NOTES TO FINANCIAL STATEMENT
Risk management
The Company monitors and manages the financial risks relating to its business and operations. These risks include insurance risk, capital risk, credit risk, interest rate risk, market risk, foreign currency risk and liquidity risk.
The Company seeks to minimize the effects of these risks by diversifying the sources of its capital. It maintains timely reports about its risk management function and monitors risks and policies implemented to mitigate risk exposures.
Insurance risk
The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount of the resulting claim. By the nature of an insurance contract, this risk is random and therefore unpredictable.
For a portfolio of insurance contracts where the theory of probability is applied to pricing and provisioning, the principal risk that the company faces under its insurance contracts is that the actual claims and benefit payments exceed the estimated amount of the insurance liabilities. This could occur because the frequency or severity of claims and benefits are greater that estimated. Insurance events are random and the actual number and amount of claims and benefits will vary from period to period from the estimate established using statistical techniques.
Experience shows that the larger the portfolio of similar insurance contracts, the smaller the relative variability about the expected outcome will be. In addition, a more diversified portfolio is less likely to be affected across the board by a change in any subset of the portfolio. The company has developed its insurance underwriting strategy to diversify the type of insurance risks accepted and within each of these categories to achieve a sufficiently large population of risks to reduce the variability of the expected outcome.
The Company manages risks through its underwriting strategy, adequate reinsurance arrangements and proactive claims handling. The underwriting strategy attempts to ensure that the underwritten risks are well diversified in terms of type and amount of risk, industry and geography. Underwriting limits are in place to enforce appropriate risk selection criteria.
Underwriting strategy
The Company’s underwriting strategy is to build balanced portfolios based on a large number of similar risks. This reduces the variability of the portfolio’s outcome.
The underwriting strategy is set out by the Company that establishes the classes of business to be written, the territories in which business is to be written and the industry sectors in which the Company is prepared to underwrite. This strategy is cascaded by the business units to individual underwriters through detailed underwriting authorities that set out the limits that any one underwriter can write by line size, class of business, territory and industry in order to ensure appropriate risk selection within the portfolio.
Reinsurance strategy
The Company reinsures a portion of the insurance risks it underwrites in order to control its exposure to losses and protect capital resources.
The Company has a Reinsurance department that is responsible for setting the minimum-security criteria for acceptable reinsurance and monitoring the purchase of reinsurance by the business units against those criteria. The department monitors developments in the reinsurance program and its ongoing adequacy.
The Company enters into a combination of proportionate and non-proportionate reinsurance treaties to reduce the net exposure to the Company. In addition, underwriters are allowed to buy facultative reinsurance in certain specified circumstances.
Capital risk
The Company’s objectives when managing capital are:
- To comply with the insurance capital requirements required by UAE Federal Decree Law No. (48) of 2023 Regulating Insurance Activities (previously Federal Law No. 6 of 2007, as amended), concerning the formation of Insurance Authority of UAE.
- To safeguard the company’s ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders.
- To provide an adequate return to shareholders by pricing insurance contracts commensurate with the level of risk.
In UAE, the local insurance regulator specifies the minimum amount and type of capital that must be held by the company in relation to its insurance liabilities. The minimum required capital (presented in the table below) must be maintained at all times throughout the year. The Company is subject to local insurance solvency regulations which it has not been complied with during the year.
The table below summarizes the minimum regulatory capital of the Company and the total capital held.
| (Restated) | ||
| 31 December 2023 | 31 December 2022 | |
| AED | AED | |
| Total capital and reserves | 18,838,650 | 61,411,501 |
| Minimum regulatory capital (Note 1.1) | 100,000,000 | 100,000,000 |
The CBUAE has issued resolution no. 42 for 2009 setting the minimum subscribed or paid-up capital of AED 100 million for establishing insurance companies and AED 250 million for reinsurance companies. The resolution also stipulates that at least 75 percent of the capital of the insurance companies established in the UAE should be owned by UAE or GCC national individuals or corporate bodies. The Company is in compliance with these rules.
