Insurance (Minimum Capital and Solvency Requirements for Life Insurers) Directive, 2017

591 The Malawi Gazette Supplement, dated 11th August, 2017, containing Regulations, Rules, etc. (No. 19A)

GOVERNMENT NOTICE NO. 41

INSURANCE ACT (CAP.47:01)

INSURANCE (MINIMUM CAPITAL AND SOLVENCY REQUIREMENTS FOR LIFE INSURERS) DIRECTIVE, 2017

ARRANGEMENT OF PARAGRAPHS

PARAGRAPH PART I—PRELIMINARY

1. Short title
2. Application
3. Interpretation

PART II—OBJECTIVES 4. Objectives

PART III—DUTIES AND OBLIGATIONS OF THE BOARD AND APPOINTED ACTUARY 5. Board responsibility 6. Obligations on calculation of solvency

PART IV—CAPITAL AND SOLVENCY REQUIREMENTS 7. Minimum capital requirements and solvency requirements 8. Determination of core capital 9. Computation of base capital 10. Determination of solvency ratio 11. Calculation of solvency capital 12. Calculation of solvency requirement 13. Adjustments by the Registrar

PART V—DECLARATION OF BONUSES AND DIVIDENDS 14. Declaration of bonuses

PART VI—SUPERVISORY INTERVENTION 15. Registrar to be notified 16. Solvency buffer levels

PART VII—ADMINISTRATIVE PENALTIES AND SANCTIONS 17. Administrative penalty

PART VIII—TRANSITIONAL ARRANGEMENTS 18. Transitional arrangements

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IN EXERCISE of the powers conferred by section 13 of the Insurance Act, I, DALITSO KABAMBE PhD, Registrar of Financial Institutions, issue the following Directive—

PART I—PRELIMINARY

Short title 1. This Directive may be cited as the Insurance (Minimum Capital and Solvency Requirements for Life Insurers) Directive, 2017.

Application 2. This Directive applies to insurance companies licensed to carry on life insurance business in Malawi.

Interpretation 3.—(1) In this Directive, unless the context otherwise requires— "actuarial professional standards" includes actuarial professional standards of South Africa, Canada, Australia and United Kingdom or as may be approved by the Registrar; "adjusted assets" for a life insurance fund, means the total assets attributable to the life insurance fund less any inadmissible assets attributable to that fund; "base capital" means capital that is computed by adding core capital and fifty percent of supplementary capital; "best estimate assumptions" means assumptions about future experience which are made using professional judgment, training and experience and are neither deliberately overstated nor deliberately understated; "best estimate liability" means the liability calculated using the best estimate assumptions; "classes of insurance business" means classes and sub-classes of insurance business described in the Insurance (Classes of Insurance Business) Directive, 2017; "core capital" means capital determined in paragraph 8 of this Directive; "fund" means either the shareholders' fund or a life insurance fund; "inadmissible assets" means assets listed in Table 1 of the First Schedule that are inadmissible for purposes of calculating the solvency position of a life insurer; "intangible asset" means an identifiable non-monetary asset that has no physical substance; "net base capital" means the capital determined by taking the base capital less any inadmissible assets not attributable to any life insurance fund; "paid up capital" means the amount of share capital for which a company has received payment from shareholders; "policy liability" means a liability calculated in accordance with the Registrar's Directives on determination of policy liabilities of life

