Insurance (Reserving Requirements for General Insurers and Reinsurers) Directive, 2019

GOVERNMENT NOTICE NO. 33

INSURANCE ACT
(Cap 47:01)

INSURANCE (RESERVING REQUIREMENTS FOR GENERAL INSURERS AND REINSURERS) DIRECTIVE, 2019

ARRANGEMENT OF PARAGRAPHS

PARAGRAPH

PART I—PRELIMINARY

1. Citation
2. Interpretation
3. Application

PART II—OBJECTIVES
4. Objectives

PART III—SPECIFIC REQUIREMENTS
5. Reserving policy
6. Determination of technical reserves
7. Reporting requirement
8. Data requirements

PART IV—ENFORCEMENT
9. Administrative penalties

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IN EXERCISE of the powers conferred by section 79 (3) of the Insurance Act, I, Dr. DALITSO KABAMBE, Registrar of Financial Institutions, has issued the following Directive—

PART I—PRELIMINARY

1. This Directive may be cited as the Insurance (Reserving Requirements for General Insurers and Reinsurers) Directive, 2019. Citation

2. In this Directive unless the context otherwise requires— Interpretation

"actuary" means an actuary appointed according to the same requirements as those for a life insurer under section 25 of the Act;

"gross reserves" means the amount of funds set aside by an insurer to meet future losses, outstanding claims, incurred but not reported losses, premium liabilities and any associated expenses before reinsurance credits and offsets;

"financial year" has the same meaning ascribed to it under the Financial Services Act; Cap. 44:05

"incurred but not reported (IBNR) claims reserve" means a reserve for claims incurred but not reported at the reporting date;

"netreserves" means gross reserves adjusted for reinsurance credits and offsets;

"outstanding claims reserve (OCR)" means a reserve held in respect of payments due and claims expenses in respect of claims that have already been incurred and reported but have not been settled;

"premium deficiency reserve (PDR)" means a reserve held in excess of the unearned premium reserve, which allows for any expectation that the unearned premium reserve will be insufficient to cover the cost of claims and expenses incurred in connection with insurance contracts in force;

"technical reserves" means the total reserves determined by an insurer in accordance with this Directive, and may be gross reserves or net reserves;

"unearned premium reserves (UPR)" means the part of premium written that is corresponding to the period remaining on an insurance policy contract;

"unexpired risk reserve (URR)" means the amount of reserves set aside to cover claims and expenses which will emerge from unexpired risks at the valuation date, and is generally equal to the sum of UPR and PDR; and

"1/365th method" means a basis for estimating unearned premium reserve, based on the assumption that the risk is spread evenly over the 365 days of a year of cover.

3. This Directive shall apply to all general insurance companies and reinsurance companies licensed under the Financial Services Act. Application Cap. 44:05

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PART II—OBJECTIVES

Objectives 4. The objectives of this Directive are to ensure—

(a) consistent valuation and reporting of technical liabilities by insurers;

(b) that an insurer holds sufficient reserves to enable them meet obligations arising out of insurance contracts as they fall due with a reasonable level of certainty; and

(c) that insurers properly reflect the risks on their books in their present financial statements.

PART III—SPECIFIC REQUIREMENTS

Reserving policy 5.—(1) An insurer shall have a reserving policy, approved by the Board of directors of the insurer, covering the establishment of technical reserves in accordance with provisions of this Directive.

(2) The policy shall, at a minimum, include the following requirements—

(a) description of the methodology for determining reserves;

(b) periodic reporting procedures to senior management;

(c) description of the classes and sub-classes of insurance business for purposes of determining reserves under this Directive; and

(d) independent verification of the adequacy of reserves by actuaries and auditors approved by the Registrar.

(3) The insurer shall review the policy, at least once every three years, or whenever there have been material changes to the operating environment of the insurer.

(4) The insurer shall not materially deviate from, or change the reserving methodology described in the reserving policy except where such deviation or change has been approved by the Registrar.

(5) An insurer who does not seek the Registrar’s approval as provided in subparagraph (4) above shall be liable to administrative penalty.

Determination of technical reserves 6.—(1) An insurer shall establish and maintain, at a minimum, the following technical reserves in respect of each class of insurance business—

(a) the unexpired risk reserve, or the sum of unearned premium reserve and premium deficiency reserve whichever is higher;

(b) outstanding claims reserves; and

(c) incurred but not reported claims reserves.

(2) The insurer shall determine unexpired risk reserve by calculating the actuarial estimation of the expected claims and costs of the unexpired business for each class of business.

