Regulation on the Calculation of Minimum Solvency Margin, Capital Adequacy and Guarantee Fund for Non-Life Insurers

Based on Article 35, paragraph 1, sub-paragraph 1.1, of Law No. 03/L-209 on the Central Bank of the Republic of Kosovo (Official Gazette of the Republic of Kosovo, No. 77/16 August 2010) and Articles 4, paragraph 3, 60, 61, and 62 of Law 05/L-045 on Insurance (Official Gazette of the Republic of Kosovo, No. 38/24 December 2015), the Board of the Central Bank, at the meeting held on May 30, 2019, approved this:

REGULATION ON THE CALCULATION OF THE MINIMUM SOLVENCY MARGIN, CAPITAL ADEQUACY AND GUARANTEE FUND FOR NON-LIFE INSURERS

Article 1
Purpose and Scope

1. This Regulation determines the methods for calculating the minimum solvency margin, capital adequacy, and guarantee fund for non-life insurers, as well as the deadlines, formats, content, and manner of reporting to the Central Bank of Kosovo (CBK). Furthermore, this Regulation describes in more detail the other elements included in the calculation of capital, such as:
   1.1. Detailed characteristics of dependent debt instruments, and
   1.2. Illiquid assets and other elements deductible from capital.
2. This Regulation applies to all insurers and branches of foreign insurers licensed by the Central Bank of the Republic of Kosovo to conduct business in Kosovo.

Article 2
Definitions

1. All terms used in this Regulation have the same meaning as the terms defined in Article 3 of Law 05/L-045 on Insurance (hereinafter: Insurance Law) and/or with the following definitions for the purpose of this Regulation:
   1.1. Guarantee Fund - represents the amount of funds required in cash, or an equivalent amount in cash value, which must be maintained at all times by insurers and branches of foreign insurers licensed in the Republic of Kosovo under the Insurance Law, and is available only in the event that the insured is at risk due to insolvency or the inability of insurers to fulfill financial obligations.

1.2. Guarantee Fund Account - refers to a trust account created in the name of the guarantee fund which must be maintained at all times and cannot be touched without the approval of the CBK.
1.3. Solvency Margin - refers to the amount of the insurer's assets exceeding any obligation or liability, deducting from them any non-touchable assets.
1.4. Available Capital - refers to the amount of basic capital and additional capital defined by this Regulation, including any deductible element in the solvency margin calculation.
1.5. Required Solvency Margin Level - refers to the minimum amount of required available capital that must be maintained at all times according to the requirements of this Regulation.
1.6. Deductible Elements - refers to the amount of capital elements that are not accepted in the solvency margin calculation.
1.7. Gross Written Premiums - refers to the sum of gross written premiums excluding VAT from direct insurance, reinsurance, and co-insurance for a financial year, deducting from this sum the amount of cancelled premiums for the financial year.
1.8. Gross Earned Premiums - refers to the sum of premiums earned during a financial year without deducting the share of the reinsurer and/or co-insurer1.
1.9. Gross Incurred Losses - refers to the sum of losses incurred during an accounting period without deducting the share of the reinsurer and/or co-insurer.
1.10. Net Incurred Losses - refers to the sum of losses incurred during an accounting period after deducting the share from reinsurers and/or co-insurers2.

Article 3
Insurer Capital

1. Insurers must at all times possess sufficient capital to maintain their solvency.
2. Solvency consists of the insurer's assets free from any foreseeable obligation/liability, deducting from them any deductible asset according to this Regulation.
3. In the calculation of insurer capital, the basic capital elements defined in Article 4 of this Regulation, additional capital defined in Article 5 of this Regulation, and capital deduction elements defined in Article 6 of this Regulation must be taken into account. Capital calculated in this manner will be recognized as available capital.

1 The share of the reinsurer and/or co-insurer refers to – the portion ceded in reinsurance and/or co-insurance and any change in the reserve for unearned premium belonging to reinsurance and/or co-insurance.
2 Refers to amounts receivable from the reinsurer and/or co-insurer for losses, as well as any change in reserves for losses belonging to reinsurers and/or co-insurers.

Article 4
Basic Capital

1. In the calculation of the basic capital of insurers, the following elements are included:
   1.1. Paid-in share capital of insurers consisting mainly of issued ordinary shares;
   1.2. Capital reserves (legally recognized reserves and free reserves), which do not correspond to obligations arising from insurance contracts;
   1.3. Retained earnings from previous accounting periods, the profit of the last accounting period verified by the external auditor and approved by the General Assembly of Shareholders, after deducting the payable dividend.
2. In the calculation of the basic capital of insurers, the following elements will be considered deductible elements:
   1.1. Own shares repurchased;
   1.2. Investments in non-touchable assets (intangible);
   1.3. Carried forward losses and current year losses (operational);
   1.4. The difference between discounted and undiscounted loss reserves (in cases where applied and permitted by the CBK).

