Regulation on Limits and Requirements for Reinsurance with Foreign Insurers, Reinsurance Policies, and Catastrophic Risks

“Approved”
Central Bank of the Republic of Azerbaijan
Resolution No. 54/1
3 November 2023
Regulation on setting limits and requirements for reinsurance of risks with foreign insurers, as well as requirements for insurers’ and reinsurers’ reinsurance policies and reinsurance of catastrophic risks

1. General provisions
   This Regulation has been developed in accordance with Articles 10.2, 10.6 and 78.2 of the Law of the Republic of Azerbaijan “On Insurance Activity” (“Law”) and establishes the limits and requirements for reinsurance of risks with foreign insurers, as well as the minimum requirements for insurers’ and reinsurers’ reinsurance policies and reinsurance of catastrophic risks.
2. Definitions
   2.1. For the purposes of this Regulation, the following terms shall have these meanings:
   2.1.1. lead reinsurer is a foreign insurer responsible for negotiating the terms and conditions
   of a reinsurance contract (contracts) involving more than one foreign insurer who have agreed to and bound by the same terms and conditions;
   2.1.2. credit rating means a rating assigned to foreign insurers by relevant internationally
   recognized rating agencies regarding the ability to fulfill their long-term financial obligations, as specified in Annex No. 1 to this Regulation;
   2.1.3. rating group – means the classification of credit quality of foreign insurers into 4 groups,
   starting from group 0, characterized by minimal credit risk, up to to group 4, categorized by very high credit risk, as specified in Annex No. 1 to this Regulation;
   2.1.4. Solvency II regime is an EU regulatory framework for implementing risk-based
   supervision of insurers operating in the EU;
   2.1.5. Solvency II equivalent supervisory regimes are insurance supervisory regimes
   recognized by the European Commission and published on its official website as equivalent to the EU Solvency II Regime;
   2.1.6. solvency ratio is a financial metric that measures the ability of foreign insurers within the
   scope of the Solvency II regime and Solvency II equivalent supervisory regimes to meet their financial obligations, as calculated under the Solvency II directive and acts adopted thereunder;
   2.1.7. catastrophic risk means earthquake for the purposes of this Regulation;

2.1.8. probable maximum loss (hereinafter “PML”) is the probable maximum loss per event
that may occur as a result of a catastrophic risk occurring once;
2.1.9. concentration risk - for the purposes of this Regulation, the sum of insurance risks
concentrated at least by country, region, as well as insurer and foreign insurer;
2.1.10. high-risk zones are high-risk zones determined in accordance with Article 9.5 of the
Law of the Republic of Azerbaijan "On Prevention of Legalization of Criminally obtained Property and the Financing of Terrorism" and countries and territories with preferential taxation as determined by Decree No. 1505 of the President of the Republic of Azerbaijan "On approval of the list of countries and territories with preferential taxation" dated July 11, 2017;
2.1.11. Protection and Indemnity Club (hereinafter “P&I Club”) is an association of
shipowners accepting risks to insurance and (or) to reinsurance;
2.2. The terms "insurer" and "foreign insurer" used in this Regulation shall also include
reinsurers and foreign reinsurers, respectively.
3. Requirements for ceding risks to foreign insurers
3.1. Insurer may reinsure insurance risks with foreign insurers that have a license (permit) to
conduct reinsurance activities and meet the following requirements:
3.1.1. foreign insurers shall have credit rating as provided in Annex No. 1 to this Regulation,
issued within the last 12 calendar months prior to conclusion of the reinsurance contract;
3.1.2. foreign insurers that do not meet the requirements of subsection 3.1.1 of this Regulation
shall have a solvency ratio in relation to relevant credit rating in accordance with Annex No. 1 to this Regulation, assigned within the last 12 calendar months prior to conclusion of the reinsurance contract.
3.2. When reinsuring insurance risks with foreign insurers specified in section 3.1 of this
Regulation, the insurer shall meet the following requirements:
3.2.1. in the case of proportional reinsurance contracts, participation of every foreign reinsurer
having credit rating of group 4 as indicated in Annex No. 1 hereof shall not be more than 10% of the total sum insured under the insurance contract, and participation of all foreign reinsurers meeting the same criteria shall not exceed 20% of the total sum insured under one insurance contract;
3.2.2. in the case of non-proportional reinsurance agreement, reinsurance is permitted only
with foreign insurers of group 3 or higher as specified in Annex No.1 to this Regulation;
3.2.3. taking into account the requirement of subsection 3.2.4 hereof, reinsurance of risks with
foreign insurers located in high-risk zones shall be permitted only if such foreign insurers are included in credit rating group 0 or 1 as specified in Annex No.1 hereto;
3.2.4. reinsurance of catastrofic risks shall be permitted only with foreign insurers having a
credit rating. In this case, the foreign insurer shall have a credit rating equivalent to group 3 or