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insurers; "revaluation reserve" means the increase in book value of a fixed asset or other tangible asset based on a professional appraisal as opposed to the market value of such asset; "shareholders' fund" means that portion of the life insurer's assets and liabilities that are not referable to the life insurance funds of the insurer; "solvency capital" means capital that is available for a life insurer to meet solvency at the level of— (a) life insurance fund; (b) shareholders' fund; or (c) life insurer as a whole, determined in accordance with this Directive; "solvency margin" means the excess of the solvency capital over the solvency requirement expressed as a monetary amount, the calculation of which is carried out in respect of each life insurance fund; "solvency ratio" means the ratio of the solvency capital divided by the solvency requirement expressed as a ratio or a percentage; "solvency requirement" means the amount of capital that a life insurer must hold to cover the risks of its business and is determined in accordance with this Directive; "supplementary capital" means the sum of— (a) revaluation reserves, (b) subordinated debt; and (c) capital instruments that— (i) have characteristics of equity and hybrid debt; (ii) are able to support losses on an on-going basis without triggering liquidation; and (iii) are unsecured, subordinated, fully paid-up and approved by the Registrar; "technical provisions" means the amount calculated in accordance with actuarial professional standards that— (a) is set aside by the insurer to fulfil its obligations and commitments under all policies up to the term of each policy at which the insurer can unilaterally terminate the contract, refuse to accept a premium, or amend the benefit or premium without limit, and includes— (i) cost of administering those policies; (ii) capital to support those policies; (iii) cost of insurance or reinsurance in respect of those policies;

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(iv) claims and cost for beneficiaries whose claims have not been settled; and (v) appropriate risk margins; and (b) is not less than the policy liability.

PART II—OBJECTIVES

Objectives 4. The objectives of this Directive are to— (a) protect the interests of policyholders and beneficiaries by requiring each life insurer to ensure that each life insurance fund has sufficient assets to meet all obligations referable to that life insurance fund; (b) ensure that each life insurer has sufficient capital available to absorb losses arising from current and future uncertainties associated with life insurance activities; (c) ensure the standards of governance and discipline by boards and management of life insurers by setting out expectations or strategic and governance activities with respect to capital management, conservative risk taking, business mix and the relative complexity and correlation of risks assumed; and (d) implement the framework of prudential regulation of Malawi's life insurance sector that support financial stability objectives and is consistent with international supervisory standards.

PART III—DUTIES AND OBLIGATIONS OF THE BOARD AND APPOINTED ACTUARY

Board 5. The Board of a life insurer shall ensure that a life insurer— responsibility (a) undertakes prudent management of capital to support current and future operations even under adverse economic conditions; (b) and each life insurance fund maintains an adequate level and quality of capital appropriate to the size, nature and complexity of its business and risk profile; and (c) meets all capital and solvency requirements for each life insurance fund and the life insurer as a whole on a continuous basis.

Obligations on 6.—(1) A life insurer shall ensure that its appointed actuary, on an calculation of annual basis— solvency (a) undertakes the necessary calculations to determine the solvency status of each life insurance fund and the life insurance company; and (b) certifies that the calculations and the underlying assumptions are in accordance with actuarial professional standards. (2) An appointed actuary shall undertake solvency calculations for

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quarterly reports or provide the life insurer with appropriate instructions to enable the life insurer to make such estimates as are necessary to complete quarterly reports. (3) The Registrar may remove an appointed actuary who does not comply with the provisions of this paragraph.

PART IV—CAPITAL AND SOLVENCY REQUIREMENTS

7.—(1) A life insurer who is licensed to carry on all classes of life Minimum insurance business shall maintain a minimum— capital and (a) paid up capital of K1,000,000,000; solvency (b) core capital of K800,000,000; and requirements (c) base capital of K800,000,000. (2) A life insurer who is licensed to carry on only one class of life insurance business shall maintain a minimum— (a) paid up capital of K300,000,000; (b) core capital of K240,000,000; and (c) base capital of K240,000,000. (3) A life insurer shall maintain a minimum solvency ratio of one hundred and twenty percent for the life insurer as a whole and one hundred percent for each life insurance fund. (4) The Registrar may give a direction in writing to a life insurer, to maintain a higher minimum— (a) paid up capital; (b) core capital; or (c) base capital.