Article 5
Additional Capital

1. In the calculation of the additional capital of the insurer, the following elements are included:
   1.1. Share capital of the insurer, which consists of the issuance of preferred shares according to their nominal paid-in amount in the form of cash in the equity of the insurer.
   1.2. Dependent debt instruments, defined in Articles 15, 16, 17 of this Regulation.
   1.3. Capital reserves related to preferred shares,
   1.4. Other capital elements, different from those included in basic capital, but which by nature are part of the insurer's capital.

2. Dependent debt instruments are securities and other financial instruments that authorize the holder in the event of the issuer's bankruptcy or liquidation for payment, only after the claims of other creditors have been settled. This instrument will be accepted in the calculation of additional capital only if it meets the conditions specified in Articles 15, 16, and 17 of this Regulation.

3. Other elements mentioned in point 1.4 of this Article are reserves arising from the valuation of assets that are not of an extraordinary nature, such as: reserves from the valuation of land and buildings, reserves from the valuation of financial assets, and reserves from the valuation of other assets.

4. In the calculation of insurer capital, the additional capital elements specified in paragraph 1 of this Article may be taken into account up to a maximum of 50% of the available capital or the minimum required solvency margin, calculated on a premium basis and loss basis, whichever is lower.

5. Regardless of the provisions of paragraph 4 of this Article, dependent debt instruments with a fixed maturity period and paid-in capital based on preferred shares with a specific duration will be taken into account only up to a maximum of 25% of the basic capital or the minimum required solvency margin calculated on a premium and loss basis according to this Regulation, whichever is lower.

Article 6
Deductible Elements in Capital Calculation

1. In the calculation of insurer capital (available capital) which consists of the sum of basic capital and additional capital, the following elements will be deducted:
   1.1. Participations or ownership in other insurance companies, reinsurance, insurance holding groups, banks and/or branches of foreign banks, brokerage firms, administrative companies, and other financial institutions;
   1.2. Investments in dependent debt instruments and other investments in the entities mentioned in point 1.1 of this Article which, for the purpose of compliance with the capital adequacy requirements of these entities, will be taken into account in the calculation of their capital;
   1.3. Illiquid assets;
2. Illiquid assets defined in paragraph 1.3 of this Article are:
   1.1. Shares not listed on regulated markets;
   1.2. Loans, receivables, and all transactions with related parties, except for transactions made with reinsurers in the name of insurance activities;
   1.3. Loans from and to brokers and agents;
   1.4. Receivables from premiums and receivables from reinsurance over 180 days;
   1.5. Other debtors and other net receivable accounts from provisioning, overdue by more than 365 days, which do not arise directly from insurance activities;
   1.6. Claims from debtors who are in bankruptcy proceedings, and/or claims arising from investments made in an entity that is subject to bankruptcy procedures;
   1.7. Claims or demands on a contestable legal basis;
   1.8. Long-term investments in property and buildings and rights to immovable property which do not meet the conditions according to Article 7, paragraph 1, point c) of the Regulation on the Investment of Assets to Cover Technical and Mathematical Provisions and the Investment of Share Capital, and which were made without the prior approval of the CBK;
   1.9. Other material investments for which the insurer does not possess the necessary documentation on ownership;
   1.10. Deferred tax assets;
   1.11. Prepaid expenses, except for deferred acquisition costs defined by the CBK Directive in force "on the calculation and registration of deferred costs of purchase in Financial Statements"

1.12 50% of the total amount of other assets, which are not free from any obligation or foreseeable liability;
1.13 Other assets, which are not easily convertible into cash at the time it is needed to fulfill financial obligations when they mature.