higher as specified in Annex 1 to this Regulation, and when located in high-risk zones, to group 0 or 1.
3.3. If the reinsurance agreement envisages the existence of lead reinsurer, then this reinsurer’s
credit rating shall include in credit rating group 3 or higher as specified in Annex No.1 to this Regulation.
3.4. In respect to subsection 3.1.1 of this Regulation, the lowest credit rating in force shall be
considered.
3.5. In respect to subsection 3.1.2 of this Regulation, the solvency ratio determined based on the
latest official report (solvency and financial condition) published by foreign insurers themselves on their official websites shall be considered.
4. Reinsurance of catastrophic risks
4.1. If the insurer insures (reinsures) catastrophic risks, it shall calculate the PML amount for
the risks that will occur over a period of at least 250 years in relation to accumulated catastrophic risks under all valid insurance (reinsurance) contracts.
4.2. The insurer may retain with itself that portion of the PML amount for catastrophic risks
not exceeding 20 percent of its aggregate capital. This is applied to the lowest amount of aggregate capital calculated during the 12 calendar months preceding the reinsurance contract.
4.3. The insurer shall submit quarterly reports to the Central Bank of the Republic of
Azerbaijan regarding accumulated catastrophic risks. The reports shall be submitted through the electronic system of the Central Bank of the Republic of Azerbaijan within 20 (twenty) days after the end of the relevant quarter, approved by the enhanced electronic signature of the Chairman of the Board of Directors of the insurer (or the person temporarily performing his/her duties) in accordance with the form specified in Annex 2 of this Regulation.
5. Determination of reinsurance policy
5.1. Taking into account the requirements of this Regulation, the insurer shall determine the
policy for reinsurance operations at least in accordance with the following guidelines:
5.1.1. types of reinsurance contracts intended to be concluded with respect to insurance
classes;
5.1.2. the insurer's expected retention for each class;
5.1.3. criteria for selecting insurers and foreign insurers, as well as insurance brokers and
obtaining reinsurance quotes;
5.1.4. mechanisms and procedures for monitoring the financial condition of insurers and
foreign insurers, including, at a minimum, analysis of financial statements and credit ratings;
5.1.5. mechanisms and procedures for monitoring the reinsurance program and reviewing the
continuity of sufficient (adequate) reinsurance coverage.

5.2. The insurer shall determine its risk and loss profiles in relation to classes of insurance.
5.3. The insurer's reinsurance policy shall specify the objectives of the reinsurance program
and ensure that the reinsurance program established is consistent with the insurer's objectives and risk profile.
5.4. The insurer's reinsurance policy shall reflect the requirement that the insurer that has
insured (reinsured) the risks under the insurance (reinsurance) contract shall not accept those risks for reinsurance.
5.5. The insurer’s reinsurance policy shall have the function of reducing the possible negative
impact of losses on insurance and reinsurance contracts.
5.6. If the insurer's reinsurance policy changes, the insurer shall conduct an analysis of the
impact of such changes on its financial condition and report thereon to the Board of Directors each calendar year.
5.7. The insurer shall measure the concentration risk with respect to risks ceded to the
reinsurer and submit reports thereon to the Board of Directors each calendar year.
5.8. The insurer shall update the reinsurance policy on the basis of the report submitted in
accordance with sections 5.6 and 5.7.
6. Closing provisions
6.1. The requirements set out in section 3 of this Regulation shall not apply to the reinsurance
of risks by P&I Clubs and to the reinsurance of insurance risks within the travel insurance class.
6.2. The requirements of section 3 of this Regulation shall apply to reinsurance contracts
concluded, continued and renewed after the date of entry into force of this Regulation.
6.3. Relations under reinsurance contracts concluded for more than 1 (one) year prior to the
entry into force of this Regulation shall be brought into compliance with the requirements of
section 3 of this Regulation within 1 (one) year from the date of its entry into force.
6.4. Insurer shall ensure the application of the requirements of section 4 of this Regulation to
all insurance (reinsurance) contracts within 3 (three) months from the date of entry into force of this Regulation.

