Briefing

New captive insurance regime in Saudi Arabia

In alignment with Vision 2030, and to facilitate the insurance sector as a key pillar of the economy of the Kingdom of Saudi Arabia (KSA), the Insurance Authority (IA) has developed the National Insurance Sector Strategy (NIS) to enhance insurance protection for businesses and consumers, develop an efficient and sustainable insurance market, and ensure that national-level risks have adequate cover.

A part of the strategy is the development of captive insurance within KSA, and the IA has recently published its draft Captive Insurance Companies Regulation (‘the regulations’). The date of entry into force will be announced by the IA in due course.

The objective of the regulations is to set out the terms and requirements for obtaining licenses to conduct captive insurance and reinsurance, to guarantee fairness and transparency in the captive sector, and to ensure effective regulatory supervision. We have set out below some of the key aspects.

Captive Company

A Captive Company is defined as a company or foreign branch established in KSA whose primary purpose is to carry on Captive Business. A company cannot apply for a license unless it is incorporated inside or outside of KSA. A duly licenced Captive Company must maintain its head office in the Kingdom.

There are two classes of Captive Company being:

Class 1 that insures or reinsures only the members of its group and controlled entities (i.e. more than 50% of shares or voting rights being under the contractual, management or other control of one or more members of the group); and
Class 2 that, in addition to group members and controlled entities, also insures or reinsures associated third parties (i.e. where the individual/combined share capital of the Captive Company and each group member is between 20-50% and over which the Captive Company and group members, either individually or combined, exercise significant influence through contractual, management or other control).

Captive Business

Captive insurance is a form of self-insurance whereby a company establishes its own insurance subsidiary (i.e. the captive) to underwrite its own risks. It gives businesses control over premiums and offers the potential to retain profit. It allows for policies to be written to the company’s specific requirements and can assist where traditional insurance may not adequately cover unique risks.

Captive Business is defined in the regulations as meaning both captive insurance and captive reinsurance (excluding retrocession business which is prohibited unless the reinsured risks that are to be transferred are solely group risks or associated third-party risks).

To engage in Captive Business, the Captive Company must be licensed by the IA. To be eligible to apply for a license the company must be a member of a group with a parent or other member listed on a securities exchange that is recognised by the IA; and have a consolidated annual turnover of at least SAR 10,000,000,000 (c. US$ 2.66bn) or an equivalent amount in a foreign currency. The IA also has discretion regarding companies that it deems to be of sufficient scale or sufficient importance to KSA.

There is a non-refundable license application processing fee of SAR 10,000 (c. US$ 2.66k), and upon approval fees of SAR 30,000 (c. US$ 8k) are payable for a Class 1 Captive Company, and SAR 50,000 (c. US$ 13.3k) for a Class 2 Captive Company. A licenced Captive Company must pay an annual supervisory fee to the IA of 0.5% of total underwritten premiums, excluding premiums ceded to licenced reinsurance companies in KSA. The IA may alter fees in due course.

It is prohibited to carry on Captive Business in KSA without a licence. The licence application must include various documentation and information such as: disclosure of incorporators, major shareholders, and holders of senior managerial positions; memorandum and articles of association, certificate of incorporation; group ownership structure chart; proposed board of directors or managers, key functions and senior management; three year business plan covering classes of business to be written; premium volumes; retention and cession strategy; projected exposures by category of policyholder; projected financial statements and solvency position; and corporate governance framework.

Captive Insurance Manager

A licence is also required to be a Captive Insurance Manager, i.e. engaged to provide: directorship duties; key functions; corporate administration; financial accounting; regulatory reporting; claims and reinsurance administration; underwriting support; risk management support; actuarial services; data administration; and any other administration activities.

Capital requirements

Eligible Own Funds include: (a) fully paid-up ordinary shares; (b) disclosed reserves; (c) retained earnings; and (d) subordinated or hybrid instruments that have clear loss-absorbing potential (the latter subject to IA approval).

Up to 50% of the value of outstanding loans and receivables owed by group members may be included within eligible own funds, provided that they are legally enforceable in KSA or in another jurisdiction approved by the IA. If a Captive Company wishes to recognise more than 50% of outstanding loans and receivables owed by group members, it must obtain the prior written approval of the IA.

A Captive Company must at all times maintain eligible own funds at least equal to the greatest of: (a) the Base Capital Requirement (SAR 5,000,000 (c. US$ 1.33m) for Class 1 and SAR 15,000,000 (c. US$ 4m) for Class 2); (b) the Premium Risk Requirement (20% of net premiums where the net premium does not exceed SAR 20,000,000 (c. US$ 5.33m); and SAR 4,000,000 (c. US$ 1.06m) plus 15% of the net premium when it exceeds SAR 20,000,000); and (c) Insurance Risk Requirement (5% of the sum of net liability for incurred claims and net liability for remaining coverage).

Accepted Collateral (i.e. collateral or letters of credit that are issued by a bank either licensed in the Kingdom or acceptable to the IA) may contribute up to 50% of the capital requirements, subject to enforceability in KSA or another jurisdiction approved by the IA.

The IA may adjust or increase a Captive Company’s capital requirements at any time, including at the time of licensing, having regard to risk profile, complexity and governance arrangements.

The minimum capital requirement for a Captive Insurance Manager is SAR 350,000 (c. US$ 93.3k), unless specified otherwise by the IA.

