to maintain adequate capital resources at all times, its systems and controls need to enable the directors to determine and monitor the capital requirements of the Insurerand the capital resources that it has available, and to identify occurrences where the capital resources fall short of the capital requirements or may fall short in the future. An Insureris not required to measure the precise amount of its capital resources and its capital requirements on a daily basis. However an Insurershould be in a position to demonstrate its capital adequacy at any time if asked to do so by the DFSA.
PIN 4.3 PIN 4.3 Minimum capital requirement for insurers that are not protected cell companies
This section applies only to
Insurersthat are not Protected Cell Companies.
Insurerthat is not a Protected Cell Companymust always have Adjusted Capital Resourcesequal to or higher than the amount of its Minimum Capital Requirement.
Insurer's Adjusted Capital Resourcesmust be calculated in accordance with PIN App3.
Insurer's Minimum Capital Requirementmust be calculated in accordance with PIN App4.
PIN 4.4 PIN 4.4 Minimum capital requirement for insurers that are protected cell companies
This section applies only to
Insurersthat are Protected Cell Companies.
Insurerthat is a Protected Cell Companymust ensure that at all times the Insurerhas Adjusted Non-Cellular Capital Resourcesequal to or higher than the amount of the Minimum Non-Cellular Capital Requirement.
Insurerthat is a Protected Cell Companymust ensure that at all times, in respect of each of its Cells, the Insurerhas Adjusted Cellular Capital Resourcesequal to or higher than the amount of the Minimum Cellular Capital Requirementin respect of that Cell.
Adjusted Non-Cellular Capital Resourcesin respect of an Insurerthat is a Protected Cell Companymust be calculated in accordance with PIN App5.
Minimum Non-Cellular Capital Requirementin respect of an Insurerthat is a Protected Cell Companymust be calculated in accordance with PIN App6.
Adjusted Cellular Capital Resourcesin respect of a Cellmust be calculated in accordance with PIN App5.
Minimum Cellular Capital Requirementin respect of a Cellmust be calculated in accordance with PIN App6.
PIN 4.5 PIN 4.5 [Deleted][Deleted] RM46/2007 (Made 5th July 2007). [VER6/07-07]
This section applies only to
Insurersthat undertake Insurance Businessin Class7.
Insurerthat undertakes Insurance Businessin Class7 must calculate a Class 7 Capital Requirementin respect of that business.
Insurerthat is a Protected Cell Companythat undertakes Insurance Businessin Class7 must calculate a Class 7 Capital Requirementin respect of every Cellto which such business is attributable.
Class 7 Capital Requirementmust be calculated in accordance with principles notified to the Insurerby the DFSA.
Insurerintending to undertake Insurance Businessin Class7 must notify the DFSAin writing before commencing to undertake such business.
PIN 4.6 PIN 4.6 Insurers that undertake long-term insurance business
Subject to PIN Rule 4.6.2, this section applies only to
Insurersthat undertake Long-Term Insurance Businessthrough a Long-Term Insurance Fund.
This section does not apply to either:(a) an
Insurerthat is deemed to constitute a single Long-Term Insurance Fundin accordance with PIN Rule 3.2.2(b); or(b) an Insurerthat is a Protected Cell Companyin respect of a Cellthat is deemed to constitute a single Long-Term Insurance Fundin accordance with PIN Rule 3.2.3(b).
Insurerthat undertakes Long-Term Insurance Businessthrough a Long-Term Insurance Fundmust ensure that at all times, in respect of each Long-Term Insurance Fundmaintained by it, the Insurerhas Adjusted Fund Capital Resourcesequal to or higher than the amount of the Minimum Fund Capital Requirementin respect of that Long-Term Insurance Fund.
Adjusted Fund Capital Resourcesin respect of a Long-Term Insurance Fundmaintained by an Insurermust be calculated in accordance with PIN App7.
Minimum Fund Capital Requirementin respect of a Long-Term Insurance Fundmaintained by an Insurermust be calculated in accordance with PIN App8.
PIN 4.7 PIN 4.7 Availability of assets of insurers incorporated outside the DIFC
PIN 4.7.1 PIN 4.7.1
This section applies only to
Insurersthat are not DIFC Incorporated Insurers.
PIN 4.7.1 Guidance
The provisions in this section require an
Insurerto have assets, of a minimum quality, available to meet its gross Insurance Liabilitiesarising from its DIFC Insurance Businessplus a margin. Although the Insureris required to cover its Insurance Liabilitiesgross of reinsurance, an Insurerstill has benefit of its reinsurance arrangements because assets may include amounts receivable from reinsurers in respect of gross Insurance Liabilities, including amounts potentially receivable from reinsurers in respect of the exposures reflected in the Insurer's Premium Liability. No credit, however, may be taken in respect of a reinsurer that is Ratedworse than BBB.
