Module 5:
The Need for Documentation
Module 5:
The Need for Documentation
After studying this module, you should be
able to:
-Describe the content and structure of the policy
- Understand the difference between a cover
note and a certificate of insurance
- Understand the importance of renewal
invitations
Principles and Practices of Insurance
Introduction
A contract does not have to be in writing to be a valid contract. However,
in a complex matter such as insurance, it is advisable to have the details
in writing. There is clearly an opportunity for disagreement if changes
are not confirmed in writing. Documents serve several purposes
including:
•
Information: Standard documents are used, which help insurers
receive information in a consistent manner. This reduces the possibility
of receiving irrelevant data or missing important information.
•
Record Keeping: Insurers need to know their potential liabilities,
reinsurance requirements etc.
•
Discrepancies: The documents clarify discussions and agreements
and ensure that insurers satisfy the policyholder’s requirements
•
Disputes: Reference to the appropriate document can often resolve
disputes at an early stage.
The result is a range of documents for different purposes, which we
shall examine in this final module. Several will be familiar as they were
discussed in earlier modules. Others will be new to you.
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Principles and Practices of Insurance
5.1 - Proposal Forms and policy structure
Proposal Forms
The proposal form is the most convenient way for the insurer to receive
information concerning the proposed risk. Proposal forms can be
quite plain or can be a form of advertising, particularly for personal
business.
See Module 3: Risk Underwriting; Section 3.3 for more detailed
information on the Proposal forms.
A brochure helps to sell the product and the proposal when completed
is detached and sent to the company. The policyholder retains the
brochure for information purposes. Brochures may contain a note that
the brochure is not part of the contract and is ‘for information only’.
It is however advertising and like all advertising, it cannot mislead or
misinform the client.
You will recall from module 3.3 that marine insurance and sometimes
large and complex fire risks do not use proposal forms. Briefly, explain
the reasons for this.
Policy Forms
When the insurer has accepted the proposal, terms agreed, the
premium paid (or the insured has promised to pay the premium) then
the contract is in force and subject to the laws of contract, irrespective
of the existence of a policy wording. The policy is the evidence of the
contract, not the actual contract.
Every insurer has their own style of wording for the different classes
of business they write. The approach and presentation may be decided
by company policy, some are simple A4 format, others particularly for
personal lines use a small booklet, bound in plastic covers or try to
make them ‘user friendly’ with explanatory notes and glossy pictures.
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Principles and Practices of Insurance
The class of business determines the length of the document. A
simple PA policy may be just a few pages but a house insurance with its
numerous sections or a fire and perils policy for a large manufacturing
risk, with extra perils, warranties etc could be quite a bulky document
of several pages.
In the UK, the Plain English Campaign has had a major influence on
insurers’ approach to policy wording. It has made them consider the
structure, layout and language used and many policies try to use clear,
everyday language and define any words that may be unfamiliar or
capable of misinterpretation.
Whilst we have stated that every insurer has their individual style, all
policies contain eight sections. They are:
Heading:
The section at the top of the policy giving the insurer’s name, possibly
the company logo and the registered address.
Preamble:
Usually found immediately below the heading (which means a preliminary
statement or introduction).
The preamble contains two essential points:
•
The proposal is the basis of the contract and the proposal form
incorporated in the contract. The proposal is not confined to just the
proposal form. Other documents, correspondence, discussions etc
are part of the proposal and therefore, part of the contract.
•
Reference to the consideration of the insured (has paid or agreed to
pay the premium) and the consideration of the insurer (will provide
the insurance as detailed).
Operative Clause:
An important section of the policy as it sets out precisely the cover
provided by insurers and the circumstances when they will pay.
They often start with the phrase ‘The Company will pay’ and then the
details follow. The Operative Clause can be very short, (certain All Risks
Policies) or quite lengthy (a motor policy).
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Principles and Practices of Insurance
Why is the Operative Clause on an All Risks Policy much shorter than
that of a named perils policy?
Exclusions:
Also known as exceptions they detail what the policy does not cover.
Exclusions can be classified into one of three categories:
•
Risks considered uninsurable in the normal insurance market. Sonic
bangs, radioactive contamination and war (on land) risks are three
that are most common.
•
To avoid confusion certain risks are more appropriately insured under
another policy. The theft policy may exclude money; the PL policy
excludes liability arising from the use of motor vehicles and so on.
•
There are risks that insurers are prepared to consider but because
they are extra hazardous, only after making further enquiries and
possibly requesting additional premium and/or other terms.
Give an example of two exclusions:
The first - because the cover is available under another policy
The second - where the risk is insurable but excluded because it is an
additional hazard for insurers
Conditions:
All insurance policies are subject to conditions - either Implied i.e. not
written in the policy or Express i.e. they are written in the policy. They
lay down rules that govern the behaviour of both parties during the
currency of the policy.
Implied conditions are present for all policies and they are:
•
That the subject matter of the insurance (property etc) actually exists
and is identifiable
•
That both parties have observed utmost good faith
•
That the insured has insurable interest
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Principles and Practices of Insurance
Written into and part of the wording are the express conditions. They
vary according to the type of contract but several are common to most
policies. Conditions can be general, which means they apply to the
whole contract. These include:
•
Alterations
•
Cancellation
•
Claims Notification
•
Fraud
•
Reasonable Care
•
Subrogation
•
Contribution
•
Arbitration
If general conditions apply to the entire contract then particular
conditions are conditions that relate to a particular or an individual
section of the policy and not the entire contract.
Conditions vary according to the time they operate for example, some
relate only to after a claim has occurred. There are three headings:
•
Conditions before the contract These are mainly the implied
conditions but may also be written into the wording. They operate
before the contract is formed.
•
Conditions after the contract These operate after the contract is
in force and are the majority of the conditions. They include taking
proper care, fraud, cancellation, alterations etc.
•
Conditions before liability These conditions apply after a claim
and if the claim is to be paid must not be broken. Subrogation,
contribution (other insurances), claim notification are examples.
COOPERATIVE PROFIT SHARING CLAUSE:
Ten Percent (10%) of said Net Surplus shall be distributed to all
Policyholders, each proportionately to his premium, by reducing the
premium of the following year.
Signature:
The policy is signed by a senior official of the company, typically the
managing director or general manager. The signature is printed on the
policy and usually countersigned or initialled by the official checking the
contents before forwarding to the client.
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Principles and Practices of Insurance
Schedule:
The six sections of the policy discussed so far are a standard document
for each type of policy. The policy forms are mass-produced and the
schedule contains all the information concerning the individual risk that
makes it an individual contract.
The schedule may include the following information;
• Name of the insured
• Postal address
• Risk address
• Description of business
• Inception Date
• Renewal date
• First and annual premium
• Policy number
• Sums Insured
• Description of property insured (if large a separate specification may
be attached)
• Excess or deductibles
• Special conditions
• Name of broker or agent
5.2 - Warranties and endorsements
Warranties
See Module 3: Risk Underwriting; Section 3.2 for more detailed
information on Warranties.
What is the definition of a warranty?
Some people argue that warranties are part of the policy conditions
and not a separate section of the policy. The argument is academic;
the main point is that a breach of warranty entitles the aggrieved party
(nearly always the insurer) to repudiate the entire contract. In that
sense they are more ‘important’ than the conditions where although
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Principles and Practices of Insurance
a breach might entitle insurers to repudiate the contract (e.g. fraud),
many breaches of conditions may entitle insurers only to repudiate an
individual claim (breach of subrogation condition) or to impose stricter
terms (e.g. failure to declare a premium adjustment condition).
Despite the seriousness of a breach of warranty, insurers in practice
tend to be more moderate in their approach and unless it is very serious
do not repudiate contracts for a single breach. They would not wish to
lose an otherwise good policyholder and it is unlikely that they would
repudiate a claim if the breach were unconnected to the loss.
Endorsements
During the currency of a policy, changes are inevitable, the insured may
change his motor vehicle, property owners buy and sell properties, values
change, and items added to the schedule with others deleted. Insurers prepare
an endorsement detailing the changes made to the terms of the insurance.
Typical of an endorsement is a change of vehicle under a motor policy.
The insured advises insurers who if they are prepared to accept the change
will advise the insured of any extra terms or conditions they may wish to
impose. (It may be a vehicle with much higher value or performance). If
the insured agrees to the new terms then an endorsement will make the
change to the policy. The endorsement will note details of the new vehicles,
any extra terms (higher excess) or additional premium that may be due.
5.3 - Cover Notes and Certificates of Insurance
Cover Notes
The policy is the written evidence of the contract and contains all the
details of cover provided. Preparing the formal document takes time
and it is not always possible, in fact, it is very rare for the document to
be ready from the first day of the insurance.
In the meantime, the insured may need to show to a third party that
insurance is in force. If property is security for a loan, the bank may insist
on insurance or a contractor may need to prove insurance to his principal
before commencing work. The cover note serves this purpose.
The cover note simply states that insurance is in force and gives brief details
of the cover. The notes are temporary and not needed once the policy is
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Principles and Practices of Insurance
issued. The cover note may be a pre-printed form often in a numbered
book or could take the form of a letter from the insured to the insurer.
Cover notes can be informal and vary between insurers as to content,
style and appearance. They all, however, serve the same purpose - they
are proof - if proof is needed that insurance is in force and insurers are
preparing the policy documents.
Certificates of Insurance
Certificates of insurance serve a very similar purpose as cover notes;
they confirm that cover is in force. When insurance is compulsory, the
authorities may ask the insured to confirm that cover is in force.
It would be cumbersome to carry the entire policy document and as they
differ from company to company, it would be difficult for the authorities
e.g. the police to be sure that the policy was valid. Certificates are therefore
required and they are in a standard format recognisable by all concerned.
Marine cargo insurance uses certificates of insurance and they become
part of the shipping documents. The certificate of insurance contains
information concerning the shipment which will be substantially the
same as that contained in a policy i.e. description of goods, conveyance,
voyage, sum insured etc.
Marine Insurance plays a vital role in the international system of trade and
although not legally required the insurance policy together with letters
of credit, bills of exchange, bills of lading, are necessary documents to
facilitate the smooth exchange of goods and money around the world.
A vendor selling his goods overseas will naturally want payment for those
goods when they leave his warehouse. A purchaser buying those goods will
not wish to pay for them until they have safely arrived in his warehouse,
possibly thousands of miles away. Journey times may take several months
and there is clearly a problem if both parties are to be satisfied.
A step-by-step example will make the process clear.
1. Rashid in Riyadh agrees to purchase machine parts from a company
based in Manchester, UK.
2. Rashid visits his bank in Riyadh and obtains a letter of credit.
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Principles and Practices of Insurance
3. The letter of credit is sent to the supplier’s bank in the UK.
4. To obtain the money the supplier sends the goods to Riyadh and
confirms by giving the shipping documents including the certificate of
insurance to the bank.
5. The UK supplier receives his money.
6. The UK bank sends the shipping documents to Riyadh.
7. The goods are in transit between UK and Riyadh
8. The goods arrive.
9. To collect his goods Rashid needs the shipping documents, to collect
these he needs to pay the bank in Riyadh.
10.Sothesuppliergetshismoneyfromthebank,thebankcollectsthemoney
from the buyer and the buyer collects the documents from the bank and
collects his goods. So every party is satisfied with the transaction.
The journey from the UK to Saudi Arabia could take several weeks. If
there is a problem e.g. the boat sinks or an accident destroys the goods,
the banks and/or Rashid have lost their money. Consequently, the banks
will require a marine insurance policy to cover the goods during the
journey. The certificate of insurance is an essential part of the shipping
documents and is proof that a policy is in force.
As the certificate of marine insurance is part of the shipping documents
if the goods change hands, the insurance certificate also changes hands
with the goods. This is different from other classes of general insurance
(non life) business. If a motorcar or a building is sold, the insurance
is not sold with the property. The identity of the policyholder is an
important underwriting consideration for insurers and they may not
wish to give cover to the new owner.
Why do you think that a bank involved in an international transaction
will insist on marine cargo insurance?
5. 4 - Claim Forms
Generally, policyholders notify insurers (or their brokers) of a claim by
telephone who send a claim form to the insured for completion and
return. To satisfy the claim notification condition the insured should
return this within a reasonable time.
