The Financial Regulatory Authority (FRA) has announced that its board has made decisions on new rules for calculating and forming technical provisions by property and liability insurance companies and life insurance companies.
The decisions are based on the Unified Insurance Law No. 155 of 2024 and Egyptian Accounting Standards, to ensure insurance companies’ ability to fulfill their obligations towards policyholders and beneficiaries.
For the property and liability insurance sector, the FRA requires insurance companies to create the necessary technical provisions, namely:
1) a provision for ongoing risks, which covers insurance obligations that continue after the end of the fiscal year
- When companies apply the premium allocation approach, the provision estimates must include 100% of the balance of long-term insurance policy premiums for the years following the past fiscal year, in addition to 100% of the balance of premiums paid in advance for a subsequent fiscal year, as well as 100% of the premiums of policies whose effective date begins after the end of the fiscal year.
- A maximum of 20% must also be deducted for commissions and production costs (acquisition costs), taking into account the formation of an additional provision to address contracts with losses exceeding 100% of the cumulative loss rate.
2) a provision for compensation under settlement (provision for incurred claims), which includes reported incidents up to the date of preparing financial statements but not yet settled
- Insurance companies must estimate the provision based on reports from experts, including all expenses related to settling the compensation.
3) a provision to meet unreported incidents up to the date of preparing financial statements
- The decision requires insurers to create the provision, using approved statistical and actuarial methods according to the estimates of each company’s actuary.
4) a provision to meet any future adverse fluctuations that may affect the stability of an insurer.
- Funds are set aside in years in which actual loss rates are lower than estimated to meet the risks of higher loss rates in later years.
- The decision also specifies precise ratios for forming this provision, based on the nature of the risks covered by the various insurance policies.
To enhance transparency and oversight, the FRA requires technical allocations to be approved by the company’s actuarial expert. The decision also requires companies to adhere to new accounting standards (such as Egyptian Accounting Standard No. 50 “Financial Reports for Insurance Contracts”). It is not permissible to dispose of or use any special reserves without prior written approval from the Authority.
Life insurance
For the life insurance sector, the technical provisions include the accounting reserve, the provision for outstanding claims, and the provision for claims for unreported incidents.
FRA’s new rules specify the mechanisms for calculating these provisions to ensure the accuracy of financial estimates, which would have to be in line with Egyptian accounting standards and best actuarial practices.
The accounting reserve represents the remaining insurance coverage obligation and is calculated based on the present value ??of future cash flows, taking into account the difference between the present value of the expected insurance amounts that will be paid to policyholders, and the present value of future premiums that must be paid to the companies.
The provision for outstanding claims is calculated based on the claims reported that have not been settled up to the date of preparing financial statements.
Companies must also create a special provision for incidents that have occurred but are not yet reported, in accordance with approved statistical and actuarial methods.
The decision obliges companies to adhere to the executive rules issued by the Authority when applying the requirements of Egyptian Accounting Standard No. 50 concerning financial reports for insurance contracts. It also requires the approval of all technical provisions by an actuary registered with the FRA, to ensure their adequacy to meet the companies’ obligations towards the insured. If the Authority finds a deficiency in these provisions, the companies are obligated to address it through distributable profits in accordance with specified procedures.