Underwriting Practices 2015
SAMA issued the original Underwriting Circular on 25/5/1435.
At the request of the Insurance Executive Committee (IEC) SAMA subsequently issued standard claims experience forms for medical and motor insurance on 1 December 2014 to come into effect on 1 January 2015. These forms included clarifications, corrections and updates to the original Underwriting Circular.
With the issue of this Circular, the Claims Experience Forms remain in force. There are some clarifications to the instructions for quotations which are shown in Appendices Four and Five to this Circular.
SAMA has noted that underwriting practices in the market remain out of line with international practice in several respects that are damaging the functioning of the market. These practices include:
• Inadequate loadings being applied to risk premium rates to allow for all expenses, contingencies, profit and the financial condition of the company. • Limited rating factors being used to price individual motor and medical risks, with such risks being treated as commodity products • For property and engineering insurance, and other largely reinsured risks, insurers acting as intermediaries focusing on volume rather than as risk takers.
SAMA introduced requirements for insurance companies to obtain and submit actuarial pricing reports for medical expenses and motor businesses late in 2012 and to be implemented starting from 1 January 2013 for medical expenses insurance business and from 1 April 2013 for motor insurance business. These actuarial pricing reports were required to be updated by June 2014 for medical and August 2014 for motor.
The submitted actuarial medical and motor pricing reports must be updated to fully take into account the recent claims experience of insurance companies.
The technical instructions for the actuarial pricing reports have now been included within SAMA’s Actuarial Work Regulations, and these Regulations should be read in conjunction with this Circular.
This Circular details SAMA’s instructions with respect to the above mentioned issues.
No insurance company shall ever provide a quotation without having adequate underwriting information, including claims experience, on which to scientifically determine the premium rales appropriate for the policy terms & conditions offered. It should be noted that this applies to all insurance policies of all classes.
1. Claims Experience Requirements
1.1 Medical and Motor Underwriting
SAMA has included updated quotation instructions within the claims experience developed at the request of the industry.
These have been further clarified following feedback from the industry, and the current versions are shown in Appendix Four and Appendix Five of this Circular.
1.2 Nature of the Claims Experience to be Required for Medical and Motor
At the request of the industry SAMA developed standard forms to be used by all insurers. These were issued in December 2014, and came into effect from 1 January 2015.
SAMA notes that sometimes the completion of these forms may not be as required, and would clarify that:
a) The company providing the claims experience must always provide data that is as up-to-date as possible.
b) The monthly data provided for the most recent underwriting year is for claims paid in each month, and claims outstanding at the end of each month. All data must be shown.
c) The Policy Year is the year from the last renewal data of the policy. If, for instance, a policy renews on 1 July, then the 2015 Policy Year is the period from 1 July 201 5 to 30 June 2016.
d) Full benefit information must be provided as stated in the experience form instructions.
1.3 Responsibility for Providing Claims Experience
The key relationship is between the policyholder and the insurance company. SAMA requires that the insurance company provides the policyholder, upon his written request or his representative’s written request (i.e. broker), within 15 working days of making the request with sufficient and accurate information of his claims experience, including up-to-date incurred claims. It is the responsibility of the policyholder to provide the insurance company with sufficient and accurate information for it to price and underwrite the risk it is taking on.
Where the insurance company outsources its claims administration to a TPA, then the TPA is required to provide the data requested to the insurance company within 10 working days of its request.
The claims experience report issued by either the insurance company or its TPA must be stamped & signed by the authorised person and the report must be printed on the issuer heading letters (insurance company or its TPA).
After receiving the claims experience, the policyholder should review the report and confirm in writing that he reviewed it and that all information included within the report is accurate to the best of his knowledge.
If the insurance company fails to obtain the policyholder’s confirmation that the claims experience is accurate then it should note that if may not be able to lake any action if it subsequently discovers it has charged an inadequate premium rate based on the data provided.
With respect to the personal lines of the business, the insurance company is not required to obtain the policyholder’s claims experience in a report format from the policyholder or the existing insurance company; instead the insurance company should ensure that its proposal form asks about all material facts including the policyholder’s claims experience.
If it is found that inaccurate claims experience was provided then the insurance company shall have the right to review the premium rate charged, and take appropriate actions. These include adjusting the premium, or requiring that any commission paid to the broker be refunded if due to broker misrepresentation or non-disclosure.
In extreme circumstances where evidence has been obtained that claims data provided to the insurance company in order to quote was misstated with fraudulent intent, then the insurance company may cancel the policy and take the proper actions against the parties who are responsible.