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A liability claim form will ask for details of the incident and extent of injuries or
property damage to third party as a guide to the size of the claim expected.
On receipt of a claim form the claims official will make a number of
checks before proceeding. Typically these are:
•
That there are no outstanding premiums
•
Loss date is within the period of insurance
•
Name, address, occupation, previous claims, and other information
agree with the underwriting file
•
Cause of loss is an insured peril
•
There is no breach of a warranty or condition
•
That the sum insured (for property insurance) is adequate
•
The amount claimed is reasonable
In the event of doubt of any issue, further enquiries may be necessary.
Some claims dispense with the need for a claim form. Large losses
where loss adjusters are carrying out a detailed investigation make a
claim form unnecessary.
Typical questions on a property claim form and their reason for insurers
asking them include:
Name, address and policy number -enables insurers to locate the
underwriting file
Date of Loss - to check it occurred during the period of insurance
Cause of Loss – to ascertain if the peril is insured
Details of damaged property – to check that the policy insures it
Insured’s relationship to the property – check on policy cover and insurable
interest
Value of the property – to check the sum insured and for average
Cost of repairs or replacement – the basis of the insured’s claim
Details of any other party involved – checking for possible recovery
through subrogation
Other insurances – to check for double insurance
What action would you recommend if the information on the
underwriting file contradicts the information on the claim form?
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Principles and Practices of Insurance
5.5 - Renewal Invitations
The majority of policies run for 12 months. There is no obligation on
either side to renew but insurers are keen to keep good business and
want the insured to renew the contract for a further 12 months.
The insurer will issue a renewal notice just before the renewal date (three
to four weeks is a typical period), which brings to the insured’s attention
that the period of insurance is ending and indicating the renewal premium
required. There is no obligation to issue a renewal notice but it is clearly
in insurer’s interests if they wish to retain the business.
The renewal notice will indicate the premium required by insurers to
continue the insurance for a further 12 months. It will contain brief
details of the insurance, policy number and possibly where and how to
pay. The renewal notice may also contain a warning or reminder to the
insured of the duty of utmost good faith and that he must notify any
changes or alterations to the risk.
The new period of insurance is a new contract albeit at the same terms
and conditions as the expiring contract.
What effect does the renewal, being a new contract, have on the insured’s
duty of utmost good faith?
Days of Grace
Many insurers will insist that they receive the renewal premium before
the renewal date. If there is non-payment then the implication is that the
insured does not want to renew the insurance and the policy will lapse.
There are cases however when the insured has not paid the premium by
the due date but it is their intention to renew. The renewal notice may
have been lost, the insured on holiday when it arrived, the cheque for
payment may be mislaid. To allow for this insurers may allow a period
of time, (7 to 14 days is typical but could be 30 days) known as days
of grace during which if the premium is paid the policy will continue
without any break in cover.
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Days of grace do not apply if the insured indicates that it is not their
intention to renew. Neither are they on extension of cover.
The Finance Director of a company returns from vacation on 5th
September and discovers the renewal notice for the company’s public
liability on his desk. The renewal date was 1st September and he
immediately prepares a cheque and sends it to insurance company by
messenger. Several weeks later, a customer makes a claim against the
company alleging injuries received in a showroom on 3rd September
two days before the premium was paid. Do you think insurers will deal
with claim? Give reasons for your answer.
Insurers do not have to accept the offer and if they revise the terms
and conditions of the insurance, this becomes a counter offer and the
insured does not have to accept the new terms. It helps insurers to retain
business especially on a large commercial contract where the expenses
of surveying and policy preparation are in the first year.
Both sides benefit from a long-term agreement, the insured from the
reduction in premium and the insurer retains the business.
Long-term agreements are not long-term contracts, each contract is for
12 months and the agreement is simply that insurers have an opportunity
to retain business while their terms remain unchanged.
Long-Term Agreements
Long-term agreements are agreements between the insured and insurer
whereby the insured agrees to offer the risk for insurance to the insurer
for a stated number of years (three is typical) at the same terms and
conditions in force at expiry. In return, insurers offer a discount from
the premium (5% or even 10%).
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Progress Check
Directions: Choose the best answer to each question.
1. Why do insurance companies use proposal forms?
a. To determine the deductable
b. To calculate the premium
c. To get the material facts
d. To put the conditions
2. What information is in the preamble?
a. The exclusions
b. The coverage
c. Proposal; is basis of contract
d. The warranties
3. What information is in the operative clause?
a. The exclusions
b. The coverage
c. Proposal; is basis of contract
d. The warranties
4. Why do insurance policies need conditions?
a. To set the rules for insured and insurance company
b. To control bad moral hazard
c. To keep good aspects of risk
d. To control morale hazards
5. Generally what is more serious?
a. breach of warranty
b. breach of condition
c. both are correct
d. both are wrong
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6. When do insurers use endorsements?
a. If there is a physical hazard
b. To control moral hazard
c. To eliminate morale hazard
d. If there is any change in the policy
7. Why do insurers issue renewal notices?
a. To maintain policyholders
b. To get new policyholders
c. If there is any change in the policy
d. Evidence for cover
8. Days of grace.
a. A period with no cover
b. There is cover although premium is not paid
c. There is intent to renew and coverage but premium is not received
d. Is obligatory for an insurance company to give to all policy holders
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Module 6:
Regulation of the Insurance
Industry in the Kingdom
Module 6:
Regulation of the Insurance
Industry in the Kingdom
After studying this module, you should be
able to:
- Understand why the insurance and protection
savings industry needs to be regulated
- Understand the role of SAMA
- Understand article two of the regulations
Principles and Practices of Insurance
Introduction
National economies vary from free market, open economies to state
controlled nationalised economies. However, even in the freest of free
market economies governments find it necessary to control and regulate
their insurance industry.
Insurance companies are entrusted with huge amounts of money - in
the $50 Billion to $200 Billion range in the case of the largest U.S. life
insurance companies, such as the Prudential Insurance Company of
America, Metropolitan Life Insurance Company and New York Life
Insurance Company. The insurers are thus custodians of public funds
and they have to be regulated in an effort to ensure that the public and
its funds are dealt with honestly and also to prevent the insurers from
taking unwarranted risks in the name of investments with the money
they are holding.
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Principles and Practices of Insurance
The Purpose of Regulation
The primary purposes of insurance regulation historically have been:
(1) To maintain the insurers’ financial solvency and soundness so they can
carry out their long term obligations to policyholders and pay claims.
(2) To guarantee a fair treatment of current and prospective policyholders
and beneficiaries by both insurers and the people who sell their
policies.
(3) The need to make certain types of insurance compulsory as a way of
achieving broad financial protection to the general population.
In this section, we start with a look at the background to the introduction
of regulation in the Kingdom of Saudi Arabia, why government controls
are necessary, why some classes of insurance are compulsory, and how
these issues are dealt with in the Kingdom.
6.1 - Why the insurance industry needs to be regulated?
Consumers buy insurance to protect themselves against what is generally
a small probability of a catastrophic loss, effectively transferring the risk
of any loss to an insurance company. In turn, the insurance company
spreads the risk it assumes over a large pool of policyholders, using
capital reserves to shoulder any compensation costs to policyholders
who may incur an unexpected loss.
Concepts of insurance dates back to 3000 B.C. There are several examples
of pre-Islamic history whereby families, tribes or related members
throughout the Arabian Peninsula pooled their resources as a means to
help the needy on a voluntary and gratuitous basis. These practices were
validated by Prophet Mohammad (Peace Be Upon Him) and incorporated
into the institutions of the early Islamic State in Arabia around 650 AD.
Examples of these early Islamic practices include the following:
• Merchants of Mecca formed funds
to assist victims of natural disasters
or hazards of trade journeys.
• Surety called “daman khatar al-tariq”
was placed on traders against losses
suffered during a journey due to
hazards on trade routes.
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• Assistance was provided to captives and the families of murder
victims through a grouping known as a’qila.
• Contracts, called “aqd muwalat”, were entered into for bringing about
an end to mutual amity or revenge.
• Confederation was brought about by means of a “hilf ”, or an
agreement for mutual assistance among people.
However, it was during 1500’s to 1700’s, when more modern types of
policies began to develop for life, marine and fire insurance
The roots of Lloyds’s of London began at Lloyd’s Coffee in 1688,
where shippers and merchants would negotiate and obtain insurance
on shipping fleets and their cargo.
During the period of the British colonisation and trade with U.S. colonies,
some insurers cooperatively agreed to set reserves, in order to maintain
solvency and build public trust and confidence. This was the first major
step towards regulation, although it initially was self-regulation. Early
government regulation included reporting requirements, taxes on
insurers, and granting charters.
Later, in the 1800s, as rapid urbanisation and industrialisation took place
across Europe and America, many governments established regulations
to set standards and guard against problems of insolvency, after a number
of catastrophic fires led to insurance bankruptcies. Regulations also were
used to discourage opportunistic and financially unsound companies.
Throughout this period, governments and their regulators became
anxious about insurance policy rates that were either too high or too
low. The regulators wanted to keep the industry competitive but also
balanced. If markets and prices were too competitive, regulators believed
that low rates could be predatory and would lead to a decreased number
of insurance companies, many failing due to bankruptcy. In such cases
policyholders would suffer as there would be insufficient funds available
to pay for policyholders’ losses. On the other hand, if rates were too
high insurance companies would be seen as price-gouging by not
offering affordable rates to the masses which could lead to the public
avoiding insurance which, in turn, could impact the public well-being.
During this time period, regulators also started to become concerned
with preventing price discrimination.
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Principles and Practices of Insurance
The period following World War II through to the end of the 20th
Century saw increasing and more sophistication of regulation in the
insurance and financial sector as a whole. Largely driven by the need
for consumer protection regulation encompasses many aspects of the
industry, from robust financial requirements of insurers and reinsurers
to codes of conduct for agents and brokers.
Some economists have criticised regulation by pointing out that
efficiently working markets are the best means for consumers to get
what they want at the lowest price and highest quality. While this
may be true, regulations have been shown to be necessary in order to
protect consumers, correct market imperfections and be a backstop
for preventing a variety of harms caused to consumers. Regulations
can help consumers by providing recourse for common problems
and complaints, helping industries institute universal standards and
guidelines, and, most importantly, increasing consumer welfare.
“Competition can be depended on to keep rates from being excessive, and
good management will keep them from being inadequate; regulation of
insurance rates is an infringement on the right of management to make
business decisions.”
Do you agree or disagree with this statement? Why?
6.2 - The Historical Background of the Insurance Industry in
the Kingdom
The Control of Cooperative Insurance Companies Regulation, which
was enacted as Royal Decree No M/32 on 1 August 2003, is the first
Saudi Arabian legislation regulating insurance. While in recent years over
75 insurance operators were writing business estimated in excess of SAR
2.7 billion in the Kingdom, they were able to do so without virtually any
regulation at all. Now, this has been completely transformed. What used
to be an unregulated, free-for-all has become one of the most closely
regulated insurance markets in the region.
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Principles and Practices of Insurance
The past lack of regulation does not mean that the Saudi Arabian
government took a non-interventionist approach to the insurance
industry. Rather, its past reluctance to legislate in relation to insurance
arose from the uncertain status of insurance under Sharia’h Law. While,
for example, the prohibition of charging or paying interest is based
on clear statements in the primary sources of Islamic Law, there is no
reference to insurance in the Islamic Law texts which are regarded as
authoritative in Saudi Arabia. This is not surprising, since these texts
were compiled in the period from the 13th to 17th centuries of the
Gregorian calendar, that is, at a time when insurance was just evolving
as a business in Europe.
In Saudi Arabia, the debate of whether or not contracts of insurance are
legitimate under Sharia’h law was narrowed down to the key issue that to
profit from an insurance transaction runs counter to Islamic law, while
collective risk sharing is acceptable and in the community’s interest. This
is based on Decision No 51 of 23 March 1977 of the Supreme Council
of the Senior Ulema, a Saudi Arabian government body of religious
scholars, who ruled that cooperative (or mutual) insurance is “a form
of contract of donation”, and, because no one is supposed to profit
from cooperative insurance transactions, the Senior Ulema considered
insurance in this form to be acceptable under Islamic Law.
