Regulatory Alerts2017-01-01
Circular No. 6 of 2017 on Rules for Estimating Loss Rates to Calculate the Reverse Fluctuation Provision for Property and Liability Insurance Companies
The Egyptian Financial Supervisory Authority issued Circular No. 6 of 2017 to establish mandatory rules for property and liability insurers and their credit experts when estimating loss rates for calculating the reverse fluctuation provision. The directive requires companies to project target loss rates for at least one upcoming underwriting year, formally involve credit experts in pricing and business plan development, and submit detailed actuarial methodologies and supporting data electronically. It further mandates specific calculation parameters, including the use of credibility models for insufficient historical data, mandatory pricing soundness studies when expected loss rates exceed 100%, and transparent justification for any deviations from recent three-year underwriting experience averages.
Circular No. (6) for the Year 2017
Regarding the Rules to be Observed When Estimating Loss Rates for Calculating the Reverse Fluctuation Provision for Property and Liability Insurance Companies
In light of the commencement of the implementation of the Authority's Decision No. (535) for the Year 2017 regarding the aforementioned subject, the following shall be observed when preparing credit reports to estimate loss rates for calculating the reverse fluctuation provision:
(1) It shall be noted that the purpose of the report is for the company to estimate target (or expected) loss rates for each line of business for at least one upcoming underwriting year, to be used at year-end to present the line's experience based on actual loss rates at year-end and to calculate the reverse fluctuation provision accordingly at that time. The report shall include the calculation of the reverse fluctuation provision value for the year ending on 2017/6/30 using the rate according to the method deemed appropriate by the expert, given that this is the first time the decision is being applied (or using the last standard rate) and approved by the Authority.
(2) In light of the foregoing, reports for subsequent years must use the rates estimated in the previous year's report to calculate the provision value for the report year and estimate the expected rate for the coming year, as previously explained.
(3) The credit expert shall not rely on estimated loss rates contained in the company's business plan prepared for previous years in which they did not participate in preparing the plan, for the purpose of calculating the reverse fluctuation provision, except after presenting any measures taken to test them and verify the soundness of the foundations upon which they are based, or presenting an alternative if required.
(4) The company must involve the credit expert in establishing pricing bases, preparing and estimating target loss rates in the company's business plan, and verifying and ensuring the soundness of the data, bases, and methods used in collaboration with the company's technical departments. The company shall submit this information to the Authority, signed by the credit expert, certifying the accuracy and soundness of the data and bases used.
(5) When estimating loss rates, it must be noted that data on gross operations for underwriting years should be used. If this is not feasible, financial years may be used, provided that the reasons are stated and a plan is established for using underwriting years.
(6) In the event that the expected loss rate (including expenses and commissions, based on the estimation method used) exceeds 100%, the credit expert must prepare a study on the soundness of pricing in the line(s) of business, including the steps to be taken to address the expected deterioration in results, and submit it to the Authority. The same study must also be submitted if actual rates exceed this percentage for more than one year.
(7) It shall be ensured that the expected loss rate does not fall below the company's average experience over the last three underwriting years, unless the expert identifies radical changes in the company's experience, in which case the reasons for such changes must be clarified based on the underwriting and claims management policies and any amendments thereto.
(8) Credibility models shall be used to weight the company's experience against the market average in the absence of sufficient historical data to rely upon.
(9) Three years after the lowest and five years after the highest shall be used when calculating the company's or market's average experience, with the report reviewing the actual company and market experience used in the estimation.
(10) It shall be ensured that any actuarial methods, assumptions, or treatments used to estimate the loss rate are clearly and detailedly specified in the submitted credit certificate.
(11) It shall be ensured that the detailed data used are submitted to the Authority via an electronic medium.
Dated: 2017/ /
Acting Chairman of the Authority
(Dr. Mohamed Omran)
General Authority for Financial Supervision
Egyptian Financial Supervisory Authority
Smart Village, Building 136, B, Giza
Postal Code: 12577
Tel: 25245250 - Fax: 25270027
70 Emad El-Din St. - Cairo
Postal Code: 11111
Tel: 25792240 - Fax: 25745598
78 Talaat Harb St. - Cairo
Postal Code: 25450
Tel: 25758807 - Fax: 25758581