1.4 Role of Brokers
A broker may collect the claims experience and provide it to the insurance company. It should be noted that brokers must act on behalf of the policyholder and conduct their business according to professional and ethical standards and as per the applicable laws and regulation, including the provisions of the Implementing Regulations of the Law on Supervision of Co-operative Insurance Companies, Insurance Intermediaries Regulation, Market Code of Conduct Regulation and Regulation of Reinsurance Activities Regulation.
Using a broker to collect this data does not in any way reduce the responsibility of the policyholder to ensure that accurate information is provided to the insurance company.
1.5 Pricing of Group Medical or Motor Fleet/Leasing Risks
Insurance companies must comply with the following instructions when applying the claims experience:
1. Apply an experience rating approach for group or fleet/leasing risks, and must supply a fully justified credibility formula recommended, and signed off, by the company’s Actuary. 2. A form or Excel spreadsheet shall be produced which ensures that the pricing mechanism adopted complies with the credibility formula that is recommended by the company’s Actuary. A copy of the form or Excel spreadsheet must be provided to SAMA. 3. The Actuary shall determine the annual increase in the burning costs allowing for claims trends, inflation to be built in the credibility formula calculation mechanism. 4. The Actuary’s pricing report shall specify the size of schemes for which this blended pricing approach must be adopted. It must define the size of smaller schemes where book rates shall be used. 5. The insurance company may request that its Actuary assists with individual quotations for a particular scheme if it considers that there are reasons why the scheme falls outside the standard pricing process. All such individual quotations must be fully documented, auditable, and made available to SAMA on request. The Actuary should ensure that these individual quotations fall outside the standard pricing process before providing his/her recommendation.
It should be noted that SAMA imposes no restrictions on the form of the credibility formula to be adopted by each company, provided that it has been recommended by the Actuary. For instance, the Actuary may choose to vary the credibility formula by class of insurance, own or other insurer’s experience, good or poor experience. SAMA may challenge the credibility formula adopted if it considers that it has not been fully justified technically.
1.6 Pricing of Individual Medical Risks
SAMA notes that many of these products are issued solely in order for expatriates to obtain, or renew, their residence permit (Iqama) to live in Saudi Arabia.
This situation is not sustainable indefinitely, with claims rates at their currently low levels.
SAMA will seek to work with the Insurance Industry, and other Government agencies, to ensure that all insurance products sold provide genuine benefits to the consumer, and are not just put in place to comply with other regulatory requirements.
1.7 Pricing of Individual Motor Risks
This class of business has been unprofitable for many in the market, partially due to limited data collection and the use of insufficient rating factors.
SAMA will seek to work with the Industry to agree minimum data collection and rating factors to be used, by each individual company.
It should be noted that an industry database would primarily be used for fraud detection, and not for setting prices.
It may be possible to use some rating factors from industry data, but these would need to be used within the pricing framework set out in the actuary’s pricing report.
Under no circumstances may companies use premium rates derived entirely from industry data.
1.8 Underwriting of Property Insurance
SAMA intends to issue quotation instructions for Property Insurance in 2015.
These should be considered to be part of this Circular, and in particular Section 6 on Compliance fully applies to these Instructions.
1.9 Underwriting of Engineering Insurance
SAMA intends to issue quotation instructions for Engineering Insurance in 2015.
These should be considered to be part of this Circular, and in particular Section 6 on Compliance fully applies to these Instructions.
1.10 Underwriting of Other Insurance Risks
SAMA will continue to review the state of the market for all insurance classes, together with the effectiveness of the measures undertaken for Medical, Motor. Property and Engineering risks.
Measures on other classes may be taken following detailed consultation with the industry.
2. Premium Rate Guarantees
It is not permitted for any insurance company to enter into any arrangement with any insured for a period in excess of one year tor medical expenses insurance or for motor insurance with rates guaranteed for more than one year. Policyholders can choose to renew their annual policy with the same insurance company, but this must be on terms negotiated and agreed at renewal.
It should be noted that the use of prescribed formula for renewals, even if it takes into account the loss experience for the first year is not acceptable. Full allowance for current inflation and future trends expectations must be made for all quotations at the time of the renewal.
3. Insurance Companies Other than Leading a Medical or Motor Policy
3.1 Acting as Third Party Administrator (TPA’S)
SAMA noticed that there are some insurance companies that manage insurance expenses claims (e.g. medical costs) without taking on the risk. Under this type of arrangement, the risk is not covered/shouldered by the insurance company, but the company administers the insurance claims of the client. This service represents claims administration services, or acting as a TPA, without bearing the insurance risk, which insurance companies are not licensed to do.