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(3) The insurer shall determine unearned premium reserve by using 1/365th method.

(4) A reinsurer shall determine unearned premium reserve by using 1/365th method for facultative business, and 1/8th method for treaty business.

(5) An insurer shall determine premium deficiency reserve as the difference between unexpired risk reserve and unearned premium reserve.

(6) An insurer shall determine outstanding claims reserve by—

(a) providing, in full, known amounts of all outstanding claims; and

(b) reasonably estimating all reported claims whose amounts are not yet known to the insurer.

(7) An insurer shall determine incurred but not reported claims reserve by—

(a) using an actuarial valuation method that takes into account historical claims experience; or

(b) using a percentage of outstanding claims at the valuation date, and the applicable rate of not be less than twenty percent; or

(c) any other method approved by the Registrar.

(8) The determination of the technical reserves shall be based on assumptions for future experience and circumstances of the insurer, and shall be—

(a) made using judgement and experience;

(b) made having regard to reasonably available statistics and other information; and

(c) neither deliberately understated nor overstated.

(9) An insurer may establish technical reserves as gross reserves or net reserves and where net reserves have been used, the insurer shall also establish reinsurance recoveries reserve and the methods and principles used for setting both reserves shall be consistent.

(10) Where the Registrar has reason to believe that the technical reserves of an insurer are insufficient, having regard to the business and risk profile of the insurer, the Registrar may—

(a) recommend to the insurer a reserve amount or additional reserves such as the premium deficiency reserve which the Registrar considers appropriate; and

(b) require the insurer to obtain a valuation of its liabilities from the actuary at the expense of the insurer, and the actuary shall submit a report of the valuation to the Registrar within a specified period.

(11) The insurer who fails to maintain sufficient technical reserves as required by this Directive shall be liable to an administrative penalty.

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(12) An insurer who deliberately understates technical reserves shall be liable to an administrative penalty.

Reporting requirements 7.—(1) An insurer shall submit an annual technical reserves valuation report to the Registrar within three months after the end of a financial year.

(2) The technical reserves valuation report shall be signed by an actuary.

(3) The technical reserves valuation report shall, at a minimum, contain the following—

(a) a statement that the methodology used is in compliance with this Directive;

(b) a detailed description of the reserves valuation; and

(c) narration and explanation of special terms and concepts in the report.

(4) Description of the reserves valuation shall include the following—

(a) completeness and accuracy of the data of different classes of insurance business, and description of the problems the data may have;

(b) the actuarial method and model for valuation where the actuarial method and model differs from those previously adopted and reasons for making the change and its effects on the current determination of reserves shall be described;

(c) major assumptions of the actuarial method and model, and reasons for adopting such assumptions; and

(d) any discrepancies between the actuarial result of the previous reserving method and actual experience.

(5) The actuary shall provide guidelines to an insurer for the purpose of determining quarterly valuations for the business.

(6) The Registrar may require additional information to form part of the technical reserves valuation report including any scenario or stress tests.

Data requirements 8.—(1) An insurer shall be responsible for ensuring that its database is properly maintained and that the data provided to the actuary is accurate and complete.

(2) The insurer shall givethe actuary unrestricted access to the database and shall furnish immediately, upon request, such data and explanation as the actuary may require when conducting the valuation of liabilities of the insurer’s business.

(3) Where the actuary has reason to believe that the data may produce material biases in the results, the actuary shall make appropriate allowance in the estimations, and document the basis of such allowance.

PART IV—ENFORCEMENT

Monetory penalties 9.—(1) Where the Registrar determines that an insurer has not met the requirements of this Directive, the Registrar may impose administrative penalties under the Financial Services Act. Cap. 44:05

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(2) Notwithstanding subparagraph (1), where an insurer has not met the requirements of this Directive, the Registrar may impose the following administrative penalties—

(a) where an insurer or reinsurer fails to maintain sufficient technical reserves as required under this Directive, a fine of five million Kwacha and fifteen percent of the total amount by which the technical reserve was understated;

(b) where an insurer or reinsurer fails to obtain the Registrar’s approval in respect of material deviations or changes from its reserving methodology, a fine of ten million Kwacha; and

(c) for failure to submit the technical reserves valuation report and any other information within the required deadline, a fine of five million Kwacha.

Made this 14 day of June, 2019.

(FILE NO. FIN/PFSPD/03/04)

DALITSO KABAMBE, PhD
Registrar of Financial Institutions

GOVERNMENT NOTICE NO. 34

INSURANCE ACT
(Cap 47:01)