8. A life insurer shall determine its core capital in the following Determi- manner— nation of The sum of— core (a) paid-up ordinary shares; capital (b) share premium reserve; (c) other reserves that are created or increased by appropriations of retained earnings, such as those arising from the revaluation of investments but excluding revaluations of property, plant and equipment; (d) retained earnings— (i) one hundred percent of the value of year end retained earnings where audited; and (ii) eighty percent of cumulative after-tax profits in the current year-to-date or one hundred percent of losses. Less the following items—

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(e) goodwill and intangible assets; (f) equity investments in, and subordinated loans to, an associate; (g) allowance for any dividend declared or repayment of capital or subordinated debt scheduled within one year; and (h) revaluation reserves from investments in property.

Computation of 9. A life insurer shall calculate its minimum base capital, maintained base capital per the requirements in paragraph 7, as the sum of core capital and fifty percent of supplementary capital in line with Table 1 in the Second Schedule.

Determination 10. A life insurer shall calculate its solvency ratio, maintained per the of solvency requirements set out in paragraph 7(3), as the percentage that solvency capital ratio bears on solvency requirement in line with Table 2 in the Second Schedule.

Calculation of 11.—(1) A life insurer shall calculate the solvency capital for each life solvency insurance fund in this manner— capital The value of adjusted assets Less the following liabilities— (a) policy; (b) technical; and (c) other liabilities. (2) A life insurer shall calculate the solvency capital at the shareholders' fund level in this manner— the base capital less any inadmissible assets not attributed to any life insurance fund. (3) A life insurer shall calculate the solvency capital for the life insurer as a whole in this manner— the net base capital from the shareholders' fund plus the solvency capital available from each life insurance fund.

Calculation of 12.—(1) A life insurer shall calculate its solvency requirement from the solvency following components— requirement (a) asset risk charge; (b) insurance risk charge; and (c) liabilities risk charge. (2) In this Directive, the solvency requirement for a life insurer as a whole shall be the sum of the solvency requirement for each life insurance fund plus the solvency requirement attributable to shareholders. (3) The risk charges in sub paragraph (1) shall be defined as follows— "asset risk charge" means a charge levied on an asset— (a) that relates to adverse movements in the value of assets, particularly in shock situations, and to losses on the materialisation of credit and other risks; and

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(b) shall be calculated by— (i) applying the risk factors as set out in Table 2 of the First Schedule, to each asset class; and (ii) despite subparagraph (i), by applying a risk factor of five percent on benefits explicitly linked to the face value of an asset, or a unit of an asset portfolio; provided the units and assets linked to the benefits are held by the life insurer exclu- sively for the purpose of providing the benefits. "insurance risk charge" means a charge levied on an asset— (a) that relates to the risks of adverse impacts on assets due to movements in mortality, morbidity, longevity, servicing expenses and other insurance risks; and (b) is determined as five per thousand of the net sum at risk being total potential death benefits less, expected reinsurance recoveries, less the technical provisions; and "liabilities risk charge" means a charge levied on an asset, that— (a) includes risk of loss resulting from— (i) inadequate or failed internal processes; (ii) people; or (iii) external events. (b) includes risks associated with the guarantees incorporated in products; and (c) is determined as three percent of technical provisions. (3) Where a licensed insurer holds investments in a professionally managed collective investment vehicle, the underlying asset classes shall be identified on a look through basis and the appropriate risk charge shall be applied in accordance with Table 2 of the First Schedule. (4) Appointed actuaries shall establish appropriate reserves to cover the wider risks of faced by the life insurer.

13. If the Registrar forms the opinion that solvency calculation for a Adjustments fund does not produce an appropriate outcome in respect of a particular life by the insurance fund or the life insurer; or that a life insurer has used inappropriate Registrar judgement with respect to any valuation, the Registrar may require the insurer to adjust any aspect of the solvency calculation.