Article 3-2 of the Law On Supervision of Cooperative Insurance Companies does not permit insurance companies to carry out any activities other than insurance. Insurance companies are not allowed to provide claims administration services without bearing insurance risk.
3.2 Acting as Co-Insurer Not Leading the Policy
Any insurer participating in a panel of insurers, or following a lead co-insurer must ensure that they obtain full exposure and claims data to underwrite the policy fully. It is not permitted to place full reliance on a lead insurer.
4 Medical & Motor Pricing Report
4.1 General Requirements
SAMA is requiring all insurance companies to provide a full actuarial pricing update for medical and motor products on at least an annual basis, and will consider requiring more frequent updates if necessary.
SAMA, requires all companies approved to sell medical or motor products to provide full updated reports as follows:
1) Medical, by 31 August 2015 2) Motor, by 30 September 2015
For any medical/motor pricing reports, the Responsible Actuary must use up to date complete data to determine the premium rates. The data used in the report must be up to date when the report is submitted to SAMA. Specifically if a report is submitted between:
1) 1 March to 31 May: it must use complete data up to at least 31 December of the previous year. 2) 1 June to 31 August: it must use complete data up to at least 31 March of the same year 3) 1 September to 30 November: it must use complete data up to at least. 30 June of the same year. 4) 1 December to 31 December: it must use complete data up to at least 30 September of the same year. 5) 1 January to 28 February: it must use complete data up to at least 30 September of the previous year.
Medical/Motor products approval may be withdrawn if the updated actuarial pricing reports are not submitted or are not compliant with SAMA’s instructions.
The insurance company’s Responsible Actuary shall prepare the medical and motor pricing reports that are to be submitted to SAMA unless the insurance company has obtained SAMA’s no objection to ask another actuary to prepare the pricing reports at least three months before the date of the actuarial report submission. It should be noted that SAMA will only allow another actuary to be used only if it is justified, and SAMA will require a report to be submitted from the Responsible Actuary in addition to those prepared by the other actuary. It should be noted that there are no restrictions on the preparation of technical or actuarial reports that are not submitted to SAMA.
If a company submits two actuarial reports to SAMA then it must implement the one prepared by its Responsible Actuary. It may only implement the premium rates in the other actuary’s report if and when it receives SAMA's no- objection.
The insurance company should note that it is acceptable to provide partial submissions to SAMA from the Actuary in respect of
a. Revisions to credibility formula b. Changes to recommended loadings c. Pricing of a single product within the medical or motor class d. Introduction of a new rating factor e. A new network option for medical expenses f. Other amendments to the pricing basis that the actuary recommends, subject to these not leading to a reduction in premium rates for retail/individual medical or retail/individual motor business
The insurance company may seek SAMA’s approval to provide partial pricing submissions from the Actuary in other circumstances.
It is always acceptable to charge higher premium rates than those determined by the Actuary, subject to such rates being fully documented, justified, and in line with Article (46) of Implementing Regulations.
It should be noted that there is no requirement for the company to submit any actuarial pricing report to SAMA unless required by this Circular, or the company wishes to amend its premium rates or rating structure. The company must never charge rates lower than those that have been submitted to SAMA. It is always permitted to charge higher rates than those in the actuary's report, provided the rates charged arc fair, reasonable and technically justified.
If the company makes any material alteration in its reinsurance arrangements for medical or motor insurance, then it must consult with its Actuary to determine whether the recommended loadings in the premium rates remain adequate, and must amend its rates as appropriate.
It should be noted that the Actuary must recommend premium rates with no cross subsidies between the rating factors, in line with Article 46 of the Implementing Regulations. However if, for competitive purposes, the company wishes to charge rates which have some element of cross-subsidisation, then it may ask the Actuary to prepare an additional report setting out the risks of applying the cross-subsidies, based on expected portfolios of business written which may not be too dissimilar to the in-force portfolio. SAMA will review the cross-subsidy report separately.
It should be noted that cross-subsidies are only permitted within the same class of insurance. In addition no cross-subsidies are permitted between retail and corporate business for either medical or motor.
The Actuary is responsible to ensure a comprehensive and concise report is provided to SAMA as to minimize the extent of required follow-up queries from SAMA.
In addition, the Actuary must prepare a short summary document highlighting his key findings for each actuarial pricing report. This shall be no more than five (5) pages in length, and must be submitted to the Board of Directors of the company as a Board paper within five working days of the Actuary’s submission, with the Actuary’s full report being an appendix to the Board paper.