In 1985, the state-owned National Company for Cooperative Insurance
(NCCI) -which is now named TAWUNIA -was formed by Royal Decree
as a Saudi Arabian joint stock company, with the Public Investment
Fund, the Pension Fund and the General Organization for Social
Insurance as its shareholders. This was done in response to the Senior
Ulema’s recommendations that a cooperative insurance company should
be established in the Kingdom of Saudi Arabia to offer an alternative to
commercial insurance.
In keeping with NCCI’s articles of association, the company maintains
separate accounts for both its policyholders and for its shareholders.
Therefore, it is actually a hybrid between a true mutual insurer, which
is wholly owned by its policyholders and not traded on a stock market,
and a commercial insurer, but nevertheless sufficiently mutual to meet
the Senior Ulema’s recommendation that it should conduct its business
on a cooperative basis.
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Principles and Practices of Insurance
Although there was never a statutory prohibition of commercial
insurance in the Kingdom, the Saudi Arabian Ministry of Commerce
did not issue commercial registrations to any person or company, other
than NCCI, to conduct insurance business in the country. Yet, a fair
number of foreign-registered insurance organisations operated in Saudi
Arabia. The majority of these were Bahraini-exempt companies, that
is, companies registered in Bahrain with the express purpose of not
conducting business there. The companies’ day-to-day business in Saudi
Arabia, such as writing policies and settling claims, was done through a
local agent. In other words, the majority of insurance operators in Saudi
Arabia were foreign-based but marketing and underwriting risks within
the Kingdom.
13 ptIn accordance with the strict letter of the law, conducting any kind
of business in Saudi Arabia without holding the requisite commercial
registration is unlawful. Notwithstanding this, the Ministry of
Commerce exercised a loose supervisory function over foreign insurers
who conducted business in the country, and there certainly was nothing
clandestine in the manner in which those organisations operated.
For example, all government construction contracts contain a proviso
that the contractor must have Contractor’s All-Risks Insurance with an
insurer who is represented in Saudi Arabia, and it was quite acceptable
to insure such risks with Bahrain-based, Saudi-operating insurers other
than NCCI. Despite this pragmatic approach to a predicament created
by an interpretation of the Islamic law principles, which are relevant in
this context, having an insurance industry which is essentially offshore
and not subject to strict supervision naturally created problems.
While a handful of the foreign insurers who wrote business in Saudi
Arabia were of a blue-chip background, there were many who were
financially unsound and sometimes unscrupulous. Not surprisingly,
there were incidents of insurers collecting premiums and disappearing
overnight. Furthermore, because the business was essentially foreign,
local retention of risk and reinsurance within the Saudi market was
low, with over 70 per cent of the premiums generated in Saudi Arabia
leaving the country. Nevertheless, until quite recently, no serious effort
was made to impose real control on the Kingdom’s insurance market.
The current reforms were driven by two important changes that were
taking place within the Kingdom.
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Principles and Practices of Insurance
As insurance was an unrecognised business in the Kingdom, how did
insurers get around the problem to enable them to write business in
Saudi Arabia?
The main reasons for allowing and regulating insurance are:
1. The medical compulsory Insurance.
2. Joining the World Trade Organization.
For many years, all health-care
in Saudi Arabia has been free
to citizens and foreign residents
alike. Since there are an estimated
six million foreign workers and
their dependents in Saudi Arabia,
this clearly imposes a considerable
burden on the nation’s healthcare
system and on the economy as a whole. To alleviate the problem, the
government introduced the Cooperative Health Insurance Act, Royal
Decree No M/10 of 13th August 1999, which makes it mandatory
for employers to take out private medical insurance for their foreign
employees and their dependents.
In principle, the government could have just made private health
insurance for foreigners obligatory and left the Saudi insurance market
in its existing, disorganised state. However, the Regulation requires
that insurers providing cover under the scheme must be Saudi-
registered cooperative insurance companies. Because there was only
one entity which fulfils this requirement, namely the NCCI, the effect
of the legislation could have been the introduction of a state-owned
monopoly. However, the expansion of state-owned industry is not in
line with the overall government policy. Rather, the Saudi government
has been working to encourage an increase in the private sector’s role
in the economy as a whole not to decrease it. Additionally, setting up
the provision of health insurance to an estimated four to six million
persons within a relatively short period would have been a logistical
exercise well beyond the capacity of any single entity.
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Principles and Practices of Insurance
The second key driver to the introduction
of insurance regulation in the Kingdom
was King Abdullah’s determination to
have Saudi Arabia accede to the World
Trade Organization (WTO). A part
of the Kingdom’s agreement to join
the WTO was the opening up of its
insurance sector to foreign interests.
In truth, this is a paradox, because in
its past unregulated state the Saudi insurance market was open to all
comers, albeit not in any official basis. If one viewed the opening up
of the Saudi insurance market solely from the perspective of being
able to establish a licensed Saudi Arabian insurer, it was closed to both
foreigners and Saudis alike, since there was no framework for the setting
up of such entities, other than NCCI, of course.
World Trade Organization website: www.wto.org
So, the Control of Cooperative Insurance Companies Regulation came
into force on 20th November 2003. With the issue of the Implementing
Rules on 23rd April 2004, a new industry in the Kingdom was born.
6.3 - Regulation of Insurance in the Kingdom of Saudi Arabia
Recall from the previous section, when the decision was made for Saudi
Arabia to open its doors to insurance it was done so on the basis of the
improving the consumers’ welfare, it being in the public interest, to enable
the nation to deal with its healthcare insurance problem, and also to bring
about an open market, fairness and a level-playing field between foreign
and domestic insurance companies in line with WTO agreements.
On 30th of July 2003, the Saudi Council of Ministers passed historic
legislation opening the Kingdom’s insurance sector to foreign
investment and the Control of Cooperative Insurance Companies Law
came into force on 20 November 2003. However, the issuance of the
Implementing Rules, which were meant to be published on 21 October
2003, was delayed until 23 April 2004. Therefore, because much of the
detail of the legislation is contained in the Implementing Rules, the new
regulatory scheme did not become effective until 23 April 2004.
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Principles and Practices of Insurance
The objective of the law and the implementing Regulations we expressed
in the Article two of the Regulations:
‘Article Two’
Objectives of the law and its implementing Regulations
1. Protection of policy holder and shareholders
2. Encouraging fair and effective competition
3. Enhancing the stability of the insurance market
4. Enhancing the insurance sector in the Kingdom and provide training
and employment opportunity to Saudi nationals.’
The government regulator of the Saudi insurance sector is the Saudi
Arabian Monetary Agency (SAMA), which, since its formation in 1957,
has proven to be a successful and stringent regulator of the Saudi banking
sector. Indeed, SAMA has brought this young nation’s monetary system
well within modern standards.
SAMA website: www.sama.gov.sa
With respect to insurance, SAMA’s duties and powers are wide-ranging.
They include the preparation of the Implementing Rules of the
Regulation, licensing of insurers wishing to operate in Saudi Arabia,
and, generally, policing and control of the Saudi insurance sector. This
also includes insurance brokers, insurance agents, insurance consultants,
surveyors, loss adjusters and actuaries, all of whom must now apply to
SAMA for a licence to carry on business in Saudi Arabia. When viewed
broadly, SAMA’s insurance regulatory powers in the Kingdom includes
the following:
1. Regulations for the establishment of insurance and reinsurance
companies in the Kingdom;
2. The supervision of the technical aspects of insurance and reinsurance
companies’ operations;
3. Regulation of the distribution of surplus funds to shareholders and
policyholders;
4. Determining the capital and solvency requirements for each class of
insurance business required by companies;
5. Regulation of the companies’ investments both inside and outside of
the Kingdom;
6. Actuarial and rating approval.
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7. Education and qualification requirements of insurance company
personnel, brokers and agents.
8. Content of policy forms.
9. Code of Conduct, insurance sales and information disclosure.
10.Contract interpretation and enforcement.
11.Compulsory purchase of insurance coverage.
Now let’s look at each of these regulatory areas in more detail and with
specific reference to the Kingdom’s legislation.
1. Regulations
for the establishment of insurance and
reinsurance companies in the Kingdom
The Regulation restricts insurance activities in the Kingdom to Saudi-
registered companies which are incorporated by Royal Decree as public
joint stock companies, with a minimum paid-up capital of SAR100
million for primary insurers, and SAR200 million for reinsurers.
Applications for licences must be lodged with SAMA, which, if the
application is approved, refers the matter to the Ministry of Commerce
and Industry for the formalities of incorporation in accordance with
the Saudi Arabian Companies Regulation.
Licensing Requirements – Insurance and Reinsurance
Companies
Before licensing, the prospective insurer or reinsurer must complete an
application and submit it to SAMA for review. The application package
should include the following:
1) Completed licensing application
2) Memorandum of Association
3) Articles of Association
4) Organisational structure
5) Feasibility study
6) Five-year business plan which must include as a minimum:
i) Classes of insurance that will be undertaken by the Company.
ii) Ability to cede or accept reinsurance treaties for classes the
Company intends to insure.
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iii)Marketing plan.
iv)Projected costs and financing to start the Company’s operation.
v) Projected underwriting growth taking into consideration solvency
margin requirements.
vi)Expected number of employees and a Saudisation plan for training
and employment.
vii) Annual costs based on projected growth rate.
viii) Projected financial statement related to the growth rate.
ix)Technical Provisions statement for the proposed growth of the
insurance operation certified by a qualified actuary.
x) Branch distribution plan in the Kingdom.
7) Any agreements with outside parties.
8) An irrevocable bank guarantee issued by a local bank for the capital
required (Such a guarantee must be renewed until the capital is paid up.)
9) A non-refundable application fee of SR 10,000 for Companies.
Licensing Requirements – Individual Insurance Professions
The regulations identify specific insurance professions requiring
licensing. These include:
• Actuaries
• Insurance agents
• Insurance Brokers
• Insurance Consultants and Advisors
• Claims or loss assessors, adjusters and claims settlement specialists
• Key Company personnel dealing with and advising the public.
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These professionals must meet the following requirements:
1) A university degree as a minimum, and five years relevant insurance
experience, or an insurance professional designation acceptable to
SAMA.
2) Pass the examination approved by the SAMA to engage in the
qualification acceptable to SAMA.
Once the application has been received SAMA will advise the
applicant within 30 business days confirming the application is
complete or further information is required. When the application
is complete, SAMA will advise the applicant of its decision within
90 business days. Upon approval of the license a licensing fee is
required:
Insurance Companies SR 100,000
Reinsurance Companies SR 200,000
Insurance and Reinsurance Companies SR 300,000
Insurance and Reinsurance Providers
(Except Actuaries and Insurance Advisors)
SR 25,000
Actuaries and Insurance Advisors SR 5,000
The regulations also aim to ensure that companies involved in the
provision of insurance and reinsurance services, other than insurers
and reinsurers, are financially sound. As a result minimum capitalisation
requirements for these companies are required. In addition, to ensure
that the public and other industry members are protected, insurance
and reinsurance services providers have to obtain a professional
liability policy covering liability risks for negligence, wrongdoing and
dereliction of duties.
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The minimum requirements for capitalisation and professional
liability insurance cover are given in the following table:
Type of Insurance
Service Provider
Minimum capitalisation
Requirement
Minimum Professional
Liability Cover
Reinsurance Brokerage SR 3,000,000 SR 6,000,000
Insurance Brokerage SR 3,000,000 SR 3,000,000
Claims Settlement
Specialists (Third Party
Administrator)
SR 3,000,000 SR 1,000,000
Insurance Agency SR 500,000 SR 1,000,000
Loss Assessors and Loss
Adjusting
SR 500,000 SR 3,000,000
Insurance Advisor SR 150,000 SR 500,000
Actuary SR 150,000 SR 6,000,000
2. The supervision of the technical aspects of insurance and
reinsurance companies’ operations
As well as fairly strict licensing conditions on companies and individuals,
the regulations place high, but not unreasonable, capitalisation
requirements on companies wishing to operate within the Kingdom’s
insurance sector. It is quite likely that these stringent requirements will
lead to a large-scale exodus of insurers from the Saudi Arabian market,
leaving a few well-structured and highly regulated insurance companies.
