Statement of Guidance - Capital Adequacy of Class B Insurers

Summary

This is a 2006 CIMA Statement of Guidance explaining how the Authority expects Class B insurance companies (both unrestricted and restricted) to determine and maintain adequate capital. It sets out CIMA's supervisory thinking on technical provisions/reserves, asset quality, and the main risk categories that should inform how much capital a Class B insurer holds beyond simple premium-to-surplus ratios.

• Insurance (underwriting) risk: A key risk category informing capital adequacy.
• Investment risk: A key risk category informing capital adequacy.
• Credit risk: Includes reinsurance and ceding-insurer exposures, and informs capital adequacy.

The guidance distinguishes between the statutory capital requirement (the minimum net worth prescribed by the Insurance Law) and a further risk-based 'regulatory capital' amount that CIMA may require on top of the statutory minimum, which together form the insurer's overall regulatory capital.

• Reserving practices: CIMA's expectations on technical provisions and reserving.
• Asset quality and liquidity: Expectations on the quality and liquidity of assets held.
• Concentration and related-party lending: Guidance addresses concentration risk and related-party lending exposures.
• Minimum funding expectations: Aiming for at least break-even underwriting results.
• Monitoring and capital-injection triggers: Triggers for monitoring and capital injection when capital is eroded.
• Run-off capital reviews: Guidance on capital reviews during run-off.
• Segregated portfolio companies (SPCs): Specific expectations for SPCs, including an example minimum net worth of US$120,000 for an unrestricted Class B SPC writing general business only.

As guidance rather than binding legislation, most of the document expresses CIMA's supervisory expectations and good-practice recommendations for Class B insurers to consider in managing capital, reserving and risk, rather than imposing new statutory obligations beyond those already found in the Insurance Law.

Key obligations

• Unrestricted Class B insurers must maintain at all times net worth (statutory capital) as prescribed by the Insurance Law, held as realisable assets.
• Restricted Class B licensees must maintain the minimum net worth amount as agreed with CIMA.
• Segregated portfolio companies (SPCs) must maintain the minimum overall net worth prescribed by the Insurance Law (e.g. US$120,000 for an unrestricted Class B insurer writing only general business), and each individual segregated portfolio is expected to be solvent in its own right.
• CIMA may require insurers to maintain a further risk-based level of regulatory capital in addition to statutory capital.
• Where regulatory capital has been eroded, insurers may be required to inject additional capital.
• Management should regularly monitor company performance, including regular analysis of management accounts, to assess whether capital and surplus remain sufficient for the risks being written.
• Long-tail/long-term claims liabilities should be calculated by actuaries or supported by an equally credible process, and CIMA may call for additional actuarial work.
• Insurers should select reinsurers with a proven track record of meeting obligations and adopt risk management strategies to address reinsurance credit risk.
• Licensees should avoid holding assets subject to conditions or restrictions requiring future commitments of funds.

Applies to

Class B insurers (unrestricted), Class B insurers (restricted), Segregated portfolio companies (SPCs) licensed as Class B insurers