regulators role in enhancing Insurance company's rating, in addition this presentation talks about regulation in Jordan related to credit rating and how thet y effect ERM
2. Mr. Ala Alodeh holds more than 13 years experience as an Insurance supervisor, during his
work he have been exposed to many aspects in related to insurance operations and
technicalities. He currently works as the financial supervision head of the Insurance
administration in Jordan, he is also an expert in the fields of risk management, compliance
and internal audit.
Mr. Ala has a master in business administration (MBA) from New York Institute of
Technology (NYIT) , in addition he holds many diplomas and certificates in insurance.
Contact: aalodeh@gmail.com
LinkedIn: https://www.linkedin.com/in/alaalodehmba/
3. Outline
• Regulators Relationship with CRA.
• Credit Ratings in Jordan Insurance legislations.
• Credit Ratings post the financial crisis 2008.
• Benefits of credit rating for insurers.
• Rating methodology.
• Enhancing rating for local and regional insurers.
4. Regulators Relationship with CRA
• CRA function plays an important role in helping regulators achieving
their objectives.
• According to the stocktaking study conducted by the Joint Forum
(2009) the role of CRA included the following:-
1. Capital.
2. Asset identification.
3. Securitizations and covered bond offerings.
4. Disclosure requirements.
5. Prospectus eligibility.
6. Other.
6. Credit Ratings in Jordan Insurance legislations
• Reinsurance Instructions no (4) 2002 and its amendments
thereof.
• The Insurance company must reinsure their policies with first
and/or second category according to the solvency margin decision.
• This include both treaty and facilitative arrangements.
• Rating must be interactive not based only on financials.
• Some exceptions can be granted upon the approval of the
ministry.
7. Credit Ratings in Jordan Insurance legislations
AM BestMoody'sStandard & Poor's
First Group
SuperiorA++ & A+ExceptionalAaaExtremely StrongAAA
ExcellentA & A-ExcellentAaVery StrongAA
2nd Group
GoodB++ & B+GoodAStrongA
AdequateBaaGoodBBB
3rd Group
FairB & B-QuestionableBaMarginalBB
MarginalC++ & C+PoorBWeak/
Vulnerable
B
WeakC & C-
4th Group
Less than
that or not
rated
8. CRA in Jordan Insurance legislations
• Investment instructions no (1) 2006 and their amendments
thereof
• Included limits related for the foreign not rated investments.
• Excluded not first group rated foreign investment for the purpose
of Insurance liabilities matching.
• affects the solvency margin.
9. Credit Ratings in Jordan Insurance legislations
BanksBonds
AA
Standard &
Poor’s
AAMoody’s
BBFitch Ibca
10. Credit Ratings post the financial crisis 2008
• The role of CRAs had been criticized after the recent financial
crisis, most importantly:-
• Conflict of interest.
• Failing to address important risks which lead famous financial
failures.
• The role of CRAs in structured products.
• Can Impose systemic risk.
• Credit rating are opinions thus can hinder accountability.
11. Benefits of credit rating for insurers
• More trust in the rated insurers.
• Help Insurers to get new business.
• Enhancing the ERM for the companies.
• Help to obtain credit.
• Help to rise capital.
12. Rating methodology
• Sovereign debt or country rating is usually the basic starting
point for institution ratings (including insurance companies).
• Key elements in determining Sovereign debt rating:-
• Economic risks.
• Political risks.
• Financial system risks.
• Law sovereignty.
• Legal framework.
13. Rating methodology
• Financial system risks; risk imposed form the lack of
regulations, weak banking system and financial market, poor
financial disclosure and lack of proper over site.
• The financial crisis of 2008 had shown how easy risks can be
transferred trough the financial system.
• the Importance of efficient and effective oversight and
regulations.
15. Rating methodology
• Key elements for Insurance company:-
• Financial position strength.
• Reinsurance arrangements.
• Insurance (technical) provisions sufficiency.
• Assets quality and diversification.
• Company’s liquidity.
• ERM.
• Management and operations efficiency.
16. Enhancing rating for local insurers
• No of rated Jordanian insurance companies (8) out of (24).
• Insurance regulators may have two approaches to motivate
companies getting rated:-
• Direct approach: in this approach insurance regulator may
introduce a legislation to mandate that companies get a rating.
• Indirect approach : in the approach insurance regulator prepare
the framework to enhance the ability of companies getting the
rating.
17. Enhancing rating for local insurers
• Insurance companies criticism to mandate getting a rating:-
• High cost.
• The Sovereign debt or country rating cap.
• A lack of understanding on how rating can attract
investment.
• Rating doesn’t reflect the possibilities of bankruptcy.
• Suggestions of merging companies.
• To much administrative work.
18. Enhancing rating for local insurers
• How can Insurance regulator enhance the ability for
supervised insurer getting a rating?
• According to ICP 2 issued be IAIS ; insurance supervisor must
be:
• Have operational independence.
• Sufficient resources.
• Legal protection.
• Confidentiality in performing its tasks.
• Professionalism.
19. Enhancing rating for local insurers
• Establishing a comprehensive legal formwork for the
following:-
• Risk based solvency requirement.
• Early warning system and Stress testing.
• Legal frame work for effective corporate governance.
• ORSA.
• Transparency.
• Enhancing public awareness.
20. Enhancing rating for local insurers
• Adopting “Macro prudential surveillance” to decreases the
level of systematic risk for the financial market.
• Relatively a new concept.
• Came into spotlight after the 2008 financial crisis.
• Cooperation and integration between financial supervisors.
• Economic indicators in addition to prudential supervision.
• Upper prospective.
21. Enhancing rating for local insurers
• Developing Enterprise Risk Management for Insurers (ERM).
• Risk is the fundamental concept for insurance.
• According to COSO ERM is: “Enterprise risk management is a process,
effected by an entity’s board of directors, management and other
personnel, applied in strategy setting and across the enterprise,
designed to identify potential events that may affect the entity, and
manage risk to be within its risk appetite, to provide reasonable
assurance regarding the achievement of entity objectives”
22. Enhancing rating for local insurers
• In article (8) of Corporate governance instructions no (2)
2006 insurance companies must have a risk management
system which:-
• Covers all company’s activates and include limits and
measurement for all its risks.
• Assuring a companies compliance with this system and its policies.
• Procedures for delivering appropriate information for decision
makers.
• Reviewed on periodic bases.
23. Enhancing rating for local insurers
• Encouraging companies to merge.
• Intense competition in the market.
• Low market performance indicators (penetration ratio; 2.1% in
2004).
• In 2015 there were one merger case between two insurers.
• The Objective of merger is the create big entities with high
solvency and can deliver high quality serves. This will help
companies to obtain a higher credit rating.
24. Enhancing rating for local insurers
• Pushing forward to develop IT systems:-
• Very important issue not only for rating purposes.
• The importance of having sufficient data bases for underwriting
and claims management.
• Inspections have shown some weakness in current IT systems.