Permitted activities

In terms of permitted activities, a Captive Company may carry on Captive Insurance Business or Captive Reinsurance Business or both, but not: (a) Long Term Business (i.e. regarding life, the payment of sums on marriage or the birth of a child; or health insurance); and (b) any Captive Business regarding compulsory insurance, including motor and health, or directors’, managers’, or other officers’ or employees’ liability. These restrictions do not apply regarding non-local business.

A Captive Company must not underwrite consumer business, including policies issued to individuals or to employees of the group or its subsidiaries

A Class 1 Captive Company must not underwrite the risks of any person other than members of its group and its controlled entities; and a Class 2 Captive Company must not underwrite the risks of any person other than members of its group, its controlled entities and associated third parties, unless it has obtained the prior written approval of the IA. In granting or withholding such approval, the IA will consider the public interest and the interests of policyholders.

To obtain reinsurance, a Captive Company must ensure that the reinsurer meets the company’s reinsurance credit criteria, and it must notify the IA of any material reduction in counterparty credit quality. It must also document its reinsurance credit criteria and provide a copy to the IA upon request.

A Captive Company may outsource to a Captive Insurance Manager. A Captive Insurance Manager must not outsource any core functions (including in relation to risk management, legal or regulatory compliance), although it may outsource non-material functions.

A Captive Company must not transfer the whole or part of its Captive Business without prior written IA approval. An application for such approval must include details of the business to be transferred and the proposed transferee; an actuarial report; the proposed effective date and draft legal documentation (including the draft transfer or novation agreement and any key related contractual agreements), as well as an outline of the proposed operational arrangements (including in relation to any outsourcing).

Prior written IA approval is also required for a Captive Company to transfer the whole or part of its Captive Business outside of KSA. The IA may grant such approval only where it considers that: (a) the rights and interests of policyholders will not be adversely affected; (b) all financial, contractual, tax, regulatory and legal obligations owed or applicable in KSA have been settled or complied with; and (c) the relevant jurisdiction applies prudential and regulatory standards acceptable to the IA.

Investment

A Captive Company must establish an investment policy which specifies the nature, role, and extent of its investment activities and establishes explicit risk-management procedures. Investments must reflect the nature, currency and duration of the liabilities of the Captive Company and the assets in which a Captive Company may invest are (a) cash and deposits with banks licensed in KSA or internationally regulated banks with a minimum long-term rating of A- or higher (S&P) or A3 or higher (Moody’s); (b) debt securities rated at least investment grade (BBB- or higher by S&P; or BAA3 or higher by Moody’s); (c) equities listed on a recognised exchange with adequate liquidity; (d) investment-grade bonds and intercompany loans that meet prudence, liquidity and concentration criteria; and (e) any other assets of satisfactory credit quality permitted by the IA. Exposures to assets other than these may only be permitted where fully collateralised or approved by the IA. The investment policy must be reviewed and approved by the board at least annually.

Governance and risk management

A Captive Company must have a board of directors or managers comprising at least three directors or managers, each approved by the IA, and at least one board member or person holding a senior managerial position must be resident in KSA.

It is prohibited to be a director or manager of a Captive Company, and to carry out a key function or be a senior executive officer, without prior written IA approval.

The IA may request copies of the Captive Company’s risk management policy, inclusive of risks in respect of underwriting (pricing, limits and concentration); reserving (including policies for claims provisions and, where material, actuarial input); investment (including asset-liability matching, concentration limits, liquidity and credit quality); reinsurance and counterparty (including selection criteria, credit standards, diversification and collateralisation); operations (including governance, systems, fraud, business continuity and cybersecurity); outsourcing (including due diligence, contractual arrangements and oversight of service providers); and all other categories of risk that are material to the business of the Captive Company. A Captive Company must retain all books, records, policies and correspondence for not less than ten years from the end of the relevant financial year.

A Captive Insurance Manager must obtain professional indemnity insurance at not less than: (a) SAR 10,000,000 (c. US$ 2.66m) for a single claim; (b) SAR 20,000,000 (c. US$ 5.33m) for total claims; or (c) the equivalent of 10% of its total annual income, whichever is higher. A valid certificate must be provided annually to the IA.

A Captive Company must immediately notify the IA of any material change to its business, and it must submit an annual report to the IA within three months of the end of its financial year.

External auditors must be licensed in KSA and the Captive Company must notify the IA of its proposed auditor and obtain approval of the same in writing.

Supervision

The IA may issue rules, instructions, guidelines and standardised forms to implement or clarify the regulations, and it is empowered to grant waivers or transitional relief where it deems it consistent with policyholder protection, market stability, or for any other reason that it considers appropriate.

The IA also has the discretion to exempt a Transitioning Captive Company (i.e. a Captive Company to which the whole, or a substantial part, of a Captive Business carried on by a person established outside KSA is transferred) or any other Captive Company from the current retention (at least 30% of total premiums to be kept inside KSA) and cession (at least 30% of total premiums KSA-licenced reinsurers) requirements.

The IA may also exempt such companies from the requirement to locate the head office in KSA, and from any other regulatory requirements issued by the IA.

If the IA considers a Captive Company, or any other person, to be in breach of the regulations, it may exercise one or more of its monitoring and enforcement powers in accordance with all applicable laws.