Certainly, this is the intention of the regulations. Because the legislation
requires insurers to be incorporated as public joint stock companies,
the Kingdom will see a fair number of new companies coming onto the
stock market (IPOs) within a relatively short period.
Foreign Ownership
There are no restrictions on foreign participation in insurance companies
registered under the new framework. However, full foreign ownership
of a Saudi insurance company is at present precluded, because under
the current regulations publicly traded stock may not be owned by
non-Saudi interests. Therefore, at present, foreign interests can only
participate in a Saudi insurance company as founding shareholders.
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Principles and Practices of Insurance
Neither the Regulation nor the Implementing Rules specify how much
of an insurance company’s stock must be floated, but Saudi Arabian
banks with foreign shareholders, which operate under similar principles,
have between 30 and 40 per cent of their stock traded publicly, and
there have been indications that the requirement in respect of insurance
companies will be 25 per cent.
Classes of Insurance
Insurers must be licensed by SAMA to write specific classes of
business, which are broadly grouped as general insurance (including
accident, liability, motor, property, marine, aviation, energy and
engineering), health insurance, and protection and savings insurance,
or for two or more of these, depending on the proposals put forward
by the applicant in the feasibility study and business plan, which must
be submitted with the licence application. Once a company is duly
licensed, the offering of any products in the market must be pre-
approved by SAMA.
Valuation of Investments, Assets and Technical Provisions
As far as finances are concerned, the Implementing Rules contain
detailed provisions governing investments, solvency margins, evaluation
of assets and technical provisions. Saudi insurers are required to maintain
50 per cent of their assets in Saudi Riyals, although this may be reduced
with SAMA’s prior approval. Saudi insurers may not invest more than
20 per cent of their assets outside of Saudi Arabia. Certain types of
investments, for example those in derivatives, require pre-approval of
SAMA. A company is required to have written investment and risk
assessment guidelines approved by its board.
Transnational Transactions
Under the terms of the Implementing Rules several restrictions are
imposed on transnational transactions. Thus SAMA’s approval must be
obtained before a Saudi insurer associates with non-Saudi insurance
funds. Saudi insurers, brokers and agents who wish to place cover
with Lloyd’s or non-Saudi insurance companies must obtain SAMA’s
permission. At least 30 per cent of cover must be reinsured within
the Kingdom, although this percentage may be reduced with SAMA’s
consent.
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Principles and Practices of Insurance
Reinsurance regulations
The Implementing Rules set out detailed guidelines relating reinsurance
and are particularly specific regarding the use of non-Saudi reinsurers
with who cover may be placed. Certainly, dealing with a reinsurance (or
insurance) company not licensed in the Kingdom will not be tolerated
and heavy fines will be imposed. Consumer protection is naturally the
main reason for such stringent rules. An insurer that engages treaties
outside the Kingdom must adhere to the following criteria:
1) The foreign reinsurer is licensed to transact the type of reinsurance
proposed in the Kingdom in its own country of domicile.
2) The insurance regulator of the foreign reinsurer must authorise the
exchange of relevant information with SAMA.
3) The foreign reinsurer must maintain separate records and financial
statements of all Saudi operations and these must be made available
to SAMA upon request.
4) The insurance company must provide SAMA with the reinsurer’s
latest financial statements and the latest regulatory report issued by
the reinsurer’s insurance regulatory authority.
5) The insurance company must select a reinsurer with a minimum S&P
(Standard and Poors) rating of BBB (or equivalent internationally
acceptable rating).
In addition, whether the reinsurance agreements are with foreign based
or Saudi based reinsurers, all reinsurance agreements must be filed with
SAMA.
Technical Provisions
Naturally, the Technical Provisions must be calculated in accordance
with generally accepted accounting standards and approved by the
actuary. When reporting, the following technical provisions must be
included as a minimum:
1) Unearned premium reserve
2) Unpaid claims reserve
3) Incurred but not reported (IBNR) claims reserve
4) Unexpired risk reserves
5) Catastrophe risk reserves
6) General Expense reserve
7) Reserves related to Protection and Savings insurance, such as disability,
old age, health, death, medical expenses, etc.
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Principles and Practices of Insurance
The reserves must be calculated in a specified manner as approved by
the regulations.
3.
Regulation of the distribution of surplus funds to
shareholders and policyholders
A key aspect of the introduction of regulated insurance in the Kingdom
is the cooperative nature of the industry. Therefore the regulations
require that Saudi insurers must operate on this cooperative basis. As
a model for what constitutes cooperative insurance, the Regulation has
pointed to NCCI’s articles of association, which insurance companies
registered in the Kingdom are supposed to use as a blueprint for their
articles of association.
The key to the distribution of surplus funds lies in how the net surplus
is calculated. This calculation is made in the following steps:
Step 1) Determine the Earned Premiums, and income generated from
reinsurance commissions and other insurance operations.
Step 2) Determine the Incurred Indemnification.
Step 3) At the end of each year calculate the Total Surplus representing
the difference between Step 1 and Step 2, less any marketing,
administrative expenses, the necessary technical provisions, and
other general operating expenses.
Step 4) The Net Surplus is then calculated by taking the Total Surplus
and adding or subtracting the policyholders’ investment return,
and subtracting the general expenses related to the management
of the policyholders’ investment funds.
Step 5) Once the Net Surplus has been calculated 10% of the net
surplus is to be distributed to the policyholders directly either
in the form of a direct payment or as reduction in premium for
the next year.
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10%
20%
70%
Policy Holders
Reserve
Stock Holders
The remaining 90% of the Net Surplus is to be transferred to the
shareholders income statements. Twenty percent (20%) of the net
shareholders’ income is to be set aside as a statutory reserve until reserve
amounts are equal to 100% of the paid capital.
In addition to these rules, SAMA must approve the Company’s
calculations and net surplus distribution and timing.
4. Determining the capital and solvency requirements for each class of
insurance business required by companies
Solvency is the minimum standard of financial health for an insurance or
reinsurance company, where assets exceed liabilities. For the protection
of policyholders and the assurance of stability within the marketplace,
regulators, such as SAMA, are particularly concerned about monitoring
company solvency.
Statutory Deposits
Initially, each company must make a Statutory Deposit of 10% of the
paid up capital. If SAMA believes there to be a greater than normal
risk with the company or the type of business it is participating in, then
it may request a statutory deposit of up to 15%. The deposit must be
made within 3 months of the company’s license being issued, in a bank
designated by SAMA.
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Asset Valuation and Solvency Margins
The principal assets of general insurers tend to be:
(1) The loss reserves.
(2) The unearned premium reserves.
(3) Investments.
For companies involved in the Protection and Savings area of insurance,
the assets are primarily accounted for by the policy reserves, which is
the insurer’s obligation to policyholder for the policyholders’ savings and
expected policy payments. The much lower capital-to-assets ratio for
protection and savings companies than general insurers (6% to 35%)
reflects the differences in the risk for the products that the two groups
sell. Variability of claims costs are much lower for protections/savings
(and health and life insurers) than they are for general insurers. As a
result, the regulations require a much smaller cushion (or amount of
capital per Riyal of assets) needed to avoid the probability of insolvency
for the protection/savings industry.
Additionally, within general insurance the riskiness of business can vary
considerably. In view of the risk differences between general insurers
and protection and savings companies, the assets of each class of
business must be considered separately.
The assets that can be included in the solvency calculation must be
related to the business of insurance. For example, if a company has
issued bonds or has assets obtained from loans, then these cannot be
included as they have non-insurance related liabilities attached to them.
The regulations provide a table of acceptable assets and the conditions
to their valuation.
Also, the Regulations demand that companies that fall below their
required solvency margins notify SAMA immediately and agree upon a
plan with SAMA to restore the margins to their approved levels within
the next financial quarter. If the margins fall significantly and the
company has not been able to restore them to the acceptable levels then
SAMA will require the company to do some or all of the following:
a. Increase the Company’s capital,
b. Adjust their insurance premiums,
c. Reduce costs,
d. Stop underwriting business,
e. Asset liquidation.
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Principles and Practices of Insurance
Furthermore, SAMA may enforce other actions and may appoint an
advisor to provide private consultation and advice to the company or
even order a cease and desist order to stop the company underwriting
business. SAMA can also withdraw the company’s license if the solvency
margin falls below 25% or the company fails to rectify its solvency
problem.
5. Regulation of the companies’ investments both inside and
outside of the Kingdom
As insurance companies are tasked with the stewardship of their
policyholders’ money, either for savings and investment or for
ensuring funds are available to cover their policyholders’ losses, it is
important that these funds are managed prudently. To help ensure wise
investment management the regulations demand that the insurance
and reinsurance companies invest these funds wisely.
Each company must have a clear, written investment policy governing
the investment policy and methods of managing their investment
portfolios. At least 50% of the company’s investments must be
invested in Saudi Riyals. And the investment policy must include
a diversification strategy, which gives consideration to the risks
faced by the company and the environment in which it operates.
Risk management of the investments is critical and the investment
diversification plan should, at a minimum, include consideration of
the following:
Risks:
a. Market risk
b. Credit risk
c. Interest rate risk
d. Currency exchange risk
e. Liquidity risk
f. Operations risk
g. Country risk
h. Regulatory and legal risk
i. Reinsurance risk
j. Technology risk
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Principles and Practices of Insurance
Within the regulations, SAMA has provided a set of investment standards
which the companies must work within. These set the limits of the
types of investment and their concentration. Specifically, companies
are not permitted to use financial instruments such as derivatives and
off-balance-sheet items, other than for efficient portfolio management
and only with SAMA’s approval.
6. Actuarial and rating approval.
The regulations require that each company appoint an Actuary who
holds that designation of ‘Fellow’, or contracts the services of an
actuarial firm with the permission of SAMA.
The actuary or actuarial firm plays an important role in maintaining the
company’s sound financial position. Indeed, the regulations provide an
outline to the duties of the actuary:
a. Obtain all required previous information from the previous actuary.
b. Examine the Company’s financial position.
c. Evaluate the Company’s ability to meet its future obligations.
d. Determine adequate risk retention levels.
e. Price the Company’s insurance products.
f.
Determine and approve the Company’s technical provisions.
g. Provide advice and recommendations related to the Company’s
investment policy.
h. Any other actuarial recommendations as he or she sees fit.
As a qualified professional, the Actuary is deemed to be professionally
liable for his/her advice and technical services provided to the Company.
The actuary is viewed by the regulations as the pivotal individual for the
supply of financial and technical information to SAMA.
7. Education
and qualification requirements of insurance
company personnel, brokers and agents.
The regulator, SAMA, also oversees the education and qualifications of
all insurance industry professionals.
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Principles and Practices of Insurance
The Institute of Banking (IOB) is currently the education and training
arm of SAMA. The IOB has already been very successful in developing
professional education programs for the financial services industry in the
areas of banking, investment, banking operations and English language.
The IOB also, currently manages insurance exams for the Chartered
Insurance Institute and the Bahrain Insurance Institute. Currently, the
IOB is developing a program for training and education in conjunction
with SAMA and the major insurance companies.
IOB website: www.iobf.org
Ultimately, however, the regulations place the responsibility of ensuring
that insurance employees are trained, educated and qualified by the
companies themselves.
Also, related to this is the requirement within the regulations that the
percentage of Saudi employees be at least 30% at the end of the first
year of the company’s operation and that this percentage be increased
annually according to the Saudisation plan submitted to SAMA.
8. Content of policy forms.
The regulations have not specified the use of a standard form of policy
for each class of insurance as is often done in other jurisdictions.
However, the regulator, SAMA, must approve all of the policy wordings
used by each insurer and reinsurers. In addition, the company must
adhere to minimum coverage levels as agreed with SAMA for each class
of business.
Naturally policies must be written in such a way that they are clear
and unambiguous and can be read by the public at large. In line with
conventional policy documentation the policy schedules must contain,
at a minimum, the following:
a. The policy number,
which must also be provided in all related
documents,
b. Policyholder’s name and address,
c. The period of cover,
d. Description of coverage and limits,
e. Deductibles and retentions,
f.
Endorsements, warranties and riders,
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g. Conditions and exclusions
h. The
insurance rates, premium amounts, the basis of premium
calculation and the amount of commission paid to a broker or agent.
i. Clear identification of the property or activities being insured.