PIN 4.7.2 PIN 4.7.2
Insurerthat is not a DIFC Incorporated Insurermust always have assets, of a type referred to in PIN Rule 4.7.3, that are available to meet Insurance Liabilitiesof the Insurerarising in respect of operations conducted by the Insurerin the DIFC, at least equal to the sum of the following:(a) the sum of the default risk component and the investment volatility risk component in respect of those assets, calculated according to the methods set out in sections PIN A4.4 and PIN A4.5 respectively, applying those methods so far as concerns those assets only;(b) Insurance Liabilitiesof the Insurerin respect of its DIFC Insurance Business; and(c) the Insurer's DIFC Business Risk Capital Requirement, calculated in accordance with PIN App9.
PIN 4.7.2 Guidance1. Assets are not normally available to meet
Insurance Liabilitiesof an Insurerarising in respect of operations conducted by the Insurerin the DIFC, if those assets are required to meet liabilities of the Insurerin jurisdictions other than the DIFC, except where those liabilities are also Insurance Liabilitiesof the Insurerarising in respect of operations conducted by the Insurerin the DIFC.2. Assets are not normally available to meet Insurance Liabilitiesof an Insurerarising in respect of operations conducted by the Insurerin the DIFC, if those assets are required, under the laws of any jurisdiction, to be located in a jurisdiction other than the DIFC, except where the assets are required to be located in that jurisdiction to meet, or as collateral against, either:a. liabilities that are Insurance Liabilitiesof the Insurerarising in respect of operations conducted by the Insurerin the DIFC; orb. liabilities that may arise in the future and that would, if they arose, be Insurance Liabilitiesof the Insurerarising in respect of operations conducted by the Insurerin the DIFC.
The assets available to an
Insurerfor the purposes of PIN Rule 4.7.2 may comprise any combination of the following types of asset:(a) bonds Rated'BBB' or better;(b) equities listed on an Approved Stock Exchange;(c) reinsurance recoverable in respect of General Insurance Liabilitiesreferred to in PIN Rule 4.7.2(b), where the reinsurer is Rated'BBB' or better; and(d) land and buildings.
Insurersubject to this section must demonstrate to the satisfaction of the DFSAthat the Insurercomplies with PIN Rule 4.7.2, when the DFSArequests it by written notice to do so.
PIN 4.8 PIN 4.8 Failure to comply with this chapter
Insurerthat becomes aware that it does not comply with this chapter:(a) must immediately notify the DFSAin writing;(b) must not effect any Contracts of Insurancethrough an establishment in the DIFCuntil the DFSAhas given it written permission to recommence business;(c) must not, if the Insureris a DIFC Incorporated Insurer, effect any Contracts of Insuranceuntil the DFSAhas given it written permission to recommence business; and(d) must not make any distribution of profits or surplus however called or described, or return of capital, without the written permission of the DFSA.
Insurerthat believes that it may not be in compliance with this chapter or may not continue to comply with this chapter in the future must immediately provide the DFSAwith a written statement of:(a) the reasons for the Insurer'sbelief that it may not be in compliance or may not continue to comply; and(b) the action that the Insureris taking to avoid non-compliance.
PIN 4.8.3 PIN 4.8.3
Insurerto which PIN Rule 4.8.2 applies must not make any distribution of profits or surplus, however called or described, or return of capital without the written permission of the DFSA.
PIN 4.8.3 Guidance
In dealing with non-compliance, or possible non-compliance, with this chapter, the
DFSA'sprimary concern will be the interests of policyholders, both existing and prospective. It recognises that there will be circumstances in which a problem may be resolved quickly, for example by support from a parent company, without jeopardising the interests of policyholders. In such circumstances, it will be in the interests of all parties for there to be minimum disruption to the Insurer'sbusiness. The DFSA'snormal approach will be to seek to work cooperatively with firms to deal with any problems. There will, however, be other circumstances in which it is necessary to take firm action to avoid exposing further policyholders to the risk of the Insurer'sfailure, and the DFSAwill not hesitate to do so.
PIN 4.9 PIN 4.9 Limitations on distributions by insurers
Insurermay make any distribution of profits or surplus, however called or described, or return of capital if such distribution or return would cause the Insurerto fail to comply with any provision of this chapter.