Part of the genius of modern Dubai was the decision to launch the DIFC and so create a new financial services hub for the region. Regulating the insurance sector activity of entities based in the centre falls to the DFSA. We spoke to its chief executive Bryan Stirewalt about regulatory developments for the industry.
The DIFC has been operational for less than two decades and yet it has already been through the best of times and the worst of times.
The worst of times would certainly include the onset of the global financial crisis and the mass exodus of expatriates from the emirate – as well as the scourge of the pandemic that brought business around the world to its knees.
Mr Stirewalt echoes the sentiment of many global CEOs. “Our primary focus over the last 12 months has been on the health, safety and well-being of our staff,” he said.
In terms of the insurance sector in particular he said, “We are very pleased to say that this was also the priority of the entire DIFC community that we regulate. Our supervisory effort over the past 12 months has been engaging with regulated entities and to assist them to carry out their business continuity plans effectively so that business could continue without disruption to their customers and counterparties.”
Such supportive measures have to be holistic to be effective. “We tried not to introduce any unnecessary regulatory burdens over the past year, as we knew that regulated firms were busy implementing COVID-19 protocols and enhancing systems to accommodate remote working arrangements for their employees,” Mr Stirewalt said.
“We closely monitored levels of claims reported, both on health and business interruption (BI) cases, to assess whether COVID-19 was having any systemic impact on the insurance market of the DIFC. The health crisis and the lockdown measures did not materialise into systemic risks. Insurance firms in the DIFC showed strong results in both financial and operational resilience measures.”
One important change to the regulatory framework was in relation to captive insurance. “This was in response to the hardening reinsurance market we observed globally and regionally, particularly in the property and casualty space,” Mr Stirewalt said.
“As reinsurance rates increased, we knew that a growing number of risk managers were starting to consider captive insurance as one of the ways to control the cost of the insurance programme. The DFSA undertook an extensive benchmarking against the major captive jurisdictions around the world to bring about bespoke prudential requirements.
“We publicly consulted on the proposed changes in the last quarter of 2020 through Consultation Paper no. 134. The proposed changes to our captive regime will likely be enacted in the second quarter of this year. We believe that this will bring about a renewed increase in the number of applicants and authorised captives in the near future and further strengthen the DIFC community,” Mr Stirewalt said.
The year ahead
The insurance industry should have a significant role to play in supporting global economic recovery and preparing for other systemic risks in the future.
“In turn, regulators need to focus on making sure that the insurance industry is prepared for the next big risk,” Mr Stirewalt said. “We already have regulations in place that require insurance firms to have a robust risk management framework enabling them to identify, measure and mitigate the emerging risks and stay operationally resilient. Firms need continuously to undertake appropriate stress testing to remain financially prepared. We will be focusing on supervisory measures to make sure that this is done in practice.”
The global health crisis also brought forward an acceleration of digitalisation and a shift to remote working across all types of companies, regulated and unregulated.
“While this has been a positive for operational resilience, it has also increased the threat of cyber-attacks and incidents of fraud,” Mr Stirewalt said. “We will continue to intensify our cyber risk supervision programme by focusing our reviews on the cyber risk governance, hygiene practices and resilience capabilities of regulated entities. Through cyber risk insurance offerings, insurance firms will also play a vital role in helping all types of companies prepare for this risk in the future,” he said.
Coverage of BI losses arising from the pandemic was a controversial issue last year across the globe with different jurisdictions responding differently.
“This will no doubt lead to a revision of many policy wordings in reinsurance contracts,” said Mr Stirewalt. “We need to make sure that when renegotiating and renewing reinsurance contracts the parties involved do so in a fair and transparent manner. Any changes to coverage and exclusions must be properly disclosed. Of course, businesses need to be asking the right questions to know if BI insurance is included or not.”
Delayed payment and collection of insurance premiums has been a problem in the Middle East for a long time.
“This is an issue which was probably exacerbated by the pandemic as it provided a convenient excuse for the delayed payment,” Mr Stirewalt said. “We need to make sure that everyone in the insurance industry – brokers, insurers and reinsurers – are doing their best to improve the collection process. There needs to be a coordinated regulatory effort in the region, including the DIFC, to deal with this issue. Making sure that brokers properly segregate and reconcile insurance monies in the client accounts, and process premiums and claims payments effectively without undue delay will be points of emphasis.”
International insurance standards
Issues such as IFRS17 and capital adequacy will affect some DIFC regulated entities in the same way as they do other players in the insurance industry.
“As international best practice is communicated through the principles and standards of the International Association of Insurance Supervisors, we will continuously review and update our regulatory infrastructure,” Mr Stirewalt said. “We will ensure that the standard of regulation continues to be strong in order to attract the best reinsurers to the DIFC. The managing agents that are underwriting on behalf of the foreign insurers need to have robust underwriting standards and risks that are priced fairly and appropriately so as to sustain confidence in the market.
“In the near term, we will be working closely with DIFC-based reinsurers so that they are prepared for IFRS17 implementation. Also, we will continue to promote product innovation to further the DIFC as the go-to place for risk management solutions, particularly in complex risks such as cyber. The underwriters and brokers operating in the DIFC play an important role by bringing reinsurance capacity as well as underwriting expertise for the regional insurance industry.
“Finally, one globally important initiative for the regulatory community is embedding environmental, social and governance issues into regulation and supervision. We will be reviewing our regulation so that insurance activities in the DIFC are conducted in a responsible and environmentally sustainable manner,” Mr Stirewalt said. M