The UAE insurance sector is in a transition phase towards tougher solvency requirements. “Companies are provided three years to align their operations to the new solvency requirements which will become mandatory from 2018,” said Cedric Charpentier, CEO of AXA Insurance (Gulf). “We feel the requirements will have a significant impact on the market with companies needing to strengthen their financial position and weaker players may need to exit or look for support through consolidation.”

The new solvency regime forms part of the financial regulations issued by the Insurance Authority at the end of 2014, which also addressed areas such as investments, technical reserves, asset liability matching and Books of accounts.

The solvency regulation follows a fundamentally different approach from the past, with insurers now being required to maintain an available capital which is higher of solvency capital requirement (which introduces risk based capital components), a minimum guarantee fund (calculated based on a minimum amount of funds required to support each type of business written by the company), or minimum capital requirement (being Dh100 million for an insurance company and Dh250 million for reinsurer).

According to Sanjay Jain, MENA Insurance Advisory Leader at the consultancy EY, “New regulations… may lead to short-term challenges for the industry as insurers adjust and adapt to the new regulations. While the new reforms may initially cause a shake-up, they are essential for the long-term benefit and development of the industry.”

According to EY, Saudi Arabia had implemented similar reforms on reserves and actuarial-led pricing, which “initially resulted in less than ideal financial results and a strong reaction from the market. However, the Saudi market has grown significantly in the current financial year and is now expected to surpass the UAE in the near future to become the largest insurance market in the GCC.”