The decision aims to develop underwriting, pricing, reinsurance, and risk management policies related to this line of business, and to achieve greater discipline and financial stability in line with the nature and complexity of the risks borne by the insurance sector.
25% minimum liability for the insured or creditor
Among its several provisions, the decision sets out requirements for mandatory risk retention and the participation of credit providers in the risks covered by insurance policies. It obliges companies to ensure that the proportion of risk retained by the insured or the credit-granting entity is not less than 25% of the outstanding balance of the financing or credit facility insured with the insurance company at the time the insured risk occurs.
The Authority may decide on a higher tolerance percentage for certain types of risks or portfolios, according to risk indicators, loss and default rates, concentration, and the nature of the portfolio.
The decision also prohibits side agreements between the company, the insured, or the creditor, whether in the form of an agreement, addendum, undertaking, or arrangement, if they would directly or indirectly modify the scope of coverage, reduce or cancel the deductible, modify the conditions for entitlement to compensation, or arrange rights or obligations that contradict what is included in the insurance policy or its addenda approved by the Authority.
New standards for underwriting and creditworthiness assessment
The decision identifies key elements that an insurance company must include in its written policy for underwriting credit and guarantee insurance, which has to be approved by the insurer’s board of directors. These include risk acceptance and rejection criteria, creditworthiness assessment methodology, required deductibles and guarantees, and maximum exposure limits.
The policy also includes concentration limits for a single client, related groups, credit provider, economic sector, and type of financing, along with rules for monitoring default, recovery and collection, reinsurance policy, early warning indicators and the procedures to be followed when they are exceeded.
The decision obliges companies to develop a technical and actuarial methodology to determine the minimum technical rate for credit and guarantee insurance documents, ensuring that premiums are sufficient to cover the associated risks and costs.
When determining the minimum technical price, the company is guided by several factors, including the probability of default, exposure to default, if appropriate to the nature of the product, recovery rates, coverage ratio, deductible ratio, term of financing or facility, nature and value of collateral, margin of uncertainty or risk margin, as well as expenses, commissions, production costs and reinsurance.
The decision prohibits the issuance or renewal of any document at a rate lower than the minimum technical price resulting from the application of the approved methodology, without preventing the application of a higher commercial price in accordance with the company's policy.
Credit inquiries are primarily used for risk assessment.
Regarding the assessment of creditworthiness, the decision stipulates a set of elements that the company must consider when assessing the likelihood of default by natural and legal persons or in project financing.
The company is obligated, at a minimum, to consider the credit rating of the individual issued by a licensed credit information company, the debt burden ratio, and other statistically or actuarially significant variables, with the need to calibrate the relationship between these variables and the default rate based on reliable actual data and experience.
For corporate entities and project financing, the insurer is committed to using indicators appropriate to the nature of the risk, in particular the credit rating or assessment, cash flows, liquidity and solvency indicators, debt serviceability, collateral coverage ratio, and the economic sector and its risks.
The insurer also undertakes, if reliable historical experience is available, to compare the cost of risk derived from the model used in pricing with the actual historical cost of losses of the company in similar risks or portfolios, after standardising the basis of coverage and making the necessary adjustments to ensure comparability.
The decision requires insurers to conduct back-testing and periodic validation annually to ensure the efficiency of the price adequacy testing model and the accuracy of its predictions.
Annual review of technical limits and pricing
The decision obliges the insurance company’s board of directors to adopt the actuarial expert’s report annually, which must include the pricing methodology, the minimum technical rates, the assumptions and transactions used, the calibration bases, and the results of the tests and verification of the model.
The company is also obligated to notify the Authority before commencing work on the technical limits, through the documents and data specified by the Authority, especially the table of minimum rates according to the nature of the product, credit rating brackets, debt burden levels, type of guarantee, coverage ratio, tolerance ratio, financing period, actuarial report, calibration basis and supporting data, and supervisory test results.
The company shall resubmit the study and technical parameters to the Authority at least once a year, or when there is a material change in loss experience, default or recovery rates, underwriting policy, credit inquiry methodology or source, actuarial methodology, or assumptions and transactions used.
10% maximum for a single customer and 50% for banks
To reduce concentration risks, the decision requires insurance companies to set approved internal limits for concentration risks that include, at a minimum, a single customer, a related group, a credit provider, an economic sector, a type of financing, and a reinsurer.
The decision stipulates that the company’s obligation towards a single client or related group should not exceed 10% of the credit insurance and guarantee amounts for the existing or current portfolio or the funds allocated for branch obligations, whichever is less.
Also, the work assigned to the company by a single credit-granting entity may not exceed 50% for banks and 30% for other lending entities of the branch insurance amounts, except after obtaining the approval of the Authority.
The volume of credit and guarantee insurance premiums may not exceed 25% of the company’s total premiums at the end of the year, unless with the prior approval of the Authority.
The Authority may approve amounts exceeding the aforementioned limits, based on a technical and actuarial study that includes, at a minimum, the effect of exceeding on solvency, stress test results, reinsurance quality, concentration level, loss and default rates, and the company’s ability to absorb the risk.
Reinsurance controls
The decision requires insurance companies to ensure that their credit and guarantee insurance portfolio reinsurance programme is proportionate to the nature and size of the risks they bear.
Each company shall commit, when designing a reinsurance programme and selecting reinsurers, to take into account the solvency and rating of the reinsurer, the size of the exposure, the collectability of the amounts due, and the risk of concentration, while preventing substantial and unjustified concentration with a single reinsurer.
Semi-annual stress tests to address risks
Dr Islam Azzam, FRA Chairman, said that the decision requires companies to conduct stress tests and scenario analyses of their credit and guarantee insurance portfolio at least semi-annually, and whenever there is a substantial change in the size or nature of the risks.
These tests aim to determine the rates of default, recovery, and losses, the extent of high concentration in one financing entity, and the default or downgrading of the rating of one of the main reinsurers, while enabling the Authority, in the event of indications of portfolio deterioration, to obligate the company to submit and implement a corrective plan.
Training specialists in underwriting and pricing
Dr Azzam stressed the companies’ commitment to assigning the responsibility for underwriting, pricing, compensation, and risk management of the credit and guarantee insurance portfolio to individuals with the experience and technical qualifications appropriate to the nature, size, and complexity of the activity.
He added that the Authority will set out in a subsequent decision the detailed requirements related to experience and qualification, which will contribute to raising technical efficiency.
The FRA will also issue the necessary decisions to determine the essential rules and standards for applying these controls, including definitions of loss ratio, net liability, related group, net branch portfolio, early warning indicators, methodology for calculating concentration limits, definitions related to default, and the basic requirements of the actuarial methodology.
Insurance Federation
FRA Vice Chairman Tarek Seif said that the Insurers Federation of Egypt (IFE) will play an important role in implementing the decision, by preparing a draft of the standard conditions and minimum requirements that must be met in credit and guarantee insurance policies.
He explained that the IFE draft will include basic definitions, coverage scope, tolerance rates, exceptions, compensation eligibility conditions and other conditions, and will be presented to the Authority for review and approval before implementation, to make it easier for companies to implement the new regulations.
New rules for recording default data
Mr Saif also said that the FRA will later issue a decision to define the concept of default, cases of restructuring, rules for resolving disputes, procedures for correction, updating and deletion, the duration of data retention and controls over data confidentiality and availability.
He added that the FRA would steer the establishment of an online platform for recording and updating data on default or cessation of payments.