The actuarial pricing reports submitted to SAMA cannot be preliminary or initial and are required to be the final reports. The reports shall clearly summarize and compare the Company’s current premium rates (loads and discounts) and the new premium rates (loads and discounts) calculated by the Actuary.
4.2 Mandatory Loading Requirements
The actuary is required to include the following loadings within the gross premium rates:
1) An Expense Loading covering all of the company’s expenses, both policyholders and shareholders, allocated appropriately to each class of insurance. As medical and motor insurance are resource intensive products, the loading for expenses (including commissions) must be set at a minimum of the expense ratio for 2014 provided the company has been writing business for three full years. If a company was licensed by SAMA to write any class of insurance business as at 1 January 2012, it must cover all of its 2014 expenses in the Expense Loading. Only insurance companies that were not licensed to write any class of insurance as at 1 January 2012 may adopt prudent project projections in order to set their expense loadings. 2) A Profit Loading that must be explicitly approved by the Board of Directors of the company. This must be at least 2% of premium. 3) A Contingency Loading set at 2.5% of premium for medical expenses and 5% of premium for motor business. 4) A Financial Condition Loading to allow for the lower risk capacity of any insurance company that does not have sufficient Admissible Assets to meet the Required Margin before application of the Minimum Capital Requirement (Reporting Form 31, Line 43. Column A), The required calculation to be adopted for this loading is set out in Appendix Two.
SAMA has noted that there is some confusion in the industry about the correct definitions of Loss Ratio, Expense Ratio and Combined Ratios, so these are set out in Appendix Three.
Any Composite Insurance Company, defined as any company writing general/health insurance and a material amount of long-term Protection & Savings business, must not use the expense ratio for the company as a whole. Instead, an expense report shall determine a suitable split of expenses between Protection & Savings and General/Health, and the Expense Ratio determined for General/Health only.
If a company has not been writing any business for three full years then the actuary may estimate the expense ratio for its third year of writing business based on prudent assumptions.
If a company is in the process of increasing its capital then the actuary must provide two sets of premium rates for the company to use, one prior to the capital raising exercise, and the other based on the expected solvency position once the additional capital has been raised. The rates based on the post capital raising financial condition may only be used once the company has received the proceeds of the capital raising exercise.
Any expenses that may be subject to unusual fluctuations may be smoothed. In particular the change in Doubtful Debt Reserve must be considered part of the company’s expenses, but consideration should be given to smoothing this item.
5. The Underwriting Manual
5.1 Submission to SAMA
The company must submit a corresponding underwriting manual, rating structure and premium rates.
The rating structure and premium rates must be in Excel spreadsheet format.
5.2 Contents of the Underwriting Manual
Underwriting Manuals must contain sufficient information so that an external party can follow any quotation produced by an Insurance Company for a risk in that Class of Insurance.
Underwriting Manuals must:
• be consistent with the pricing reports • be comprehensive and cover all risks • be clear and user-friendly • fully describe the quotation process • include the Underwriting Authority Statement, fully described • be consistent with reinsurance arrangements • for medical, where appropriate, they must be consistent with TPA agreements • for medical, where appropriate, they must be consistent with CCHI requirements • for motor, where appropriate, they must be consistent with Najm procedures
All premium rates to be charged must be approved by the actuary. Any adjustments to be made to the base rates determined by the actuary must be documented in the Underwriting Manual.
The Underwriting Manual shall be signed off by the Chief Underwriter or Chief Technical Officer for the class of insurance, as designated by the company.
The Actuary should review the Underwriting Manual (excluding the Underwriting Authority Statement) for technical accuracy and consistency with the pricing report, and highlight any inaccuracies.
The Risk Manager shall also sign off the Underwriting Manual (including the Underwriting Authority Statement) from the process perspective.
It should be noted that the Company is fully responsible for the accuracy, clarity and comprehensiveness of the Underwriting Manual.
SAMA requires that companies commit to translating their Underwriting Manual and Underwriting Authority Statement into Arabic by 31 December 2016. The extended timetable granted for this is in order to ensure that the English documents are of a high standard before they are translated.
5.3 The Underwriting Authority Statement
The Underwriting Authority Statement must set out fully the levels to which each Underwriter may quote.
This could be measured by Gross Written Premium, Sum Insured, Number of Lives for Medical or Number of Vehicles for Motor for standard risks, or a combination of these.