In addition, the standard text of the policy must contain the types of
coverage, general terms, conditions and exclusions. The endorsements
and riders must indicate any additional coverage, conditions and
exclusions, identifying where they change the main agreement. Also, in
line with convention, the company’s seal and signature must be printed
on the policy and attachments.
9. Code of Conduct, insurance sales and information disclosure
Consumer protection and the development of consumer confidence
in the insurance industry are critical to the spirit of the regulations.
Therefore, it is no surprise that the regulations have several Articles
which direct companies on how they should relate to policyholders to
ensure clarity and eliminate any misunderstandings regarding the policy
coverage and premium.
Communication with Policyholders
If they wish it, policyholders must be allowed to view the policy terms,
conditions and exclusions, before agreeing to the insurance contract.
Once the policy is issued the contract cannot be changed by the company
unless there is a material change in the risk. Policyholders can amend
the policy by written request and, if agreed, this must be followed by an
addendum issued by the company.
Cancellation, Denying and Non-Renewal of a policy
The company cannot cancel insurance during the policy period unless
for a reason specified in the cancellation clause of the policy. If the
company does cancel a policy it must refund any pre-paid premium on a
pro-rata basis and the policyholder must be given at least 30 days written
notice before the effective date of the cancellation. The company must
also advise the policyholder the reason for the cancellation of the policy.
If the policyholder cancels the policy before it expires then the company
may refund any pre-paid premium on a ‘short period-rate’ basis.
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Principles and Practices of Insurance
The insurance must be issued without discrimination and unfair treatment.
For example, an insurance company cannot deny insurance to a person of a
certain race due to the colour of his or her skin. Neither can insurers deny
coverage to a person or company solely because of the decisions of other
companies. Acceptance and denial of insurance can only be made on the
basis of the risk and the activities surrounding the risk itself. This would,
however, include the loss history of the risk and/or policyholder. The same
factors apply to cancelling or non-renewing a policy. The insurer must
have credible reasons for cancelling, denying or non-renewing insurance.
Utmost Good Faith
The term utmost good faith is a key principle of insurance and the
regulations apply the principle of utmost good faith. In other words,
insurance contracts require that both the company and the policyholder
disclose all relevant information to each other. This principle requires
policyholders to respond truthfully to whatever questions the insurance
company asks. Also, the policyholder must disclose any relevant
information to the insurer about the risk or activities to be insured,
even if the insurer does not directly ask the question. Likewise, the
insurance company must disclose the policy wording, terms, condition
and exclusions to the policyholder before the contract is issued. This
must include a description of the basis of indemnification of the
policyholder in the event of a loss.
10. Contract interpretation and enforcement.
While it is the duty of each company to interpret the policy and settle
claims in line with standard insurance conventions, the regulations
require companies to show evidence of fairness and adhere to minimum
standards for claims settlement.
Each company must have its own claims department with procedures for
accepting, evaluating and processing claims. The company must maintain
records of each claim, whether they are paid, unpaid or rejected.
The regulations require that each company settle individual policyholders’
claims within 15 days of receiving all requested necessary documentation
related to the claim. If the case warrants an extension of an additional 15
days may be provided by the regulator. For commercial policyholders’ claims
the settlement must be made within 45 days. If this period is exceeded, the
regulator must be advised and provided with reasons for the delay.
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Principles and Practices of Insurance
Companies must respond to policyholders’ complaints within 15 days.
All complaints must be registered and their outcome documented. A
semi-annual report must be prepared and provided to the regulator.
11. Compulsory purchase of insurance coverage.
The Insurance Implementation Regulations do not cover the
administration of compulsory insurance purchasing, such as automobile
insurance. However, as compulsory insurance tends to be a legal
requirement, in the case of automobile insurance, health insurance and
social insurance it is worth a short discussion.
Governments in a free market economy try not to interfere in the
workings of the market place. The basic rules of supply and demand
and a competitive environment are generally sufficient to ensure good
order. However, almost every government finds it necessary to intervene
in the insurance market place and make some types of insurance
compulsory.
Failing to insure when it is compulsory will result in a criminal offence
and punishment. Typically, a fine, which should be large enough to
deter people from avoiding buying insurance and ultimately a prison
sentence, is possible.
In society, there is a general principle that the innocent victims of accidents
should be able to receive compensation from the guilty or negligent
party who caused those injuries. It is often to support this principle that
governments make some classes of insurance compulsory.
Compulsory insurance assist innocent victims to receive compensation
in three broad areas:
Funds
If a person causes injury to another, the injured party can seek
compensation from the guilty party and states have legal systems in
place to aid this process. This process is defeated however, if the guilty
party has no funds (‘a man of straw’) or hides his funds. Governments
feel it necessary therefore to make insurance compulsory in certain cases
as a means of ensuring that there will be funds available to compensate
the innocent victim of accidents.
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Society’s Duty
In the event that no financial compensation is available the consequences
can be severe for the victim and his family. In case of death or
disablement to the family ‘breadwinner’, the family may have to rely on
other family members or charity for support. If these are not available
or inadequate, society through their government has a duty to look after
its people. Insurance will provide the necessary financial compensation
and reduce the burden on family or society.
Public Demands
In some cases there are issues that the public consider unjust, because
victims are denied access to financial compensation. Insurance is
a method to help justice by ensuring that such compensation is
available.
Recently, the Kingdom of Saudi Arabia made automobile insurance
(third party liability) and medical expenses insurance compulsory for
all drivers and residents/citizens. Why do you think the government
made these types of insurance obligatory?
Do you think that the reasons fit in to the above categories or are there
other reasons?
Automobile Insurance
In KSA, third party motor insurance has been compulsory since
November 2002. Originally, the requirement was everyone who
holds a driving licence to have Rukhsa insurance providing unlimited
indemnity for death or bodily injury to a third party and a minimum
SR5M indemnity for third party property damage. Rukhsa insurance is
linked to the driver. However, this was changed in 2006, when Rukhsa
insurance was replaced with the conventional automobile insurance
based on the vehicle at risk.
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Principles and Practices of Insurance
Health/Medical Insurance
In most countries, the government is involved in providing healthcare
in some form or another. It may be supervising or nationalising health
insurance or the means of providing healthcare.
If health insurance is compulsory then the government, private insurance
companies or a combination of private and public, may provide it. The UK
has a different approach, as the government owns hospitals and provide
healthcare to citizens free at the point of delivery. The government, who
raise the revenue through taxation and national insurance contributions
pay doctors and other health service workers. Private hospitals are available
for those who are willing to pay the extra costs.
In the Kingdom of Saudi Arabia, the government requires that all
residents have medical expenses insurance. From September 2002, it
became mandatory for expatriates to have private medical insurance.
Injuries at Work
Unfortunately, accidents at work are a very common source of injuries
and could result in a great deal of litigation. To ensure that workers are
protected many governments around the world have made compulsory,
one or both of the following systems in place: a workers’ compensation
plan and/or an employer’s liability insurance contract.
Workers’ compensation usually involves the government providing a
schedule of benefits that it is compulsory for the employer to pay in the
event of injury to an employee during the course of his employment.
Sometimes, the Workers’ Compensation plan is run by the government
similar to a state-run insurance company and sometimes it is merely a
supervisor of the law. Generally, in these plans, liability is not an issue
as it is a ‘no fault’ system i.e. it is not necessary to prove fault, it is
sufficient to show that the injury occurred at work.
Compensation is the amount detailed in a schedule of benefits, typically
wages during any period of incapacity and possibly a lump sum for
certain injuries. The employer can take out an insurance policy to
indemnify him for his liability under any workmen’s compensation
rules.
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Principles and Practices of Insurance
Under an employer’s liability system, (used in the UK) there is no guarantee
of benefits. An employee must prove liability i.e. that the employer is
responsible for any injury or illness. If successful, the employee can claim
any amount considered appropriate. It is compulsory for the employer
to have an insurance policy, with an approved insurer to ensure that
funds are available to meet any award. It is worth mentioning that the
courts have shown that they consider the employer’s responsibility to
be very wide.
In Saudi Arabia, GOSI regulations cover injuries at work. They provide
compensation according to a scale of benefits considered adequate
to meet the basic requirements of an average labourer. An employer
may need workers’ compensation insurance to cover work related
injuries repudiated by, or in excess of GOSI. If the GOSI benefits are
inadequate for an employee perhaps, with a large family or additional
responsibilities the employee may take legal action for additional
compensation. Employers in KSA may therefore also require full
employer’s liability insurance to give them this extra protection.
Other Compulsory Insurances
Motor vehicle accidents, injuries at work and healthcare are areas that
most countries have legislation but governments often require insurance
as part of a licensing or authorising process for particular professions.
Examples include:
• Legal and medical professions
• Insurance brokers
• Keepers of dangerous animals (zoos, circuses)
• Riding Schools
• Funfairs and Amusement Parks
Insurance is also a requirement for many contracts, which effectively
makes insurance compulsory for the contracting party. In the Kingdom,
for example, government contracts will normally stipulate that the
contractor must have a minimum insurance arrangement with their
approved insurer. Most banks will require insurance to be placed on a
house if they are financing the purchase of the home with a mortgage
loan. They may also, require that the buyer has life insurance to ensure
that the loan can be paid off if he or she dies unexpectedly.
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Principles and Practices of Insurance
Summary
The three main reasons for insurance regulation are:
(1) To maintain the insurers’ financial solvency and soundness so they
can carry out their long term obligations to policyholders and pay
claims.
(2) To guarantee the fair treatment of current and prospective
policyholders and beneficiaries by both insurers and the people who
sell their policies.
(3) The need to make certain types of insurance compulsory as a way of
achieving broad financial protection to the general population.
In the Kingdom, the current Insurance Regulations were on 1 August
2003. This brought an end to the previously unregulated industry
that was largely based outside of the country. The introduction of the
new regulations was largely driven by two factors: the introduction
of compulsory private health insurance for foreign residents, and as a
part of the agreements for Saudi Arabia to accede to the World Trade
Organisation (WTO).
The Insurance Implementation Regulations do not cover the
administration of compulsory insurance purchasing such as automobile
insurance. However, other laws require the purchase of insurance such
as automobile insurance, health insurance and social insurance.
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Principles and Practices of Insurance
Progress Check
Directions: Choose the best answer to each question.
1. The insurance sector requires government regulation in order to:
a. protect policy holders.
b. protect insurance companies.
c. protect brokers.
d. encourage fair competition between insurance companies.
2. The landmark decision that led opening the Kingdom’s insurance
sector to foreign investment was in:
a. 1977
b. 1999
c. 2002
d. 2003
3. What is the key difference between a Sharia’h recognised Cooperative
insurance company and a typical commercial insurance company?
a. Cooperative distributes profits to policyholders only
b. Cooperative distributes profits to shareholders only
c. Cooperative distributes profits to policyholders and shareholders
d. Commercial distributes profits to policyholders only
4. What were the two key drivers that brought about the introduction
of insurance as a regulated industry within the Kingdom?
a. Motor insurance and personal accident
b. Contactors all risk and medical malpractice
c. Marine and joining gulf union
d. Medical and joining the WTO
5. Which government agency is responsible for regulating insurance in
the Kingdom of Saudi Arabia?
a. The Capital Market Authority.
b. The Ministry of Banking, Finance and Insurance.
c. The Institute of Banking.
d. The Saudi Arabian Monetary Agency.
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Principles and Practices of Insurance
6. Match each type of Insurance business with the minimum required
professional liability limits:
a. Insurance Brokerage 1. SAR 6,000,000
b. Actuary 2. SAR 3,000,000
c. Insurance Agency 3. SAR 1,000,000
a. a1; b2; c3
b. a2; b1; c3
c. a3; b2; c1
d. a2; b3; c1
7. Under the Law on Supervision of Co-operative Insurance Companies,
which one of the following statements is true?
a. Insurance companies must be 100% wholly owned by Saudis with
the entire net surplus being accounted for as Retained Earnings and
/ or returned to the shareholders as dividends.
b. All insurance companies must be “co-operative”, which means that
the company is totally owned by the policyholders with the entire net
surplus being returned to the policyholders as dividends and/or kept
in the company as Retained Earnings.
c. There are no restrictions on the ownership structure of insurance
companies operating in Saudi Arabia as this would conflict with
World Trade Organisation agreements.
d. Foreign owned companies must trade at least 30% of their stock on
the Saudi Arabia stock market.