The solvency regulations identify the required Solvency Margin to be held in addition to insurance liabilities. The Solvency Margin (presented in the table below) must be maintained at all times throughout the year. The Company is subject to solvency regulations which it has complied with during the year. The Company has incorporated in its policies and procedures the necessary tests to ensure continuous and full compliance with such regulations. The table on the next page summarizes the Minimum Capital Requirement, Minimum Guarantee Fund and Solvency Capital Requirement of the Company and the total capital held to meet these required Solvency Margins
| 2023* | 2022** | |
| AED | AED | |
| Minimum Capital Requirement (MCR) | 100,000,000 | 100,000,000 |
| Solvency Capital Requirement (SCR) | 41,753,000 | 55,752,000 |
| Minimum Guarantee Fund (MGF) | 30,489,000 | 36,938,000 |
| Own Funds
Basic Own Funds Ancillary Own Funds |
5,299,000
– |
127,069,000
– |
| MCR Solvency Margin- Minimum Capital Requirement (deficit)/surplus | (94,701,000) | 27,069,000 |
| SCR Solvency Margin- Solvency Capital Requirement (deficit)/surplus | (36,454,000) | 71,316,000 |
| MGF Solvency Margin- Minimum Guarantee Fund (deficit)/surplus | (25,189,000) | 90,131,000 |
*Indicates figures as at 30 September 2023.
**Based on previous year’s audited E-form before restatement adjustments.
Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the company.
Key areas where the Company is exposed to credit risk are:
- Amounts due from reinsurers in respect of claims already paid.
- Amounts due from insurance contract holders.
- Amounts due from insurance intermediaries.
- Amounts due from banks for its balances and fixed deposits.
The Company has adopted a policy of only dealing with creditworthy counterparties as a means of mitigating the risk of financial loss from defaults. The Company’s exposure and the credit ratings of its counterparties are continuously monitored, and the aggregate value of transactions concluded is spread amongst approved counterparties. Credit exposure is controlled by counter party limits that are reviewed and approved by the management annually.
Re-insurance is used to manage insurance risk. This does not, however, discharge the company’s liability as primary insurer. If a re-insurer fails to pay a claim for any reason, the company remains liable for the payment to the policy holder. The creditworthiness of re-insurers is considered on an annual basis by reviewing their financial strength prior to finalization of any contract.
The Company maintains record of the payment history for significant contract holders with whom it conducts regular business. The exposure to individual counterparties is also managed by other mechanisms, such as the right of offset where counterparties are both debtors and creditors of the Company. Management information reported to the company includes details of provisions for impairment on insurance receivables and subsequent write offs. Exposures to individual policy holders and groups of policy holders are collected within the ongoing monitoring of the controls. Where there exists significant exposure to individual policy holders, or homogenous groups of policy holders, a financial analysis equivalent to that conducted for re-insurers is carried out by the Company.
The carrying amount of financial assets recorded in the financial statements, which is net of expected credit loss, represents the Company’s maximum exposure to credit risk for such receivables and liquid funds.
Interest rate risk
Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rate. The Company is exposed to interest rate risk on call account, fixed deposits with bank, financial assets such as bonds. The interest rates are subject to periodic revisions.
The Company generally manages to minimize the interest rate risk by closely monitoring the market interest rates and investing in those financial assets in which such risk is expected to be minimal.
The Company is exposed to interest rate risk on:
(I) Liability for incurred claims; and
(li) Asset for incurred claims.
The below tables show the impact of 5% change in risk adjustment and discounting on liability for incurred claims and assets for incurred claims:
| 31 December 2023 | Impact on profit gross of reinsurance | Impact on profit net of reinsurance | Impact on equity gross of reinsurance | Impact on equity net of reinsurance |
| Risk Adjustment | ||||
| 5% increase | (186,350) | (105,249) | (186,350) | (105,249) |
| 5% decrease | 186,350 | 105,249 | 186,350 | 105,249 |
| Discounting | ||||
| 5% increase | 380,595 | 203,132 | 380,595 | 203,132 |
| 5% decrease | (380,595) | (203,132) | (380,595) | (203,132) |
| 31 December 2022 (Restated) | Impact on profit gross of reinsurance | Impact on profit net of reinsurance | Impact on equity gross of reinsurance | Impact on equity net of reinsurance |
| Risk Adjustment | ||||
| 5% increase | (176,149) | (72,581) | (176,149) | (72,581) |
| 5% decrease | 176,149 | 72,581 | 176,149 | 72,581 |
| Discounting | ||||
| 5% increase | 461,400 | 263,135 | 461,400 | 263,135 |
| 5% decrease | (461,400) | (263,135) | (461,400) | (263,135) |
Market risk
Market prices risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices, whether those changes are caused by factors specific to the individual instrument or its issue or factors affecting all instruments traded in the market.