Article 7
Capital Adequacy, Required Solvency Margin Level

1. The capital of insurers who conduct business with non-life insurance classes as well as the capital of insurers who conduct business in the field of reinsurance must not be lower than the required solvency margin level of insurers.
2. The required solvency margin level of insurers is the highest amount between the guarantee fund defined in Article 8 of this Regulation and 150 percent of the minimum solvency margin defined in this Article, whichever is higher between the premium-based or loss-based calculation.
3. The premium-based solvency margin (solvency) will be calculated as follows:
   3.1. The sum of insurance premiums belonging to a financial year up to 10 million Euro will be multiplied by 0.18, while any amount exceeding 10 million Euro will be multiplied by 0.16, where insurance premiums in this case will consist of the sum of written premiums or the sum of gross earned premiums without deducting the share of reinsurance and/or co-insurance, whichever of these is higher;
   3.2. The sum of products multiplied by the respective factors according to point 3.1 will be multiplied by the ratio resulting between:
   3.2.1. The sum of gross incurred losses over the last three years (unpaid losses plus any change in the loss reserve), after deducting recoverable amounts3 from reinsurance and co-insurance, and,
   3.2.2. The sum of gross incurred losses over the last three years (unpaid losses plus any change in the loss reserve), without deducting recoverable amounts from reinsurance and co-insurance.
   3.2.3. The result obtained from this ratio in no case can result in less than 0.5. If this ratio is smaller than 0.5, then the sum of products from point 3.2 of paragraph 3 of this Article will be multiplied by 0.5.
   3.3. In the calculation of the sum of insurance premiums for a financial year, premiums related to insurance classes 11, 12, and 13 specified in Article 7 of the Insurance Law will be increased by 50%.
   3.4. In the calculation of the sum of insurance premiums for a financial year, premiums will also be increased by the sum of premiums accepted from reinsurance.
   3.5. From this sum, the total sum of insurance premiums, cancelled for the last financial year, will be deducted.
4. The loss-based solvency margin (solvency) will be calculated as follows:

3 Includes all amounts receivable from reinsurers and co-insurers for losses, including any change in loss reserves belonging to reinsurers and/or co-insurers.

4.1. The annual average of gross paid loss amounts in the last three financial years including any change in loss reserves without deducting loss amounts covered by reinsurers and/or co-insurers, up to 7 million Euro will be multiplied by 0.26, while the amount exceeding 7 million Euro will be multiplied by 0.23.
4.2. The sums of products multiplied by the factors mentioned above in point 3.1 of paragraph 3 of this Article will be multiplied by the ratio resulting between;
4.2.1. The sum of gross paid losses for the last three financial years (including any change in loss reserves), after deducting recoverable amounts4 from reinsurance and co-insurance, and,
4.2.2. The sum of gross paid losses (including any change in loss reserves), without deducting recoverable amounts from reinsurance and/or co-insurance.
4.3. In the calculation of annual sums of gross incurred losses, loss amounts related to insurance classes 11, 12, and 13 specified in Article 7 of the Insurance Law will be increased by 50%;
4.4. In the calculation of the annual sum of gross incurred losses, the sum of incurred losses belonging to reinsurance and/or co-insurance is also added.
5. In the calculation of sums for gross incurred losses specified in paragraph 3, point 3.1 of this Article, the arithmetic average for the last three financial years will be used as a reference.
6. Except from paragraph 4 of this Article, in the case where insurers insure risks against credit, storm, hail, or ice, as a reference in the calculation of gross sums of incurred losses, the arithmetic average for the last seven financial years will be taken.
7. Except from paragraph 1 of this Article, the required solvency margin for the first year of the insurer's activity will be calculated in accordance with paragraph 2 of this Article.
8. In the case where the required solvency margin of the insurer calculated for the current financial year is lower than the required solvency margin calculated for the previous financial year, the required solvency margin for the operational year must be at least equal to the solvency margin of the previous year multiplied by the ratio, which results between the sum of loss provisions pending at the end of the financial year and the sum of loss provisions pending at the beginning of the financial year, provided that this ratio in no case should not be higher than 1. In this case, in the calculation of this ratio, net loss amounts from reinsurance must be taken as a basis.

Article 8
Guarantee Fund

1. The Guarantee Fund will consist of basic capital defined in Article 4 and additional capital according to Article 5 of this Regulation and is subject to approval by the CBK.

4 Includes all amounts receivable from reinsurers and co-insurers for losses, including any change in loss reserves belonging to reinsurers and/or co-insurers.

2. The Guarantee Fund in no case must not be less than 1/3 of the minimum required solvency margin level defined in Article 7 paragraph 4 of this Regulation.
3. Regardless of the provisions in paragraphs 1 and 2 of this Article:
   3.1. The Guarantee Fund of an insurer licensed to conduct insurance business in Kosovo for non-life insurance cannot be lower than 2,200,000 (two million two hundred thousand) Euro;
   3.2. In the case where one or more risks are included in classes 10 to 15 of Article 7 of the Insurance Law, then the Guarantee Fund cannot be lower than 3,200,000 (three million two hundred thousand) Euro.
4. For the purpose of its guarantee, the minimum required amount of the guarantee fund must be kept in one of the bank accounts designated as "Guarantee Fund Account", in banks and/or branches of foreign banks licensed to operate in the territory of the Republic of Kosovo. The distribution of the funds of the guarantee fund will be made as follows:
   4.1. 10% of the guarantee fund must be kept in a CBK account,
   4.2. No more than 30% of the guarantee fund in a trust account in a commercial bank specified in paragraph 4 of this Article.
5. The guarantee fund can only be invested in bank deposits and treasury bills issued by the Government of the Republic of Kosovo and cannot be touched without prior approval of the CBK.
6. Any transaction related to the guarantee fund cannot be made without obtaining prior approval of the CBK and after the insurer has submitted the request with all the necessary information required by the CBK. Any transaction is carried out only through bank transfers.