Any discretion to reduce Loadings for a particular quote would normally only lie with the Chief Underwriter or Chief Technical Officer. The scope to which this discretion extends must be fully documented.
Any additional discretion to reduce Loadings that lies with the Chief Executive Officer must be fully documented.
The Minimum Loading that must be applied for all quotations must be clearly stated. The Minimum Loading, net of commission, must be no less than 75% of the total loading, net of commission, recommended by the Actuary.
No discretion to reduce loadings to a particular quotation may be applied until the Underwriting Authority Statement has been approved by the Board of Directors, and it has been submitted to SAMA.
5.4 Training on the Updated Underwriting Manual
Everyone who has any level of authority to underwrite must be trained in the use of the Underwriting Manual and the Underwriting Tools.
Records must be maintained of formal training undergone.
6. Compliance and Record Keeping
A copy of this Circular must be passed to the Company’s Board of Directors, Audit Committee, Internal Auditors, Risk Management officers, Compliance Officer, Responsible Actuary and External Auditors.
The Actuary must prepare a short summary document highlighting the key recommendations of the pricing report. This shall be submitted to the Board of Directors and the internal control functions (internal audit, risk management, and compliance functions) with the pricing report submission.
The purpose of this document is to ensure that:
• The internal control functions understand the Actuary’s recommendations. • There are internal controls in place to ensure the company is following the Actuary’s recommendations. • The internal control functions set up a meeting with the .Actuary to understand his/her recommendations and how to ensure that the company is following his/her recommendations.
The compliance function must report to SAMA any material lack of compliance with SAMA’s instructions. This shall be based on the reports of the Internal Audit function and the Risk Management function, and shall include an action plan for addressing the key issues identified.
The Internal Audit function must carry out a continuous audit, at least on a quarterly basis, of the underwriting function to assess compliance with the company’s internal procedures and guidelines as defined in the underwriting manual submitted to SAMA.
The Risk Management function must carry out a quarterly assessment of the underwriting risks, and recommend improvements to processes, and address any other weaknesses that should be improved such as any need for additional training of underwriting staff.
The internal control functions (internal audit, risk management, and compliance functions) must provide the Audit Committee on a quarterly basis with a report on their findings and suggested corrective actions. Moreover, on a quarterly basis the compliance function must provide SAMA with a copy of the minutes of the Audit Committee meeting in which the report was discussed. The minutes must summarize the findings and any corrective action that should be taken by the company.
The Underwriting Authority Statements for Medical and Motor products must be formally approved by the Board of Directors within 60 days of the required submission dates of the actuarial pricing reports to SAMA.
The Compliance Officer must ensure that all those mentioned in the first paragraph of this section receive copies of the Actuary’s Pricing Reports, the Board Summary documents and the Underwriting Manuals.
In addition all members of staff who have a designated underwriting authority level must be passed copies of the Underwriting Manual by the Compliance Officer.
The company must ensure that it has in place a central database accessible by Senior Management and all Internal Control functions containing full records of all quotations issued by the company, and all backing data.
Companies are required to have a centralised quotations database in place by 1 July 2016.
7. Implementation of New Rates
7.1 File and Use
Any proposed revisions to premium rates, rating structure and credibility formula may be introduced on a File & Use basis, which means the insurance company files the new actuarial report with SAMA and implements the new proposed premium rate, subject to such rates being in line with Article (46) of the Implementing Regulations.
The proposed revisions must be implemented within one month of the date the report is submitted to SAMA.
One specific exception is that, for both Individual/Retail Motor and Individual/Retail Medical, premium rates may not be introduced on a File & Use basis, if the premium rates for more than 50% of the business that the company expects to write are to be reduced. Any proposed reductions in retail premium rates may only be introduced if SAMA provides its no-objection However if SAMA has not provided a response to the company within 3 months of its submission of reduced rates, then it may assume that SAMA has no objection to its introduction of the rates.
7.2 SAMA’s Review Process
SAMA’s review of the actuarial pricing reports will be split into two parts:
a) A review of the loadings for expenses, contingency, profit and any financial condition loading to be applied to ensure that these are compliant with requirements. b) A technical review of the methodology adopted.
If non-compliant loadings are being applied the company will be required to correct these within 5 working days of SAMA’s letter to the company.
SAMA will also review
c) The Underwriting Manual to check that it is complete and consistent with the actuarial pricing report. d) The Excel pricing tool provided to check that it is compliant with the actuarial pricing report, and that it is documented in the underwriting manual.
SAMA’s reviews must not be regarded as reducing in any way the responsibility of the company and the actuary to comply with regulatory requirements.