8. How much of the Net Surplus is paid to policyholders?
a. 10%
b. 20%
c. 70%
d. 100%
9. An Insurance Company, in respect to its general and health insurance
business, shall maintain a margin of solvency equivalent to:
a. The Premium Solvency Margin
b. The Claims Solvency Margin
c. The Minimum Capital Requirement
d. The highest of a), b), or c)
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Module 7:
Market Code of Conduct
Regulation (MCCR)
Module 7:
Market Code of Conduct
Regulation (MCCR)
After studying this module, you should be
able to:
-Define MCCR
- Identify what sectors of the insurance market
MCCR is applied
- Understand the minimum standards required by
MCCR
Principles and Practices of Insurance
Introduction
Insurance contract is nothing but a piece of paper which promises to
pay in the event of an insured contingency actually happens.
So in every country there will be regulations in place to protect the
customer against deficiency in service in terms of delayed issuance or
poor quality of documentation as well as non payment, delayed payment
or short payment of claims.
Saudi Arabian Monetary Agency, the Insurance regulator for the
Kingdom of Saudi Arabia has introduced Market Code of Conduct
Regulation (throughout this courseware, we will refer to this regulation as
MCCR) which will not only regulate marketing and selling of insurance
products but also stipulates codes for insurers and service providers
for a fair and transparent conduct of business and dealing with the
customers.
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Principles and Practices of Insurance
Why is MCCR an integral part of any insurance market?
7.1 - Introduction to MCCR
The code stipulates minimum standards that should be met by the
insurance companies and the service providers.
It may, sometimes, so happen that the insurance company’s internal
standard for customer service may be more stringent than the minimum
standard set by SAMA in this Regulation. Any Regulator will welcome
such a move as this only goes towards improving service delivered to
the customer and enhancing customer delight.
The following are the Service Providers who come under the scope
of MCCR Insurance Brokers, Insurance Agencies, Claim Settlement
Specialists, Loss Assessors/Adjusters, Insurance Advisors, Third Party
Administrators
In the above list of Service Providers, one service provider in the
insurance value chain is missing. Can you name them? Why MCCR is
not applicable to them?
Since Customer Service depends entirely on how efficiently the company
is organised to deliver that service, it is necessary that they establish
appropriate internal checks and controls and put in place systems and
procedures to not only ensure delivering excellent customer service but
also monitor the delivery as well.
Systems and procedures will also mean that companies maintain
adequate records like premium register, cover note control register,
certificate register, claim intimation and settlement registers etc so
that at any point of time, information can be retrieved for appropriate
customer service.
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Principles and Practices of Insurance
Since the service providers like loss adjusters and third party
administrators represent an insurance company and act as face of that
company while dealing with the public, in case of any deficiency in
service on the part of service providers, the credibility of the insurance
company who the service provider is representing will be affected. So
the insurance company will have to ensure that the service providers
have necessary controls and systems in place for efficient delivery of
customer service on their behalf.
7.2 - General Requirements
Integrity: Though it is expected that the companies will generally act
in a fair and transparent manner in all their dealings with the customer,
Regulator and the general public, the MCCR has codified this in the
form of general requirement.
The companies and the service providers are required to have an internal
document which sets out the systems and procedures for conducting and
transacting the business in a fair and transparent manner. Wherever, such
steps and procedures are not codified, they have to adopt internationally
accepted best practices for conduct of business.
What is the purpose behind codifying steps in conducting the business
in a fair and transparent manner?
Skill, Care and Diligence: In order to provide efficient customer service,
the companies should have necessary technical skills and competence.
Competence has to be developed through periodic training in technical
subjects, customer service and also regularly updating the employees
through internal communication of the happenings in the Market in
KSA and the world over.
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Principles and Practices of Insurance
It is the duty of a company to keep the employees’ skills and insurance
knowledge up-to-date? Discuss the ways in which a company can do
that.
MCCR expects all customers to be treated alike and no company can
deny renewing or cancel an insurance policy without giving a valid
reason for doing so.
Protecting customers’ personal data is very important and companies
should ensure that such data is not allowed to be abused or misused.
What are the ways in which personal data can be protected?
Any premium collected by the brokers or the agent must be immediately
deposited with the insurance company.
Can you think of two specific reasons why the premium should be
deposited with the insurance company immediately?
The brokers/agents can also the deposit the premium in the bank
account specifically for this purpose and should not appropriate this
money for any other purpose.
The only exception for the above rule is that they can withdraw their
commission from this account but only after getting the necessary
authorisation from the Insurer in writing to this effect.
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Principles and Practices of Insurance
Can the broker/agent treat the money in the premium account as
security against any sums receivable from the Insured?
Since the service providers like brokers, agents, loss adjusters, TPAs
etc represent the company and deal with the customers on behalf of
the company, it is essential that the insurance company enters into a
contract with these service providers setting out the procedures, rights
and responsibilities of each party and also the establishment of systems
controls for effective delivery of service by these providers to the
customers on their behalf.
7.3 - Conduct Standards
To ensure that the customers are not put to difficulty, MCCR insists that
the insurance policy application and contract wordings must adhere to
some minimum standards.
MCCR lists of the following as minimum standards:
1. The proposal form and the policy document must be bilingual –
both in Arabic and English.
2. The sentence structure and the language used should be simple and
should be easily understandable by laymen.
3. They should be printed in clear readable text.
4. There is also a mention about the legendary small print in insurance
policies and MCCR specifically prohibits these documents to be in
fine print.
Further guidelines:
MCCR also provides further guidelines as regards the proposal form
and the policy document.
The policy form must contain:
1. A disclosure statement indicating that the policy contract is the entire
contract
2. A description of Insured’s duties after a loss has occurred
3. A description of claims and disputes handling procedures.
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Principles and Practices of Insurance
Any amendment to the policy should be done only after receiving a
written request for the same from the Insured and also these amendments
should be made only by way of endorsement.
Policy Cancellation:
Another requirement of MCCR is that cancellation of insurance
policies should be made simple and that the terms must be fair to the
customer.
Every policy must contain cancellation terms which will include
a. conditions under which the Insurer has the right to cancel the policy
b. conditions under which an Insured can cancel the policy
c. Notice period required for cancellation by both the parties
d. The method of refunding the premium , if applicable on cancellation
and
e. A description of cash surrender value, if applicable (in case of
Protection & Savings insurance)
Free Look Clause:
A FREE LOOK clause has to be incorporated in all Protection &
Savings which should provide a minimum of 21 days period from the
date of delivery of the policy to the Insured.
Free Look period is the right of an Insured to examine an insurance
policy for a stated period, in this case 21 days, and if the Insured is not
satisfied of its suitability and benefits to him, to return the policy and
receive a refund of the initial premium.
In some markets, the refund is in full whereas, in the Kingdom, the
regulator has stipulated that a pro-rated amount will be retained by the
Insurer for the period for which they had assumed risk after deducting
the expenses incurred by them on medical examination.
In case of Unit Linked Plans, the Insurer is also entitled to make
appropriate adjustments to take the changes in the price of the Units
into consideration.
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Principles and Practices of Insurance
Discuss the issues associated with 100 % refund of premium under Free
Look Clause
Advertising and Promotion:
Companies should use their advertising campaign judiciously and should
not communicate inaccurate statements about the company, products,
price, coverage, benefit etc.
Defamatory statements about competition:
They should not also target their competitors in their advertising
campaign.
Information on companies’ offering:
The companies must disclose some minimum pre-acceptance
information to the customers:
1. Whether they are Insurers or intermediaries
2. Whether there exists any other relationship between the Insurer and
the intermediary other than the brokerage/commission
3. The nature and range of products and services they can offer.
Information from/to the customers:
Companies are obliged to seek information from customers to assess
their insurance needs depending on the products and services which
they are interested.
Since insurance contracts are based on the duty of utmost good faith,
Insurers should draw the attention of the customers to their duty to
disclose relevant and accurate information.
Companies have to take care that the advice given to clients adequately
meets their needs. They should provide sufficient information to enable
customers to make informed decisions when purchasing insurance
products and services.
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Principles and Practices of Insurance
Churning:
Companies should inform the Insured of the consequences when he
wants to replace the existing P & S insurance with a new one.
Obligation of brokers:
The brokers are Insured’s representative and hence have to get the best
possible term for their clients. They do this by obtaining quotes from
several insurance companies.
When they obtain such quotes and recommend one, they have to indicate
the reasons for recommending any particular insurance company. The
justification should include a comparison of the terms and conditions
offered by each insurance company, and if the broker would earn more
commission on the recommended contract this must be explained to
the customer.
Obligation of Insurers:
The first step before accepting a business from the proposer is to
provide the important terms and conditions of the product in which
the proposer is interested.
Some of the key information required to be furnished to the proposer
includes:
1. Benefits, exclusions, and deductibles.
2. The coverage period.
3. All related costs, including premiums and any other fees.
4. The terms of payment covering the periodicity of payment, grace
period, implications of discontinuing the premium and any other
related details.
5. The claims and complaints handling procedure.
6. The obligations of each party under the insurance policy.
7. The cancellation and renewal rights and conditions.
8. The requirements for carrying out policy alterations.
9. Any aspect of the policy where the insurance company has the right
to change something once cover has commenced such as benefit
charges and policy fees on protection and savings business.
10.Any unusual restriction or condition attaching to the customer.
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Principles and Practices of Insurance
Which principle of insurance casts the above obligations on the part of
the Insurer? How?
In addition to the above, companies must provide the following
information with
regard to protection and savings insurance products:
1. Type of plan – Participating, non participating or investment linked.
2. Basis of participation in profit in case of participating – cash bonus,
deferred bonus, reversionary bonus, terminal bonus etc.
3. Plan illustration providing the sum insured, surrender value and paid
up value over the term of the plan.
Insurance cover should not be back-dated on any insurance product.
Why?
Confirmation of coverage:
It is the duty of the Insurer to provide written confirmation confirming
the coverage as soon as a contract is concluded.
What are the ways in which a written confirmation can be given
evidencing the contract?
When an application for insurance is taken without a premium payment,
the Insurer should provide a receipt to the customer indicating that
coverage will commence at the date the policy is issued and the first
premium is paid.
Insurers are obliged to provide the full policy documentation to
customers after entering into an insurance contract promptly.
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Principles and Practices of Insurance
It is mandatory on the part of the Insurers to obtain the customers’
signature confirming the contents, understanding, and receipt of the
full policy documentation.
How does a counter signature from the customer help?
Policy coverage to employees and close relatives:
Insurers should avoid covering the assets and liabilities of their employees
which will include the owner, Board of Directors, management and
staff including their close family members. In case, this requires to be
done, then the full premium needs to be collected before the cover
commences.
Close family members will mean wi(fe)ves, children, parents, brothers
and sisters.
Premium Collection:
Insurers can collect premium on a transaction only if it is finalised.
Insurance companies are considered to have received the premiums
once the premiums are received by the agents or brokers.
The agent of an Insurer collected the premium cheque and posted it to
the company. While the cheque was in transit, a claim occurred. Is the
insurance contract is valid and the claim payable?
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Principles and Practices of Insurance
Claims handling:
Whether the Insurer handles claims directly or through outsourcing,
the following are some of the activities which are expected of them/
handling agency:
A. Respond to claims filing in a prompt manner.
B. Provide claims forms showing all the information or steps required
by the customer (including the beneficiary under a protection and
savings policy) to file the claim.
C. Acknowledge to the customer the receipt of the claim and any missing
information and documents within ten (10) days from receiving the
claim’s application form.
D. Provide adequate guidance to the customer in filing the claim and
information on the claims handling process.
E. Inform customers of the progress of filed claims, at least every
fifteen (15) working days (as per article 44 of the Implementing
Regulations).
F. Handle claims in a fair manner.
G. Appoint a claims or loss adjuster when necessary, and notify the
customer of such an appointment within three (3) working days.
H. Conduct a reasonable investigation of claims within a reasonable
time period.
I.
Notify the customer in writing of the claim acceptance or refusal
promptly after completing the investigation, stating the following:
1. For accepted claims (full or partial acceptance):
-Settlement amount.