Equity and debt price risk
Equity and debt price risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices, whether those changes are caused by factors specific to the individual security, or
its issuer, or factors affecting all securities traded in the market. The Company is exposed to equity and debt price risk with respect to its quoted equity and debt investments. The Company limits equity and debt
price risk by maintaining a diversified portfolio and by continuous monitoring of developments in the market. In addition, the Company actively monitors the key factors that affect stock and market movements, including analysis of the operational and financial performance of investees.
At the end of the reporting period, if the equity and debt prices are 10% higher / lower as per the assumptions mentioned below and all the other variables were held constant, the Company’s other comprehensive loss for the year ended 31 December 2023 would have increased / (decreased) by AED 1,110,804 (year ended 31 December 2022: AED 5,445,141).
Method and assumptions for sensitivity analysis:
- The sensitivity analysis has been done based on the exposure to equity and debt price risk as at the end of the reporting period.
- As at the end of the reporting period if equity and debt prices are 10% higher / lower on the market value uniformly for all equity and debt while all other variables are held constant, the impact on profit and other comprehensive loss for the year has been shown above.
- A 10% change in equity and debt prices has been used to give a realistic assessment as a plausible event.
Foreign currency risk
The Company undertakes certain transactions denominated in foreign currencies, which imposes sort of risk due to fluctuations in exchange rates during the year. The UAE Dirham is effectively pegged to the US Dollar, thus foreign currency risk occurs only in respect of other currencies. The company maintains policies and procedures to manage the exchange rate risk exposure.
Frequency and severity of claims
The Company manages insurance risks through its underwriting strategy, adequate reinsurance arrangements and proactive claims handling. The underwriting strategy attempts to ensure that the underwritten risks are well diversified in terms of type and amount of risk, industry and geography. Underwriting limits are in place to enforce appropriate risk selection criteria, as well as the use of reinsurance arrangements.
The Company has the right not to renew individual policies, re-price the risk, impose deductibles and reject the payment of a fraudulent claim for both short and long-term insurance contracts. Insurance contracts also entitle the Company to pursue third parties for payment of some or all costs (for example, subrogation).
The reinsurance arrangements include excess and catastrophe coverage. The effect of such reinsurance arrangements is that the Company should not suffer net insurance losses more than the limit defined in the Risk appetite statement in any one event. The risks are frequently reviewed individually and adjusted to reflect the latest information on the underlying facts, current law, jurisdiction, contractual terms and conditions, and other factors. The Company actively manages and pursues early settlements of claims to reduce its exposure to unpredictable developments.
Sources of uncertainty in the estimation of future claim payments
Claims on insurance contracts are payable on a claims-occurrence basis. The Company is liable for all insured events that occurred during the term of the contract, even if the loss is discovered after the end of the contract term. The estimation of IBNR is generally subject to a greater degree of uncertainty than the estimation of the cost of settling claims already notified to the Company, where information about the claim event is available. IBNR claims may not be apparent to the insured until several months, quarters & sometimes years after event that gave vise to the claims. For some insurance contracts, the IBNR proportion of the total liability is high and will typically display greater variations between initial estimates and final outcomes because of the greater degree of difficulty of estimating these liabilities. In estimating the liability for the cost of reported claims not yet paid, the Company considers information available from loss adjusters and information on the cost of settling claims with similar characteristics in previous periods. The Company involved an independent external actuary as well if deemed necessary. Large claims arc assessed on a case-by-case or projected separately in order to allow for the possible distortive effect of their development and incidence on the rest of the portfolio.
The estimated cost of claims includes direct expenses to be incurred in settling claims, net of the expected subrogation value and other recoveries. The Company takes all reasonable steps to ensure that it has appropriate information regarding its claim’s exposures. However, given the uncertainty in establishing some claims provisions, it is possible that the final outcome will prove to be different from the original liability established.
The liability for these contracts comprises a provision for IBNR and a provision for reported claims not yet paid at the end of the reporting period. The amount of insurance claims is in some cases sensitive to the level of court awards and to the development of legal precedent on matters of contract and tort.
In calculating the estimated cost of unpaid claims (both reported and not), the Company’s estimation techniques are a combination of loss-ratio-based estimates and an estimate based upon actual claims experience where greater weight is given to actual claims experience as time passes. The initial loss-ratio estimate is an important assumption in the estimation technique and is based on previous years’ experience, adjusted for factors such as premium rate changes, anticipated market experience and claims inflation.
