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

GOVERNMENT NOTICE NO. 44

INSURANCE ACT (CAP. 47:01)

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

ARRANGEMENT OF PARAGRAPHS

PARAGRAPH

PART I—PRELIMINARY

1. Short title
2. Application
3. Interpretation

PART II—OBJECTIVES 4. Objectives

PART III—CAPITAL AND SOLVENCY REQUIREMENTS 5. Minimum paid-up capital, core capital and solvency ratio requirements 6. Determination of core capital 7. Determination of adjusted net assets 8. Rules for calculating solvency position 9. Unrealized gains in value of property, plant and equipment and financial instruments 10. Treatment of investment in equities 11. Verification of accuracy of Form G5

PART IV—DECLARATION OF DIVIDENDS 12. Declaration of dividends

PART V—SUPERVISORY INTERVENTION 13. Registrar to be notified 14. Solvency buffer levels

PART VI—ADMINISTRATIVE PENALTIES AND SANCTIONS 15. Administrative penalties

PART VII—TRANSITIONAL ARRANGEMENTS 16. 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 General Insurers) Directive, 2017.

Application 2. This Directive applies to registered insurance companies licensed to conduct general insurance business in Malawi.

Interpretation 3. In this Directive, unless the context otherwise requires— "adjusted net assets" means net assets as presented in Form G5 in the First Schedule less inadmissible assets, discounted assets, adjustments for weighted policyholders reserves and discounted capital items; "capital adequacy" means the maintenance of sufficient core capital per the requirements of this Directive; "core capital" means capital determined in paragraph 6; "declaration of commitment" means a commitment made by a policyholder to an insurer to pay premiums for an insurance contract as per agreed terms and conditions, in line with paragraph 7 (1) of the Insurance (Premium Payments to General Insurance Companies) Directive. "discounted assets" means admissible assets that are risk weighted for purposes of solvency calculations; "incurred but not reported claims" means provision for claims incurred but not reported by the balance-sheet date; "impaired capital" means a solvency deficiency to the extent of endangering policyholders and other creditors; "inadmissible assets" means assets that are not allowable by the Registrar for purposes of calculating solvency; "intangible asset" means an identifiable non-monetary asset that has no physical substance; "Minimum Capital Requirement", means required level of capital that each insurer must maintain to sufficiently meet insurance obligations; "paid-up capital" means the amount of share capital for which the company has received payment from the shareholders; "related party" has the meaning ascribed to that term in the Financial Services Act; "revaluation reserve" means the increase in book value of a fixed asset or other tangible asset, based on a professional appraisal as to the market value of such asset; "significant interest" in relation to related parties, means a person who,

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in his personal capacity or through entities controlled by him, owns more than ten percent of all the outstanding shares of that class; "solvency deficiency" means failure to meet the solvency requirements of this Directive; "solvency ratio" means the percentage that adjusted net assets of a general insurer bears to the net premium written for the twelve month period to the date of reporting; and "supplementary capital" means capital instruments that— (a) have characteristics of equity and hybrid debt; (b) are able to support losses on an on-going basis without triggering liquidation; (c) are unsecured; (d) are subordinated; and (e) are fully paid-up.

PART II—OBJECTIVES

4. The objectives of this Directive are to— (a) protect the interests of policyholders, creditors and the general public, against risk of loss that may arise out of the insurer’s business activities; (b) help ensure that general insurers have an adequate cushion of net assets to absorb losses beyond the coverage of their technical reserves; (c) help general insurers grow their capital base so as to enable the general insurance industry develop the required capacity to underwrite large risks arising within Malawi and therefore assist in conserving valuable national foreign currency reserves; (d) implement a framework of prudential regulation for Malawi’s general insurance industry that supports financial stability objectives and is consistent with internationally recognised capital and solvency standards; (e) promote self-discipline in the management of general insurers and emphasize the responsibility of a general insurer’s board and senior management in ensuring that the general insurer’s capital resources are appropriate to the size, business mix and complexity of its business.

PART III—CAPITAL AND SOLVENCY REQUIREMENTS

5.—(1) A general insurer who is licensed to carry on all classes of general insurance business shall maintain a minimum paid up capital of seven hundred and fifty million Malawi Kwacha. (2) A general insurer who is licensed to carry on two or less classes of general insurance business shall maintain a minimum paid up capital of four hundred million Malawi Kwacha.

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(3) A general insurer shall maintain a minimum core capital of eighty percent of the minimum paid up capital of the general insurer. (4) A general insurer shall maintain a minimum solvency ratio of twenty percent. (5) The Registrar may require a general insurer to maintain a higher— (a) minimum paid-up capital; (b) core capital; or (c) solvency ratio, by giving the general insurer a direction in writing.