Annex No. 1
to the Regulation on setting limits and requirements for reinsurance of risks with foreign insurers, as well as requirements for insurers’ and reinsurers’ reinsurance policies and reinsurance of catastrophic risks Credit ratings of foreign insurers Credit rating group Credit ratings of foreign insurers Solvency ratio Standard& Poor’s (S&P) Fitch Ratings Inc. Moody’s Investors Service A.M. Best Company 0 AAA AAA Aaa aaa ≥ 196% 1 AA+ AA+ Aa1 aa+ AA AA Aa2 aa AA- AA- Aa3 aa￾2 A+ A+ A1 a+ A A A2 a ≥ 175% və <196% A- A- A3 a￾3 BBB+ BBB+ Baa1 bbb+ BBB BBB Baa2 bbb ≥ 122% və <175% BBB- BBB- Baa3 bbb￾4 BB+ BB+ Ba1 bb+ BB BB Ba2 bb ≥ 100% və <122% BB- BB- Ba3 bb-

Annex No. 2
to the regulation on setting limits and requirements for reinsurance of risks with foreign insurers, as well as requirements for insurers’ and reinsurers’ reinsurance policies and reinsurance of catastrophic risks CATASTROPHIC RISK ACCUMULATION REPORT (QUARTERLY) Insurer (reinsurer) name ______________________________________________________ Insurance class _______________________________________________________________ Reporting period _____________________________________________________________ Administrative territorial unit identification number Administrative territorial unit name Number of insurance contracts Sum insured against catastrophic risks Sum insured for catastrophic risks covered by proportional obligatory reinsurance contracts Catastrophic risk retention AZE_ABS Absheron District AZE_AGA Aghstafa District AZE_AGC Aghjabadi District AZE_AGM Aghdam District AZE_AGS Aghdash District AZE_AGU Aghsu District AZE_AST Astara District AZE_BA Baku city AZE_BAB Babak District AZE_BAL Balakan District AZE_BAR Barda District AZE_BEY Beylagan District AZE_BIL Bilasuvar District

AZE_CAB Jabrail District
AZE_CAL Jalilabad District
AZE_CUL Julfa District
AZE_DAS
Dashkasan
District
AZE_FUZ Fuzuli District
AZE_GA Ganja city
AZE_GAD Gadabay District
AZE_GOR Goranboy District
AZE_GOY Goychay District
AZE_GYG Goygol District
AZE_HAC Hajigabul District
AZE_IMI Imishli District
AZE_ISM Ismayilli District
AZE_KAL Kalbajar District
AZE_KAN Kangarli District
AZE_KUR Kurdamir District
AZE_LA Lankaran city
AZE_LAC Lachin District
AZE_LER Lerik District
AZE_MAS Masalli District
AZE_MI Mingachevir city
AZE_NA Naftalan city
AZE_NEF Neftchala District
AZE_NV Nakhchivan city
AZE_OGU Oghuz District
AZE_ORD Ordubad District
AZE_QAB Gabala District
AZE_QAX Gakh District
AZE_QAZ Gazakh District
AZE_QBA Guba District
AZE_QBI Gubadli District
AZE_QOB Gobustan District
AZE_QUS Gusar District
AZE_SA Shaki city
AZE_SAB Sabirabad District
AZE_SAD Sadarak District

AZE_SAH Shahbuz District
AZE_SAL Salyan District
AZE_SAR Sharur District
AZE_SAT Saatli District
AZE_SBN Shabran District
AZE_SIY Siyazan District
AZE_SKR Shamkir District
AZE_SM Sumgayit city
AZE_SMI Shamakhi District
AZE_SMX Samukh District
AZE_SR Shirvan city
AZE_SUS Shusha District
AZE_TAR Tartar District
AZE_TOV Tovuz District
AZE_UCA Ujar District
AZE_XA Khankendi city
AZE_XAC
Khachmaz
District
AZE_XCI Khojali District
AZE_XIZ Khizi District
AZE_XVD
Khojavand
District
AZE_YAR Yardimli District
AZE_YE Yevlakh city
AZE_ZAN Zangilan District
AZE_ZAQ Zagatala District
AZE_ZAR Zardab District
Total