Process used to decide on assumptions
The risks associated with insurance contracts are complex and subject to a number of variables that complicate quantitative sensitivity analysis. The Company uses assumptions based on a mixture of internal and market data to measure its claims liabilities. Internal data is derived mostly from the Company’s quarterly claims reports and screening of the actual insurance contracts carried out at the end of the reporting period to derive data for the contracts held. The Company has reviewed the individual contracts and the actual exposure years of claims. This information is used to develop scenarios related to the latency of that are used for the projections of the ultimate number of claims.
The Company uses several statistical methods to incorporate the various assumptions made in order to estimate the ultimate cost of claims. The two methods more commonly used are chain-ladder and the Bornhuetter-Ferguson methods.
Chain-ladder methods may be applied to premiums, paid claims or incurred claims (for example, paid claims plus case estimates). The basic technique involves the analysis of historical claims development factors and the selection of estimated development factors based on this historical pattern. Selected development factors are then applied to cumulative claims data for each accident year that is not yet fully developed to produce an estimated ultimate claims cost for each accident year. Chain-ladder techniques are most appropriate for those accident years and classes of business that have reached a relatively stable development pattern. Chain-ladder techniques are less suitable in cases in which the insurer does not have a developed claims history for a particular class of business.
The Bornhuetter-Ferguson method uses a combination of a benchmark or marker- based estimate and an estimate based on claims experience. The former is based on a measure of exposure such as premiums; the latter is based on the paid or incurred claims to date. The two estimates are combined using a formula that gives more weight to the experience-based estimate as time passes. This technique has been used in situations in which developed claims experience was not available for the projection (recent accident years or new classes of business). The choice of selected results for each accident year of each class of business depends on an assessment of the technique that has been most appropriate to observed historical developments. In certain instances, this has meant that a weighted average of different techniques have been selected for individual accident years or groups of accident years within the same class of business. The Company has an internal actuary and independent external actuaries are also involved in the valuation of technical reserves of the Company and has used historical data for the past 9 years. The Company did not change its assumptions for the valuation of the insurance contract liabilities during the year other than those disclosed.
Concentration of insurance risk
Substantially all the Company underwriting activities are carried out in the United Arab Emirates. In common with other insurance companies, in order to minimize financial exposure arising from large insurance claims, the Company, in the normal course of business, enters into arrangements with other parties for reinsurance purposes.
To minimize its exposure to significant losses from reinsurer insolvencies, the Company primarily deals with reputed counter parties and monitors the receivable position from these parties on a regular basis.
Operational risk
Operational risk is the risk of loss arising from system failures, human error, fraud, or external events. Controls fail to perform, operational risk can cause damage to reputation, have legal or regulatory implications, or lead to financial loss. The Company cannot expect to eliminate all operational risks, but through a control framework and by monitoring and responding to potential risks, the Company is able to manage the risks. Controls include effective segregation of duties, access, authorization, and reconciliation procedures, staff education and assessment processes.
Liquidity risk
The Company’s Board of Directors adopted an appropriate liquidity risk management framework as the responsibility of liquidity risk management rests with the Board of Directors.
The following table shows the maturity dates of Company’s financial assets and liabilities as at 31 December 2023.
| Less | More | Total | |
| than 1 year | than 1 year | ||
| AED | AED | AED | |
| Financial assets | |||
| Interest bearing | 37,779,645 | 14,140,727 | 51,920,372 |
| Non-interest bearing | 105,486,301 | – | 105,486,301 |
| 143,265,946 | 14,140,727 | 157,406,673 | |
| Financial liabilities | |||
| Non-interest bearing | 55,225,289 | – | 55,225,289 |
The following table shows the maturity dates of Company’s financial assets and liabilities as at
31 December 2022 (Restated).
| Less | More | Total | |
| than 1 year | than 1 year | ||
| AED | AED | AED | |
| Financial assets | |||
| Interest bearing | 57,370,841 | 14,065,289 | 71,436,130 |
| Non-interest bearing | 91,115,352 | – | 91,115,352 |
| 148,486,193 | 14,065,289 | 162,551,482 | |
|
Financial liabilities |
|||
| Non-interest bearing | 71,802,303 | – | 71,802,303 |