Determination 6. A general insurer shall determine its core capital in the following manner— of core capital The sum of— (a) paid-up ordinary shares; (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 that are— (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: (e) goodwill and intangible assets; (f) equity investments in unconsolidated companies; (g) subordinated loans to related parties; (h) allowance for any dividend declared or repayment of capital or subordinated debt scheduled within one year; and (i) revaluation reserves from investments in property.

Determination 7. A general insurer shall determine its adjusted net assets in the following manner— of adjusted net assets (a) net assets, total assets less total liabilities as per Form G5 in the First Schedule; Less the following items— (b) inadmissible assets; (c) adjustment for discounted assets; (d) weighted policyholders’ reserves; and (e) adjustment on capital items.

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8. A general insurer shall calculate its solvency position in line with the following rules— (a) the assets listed in the Second Schedule are inadmissible; (b) the following admissible assets are discounted in this manner— (i) corporate bonds, five percent; (ii) semi-government securities, five percent; (iii) mortgage loans, five percent; (iv) equity investment in listed companies, ten percent; (v) direct real estate investments, owner occupied, fifteen percent; (vi) asset backed securities, fifteen percent; (vii) direct real estate investment rented to third parties, twenty percent; (viii) equity investment in unlisted companies, twenty percent; (ix) other receivables that are overdue by more than ninety days, twenty percent; (x) loans to third parties, twenty percent; and (xi) property, plant and equipment, twenty percent; (c) The following policyholder reserves are weighted in this manner— (i) unearned premium reserve, five percent; (ii) outstanding claims reserve, ten percent; and (iii) incurred but not reported claims, fifteen percent. (d) The following capital items are discounted in this manner— (i) profit for the year, twenty percent; or zero if loss; (ii) supplementary capital, fifty percent.

9.—(1) A general insurer shall report unrealised gains on the value of property, plant and equipment to the revaluation reserve account. (2) A general insurer shall not report unrealised gains in the value of financial assets, including shares and bonds, to the retained earnings account but rather defer them to the revaluation reserve account.

10.—(1) Where investment in shares of other companies constitutes twenty five percent or less of the paid up capital of the company in which the investment is made, the investment shall be discounted based on whether or not the shares are traded on the stock exchange market as provided in items 4 and 8 of Table 2.2 of Form G5 in the First Schedule. (2) Where investment in shares of other companies constitutes more than twenty five percent of the paid up capital of the company in which the investment is made, the investment shall not be allowable for solvency calculations, whether the shares are traded on the stock exchange market or not as set out in item 3 of Table 2.1 of Form G5 in the First Schedule. (3) Where investment in shares of other companies constitutes more than

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twenty five percent of the paid up capital of the company in which the investment is made, the initial investment and any other investments by the general insurer shall be deducted from the core capital of the general insurer as set out in item 7 of Table 1 of Form G5 in the First Schedule.

Verification of 11.—(1) A general insurer shall ensure that its external auditor verifies accuracy of the accuracy of Form G5 computations as of the financial year-end date. Form G5 (2) In determining the computation for capital adequacy and solvency requirements, the Registrar may assess if the general insurer has complied with the Directive on reserving requirements and may determine if the general insurer has— (a) made adequate provisions for all technical reserves and bad debts; and (b) followed proper guidelines with regard to income recognition, specifically accrual of premium income and reserving methodologies. (3) The Registrar may require a general insurer to adjust its capital and solvency calculations with respect to increased provisions and premium income accrual, if the general insurer contravenes the Directive on reserving requirements.

PART IV—DECLARATION OF DIVIDENDS

Declaration of 12.—(1) A general insurer whose solvency ratio falls below thirty percent dividends shall not declare or pay dividends from previous or current profits. (2) A general insurer who declares or pays dividends when its solvency ratio falls below thirty percent commits an offence and shall be liable to an administrative penalty.

PART V—SUPERVISORY INTERVENTION

Registrar to be 13. A general insurer whose solvency ratio falls below the minimum at notified any time, shall immediately— (a) advise the Registrar; (b) cease writing any new business until such time as the Registrar is satisfied that the general insurer is solvent; and (c) submit, for approval, a plan to the Registrar on how it intends to rectify the insolvency position.

Solvency 14. 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 VI—ADMINISTRATIVE PENALTIES AND SANCTIONS

Administrative 15.—(1) Where the Registrar determines that a general insurer has not penalties met the requirements of this Directive, the Registrar may impose administrative penalties in line with the Financial Services Act.

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(2) The administrative penalty imposed under subparagraph (1) may include a fine of twenty percent of the dividend declared or paid where a general insurer whose solvency margin falls below thirty percent declares or pays dividends.