PART V—DECLARATION OF BONUSES AND DIVIDENDS

14.—(1) A life insurer shall not declare a bonus or transfer a profit from Declaration a life insurance fund to shareholders' fund unless— of bonuses (a) that life insurance fund maintains a solvency ratio of one hundred percent after such declaration or transfer; and (b) an appointed actuary for the insurer has certified the solvency position of the life insurance fund before such declaration or transfer.

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(2) Where a life insurer as a whole or any of its life insurance funds fails to maintain a solvency ratio of more than one hundred and twenty percent and one hundred percent respectively, the life insurer shall not declare or pay dividends. (3) Where a life insurer declares a bonus or dividend, or transfers a profit from a life insurance fund to a shareholders' fund, the effect of which is to leave the life insurance fund with a solvency ratio of less than one hundred percent, the insurer shall immediately transfer funds from the shareholders' fund to the life insurance fund in order to meet the solvency requirement of at least one hundred percent. (4) A life insurer who contravenes this paragraph commits an offence and shall be liable to an administrative penalty.

PART VI—SUPERVISORY INTERVENTION

Registrar to be 15.—(1) A life insurer shall notify the Registrar, as soon as practicable, notified of— (a) any breach or potential breach of the solvency position of the insurer as a whole or any of its life insurance funds; or (b) any reduction of the life insurer's solvency ratio below one hundred and thirty percent. (2) The notice by the life insurer in subparagraph (1) shall include any remedial actions taken or planned to be taken to address the situation and the timing of those actions.

Solvency 16. When dealing with emerging insolvency situations, the Registrar buffer levels may employ buffer levels and their corresponding corrective actions as provided in the Third Schedule.

PART VII—ADMINISTRATIVE PENALTIES AND SANCTIONS

Administrative 17.—(1) Where the Registrar determines that a life insurer has not met penalty the requirements of this Directive, the Registrar may impose administrative Cap.44:05 penalties in line with the Financial Services Act. (2) The administrative penalty imposed under sub paragraph (1) may include a fine of twenty percent of the dividend declared or paid where a life insurer whose solvency ratio falls below one hundred and thirty percent, declares or pays dividends.

PART VIII—TRANSITIONAL ARRANGEMENTS

Transitional 18.—(1) Existing life insurers shall comply with solvency requirements arrangements of this Directive within two years from the commencement date of the Directive. (2) Existing life insurers not meeting the minimum capital requirements of this Directive as at the date of commencement of the Directive shall comply in this manner—

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(a) life insurers offering all classes of life insurance business— (i) hold minimum paid-up capital of K750,000,000 by 31 December, 2017; (ii) hold minimum paid-up capital of K1,000,000,000 by 31 December, 2017. (b) life insurers offering one class of life insurance business— (i) hold minimum paid-up capital by 31 December, 2017, K200,000,000; and (ii) hold minimum paid-up capital by 31 December, 2018, K300,000,000. (3) Core capital shall be eighty percent of the paid up capital of the life insurer at each of the transitional deadline in paragraph 18 (2) (a) and (b) above.

FIRST SCHEDULE para. 3

TABLE 1—INADMISSIBLE ASSETS A Goodwill and other intangible assets B Proprietary software C Shareholder equity investments in, and subordinated loans to an associate D Deferred acquisition costs E Loans to or amounts receivable from an associate or related parties F Loans to insurance brokers, insurance agents and directors G Loans overdue more than 180 days H Insurance premiums overdue by more than 90 days I Deferred and other taxes J Reinsurance recoveries overdue by more than 90 days K Amounts secured or pledged on any asset or assets L Prepaid expenses

TABLE 2—ASSET RISK FACTORS Asset class 1 Asset Risk Factor 2 Cash and bank balances .. .. .. .. .. 0% Government securities .. .. .. .. .. 0% Bank securities (including term deposits) .. .. .. 0% Loans on insurer's policies .. .. .. .. .. 0% Listed semi-government securities .. .. .. .. 5% Mortgages on real estate .. .. .. .. .. 5% Listed equities and corporate bonds .. .. .. .. 10% Asset backed securities (including commercial loans, money market securities and infrastructure bonds) .. .. .. 15% Direct real estate investments-owner occupied .. .. 15%