Article 9
Source of Capital

1. To verify the source of capital, the insurer submits to the CBK the following information:
   1.1. For legal persons:
   1.1.1. Evidence of origin - source of creation of capital, such as the external auditor's report, annual financial statements, gifts, or other sources intended to be used for the purchase of shares of the insurer;
   1.1.2. Certificate issued by competent authorities, which provides data on the balance sheet of the legal person and on the fulfillment of tax obligations.
   1.2. For natural persons:
   1.2.1. Evidence for the source of creation of capital such as purchase or sale, gift, salary, monetary deposits in banks, or other certificates for the source of creation of capital;
   1.2.2. Certificate proving the fulfillment of tax obligations.

2. Contributions to the insurer's capital must not originate from funds borrowed from the public, bank loans, or other loans, the origin of which is illegal and unknown.

3. For the purpose of preventing money laundering, the CBK in cooperation with the Kosovo Financial Intelligence Unit may request additional information from the shareholders of the insurer during the verification of the source of capital.

Article 10
Calculation and Reporting

1. An insurer must regularly calculate and prepare reports on a quarterly and annual basis regarding:
   1.1. Capital;
   1.2. The guarantee fund;
   1.3. The required solvency margin level;
2. Insurers will calculate the level of capital and the guarantee fund on a quarterly basis, on the last day of the calendar quarter.
3. The data which will be used to fill in the quarterly reports regarding the required solvency margin level covering the period from three to seven years, must be in accordance with these circumstances:
   3.1. For the first quarter, data from the period 1 April of the previous year (respectively, the arithmetic average for three or seven previous years of the same accounting period) up to 31 March of the current year (operational);
   3.2. For the second quarter, data from the period 1 July of the previous year (respectively, the arithmetic average for three or seven previous years of the same accounting period), up to 30 June of the current year (operational);
   3.3. For the third quarter, data from the period 1 October of the previous year (respectively, the arithmetic average for three or seven previous years of the same accounting period) up to 30 September of the current year (operational).
4. Insurers must submit to the CBK the completed reports according to the requirements in point 1 of this Article, for the first, second, and third quarters within one month after the end of the reporting quarter.
5. Insurers will submit to the CBK the completed reports according to the requirements in point 1 of this Article, for the full accounting year within one month after the end of the calendar year.
6. Insurers will submit to the CBK the forms mentioned above;
   6.1. In electronic form;
   6.2. In written form (physical copy), signed by the persons responsible for filling out these forms and other responsible persons. Forms used for the calculation of capital adequacy must be signed by the certified actuary appointed by the insurer.

Article 11
Capital Adequacy for Newly Licensed Insurance Companies

1. Insurers who have received a license to conduct business in non-life insurance must submit to the CBK the calculation for the first, second, and third year of the solvency margin (capital adequacy) on a premium and loss basis, after the expiration of the first, second, and third year from the start of their activity.
2. Insurers will calculate the first, second, and third year of the solvency margin on a premium and loss basis based on relative data for the first, second, and third year of business.
3. Except from paragraph 1 and 2 of this Article, the calculation of the solvency margin for the first year of business will be made only on a premium basis as specified in Article 7, paragraph 6 of this Regulation.
4. In the second and third year of business, insurers will calculate the solvency margin in accordance with paragraph 2 of this Article.
5. The calculation of the solvency margin (capital adequacy) on a loss basis for the second and third year will be based on:
   5.1. Data from the first and second year of business for the calculation of the solvency margin (capital adequacy) for the second year;
   5.2. Data from the first, second, and third year of business for the calculation of the solvency margin (capital adequacy) for the third year.
6. Except from paragraph 5 of this Article, an insurer who insures risks mainly related to credit risk, storm, hail, and ice must calculate the solvency margin on a loss basis for the moving three-year period, until the expiration of at least seven years from the start of its activity. The first calculation of the solvency margin on a loss basis for the seven-year period will be made after the expiration of at least seven years from the start of the insurer's activity.

Article 12
Measures taken by the Board of Directors of Insurers to Ensure/Achieve the Required Level of Solvency

1. In the event that the insurer's capital is not sufficient, due to an increase