PART VII—TRANSITIONAL ARRANGEMENTS

16.—(1) Existing general insurers not meeting the minimum capital requirements of this Directive as at the date of commencement of the Directive shall comply in this manner— (a) general insurers offering all classes of general insurance business— (i) hold minimum paid-up capital of K400,000,000 by 31 December 2017; and (ii) hold minimum paid-up capital of K750,000,000 by 31 December 2018. (b) general insurers offering one or two classes of general insurance business— (i) hold minimum paid-up capital of K200,000,000 by 31 December 2017; and (ii) hold minimum paid-up capital of K400,000,000 by 31 December 2018. (2) Core capital shall be eighty percent of the paid up capital of the general insurer at each of the transitional deadline in paragraph 16 (2)(a) and (b) above.

FIRST SCHEDULE para. 7 CAPITAL ADEQUACY AND SOLVENCY REPORT—GENERAL INSURANCE BUSINESS

FORM G5 CAPITAL ADEQUACY AND SOLVENCY REPORT GENERAL INSURANCE BUSINESS (Amounts in K'000) Name of Institution: ABC Insurance Company Ltd Financial Year: 20XX Start Date: 01/01/20XX End Date: 31/03/20XX

TABLE 1: CORE CAPITAL TEST 1 Minimum core capital requirement

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2 Paid up share capital 3 Share premium 4 Retained earnings (audited as at previous December) 5 80% Current year profit or 100% loss or 100% audited year-end profit 6 Less: Goodwill and other intangibles 7 Less: Equity investment in unconsolidated companies 8 Less: Subordinated loans to related parties 9 Less: Allowance for dividends declared of repayment of capital or subordinated debt scheduled within one year 10 Total core capital (2+3+4+5-6-7-8-9) 11 Core capital surplus/deficit (10-1)

TABLE 2: SOLVENCY TEST 1 Net premium written (audited as at latest December) 2 Minimum solvency ratio and required net assets 20.0% 3 Adjusted net assets 3.1 Net assets (i.e. Total equity) as per Form G5 3.2 Less: inadmissible assets as per Table 2.1 below 3.3 Less: discounted assets as per Table 2.2 below 3.4 Less: weighted policyholders reserves as per table 2.3 below 3.5 Less: discounted supplementary capital items as per table 2.4 below 4 Net assets available to meet solvency (3.1-3.2-3.3-3.4-3.5) 5 Solvency ratio (4/1)x100% 6 Solvency margin (2-4)

TABLE 2.1: INADMISSIBLE ASSETS 1 Goodwill and intangible assets 2 Deferred acquisition costs 3 Equity investments in unconsolidated companies (if more than 25%) 4 Amounts secured or pledged on any asset 5 Loans to or any amounts due from related parties

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6 Loans to insurance brokers and insurance agents 7 Loans to third parties - overdue >90 days 8 Premiums receivables - overdue >30 days 9 Reinsurance recoveries - overdue >180 days 10 Deferred and other taxes 11 Prepaid expenses TOTAL - transfer to item 4 above

TABLE 2.2: DISCOUNTED ADMISSIBLE ASSETS 1 Corporate bonds 5% 2 Semi-government securities 5% 3 Mortgages loans 5% 4 Equity investment in listed companies 10% 5 Direct real estate investments, owner occupied 15% 6 Asset backed securities 15% 7 Direct real estate investments rented to third parties 20% 8 Equity investment in unlisted companies 20% 9 Other receivables - overdue >90 days 20% 10 Loans to third parties 20% 11 Property, plant and equipment 20% TOTAL - transfer to item 5 above

TABLE 2.3: WEIGHTED POLICYHOLDERS RESERVES 1 Unearned Premium Reserve 5% 2 Outstanding Claims Reserve 10% 3 Incurred But Not Reported (IBNR) Claims 15% TOTAL - transfer to item 6 above

TABLE 2.4: DISCOUNTED SUPPLEMENTARY CAPITAL ITEMS 1 Profit for the year or zero if loss 20% 2 Supplementary Capital 20% TOTAL - transfer to item 7 above

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SECOND SCHEDULE para. 8 INADMISSIBLE ASSETS

1. Goodwill and intangible assets
2. Deferred acquisition costs
3. Equity investments in unconsolidated companies (25% or more)
4. Amounts secured or pledged by any asset
5. Loans to or any amounts due from related parties
6. Loans to insurance brokers and insurance agents
7. Loans to other third parties-overdue >90 days
8. Insurance premium receivables-overdue >30 days
9. Reinsurance recoveries-overdue >180 days
10. Deferred and other taxes
11. Prepaid expenses

THIRD SCHEDULE Para. 14 SOLVENCY BUFFERS AND CORRECTIVE ACTION

Level	Solvency Margin	Corrective action
Strong	≥50%	Routine monitoring
Satisfactory	≥40% and <50%	Routine monitoring
Fair	≥30% and <40%	Restructuring of the statement of financial position
		Placement on watch list
Marginal	≥20% and <30%	Capital injection
		Suspension of licence
Unsatisfactory	<20%	Suspension of licence
		Statutory management
		Revocation of licence
		Winding-up of the insurer

Made this 31st day of May, 2017.

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

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