- How the settlement amount was reached.
- Justification if reduced settlement is offered.
- Justification in case any part the claim is not accepted.
2. For denied claims:
- Written reason for denying the claim under question.
-Copies of documents or information that were used in reaching
the decision, if requested.
J.
Explain the appeal or complaints process, if the settlement is not
accepted by the customer.
K. Forward the claims settlement payment without undue delay upon
receiving all required information and documentation.
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Principles and Practices of Insurance
Insurance companies are obliged to settle the claims within fifteen days
from the date of receiving all requested and necessary documents and
when that is not possible, provide an explanation, with reason(s) for
such delay.
Credit Control
Full payment terms must be agreed in writing at the outset of the
policy, and the insurance company should promptly cancel a policy,
after appropriate warnings, and thirty (30) days notice, if payments are
not made. Premiums must be paid separately from, and may not be
offset from, claims payments.
Complaints Handling
Complaints handling and resolution are important constituents of after
saes service.
Companies have to put in place a fair, transparent, and accessible
complaints handling process, and inform customers of the complaints
filing procedures.
Cancellation
Cancellation of policies must conform to the cancellation conditions
specified in the policy terms and conditions.
Cancellations by the insurance company must be notified to customers
in writing, including a reference to the relevant contractual cancellation
condition and explanation of the underlying reasons for the cancellation.
In such cases, the balance premium has to be returned on pro-rated basis.
The policyholder may also cancel the policy in which case he will be
entitled for a refund on short period scale as per the schedule given in
the policy.
Can the insurance company cancel a policy where a valid claim has
occurred?
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Principles and Practices of Insurance
Renewal and Expiry
Companies must inform customers of the policy renewal or expiry date
in a timely manner to allow customers to arrange continuing insurance
coverage.
For all protection and savings contracts, insurance companies should
provide an annual statement to their customers which include the
following information:
A.Projected maturity value, or value at age eighty-five (85) for the whole
policy.
B. Current sum insured on main and supplementary benefits.
C. Total premiums paid in the previous year.
D.Policies linked to investment funds should show the value of the
units in each fund.
Distribution of Surplus:
A key aspect of the introduction of regulated insurance in the Kingdom
is the cooperative nature of the industry. Therefore the regulations require
that Saudi Insurers must operate on this cooperative basis. One of the main
points which distinguish cooperative insurance from a traditional insurance
model is the distribution of surplus funds to the policyholders.
The key to the distribution of surplus funds lies in how the net surplus
is calculated.
This calculation is made in the following steps:
Step1: Earned Premium + income generated from reinsurance
commissions and other insurance operations.
Step2: Incurred Claims = (claims outstanding at the end of the year +
claims paid – Claims outstanding at the beginning of the year)
Step3: Total Surplus = (Difference between Step 1 and 2) – Marketing
expenses – Administrative expenses – technical provision –
general operating expenses
Step4: Net Surplus = Step 3 (+/-) Policyholder’s investment return –
expenses relating to management of policyholder’s investment fund
10% of the net surplus is to be distributed to the policyholders directly
either in the form of a direct payment or as reduction in premium for
the next year
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Principles and Practices of Insurance
The remaining 90% of the Net Surplus is to be transferred to the
shareholders income statements.
Twenty percent (20%) of the net shareholders’ income is to be set
aside as a statutory reserve until reserve amounts are equal to 100%
of the paid capital.
Insurers have to document the mechanism they have to put in place
to comply with article seventy (70) of the Implementing Regulations,
and submit this document to SAMA for approval.
This document should then be freely available to customers and
Members of the Public.
7.4 Appendix
Draft dated 05.01.2008 of the Market Code of Conduct Regulation
to be implemented by Insurers and Insurance Service Providers in the
Kingdom of Saudi Arabia – introduced by Saudi Arabian Monetary
Agency (English version)
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Principles and Practices of Insurance
Part 1
Introduction
Purpose
1. This Code presents the general principles and minimum standards
that should be met by insurance companies, including branches
of foreign insurance companies, and insurance service providers
licensed by SAMA in their dealings with their existing and potential
customers.
2. The objective of This Code is to promote high standards of business
conduct within the insurance industry.
3. This Code must be read in conjunction with articles 12, 15, 16, 19,
22, 24, 25, 26, 37, 43, 44, 45, 46, 49, 51, 52, 53, 54, 55, 56, 71, 77,
78, and 80 of the insurance Implementing Regulations.
Definitions
4. The terms used in This Code shall have the same meaning as per
article one (1) of the insurance Implementing Regulations, unless
mentioned otherwise.
Scope and Exemptions
5. The term “Companies” in This Code is intended to include: insurance
companies, insurance brokerages, insurance agencies, insurance
claims settlement specialists, loss assessors (loss adjusters), and
insurance advisors.
6. Reinsurance activities are exempted from the provisions of This
Code.
Compliance Measures
7.
Companies must establish appropriate internal controls and
procedures to ensure and monitor compliance with This Code,
including the compliance of all contracted companies.
8.
Companies must maintain adequate records to demonstrate
compliance with This Code, including but not limited to, reasons
for early termination or non-renewal of insurance policies, claims
records and complaints records.
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Principles and Practices of Insurance
Supervision of Other Contracted Companies
9. Insurance companies are responsible for ensuring that all persons
dealing with customers on their behalf, including their own staff
and other licensed agents who sell the company’s products and
services, perform their duties in compliance with this Code.
Non-Compliance
10. Non-compliance with the requirements set forth in This Code will
be deemed a breach of the licensing conditions and may subject the
companies to enforcement action.
11. Companies should promptly inform SAMA of any circumstances
that may restrict their ability to adhere to the requirements herein.
Structure of This Code
12. The market conduct requirements are outlined in Parts 2 and 3 of
this Code:
A. Part 2 -General Requirements, which are principle-based.
B. Part 3 -Conduct Standards, which stipulate the companies’ minimum
conduct requirements across the customer relationship lifecycle,
which includes pre-sales, sale, and post-sale conduct guidelines.
Part 2
General Requirements
Integrity
13. Companies must act in an honest, transparent and fair manner, and
fulfill all of their obligations to customers, which they have under the
laws, regulations, and SAMA guidelines. Where these obligations have
not been fully codified, companies may follow internationally accepted
best practices.
Skill, Care, and Diligence
14. Companies must act within their area of competence in dealing
with customers. For this purpose, competence is acquired through
training, experience, and working with experts in the field.
15. It is the duty of each company to keep their, and their employees’, skills
and knowledge of the insurance business upto-date and be informed
of the products and services offered by the company, or companies,
they represent and the intended use of these products and services.
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Principles and Practices of Insurance
Non-Discrimination
16.
Companies must not unfairly discriminate between customers,
whether existing or potential customers, and must provide credible
reasons for denying, canceling, and not renewing insurance
policies.
Adequate Resources
17. Companies must take reasonable care in maintaining adequate
managerial, financial, operational, and human resources to carry
out their business and serve their customers.
Disclosure Information to Customers
18.
Companies must communicate all relevant information to
customers in a timely manner to enable them to make informed
decisions.
19. Companies must take reasonable measures to ensure the accuracy
and clarity of the information provided to customers and make
such information available in writing.
Data Protection
20. Companies must, at all times, ensure that customer personal data
is protected. This means that the data:
A. Must be obtained and used only for specified and lawful
purposes.
B. Must be kept secure and up to date.
C. Must be provided to the customer upon his written request.
D. Must not be disclosed to any third party, without prior
authorization from SAMA, other than the companies’ auditors and
actuaries.
Security of Customer Assets
21. Companies must ensure the security of customers’ assets held on
their behalf. Any premiums collected by the broker or agent must
either be placed in a separate bank account (the premium account)
that has been established for that purpose, or passed directly
to the insurance company as is required under the contractual
arrangement with the insurance company. The only payments that
can be deducted from the premium account are:
A. Premium payments to a licensed insurance company.
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Principles and Practices of Insurance
B. Commission payments where the insurance company authorizes
the broker or agent to make premium payments net of commission.
The premium account must not be treated as the property of the
broker or agent in any sense. In particular, it must not be used as
security for any loan, and it must be clearly beyond the reach of the
broker or agent’s creditors.
Conflict of Interest
22. Companies should take reasonable measures to identify and address
conflicts of interests to ensure fair treatment to all customers. Where
conflicts of interest arise, the companies must disclose such conflicts to
the customer and must not unfairly place its interests above those of its
customer.
Contracting Service Providers
23. Companies that use the services of other parties, including other
companies, must have a contract in place setting out the terms and
conditions for the provision of services, the rights and responsibilities
of each party and the extent of the liability that each party has to the
other.
Part 3
Conduct Standards
Section A: Policy Forms and Rates
Policy Wording and Packaging
24.
The wording of the insurance policy application and contract
forms must adhere, at a minimum, to the following:
A. Written in both Arabic and English.
B. Use simple language and sentence structure, when possible.
C. Printed in clear, readable text, with no fine print.
25.
The printed insurance policy application and contract forms
must adhere to requirements set in article 52 of the Implementing
Regulations, and include:
A. A disclosure statement indicating that the policy contract is the
entire contract.
B. A description of the insured’s duties after a loss has been
incurred.
C. A description of the claims handling and dispute handling
procedures.
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Principles and Practices of Insurance
Policy Amendments
26. An insurance policy contract shall be amended only after a written
request submitted by the policyholder and to which the insurance
company agrees followed by an endorsement issued by the insurance
company to the policyholder.
Policy Cancellation
27.
Companies should include cancellation terms that are fair to
customers and are reasonable and appropriate with regard to the
product. The cancellation conditions must be clearly stated in the
policy contract, including:
A. Conditions permitting the insurance company to cancel the
policy.
B. Conditions permitting the policyholder to cancel the policy.
C. Cancellation notice requirements, including notice period. In
any case, the Policyholder should be afforded a minimum period
of thirty (30) days before the effective date of cancellation by the
companies (as per article 54 of the Implementing Regulations).
D. A description of the refund of premium due to the policyholder
on cancellation of the policy and when it would be payable.
E. For Protection and Savings insurance, in addition to (D) above, a
description and illustration of the cash surrender value, if applicable,
for each year of the plan.
“Free Look” Clause
(Protection & Savings Insurance Products)
28. Every policy for protection and savings insurance should provide
at least a twenty-one (21) day Free Look period from the date of
delivery of the insurance contract for the policyholder to review the
contract to assess its suitability and whether it provides the benefits
described by the agent or broker. The policy will be deemed to be
fully in force and this provision will be deemed to be waived by
the policyholder, if the policyholder does not inform the insurance
company within the period that the policy will be returned. If the
policyholder deems the policy unsuitable, the insurance company
must be notified in writing within the Free Look period and a refund
of premiums paid to the customer subject only to the following:
A. Deduction of the expenses incurred by the insurance company
on medical examination of the customer.
B. Deduction of a proportionate risk premium for the period of
cover.
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Principles and Practices of Insurance
C. In respect of a unit linked plan, the insurance company shall also
be entitled to make an appropriate adjustment to take account of
changes in the unit price.
Pricing
29. Companies must apply the pricing structure submitted to and
approved by SAMA as part of the product approval application.
Discrimination
30. Companies’ underwriting criteria and practices must not be unfairly
discriminatory.
Section B: Advertising and Promotion
Honest Representation
31. Companies must not communicate any statements or advertising,
directly or indirectly, that are inaccurate, misleading, exaggerated,
or deceptive, including but not limited to information on:
A. Name of the company issuing the insurance policy.
B. Financial status of the insurance company issuing the policy.
C. Coverage of the policy.
D. Benefits or advantages promised by the policy.
E. If the advertising includes the policy pricing, then it should
indicate whether the price is inclusive of all fees.
Defamatory Statements
32. Companies should not include in their advertising any false or
defamatory statements on other companies.
Section C: Pre-sale Customer Contact
Information about the Companies’ Offering
33. Companies must disclose, at a minimum, the following information
to each customer prior to accepting an application for an insurance
contract:
A. Whether they are an insurance company, or are acting on behalf
of an insurance company, or acting on behalf of the customer.
B. Any financial relationship between a broker and the insurance
company other than the normal commission agreements. In
particular if there is any cross-ownership, or both parties have
owners in common, the customer should be informed.