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Asset class 1 Asset Risk Factor 2 Direct real estate investments .. .. .. .. .. 20% Any other loans less than 180 days .. .. .. .. 20% Foreign exchange exposures .. .. .. .. .. 20% Unlisted securities and collective investments .. .. .. 30% Aggregate investment of more than 30% equity holding in other companies whether listed or unlisted. .. .. .. .. 50% Any other assets .. .. .. .. .. .. 30% 1The asset classes are those described in the First Schedule of the Directive on operation of life insurance funds. 2If the value of an individual asset exceeds the limit shown in column 4 of the second Schedule of the Directive on operation of life insurance funds, then the Asset Risk Factor should be increased so that the adjusted value of that asset does not exceed that limit.

SECOND SCHEDULE paras 9 and 10

CAPITAL ADEQUACY AND SOLVENCY REPORT-LIFE INSURANCE BUSINESS Name of Company ........................................................................Date ...........................

Table 1 Minimum Capital Base (K'000) 1 Minimum allowable capital base .. .. .. .. 800,000 2 Paid up capital .. .. .. .. .. .. — 3 Share premium reserve .. .. .. .. .. — 4 Revaluation reserves .. .. .. .. .. — 4.1 Shares in associated companies .. .. .. .. — 4.2 Shares in other companies .. .. .. .. — 4.3 Real property .. .. .. .. .. .. — 4.4 Other investments .. .. .. .. .. — 5 Retained earnings (audited at year end) .. .. .. — 6 Year to date earnings .. .. .. .. .. — Less: 7 Goodwill and intangible assets .. .. .. .. — 8 Equity investments in, and subordinated loans to, an associate — 9 Allowance for any dividend declared or repayment of capital or subordinated debt scheduled within one year. .. .. — 10 revaluation reserves from investments in property. .. .. — 11 Adjustments ordered in writing by the Registrar .. .. — 12 Total core capital (sum items 2 to 11) .. .. .. —

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Table 1 Minimum Capital Base (K'000) 13 50% supplementary capital .. .. .. .. .. — 14 Total capital base (items 12 + 13) .. .. .. .. — Minimum capital base test (is 14 > 1?) .. .. .. Yes

Table 2 Determination of solvency Shareholders Life Fund 1 Life Fund 2 Life Fund 3 Company Assets 1 Total assets — — — — — 2 Less: inadmissible assets — — — — — 3 Adjusted assets for solvency (1 - 2) — — — — — Liabilities 4 Policy liabilities — — — — — 5 Technical and other liabilities — — — — — 6 Total liabilities (4+5) — — — — — 7 Solvency capital (3 - 6) — — — — — Calculation of solvency requirement 8 Asset risk charge — — — — — 9 Insurance risk charge — — — — — 10 Liabilities risk charge — — — — — 11 Other charges or adjustments — — — — — 12 Solvency requirement (8+9+ 10+11) — — — — — Calculation of solvency margin 13 Solvency margin (7-12) — — — — — Calculation of solvency ratio 14 Solvency ratio (7/12) — >100% >100% >100% >120%

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THIRD SCHEDULE para. 16

SOLVENCY BUFFERS AND CORRECTIVE ACTION

Level Solvency Ratio Expected Supervisory Response Strong ≥150% Routine monitoring Satisfactory ≥135% but < 150% Routine monitoring Fair ≥130% but <135% • Place on Watch List • Meeting with management • Restructure balance sheet Marginal ≥120% but <130% • Warning • Capital Injection • Meeting with Board • Suspend licence Unsatisfactory <120% • Suspend licence • Statutory management • Revoke licence • Winding up

Made this 31st day of May, 2017.

D. KABAMBE, PhD (FILE REF. NO PFSP/6/3/11) Registrar of Financial Institutions