If SAMA discovers that any company or actuary has abused the File and Use process then appropriate regulatory actions will be taken.
7.3 Regular Rate Increases
All companies are required to increase their medical and motor I PL rates on a quarterly basis to allow for inflation and anticipated future trends in experience, as recommended in the actuary’s report.
Where comprehensive motor premiums are expressed as a percentage of the sum insured, quarterly rate increases are not required unless the actuary has recommended increases be applied.
Any company that is required to apply a Financial Condition Loading must update that loading annually based on the Year End position, unless there has been a material change in the cover for its solvency. It must submit a brief note to SAMA setting out and justifying the revised Financial Condition Loading.
8. Regulatory Action for Non Compliance
It should be noted that if an insurance company, broker, insurance agent or insurance claims settlement specialist (third party administrator) is not in compliance with this Circular, SAMA will take the regulatory/lcgal actions as stipulated in the Law on Supervision of Co-operative Insurance Companies and its Implementing Regulations.
Thus, SAMA instructs the insurance company to do the following:
1. Provide SAMA with the updated Underwriting Manuals, including the Underwriting Authority Statement, which reflects the instructions stated in Sections 1, 2, 3, 4 and 5 of this Circular, for medical expenses and motor insurance. These must be provided within 60 days after the deadline for the submission of the actuarial pricing reports. 2. Provide SAMA with an unprotected soft copy of the Excel spreadsheets that set out the blended credibility approach that the insurance company is going to adopt to price group medical expenses and fleet/leasing motor risks which are in compliance with instructions stated in this Circular. These must be provided with the actuarial pricing reports. 3. Immediately provide insurance company’s employees who are in charge of underwriting with a copy of this Circular. 4. The requirements set out in this Circular will be effective immediately. 5. Provide confirmation from the insurance company’s CEO/GM within seven days of the date of this Circular of adherence to the instructions stated in this Circular. 6. Copies of this Circular must be provided to the full Board of Directors of the company. Minutes of the Board meeting on the adherence to the requirements set out in this Circular must be provided to SAMA within 90 days of the date of this Circular. 7. SAMA requires that the Actuary attend Board Meetings to present his Board Pricing papers, and take questions on his full pricing reports. The company must provide minutes of the relevant Board meetings to SAMA, and copies of the Actuary’s Board papers within 10 business days of the meeting.
Appendix One - Additional Requirements
Blending Book Rates with Experience for Larger Schemes
An Excel spreadsheet must be produced which ensures that the pricing mechanism adopted complies with the credibility formula recommended by the Actuary.
Compliance with the Prior Actuarial Pricing Reports
In order to investigate the compliance with the experience rating basis recommended, the Actuary shall take samples of the top five groups/fleets by premium income from the insurance company's portfolio and derive the experienced-rated premium rate. This can then be compared with the actual rate charged for each of the top five groups.
The Actuary is required to provide with his pricing report an Excel workbook to validate compliance with previous submitted pricing reports. The Excel workbook provided by SAMA (“ComplianceWithActuarialRates.xlsx”) can be used to validate compliance for medical business, and modified to be applicable for motor business. The insurance company must provide SAMA with copies of the Excel workbooks.
Appendix Two - Financial Condition Loading
All companies that do not hold sufficient Admissible Assets to cover their Total Required Margin before application of the Minimum Capital Requirement must include an additional loading in the medical and motor premium rates that they charge.
This is based on the data presented in Form 31 in the most recent Quarterly or Annual Returns, subject to any amendments required by SAMA.
The Financial Condition Ratio is defined as the Net Admissible Assets / Total Required Margin.
Financial Condition Ratio = (Form 31, Line 39, Column A) / (Form 31, Line 43, Column A)
If the Financial Condition Ratio is greater than or equal to 1 then no loading shall be applied to the premium rates.
If the Financial Condition Ratio is less than 1 then a Financial Condition Loading must be applied
The Financial Condition Loading for Medical Expenses is determined as:
16% x (1- Financial Condition Ratio)
The Financial Condition Loading for Motor is determined as:
20% x (1- Financial Condition Ratio)
Both Loadings shall be rounded to the nearest whole percentage point.
Note “Column A" refers to the Form Label, not the Excel Column.
Appendix Three - Standard Income Statement Ratio Definitions
This section sets out the standard definitions of the Loss Ratio. Expense Ratio and Combined Ratio equivalent to those used internationally.
