New Draft Circular by the Supervisor of the Capital Market, Insurance and Savings (the Supervisor)

On 20^th January 2019 the Supervisor published a draft circular regarding transfer of funds by Israeli Insurers to Non-Israeli Reinsurers (hereinafter: New Draft Circular).

History:

Until 2012, the Control over Financial Services Regulations (ways of investing capital and undertakings of Insurers and management of its liabilities) (hereinafter: the Regulation) stipulated in Clause 25 how much of the premium due to Reinsurers by Local Insurers can be paid to the Reinsurers, and how much should remain as collateral, either as a deposit with the Local Insurers, or be guaranteed by way of a bank guarantee, in order to ensure payments of claims by the Reinsurers.

In May 2012 the Regulation was deleted, instead a new Regulation was enacted stating that transfer of funds by Local Insurers to foreign Reinsurers will be in accordance with the Supervision Instruction.

On 1^st January 2014 a draft circular was sent to Insurers allegedly replacing Clause 25 of the Regulation. Although the said draft circular never became final, the Supervisor insisted that Reinsurers must follow the requirements of the draft circular.

The New Draft Circular

On 20^th January 2019, a new draft circular was published. If approved the new draft circular will apply to Reinsurance contracts which will be in force from the year 2020 onwards.

The circular states that an Israeli Insurer can transfer funds to a Foreign Reinsurer for the following purposes only:

1. Payment of premiums less commission and paid claims for facultative reinsurance.
   The change from the previous draft: commissions cannot be transferred, and paid claims should be deducted from the transferred premium.
2. Payment for Non-Proportional Reinsurance.
3. In all other types of Reinsurance not specified in Clauses 1 and 2 above, save for Special Branches – as defined hereunder. Payments of premiums less commissions and claims paid subject to a collateral placed by the Reinsurer. The collateral should be 40% of the premiums credited to the Reinsurer for the last 4 quarters regardless of the Reinsurer’s rating.
   The change from the previous draft: In the previous draft a Reinsurer which was rated AA– and above was exempt from the duty to place collateral for the above stated branches of insurance save for the Special Branches.

   The term Special Branches means: Marine Cargo, Employers Liability, Motor Vehicles Bodily Injury, Third Party Liability (Public Liability), Product Liability and Credit Insurance for Mortgages.

4. In the Marine Cargo Insurance – the collateral should be 30% of the premiums credited to the Reinsurer in the last 4 quarters regardless of the Reinsurer’s rating.
5. The collateral in Special Branches save Credit Insurance for Mortgages –should be 70% of the Reinsurer’s share in unearned provision of premiums, and in provision of premiums in short and in reserves for pending claims (hereinafter: the Risk). However, if the Reinsurer is rated by an acceptable rating agency or if he rated AA and above, collateral should for a reduced amount.
6. The collateral can be:

• A deposit with the Local Insurer.
• Unconditional and irrevocable bank guarantee for 100% of the Risk, from an Israeli Bank, or a foreign Bank, rated AA and above.

7. In the Branch of Credit Insurance for Mortgages – the collateral should be 100% of the Risk.