The Insurance and Private Pension Regulation and Supervision Authority (SEDDK) has redefined the procedures and principles regarding risk acceptance and management in surety insurance.
The changes, which will enter into force on 1 January 2027, introduce new rules in many areas, from identifying risk groups and classifying collateral and guarantees to financial risk management and online surety applications.
In the “Circular on Risk Acceptance and Management in Surety Insurance”, SEDDK said that the regulation redefines the procedures and principles regarding risk acceptance and management processes for insurance companies operating in the direct and indirect surety insurance branches. Guarantees provided under building completion insurance are excluded from the provisions regarding guarantee and security classification.
Risk groups
The circular establishes the principles for creating risk groups, while also setting limits on the risks that insurance companies can undertake in relation to surety coverage.
In addition, the net coverage risk undertaken for an insured party or risk group cannot exceed 10% of the company's equity. The total gross coverage risk associated with existing surety bonds cannot exceed five times the insurance company's equity. Furthermore, surety bonds will be classified into five groups according to their risk levels.
According to the circular, insurance companies will also classify and track guarantees received in return for surety coverage into four separate groups based on their risk levels.
Assets such as cash, deposits, certain government debt instruments, and bank guarantee letters fall in the first group of securities, while other financial assets and collateral in kind will be monitored in the second, third, and fourth groups according to their risk levels. Furthermore, the valuation ratios of the securities have been determined separately for each group.
Financial risk management is becoming essential.
The regulation mandates that insurance companies establish financial risk assessment units within their organisations. Personnel working in these units must possess specific professional experience and complete training and examinations administered by the Insurance Education Centre (SEGEM).
Risk assessment and monitoring processes strengthened
The circular also mandates a detailed assessment of the policyholder's or insured's financial structure, payment performance, credit history, and capacity to fulfill obligations.
Insurance companies will also regularly monitor risks related to surety coverage, establish early warning systems, and track changes in risk profiles. Coverage limits will be determined on an individual, company, and risk group basis. Compliance with these limits will be monitored throughout the entire coverage process.
E-guarantee
The circular also revised the principles regarding online guarantee (e-guarantee) applications.
The verification, transmission, safekeeping, and updating of surety bonds will be carried out electronically. Insurance companies will track information and documents related to surety insurance integrated with the Insurance Information and Supervision Centre (SBM) system. It will also be mandatory to establish the technical infrastructure for monitoring data related to guarantees based on risk groups and conducting limit controls.