Key points to note are that
1) Combined Ratio = Loss Ratio + Expense Ratio 2) A Combined Ratio in excess of 100% means a General/Health Insurance company is making Underwriting Losses. These may be mitigated by investment returns. 3) These ratios must not be used for any company writing material amounts of long term Protection & Savings business.
For all three ratios the Denominator is the Net Earned Premium plus any other income other than that arising from investments:
Net Earned Premium (Form 21, Line 17, Column E) + Other Underwriting Income (Form 21, Line 19, Column E) + Other Income (Form 21, Line 71, Column E) + Other Income - Shareholders (Form 22, Line 19, Column A)
If a company has incorrectly treated movements in Premium Deficiency Reserves as part of its earned premium for accounting purposes, then it should reverse these movements out for the purposes of calculating its Standard Income Statements Ratios.
For Loss Ratio, the Numerator is the Claims Incurred (in Form 21, Line 37, Column E), adjusted to exclude any changes in Premium Reserves, such as Premium Deficiency Reserves or Catastrophe Reserves
The adjusted Claims Incurred are then divided by the Denominator to determine the Loss Ratio.
For the Expense Ratio, the Numerator is:
Commission Incurred (Form 21, Line 38, Column E) Minus Reinsurance Commissions Earned (Form 21, Line 18, Column E) + Policy Acquisition Costs (Form 21, Line 39, Column E) + Other direct underwriting Expenses (Form 21, Line 40, Column E) + Doubtful Debt Expense (Form 21, Line 41, Column E) + Operational and Technical Expenses (Form 21, Line 51, Column E) + Shareholders Expenses (Form 22, Line 39, Column A) + Zakat (Form 22, Line 51, Column A) Taxes (Form 22, Line 52, Column A)
The Combined Ratio is defined as the Loss Ratio + Expense Ratio
Appendix Four - Quotation Instructions for Medical Insurance
INSTRUCTIONS FOR HEALTH QUOTATIONS 1 This sheet contains clarifications on the quotation process required by the Underwriting Circular. 2 All insurance companies must, in addition to this experience form, obtain full exposure data at the inception date of the policy in order to finalise a quotation. 3 The required exposure data must be consistent with the company's underwriting manual. 4 Exposure Data must show all lives to be covered, and should show the rating factors used by the company for every life. Data may be used in quotations aggregated by age bands, provided these age bands are shown. 5 Full demographic data must be provided before any quotation may be provided. Age and sex of lives to be covered may be provided on an individual basis, or may be age banded. 6 Any health insurance quotation must be age, sex, employee/dependent status and benefit level dependent, at a minimum. Benefit levels must take into account provider classes and network options. It is not permitted to quote a flat fixed cost applicable to all lives covered. 7 Companies must quotes premium rates sub-divided by rating factors, and these should be in proportion to the company's book rates. Exceptions to this may only be adopted where the claims experience for the group is highly credible, and the mechanism for setting the rates is defined fully in the company's Underwriting Manual. 8 The Insurance Company must determine Book Rates for all health insurance quotations, unless the amount of claims experience is sufficient to be fully credible. The amount of experience needed for full credibility must be defined by the actuary, and documented in the Underwriting Manual. 9 The Insurance Company must determine Experience or Burning Cost Rates for all health insurance quotations, unless the number of lives is below the threshold set by the actuary The threshold must be documented in the Underwriting Manual. 10 It should be noted that the Insurance Company is required to collect experience data even when the number of lives is below the threshold. The company's underwriters should consider whether claims on small groups are indicative of issues that may merit individual underwriting. 11 Where Book Rates and Experience / Burning Cost Rates have been determined, the company must determine a Blended Rate using the credibility formulae approved by the actuary. The credibility formulae must be fully documented in the Underwriting Manual. 12 This Blended Rate represents the minimum rate that the company may quote. It is fully acceptable to quote higher rates if the Underwriter is not comfortable with the Blended Rate. 13 All loadings for expenses and profit determined by the actuary, and documented in the Underwriting Manual must be included in the Gross Premium Rates. It is only necessary to quote the Gross Premium Rates to the client. 14 Lower quotations may only be prepared to the extent that these are fully defined within the company's Underwriting Authority Statement, which must be included in the Underwriting Manual, approved by SAMA. 15 For Medical Expenses groups, it is not permitted for an Insurance Company to offer profit sharing arrangements. 16 17 During 2015, quotations may only be provided if at least two or more years' claims experience is provided. 18 From 2016 onwards, quotations may only be provided if at least 3 or more years’ claims experience is provided. 19 If a risk is entirely new, the insurance company may only quote the book rates, which have been submitted to SAMA. The insurance company is not allowed to apply any discounts to these rates. 20 If the risk has been in existence for less than 3 years from 2016, or 2 years from 2015, then the insurance company may quote, provided they receive full claims experience for the time the risk has been in existence. 