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Principles and Practices of Insurance
C. The nature and range of products and services they can
provide.
Customer Needs Assessment
34. Companies must seek information from customers as might
reasonably be expected to assess their insurance needs in relation
to the products and services in which they indicated an interest.
Companies are not required to determine customers’ insurance
needs beyond the specific products and services in which customers
have indicated an interest, except with regard to protection and
savings contracts (see article 41 below).
35. Customers should be informed of their duty to disclose relevant
and accurate information.
Advice to Customers
36. Companies must ensure that the advice given to clients adequately
meets their needs.
37. Companies must provide sufficient information to enable
customers to make informed decisions when purchasing insurance
products and services, including:
A. An explanation of how the proposed advice meets their needs.
B. If different options are identified, the difference in the benefits,
coverage, and costs of such options.
Avoidance of Churning
38. Companies should not advise a customer to replace an existing
protection and savings policy with a new one, unless it fully justifies
the recommendation and make it clear that a second set of initial
charges will be incurred, and the agent will earn initial commissions
on the new product.
Quotations to be Obtained from More than One Insurance
Company
39.
Insurance brokers must make reasonable efforts to obtain
quotations from several licensed insurance companies, and indicate
the reasons for recommending any particular insurance company.
For contracts other than protection and savings, if the insurance
company recommended by the broker has not provided the cheapest
quotation, the broker must provide details of the cheapest quotation
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Principles and Practices of Insurance
to the customer, and a full justification for his recommendation.
The justification should include a comparison of the terms and
conditions offered by each insurance company, and if the broker
would earn more commission on the recommended contract this
must be explained to the customer.
Section D: Sale of Insurance Products and Services
Disclosure to Customers
40.
Prior to accepting an application for an insurance contract,
the companies must provide customers with the key terms and
conditions of the product and service to be purchased, including
but not limited to:
A. The name of the insurance company underwriting the policy.
B. Benefits, exclusions, and deductibles.
C. The coverage period.
D. All related costs, including premiums and any other fees.
E. The terms of payment covering the periodicity of payment,
grace period, implications of discontinuing the premium and any
other related details.
F. The claims handling procedure.
G. The complaints handling procedures.
H. The obligations of each party under the insurance policy.
I. The cancellation rights and conditions.
J. The renewal rights and conditions.
K. The requirements for carrying out policy alterations.
L. Any aspect of the policy where the insurance company has the
right to change something once cover has commenced such as benefit
charges and policy fees on protection and savings business.
M. Any unusual restriction or condition attaching to the customer.
N. The postal address, telephone, fax and email contact details of
the insurance
company.
41. In addition to the above, companies must provide the following
information with regard to protection and savings insurance
products:
A. Whether the plan is participating, non-participating or an
investment linked plan.
B. In case of participating, the basis of participation in profits i.e.,
cash bonus, deferred bonus, reversionary bonus, terminal bonus
etc.
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Principles and Practices of Insurance
C. Plan illustration providing the sum insured, surrender value and
paid-up value over the term of the plan. The illustration should
show these values at the end of each of the first five (5) policy
years, five (5) yearly thereafter, and at maturity date if appropriate
or up to age eighty-five (85) if not.
D. If benefits are not fully guaranteed, the customer should be
provided with three illustrations with gross investment return rates
of 3%, 5% and 7% p.a.
E. The extent of any investment or expense guarantees. It should
be clearly stated that values shown are for illustrative purposes only
unless the investment and expense charges are fully guaranteed.
F. For non-linked plans, where applicable, a breakdown of the
premiums and charges by main cover, supplementary cover and
any other cover or services provided.
G. When presenting information related to past performance,
the basis on which the performance was calculated together with
a statement that past performance is not indicative of future
performance.
H. If the policyholders’ funds may be invested in a range of linked
investment funds, a description of the investment funds, which
should include, at a minimum:
1. A description of the asset classes the fund may invest in.
2. A risk or volatility rating for each fund.
3. If the fund is measured against a benchmark, details of that
benchmark.
4. Geographical spread of the investments.
5. A statement of any concentration of investments into particular
types of investments.
6. The currency that the fund is priced in.
7. The frequency that the fund is priced.
8. The name of the fund manager, if the fund is external to the
insurance company.
9. Past performance of the fund, subject to the same comments as
stated in (g) above.
42. Companies selling savings and protection contracts should
complete a client fact find containing sufficient information to fully
back-up the product recommendation made. The fact find must be
signed by the client, and retained on the clients file. In the event
of any dispute over the appropriateness of the contract sold, the
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Principles and Practices of Insurance
contents of the fact find will be taken fully into account. If the fact
find is not on the file, or is poorly or partially completed, this is
likely to lead to the dispute being resolved in favor of the client.
43. Insurance brokers should disclose to the customer at the point
of sale the full commissions and/or fees earned for the services
provided from all sources.
44. Companies that represent the insurance company in arranging the
insurance contract must disclose to the customer all commissions,
fees, and any other remuneration received from arranging the
insurance contract.
45. Insurance cover may not be back-dated on any insurance product.
No insurance company, or employee of an insurance company may
provide evidence of cover on a product unless the customer has
committed to taking out a full annual policy that complies with the
minimum standards set for that policy.
Customer Obligations
46. Prior to entering into an insurance contract, the companies must
inform customers of their key obligations under the insurance
contract to pay premiums in a timely manner and to provide full and
honest disclosure of all relevant information needed to determine
the insurance needs and underwrite the risk. The customer should
only be expected to advise the companies of information that a
reasonable person would regard to be relevant.
Confirmation of Coverage
47. Upon entering into an insurance contract, companies must
promptly provide customers with official written confirmation of
the insurance coverage. In case the full documentations are not
available, the companies must issue temporary evidence of coverage
confirmation, which can be legally used as a proof of coverage.
48. When an application for a compulsory insurance product such as
motor or health is taken with a premium payment, a receipt should
be provided to the customer indicating that coverage commences
at the date the application was completed.
49. When an application for insurance is taken without a premium
payment, a receipt should be provided to the customer indicating
that coverage will commence at the date the policy is issued and the
first premium is paid.
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Principles and Practices of Insurance
Documentation
50. Companies must promptly provide the full policy documentation
to customers after entering into an insurance contract. Companies
must obtain the customers’ signature confirming their revision,
understanding, and receipt of the full policy documentation.
Related Parties
51. No insurance policy shall be issued or renewed by an insurance
company to any of its owners or members of the Board of
Directors, Senior and Executive Managers, and their related parties
except after the payment of the full premium (as per article 49
of the Implementing Regulations). Related parties shall be taken
to mean close family members, wives, husbands, children, parents,
brothers and sisters.
Premium Collection
52. Companies must not collect premiums or fees for transactions that are
not in the process of being provided or have not yet been provided.
53. Insurance companies are considered to have received the premiums
once the premiums are received by the agents or brokers.
Section E: Post-sale Customer Servicing
After-Sale Service
54. Companies must provide after sales services to customers in a
timely and appropriate manner, including responding to their
inquiries, administrative requests, and requests for amending the
insurance policies. In particular, companies must:
A. Provide certificates of coverage when requested by the
customer.
B. Provide written confirmation of any amendments to the policy
and any additional amounts due.
C. Issue receipts for any amounts received, unless payment is made
by credit card or other form of automated bank transfer when the
bank records will suffice.
D. Issue refunds or other charges due to customers.
55. Companies must promptly notify customers of any changes in the
disclosures or conditions made to the customers at the time of entering
into the insurance contract. This includes changes in the companies’
contact details and changes in the claims filing procedure.
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Principles and Practices of Insurance
Claims Handling
56. For companies whose licensed activities include claims handling,
they must:
A. Respond to claims filing in a prompt manner.
B. Provide claims forms showing all the information or steps required
by the customer (including the beneficiary under a protection and
savings policy) to file the claim.
C. Acknowledge to the customer the receipt of the claim and any
missing information and documents within ten (10) days from
receiving the claim’s application form.
D. Provide adequate guidance to the customer in filing the claim
and information on the claims handling process.
E. Inform customers of the progress of filed claims, at least every fifteen
(15) working days (as per article 44 of the Implementing Regulations).
F. Handle claims in a fair manner.
G. Appoint a claims or loss adjuster when necessary, and notify the
customer of such an appointment within three (3) working days.
H. Conduct a reasonable investigation of claims within a reasonable
time period.
I. Notify the customer in writing of the claim acceptance or refusal
promptly after completing the investigation, stating the following:
1. For accepted claims (full or partial acceptance):
- Settlement amount.
- How the settlement amount was reached.
- Justification if reduced settlement is offered.
- Justification in case any part the claim is not accepted.
2. For denied claims:
- Written reason for denying the claim under question.
- Copies of documents or information that were used in
reaching the decision, if requested.
J. Explain the appeal or complaints process, if the settlement is not
accepted by the customer.
K. Forward the claims settlement payment without undue delay
upon receiving all required information and documentation.
Claims Settlement
57. Insurance companies must settle claims within the time period
indicated in article 44 of the Implementing Regulations, and when
that is not possible, provide an explanation, with reason(s) for such
delay.
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Principles and Practices of Insurance
Credit Control
58. Companies may not provide excessive credit to customers. Full
payment terms must be agreed in writing at the outset of the policy,
and the insurance company should promptly cancel a policy, after
appropriate warnings, and thirty (30) days notice, if payments are
not made. Premiums must be paid separately from, and may not be
offset from, claims payments.
Complaints Handling
59. Companies must put in place a fair, transparent, and accessible
complaints handling process, and inform customers of the
complaints filing procedures.
60. Upon receiving a complaint, companies must carryout the
following:
A. Acknowledge the receipt of the complaint.
B. Provide an estimate of the time to address the complaint.
C. Provide the customer with the contact reference to follow up on
the filed complaint.
D. Inform customers on the progress of the filed complaint.
E. Address the claims in a prompt and fair manner within ten (10)
working days of receiving the complaint.
F. Notify the customer, in writing, whether the complaint is
accepted or rejected, and the underlying reasons for the decision
and, if applicable, any offered compensation.
G. Explain the dispute filing process to escalate the complaint to
the committees established by article 20 of the law on supervision
of cooperative insurance companies.
Cancellation
61. Cancellation of policies must conform to the cancellation
conditions specified in the policy terms and conditions. Cancellations
by the insurance company must be notified to customers in writing,
including a reference to the relevant contractual cancellation
condition and explanation of the underlying reasons for the
cancellation.
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Principles and Practices of Insurance
62. Amounts due to customers as a result of the cancellation of
a
policy must be paid without undue delay, and must be calculated in
accordance with the provisions of article 54 of the Implementing
Regulations.
Renewal and Expiry
63. Companies must inform customers of the policy renewal or expiry
date in a timely manner to allow customers to arrange continuing
insurance coverage.
64.
For all protection and savings contracts, insurance companies
should provide an annual statement to their customers which
includes the following information:
A. Projected maturity value, or value at age eighty-five (85) for the
whole policy.
B. Current sum insured on main and supplementary benefits.
C. Total premiums paid in the previous year.
D. Policies linked to investment funds should show the value of the
units in each fund.
Distribution of Surplus
65. An insurance company must document the mechanism it will put
in place to comply with article 70 of the Implementing Regulations,
and submit this document to SAMA for approval. This document
should then be freely available to customers and Members of the
Public.
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Progress Check Answers Progress Check Answers
Principles and Practices of Insurance
Module 1
1-a
2-c
3-a
4-b
5-d
6-c
7-c
8-a
9-b
10-a
11-b
12-d
13-a
14-b
15-a
16-c
Module 2
1-c
2-c
3-d
4-c
5-d
6-a
7-d
8-c
9-a
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Principles and Practices of Insurance
10-b
11-d
12-d
13-c
14-c
15-c
16-b
17-b
18-c
19-c
Module 3
1-d
2-d
3-b
4-b
5-b
6-a
7-c
8-b
9-d
Module 4
1-a
2-c
3-b
4-d
5-a
6-c
7-d
8-a
9-c
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Principles and Practices of Insurance
Module 5
1-c
2-c
3-b
4-a
5-a
6-d
7-a
8-c
Module 6
1-a
2-d
3-c
4-d
5-d
6-b
7-c
8-a
9-d
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