Business insurance

Insurance sector: new risk capital regime from 1 July

ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) will issue a risk-based capital regime from July 1, 2022, which will help every insurance company determine the minimum capital required based on the risks they face.

The SECP also released a new regulatory framework for the registration of digital-only insurers and dedicated microinsurers to allow smaller, technology-enabled entities to enter the insurance market.

The SECP Annual Report (2020-21) revealed that regulatory reforms to be introduced through the Insurance Ordinance (Amendment) Bill 2021 are expected to bring about a paradigm shift in the regulation of the insurance sector by creating an environment conducive to market development, aligning the regulatory framework with international insurance supervision standards and strengthening the supervisory powers of the SECP.

The draft regulatory framework for the registration of digital-only insurers and dedicated microinsurers is expected to be finalized by the end of FY2022. This will reduce barriers to entry and enable smaller technology-based entities to enter the insurance market, thereby increasing insurance penetration in underserved markets.

With the aim of improving market behavior and ensuring the protection of policyholders’ interests, regulatory requirements relating to the sales process, eligible investment opportunities for unit-linked funds, exposure limits in particular instruments such as debt, equity, real estate, collective investment schemes, etc., and advice on the risk categorization of unit-linked funds based on the asset allocation of the funds, are being proposed through an amendment to the Unit-Linked Products and Funds Rules, 2015, the SECP said.

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The SECP stated that the regulation of unit-linked products is essential because the investment risk is borne by the policyholder in unit-linked insurance products. A roadmap is developed for the development of a risk-based capital regime and the implementation of International Financial Reporting Standard 17 (insurance contracts). To ensure a smooth transition from the implementation of IFRS-17, SECP has adopted a phased approach covering gap analysis and financial impact assessment which will be followed by system design and methodology. and parallel execution.

For the development of a risk-based capital scheme, a technical working group formed by the SECP is working on developing a preliminary design for the scheme which is to be completed by June 30, 2022. Adoption of a risk-based capital regime will help each insurance company determine the minimum capital required based on the risks to which it is exposed. The graduation of the insurance sector in Pakistan from factor-based capital requirements to risk-based capital requirements will help increase the resilience of the insurance sector to the risks it faces and improve its compliance with international standards, said the SECP.

The SECP, in collaboration with all stakeholders, will continue to infuse Shariah principles into disruptive Fintech innovations (smart contracts, Big Data and Blockchain technology), which will contribute to financial inclusion and further improve the experience. client for Sharia-sensitive investors.

The department will also review the RegTech solutions available for the supervision of the Islamic financial industry, particularly in the areas of Shariah compliance and Shariah auditing. SECP plans to work with stakeholders to increase the volume of Takaful in Pakistan, launching a Taktech (Takaful technology) to revolutionize the Takaful sector, complementing existing initiatives to improve Takaful coverage of unserved segments of the population.

The SECP will also explore the Asset Light Sukuk framework for issuing Asset Light Sukuks. For Green Sukuks, IDF is already carrying out research to create a regulatory framework for the issuance of Green Sukuks in Pakistan. In consultation with the Institute of Chartered Accountants of Pakistan (ICAP), the IFD is also in the process of introducing a Shariah audit qualification for external Shariah auditors, under the Governance Regulations of the Sharia Law of 2018. This step will help streamline the Sharia external audit profession in Pakistan.

Copyright Business Recorder, 2022