21 No insurance company is allowed to provide any quotation for medical expenses unless it has received claims experience, except if the risk is entirely new 22 Risks may be referred to the company's Responsible Actuary to quote, provided there is some claims experience. Entirely new risks with no claims experience may not be referred to the actuary. 23 An insurance company can provide a quotation as illustration only based on the information provided to it. However, the insurance company must amend the quotation based on full underwriting data. It may not issue a policy on quoted rates until it has full data to provide an accurate quotation. Under no circumstances may an insurance company provide actual rates, unless it has sufficient data, subdivided according to the rating factors it will adopt in its Underwriting Manual Appendix Five - Quotation Instructions for Motor Insurance
INSTRUCTIONS FOR MOTOR QUOTATIONS 1 This sheet contains clarifications on the quotation process required by the Underwriting Circular. 2 All insurance companies must, in addition to this experience form, obtain full exposure data at the inception date of the policy in order to finalise a quotation. 3 The required exposure data must be consistent with the company's underwriting manual 4 Exposure Data must show all vehicles to be covered, and should show the rating factors used by the company for every vehicle. 5 It is not the responsibility of any insurance company to provide exposure data to any other party unless this has been explicitly agreed between the Insurance Company and the policyholder. 6 Any motor Third Party Liability (TPL) insurance quotation must be vehicle type dependent, at a minimum. It is not permitted to quote a flat fixed cost applicable to all vehicles covered 7 The Insurance Company must determine Book Rates for all motor insurance quotations, unless the amount of claims experience is sufficient to be fully credible. The amount of experience needed for full credibility must be defined by the actuary and documented in the Underwriting Manual. 8 The Insurance Company must determine Experience or Burning Cost Rates for all motor insurance quotations, unless the number of vehicles is below the threshold set by the actuary. The threshold must be documented in the Underwriting Manual. 9 It should be noted that the Insurance Company is required to collect experience data even when the number of vehicles is below the threshold. The company's underwriters should consider whether claims on small schemes are indicative of fraudulent activity, or of issues that may merit individual underwriting. 10 Where Book Rates and Experience / Burning Cost Rates have been determined, the company must determine a Blended Rate using the credibility formulae approved by the actuary. The credibility formulae must be fully documented in the Underwriting Manual. 11 This Blended Rate represents the minimum rate that the company may quote it is fully acceptable to quote higher rates if the Underwriter is not comfortable with the Blended Rate. 12 All loadings for expenses and profit determined by the actuary, and documented in the Underwriting Manual must be included in the Gross Premium Rates. It is only necessary to quote the Gross Premium Rates to the client. 13 Lower quotations may only be prepared to the extent that these are fully defined within the company's Underwriting Authority Statement, which must be included in the Underwriting Manual, approved by SAMA. 14 15 During 2015, quotations may only be provided if at least two or more years' claims experience is provided. 16 From 2016 onwards, quotations may only be provided if at least 3 or more years’ claims experience is provided 17 If a risk is entirely new, the insurance company may only quote the book rates, that have been submitted to SAMA. The insurance company is not allowed to apply any discounts to these rates. 18 For motor schemes, an insurance company may provide a quotation with a profit sharing element. These may only be quoted if the actuary has defined how profit sharing mechanisms may work in the pricing report, and any profit sharing must follow the format set out by the actuary. 19 If the risk has been in existence for less than 3 years from 2016, or 2 years from 2015, then the insurance company may quote provided they receive full claims experience for the time the risk has been in existence. 20 No insurance company is allowed to provide any quotation for motor business unless it has received claims experience. 21 If a quotation is required for Comprehensive cover where the scheme has only been insured for Third Party cover in the past, then the existing experience should be used to determine the Third Party component of the rates. Book rates must be used to determine the Own Damage part of the premium rates. 22 If a quotation is required for Third Party cover only, where the scheme has only been insured for Comprehensive cover in the past, then experience for Third Party claims only must be obtained, and used to determine the rates. 23 An insurance company can provide a quotation as illustration only based on the information provided to it. However, the insurance company must amend the quotation based on full underwriting data. It may not issue a policy on quoted rates until it has full data to provide an accurate quotation. Under no circumstances may an insurance company provide actual rates, unless it has sufficient data, subdivided according to the rating factors it will adopt in its underwriting manual.