Amendments proposed to Solvency Margin Rules - General

REGULATION OF INSURANCE INDUSTRY ACT, NO. 43 OF 2000

Rules made by the Insurance Board of Sri Lanka under section 105 read with section 26 of the Regulation of Insurance Industry Act, No. 43 of 2000.

Chairman
Insurance Board of Sri Lanka

Colombo, …….. 2006

RULES

1. These rules may be cited as Solvency Margin (General Insurance) Amendment Rules, 2006.

2. (1) The amount of solvency margin, which is the difference between the value of the assets and the value of the liabilities, required to be maintained by any insurer who carries on general insurance business (in these Rules referred to as "insurer") shall be not less than the highest of the following:

(a) Rs. 50 million; or

(b) A sum equivalent to 20% of net written premium; or

(c) A sum equivalent to 40% of the average net outstanding claims for the three years immediately preceding the current year.

3. The value of the liabilities of an insurer for the purpose of determining the solvency margin shall be:

(a) the technical reserve which includes :

(i) Net unearned premium reserve, which shall be computed on the basis of 1/365 method or 1/24 method. In the case of marine cargo insurance the 40% basis may also be used:

However for non-annual policies an insurer may, with the prior approval of the Board, adopt any other appropriate basis for calculation of unearned premium reserve. The unearned premium reserve so calculated with reference to any of the above methods shall be adjusted for deferred acquisition expenses calculated on the same basis.

The insurer shall ensure that whatever the basis adopted is fully disclosed in the
financial statements.

(ii) Un-expired Risk Reserve, calculated on a net basis;

(iii) Reserve for net outstanding claims;

(iv) Reserve for incurred but not reported claims, calculated on a net basis; and

(v) Any other contingency reserves.

(b) liabilities as shown in the Balance Sheet; and

(c) any other liabilities of a special nature as notified by the Board.

4. For the purpose of determining the solvency margin the following types of assets of the general insurance business in such amounts or percentages as specified below are regarded as admissible:

5. (1) The value of admissible assets under Rule 4 shall be determined in the following manner: -

(2) Subject to the provisions of paragraphs 1 (k) of this Rule, an insurer shall provide for all balances, which are outstanding for more than six months from the due date of such balances, as a bad and doubtful debt.  

(3) An insurer shall treat an investment income, which is overdue for more than six months, as a doubtful debt. The asset on which the investment income is derived shall be excluded in calculating the solvency margin.

(4) The revaluation of freehold land and building and the valuation of any admissible assets the manner of determination of which is not provided for in paragraph (1) of this Rule shall be carried out in accordance with the Sri Lanka Accounting Standards.

(6). In the event an asset specified in Rule 4 (a)(iii), (c)(i), (c)(iii), (c)(iv), (c)(v), (d)(i) and (ii) above, is issued outside Sri Lanka or issued by an entity incorporated outside Sri Lanka, such asset is considered as admissible only if such asset is rated by a Credit Rating Agency listed in Part (I) of Table “A” below.   If an asset specified in the above rules is issued in Sri Lanka or issued by an entity incorporated in Sri Lanka, such asset is considered as admissible only if such asset is rated by a Credit Rating Agency listed in   Part II of Table A or by any other rated by a Credit Rating Agency registered by the Securities and Exchange Commission of Sri Lanka under the Securities and Exchange Commission Act, No. 36 of 1987.

(8). Where, on the date of the coming into operation of these Rules, an insurer who carries on general insurance business is maintaining a solvency margin of such amount determined in accordance with a method other than the method provided for in these Rules, such insurer shall be entitled, notwithstanding anything to the contrary in these Rules, to continue to use such method for a period not exceeding one year from the date of coming into operation of these Rules, and shall thereafter be required to comply with the provisions of these Rules.

(9). In these Rules unless the context otherwise requires -

"Act" means the Regulation of Insurance Industry Act, No. 43 of 2000;

“Asset backed Securities” means a security that is primarily serviced by cash flows of a discrete pool of receivables or other financial assets, either fixed or revolving, that by their terms convert in to cash within a finite time period plus any rights or other assets designed to assure the servicing or timely distribution of proceeds to the security holders;

“Board” means the Insurance Board of Sri Lanka, established under the provisions of the Regulation of Insurance Industry Act No. 43 of 2000;

“Equity” includes the issued share capital and reserves;

“investment grade rating” means a credit rating assigned by the corresponding credit rating agency set out in Part (I) and Part (II) of Table “A” below or any better credit rating assigned by such credit rating agency; or a credit rating which indicates similar credit quality as set out in Part (II) of table "A" below, assigned by an entity registered by the Securities and Exchange Commission of Sri Lanka under the Securities and Exchange Commission Act, No. 36 of 1987; To be applicable, the ratings should have been assigned or reviewed within the preceding eighteen months;

“issued shares” means the subscribed and the paid up share capital;

"licensed commercial bank", "licensed specialised bank" and “licensed finance company” shall be institutions licensed by a Government Authority to carryon such business;

"licensed stock exchange" means a stock exchange licensed by a Government Authority;

“Multilateral Agency” means and includes the International Finance Corporation and any other similar institution that may be considered and approved by the Board as a Multilateral Agency from time to time;

“Related company” shall have the same meaning given to it under the Sri Lanka Accounting Standards; 

"technical reserve" means the technical reserve maintained under section 24 of the Act and includes:-

(i) Net unearned premium reserve, which shall be computed on the basis of 1/365 method or 1/24 method. In the case of marine cargo insurance the 40% basis may also be used:

However for non-annual policies an insurer may, with the prior approval of the Board, adopt any other appropriate basis for calculation of unearned premium reserve. The unearned premium reserve so calculated with reference to any of the above methods shall be adjusted for deferred acquisition expenses calculated on the same basis.

The insurer shall ensure that whatever the basis adopted is fully disclosed in the financial statements.

(ii) Un-expired Risk Reserve, calculated on a net basis;

(iii) Reserve for net outstanding claims;

(iv) Reserve for incurred but not reported claims, calculated on a net basis; and

(v) Any other contingency reserves.

(b) liabilities as shown in the Balance Sheet; and

(c) any other liabilities of a special nature as notified by the Board.

"unit trusts" or “mutual funds” mean and include unit trusts or mutual funds regulated by a Government Authority.

Table A
INVESTMENT GRADE CREDIT RATINGS
(Part I)

(Part II)