1. This Policy presents general principles for “distribution of surplus” to policyholders in accordance with Article 70 (2e) of the Implementing Regulations of the Law on Supervision of Cooperative Insurance Companies promulgated by Royal Decree No. (M/32) dated 2.6.1424 H. The above article states that “10% of the net surplus shall be distributed to the policyholders directly, or in the form of reduction in premiums for the next year. The remaining 90% of the net surplus shall be transferred to the shareholders’ income statement,”.

   A written approval from Saudi Arabian Monetary Agency (herein after referred to as Agency) must be obtained for surplus distribution and timings.

2. The senior management of the insurance company and the company’s Board of Directors should be fully conversant with the contents of the Policy and ensure implementation of the policies and procedures contained herein in totality and in accordance with applicable regulations.
3. This Policy should be read in conjunction with the Law on Supervision of Cooperative Insurance Companies and its Implementing Regulations.
4. The company should apply this Policy for 2015 financial year and the following years.
5. The company shall maintain separate registers for each class of insurance (General Insurance, Health Insurance, and Protection and Saving Insurance). However, if the company is selling only Group Protection products, the company should include these products within the Health Insurance or General Insurance register for the purpose of calculation the surplus.
6. This Policy is applicable for General Insurance and Health Insurance classes, and Group protection products if the company is selling only these products of the Protection and Saving Insurance class.

8. The company should establish appropriate written internal controls and procedures to ensure and monitor compliance with this Policy.
9. The company shall deposit the Policyholders' Surplus amounts in a separate bank account.
10. The company should maintain adequate records to demonstrate compliance with this Policy.
11. The financial function should be vested with the responsibility of monitoring the process of surplus distribution and review it with the external auditors prior to distribution and the internal audit function should ensure compliance with this Policy and report to the company’s Audit Committee the status of surplus distribution to policyholders.
12. The company should inform policyholders who are not entitled to the distribution of surplus.
13. Internal audit function should report any violation of this Policy to the company’s audit committee and provide the compliance function with a copy of the report.
14. The company should ensure a proper technology and information supporting mechanism is in place to enable a transparent system of computation of surplus, which should be subject to audit and compliance review.

15. As per Part (2/e) of the Article (70) of the Implementing Regulations, 10% of the net surplus from insurance operations should be distributed to the policyholders directly (“Surplus Amount”) or in the form of reduction in premium for next year. This surplus amount is separately shown in the Statement Income of Insurance Operation.
16. The realized surplus is for a current reporting period (i.e. January-December), it means that only the premiums that have participated in the earnings of that financial year should qualify for surplus distribution. Such premiums are not necessarily the same as the full underwriting year’s premiums. For example, policies underwritten in the prior reporting period do not provide gross premiums but earned premiums.
17. Inwards reinsurance is not entitled to surplus distribution. The gross earned premiums, after excluding the Inwards reinsurance premium, should be the basis of calculation of surplus distribution.

18. Obtain a listing of all individual policies that have participated in gross earned premium during the current reporting period in respect of which the distribution is being made.

    The listing should include:

• Customer ID
• Policy Number
• Endorsements Certificates
• Name of Insured as stated in the Policy
• Line of Business
• Coverage Period
• Issue Date
• Gross Earned Premium
• Investment Share of Premium (Protection & Savings)
• Unearned Premium
• Gross Claims Incurred
• Outstanding Claims
• Invoice/Debit/Credit Note Number.

This listing assures that no policy or gross premium earned during the year has been missed.

19. For each individual policy in the above listing, the gross earned premium in current reporting period equals to the gross written premiums in current reporting period plus the change of unearned premiums reserves (UPR) for those policies. The list also include policies written in a previous year with an unearned premium reserve at the beginning of the year.

20. For each individual policy, the gross claims incurred in current reporting period equals to the gross claim paid in current reporting period plus the outstanding claims during the current reporting period plus the portion of other reserves during the current reporting period (e.g. IBNR, URR) that are related to the individual policy.
21. The other reserves for each individual policy shall be calculated as follow:

Other Reserves x ((individual gross earned premiums as calculated in Article (17) of this policy /(total gross earned premiums after excluding the Inwards reinsurance premium))

22. For each individual policy, the company should calculate the ratio of the gross claims incurred over the gross earned premiums. The company should eliminate policies with ratio of 70% or above.
23. Individual policies, where the ratio is greater than the specified percentage (e.g. 70%), should be excluded from distribution surplus calculation without combining them with other policies for other lines of business that one client may be having in his name. However, subject to practicality, if a client buys a number of separate policies to cover a number of similar risks in the same line of business, all such policies in the name of the same client should be combined to arrive at the ratio for determining the surplus eligibility.
24. The company should eliminate all policies that were cancelled during the current reporting period.
25. The company should eliminate fronting policies, which an insurance company acts as the insurer of record by issuing a policy, but then passes the entire risk to a reinsurer in exchange for a commission. For the purpose of this Policy, any issued policy with retained risks of 1% or less of the sum insured is considered a fronting policy.
26. The company then should eliminate policies, where the policyholders are not entitled to the surplus distribution.
27. The resulting list, after elimination of excluded policies indicated, contains all policies that are eligible for the distribution of the surplus amount for the current reporting period.

28. All policies that are identified as ineligible according to the Articles mentioned in Surplus Eligibility Section should be excluded from the policyholders' surplus distribution. The total gross earned premiums of all eligible policies after excluding the Inwards reinsurance premium will be the base on which the policyholders’ surplus (“Surplus Amount”) will be distributed.

    The share of surplus for each eligible policy shall be based on the ’contribution’ of such eligible policies. The Contribution from an eligible policy shall be calculated as:

    (Gross Earned Premium less Gross Incurred Claim)

29. Then, the share of the eligible individual policy in the surplus amount will be calculated by multiplying Contribution per Eligible Policy multiplied by Total Share Surplus and divided by Total Contribution from all Eligible Policies.
30. Where a client holds a number of participating policies, a statement should be prepared for his total entitlement, summarizing the entitlement from individual policies held by that Client.

31. Surplus payment should be made by credit note, to offset against future premium, or cheque/bank transfer sent directly to the policyholder. The surplus amount that is below S.R. 500 does not have to be send by cheque/bank transfer.
32. Policyholders should have the choice to have a cash or cheque/bank transfer or seek rebate in the renewal amount(s) due.
33. The client’s share of the surplus is subject to the settlement of all due premiums, irrespective of the year in which such premiums incepted and therefore could be offset against such due premiums.
34. If the policyholder chooses to come to the company’s offices to collect their surplus amount even if it is below S.R. 500, the company is required to pay by form of cheque this amount within 5 working days from the date of notification.
35. Surplus amount that remain unclaimed for more than 5 years will be written back to the Income Statement of Insurance Operation. If a customer makes a claim after five years, the same will be honored and charged to the Statement Income of Insurance Operation. The company will maintain the records of the surplus payable for a period of ten years. After ten years, the company must seek SAMA approval for dealing with any outstanding amounts within the Income Statement of Insurance Operation.
36. The Company should inform its policyholders through short message service (SMS), email, or a formal letter about the distribution of surplus and the company's methodology to distribute the surplus amount within (15) business days from the date of annual general assembly that approved the annual financial statements.
37. The distribution of surplus should be made within six months from the date of annual general assembly that approved the annual financial statements.

38. The company can give the surplus amount to authorized charities if the company obtains the policyholder’s written permission.