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  • RM-2.1 RM-2.1 Credit Risk

    • RM-2.1.1

      Section RM-2.1 applies only to insurance firms and insurance brokers.

    • RM-2.1.2

      Insurance licensees must identify and manage their credit risk across all their operations, and document their policies and procedures for achieving this in a credit risk policy. This policy must be regularly reviewed.

      Amended: January 2007
      Amended: October 2007

    • RM-2.1.3

      Amongst other things, a licensee's credit risk policy must identify the limits it applies to both individual counterparties and categories of counterparty, how it monitors movements in counterparty risk and how it mitigates loss in the event of counterparty failure.

      Amended: October 2007

    • RM-2.1.4

      Credit risk is the risk that a counterparty will not meet its obligations in accordance with agreed terms, causing a financial loss. In the case of an insurance firm, credit risk will normally occur with:

      (a) Reinsurance counterparties;
      (b) Assets (e.g. stock, loans);
      (c) Derivatives; and
      (d) Insurance debtors (premiums due from insured persons and intermediaries).
      Amended: January 2007
      Amended: October 2007

    • RM-2.1.5

      The licensee should consider these and other credit risk factors that may affect the licensee's solvency:

      (a) The credit-worthiness of its reinsurers;
      (b) The financial effect of non-performance of the reinsurance; and
      (c) The financial effect of non-payment of premiums, by debtors such as intermediaries and policyholders.
      Amended: January 2007

    • RM-2.1.6

      In addition to considering the failure of counterparties, the licensee should also consider scenarios such as increases in late payment and doubtful debt provisioning, and measures to mitigate credit risks, such as premium payment warranties (whereby policy coverage only becomes effective on payment of premiums).

      Amended: October 2007

    • RM-2.1.7

      An insurance firm must monitor its exposure, defined as sums insured, to an individual reinsurer and provide details of its reinsurance programme to the CBB. It must notify the CBB if its total aggregate exposure, on a premium basis, to one reinsurer (or group of related reinsurers) exceeds 25% of individual or aggregate risks and why it considers that this exposure does not pose a credit risk for which a provision should be made.

      Amended: January 2007

    • RM-2.1.8

      Paragraph RM-2.1.7 does not constitute a prohibition on exceeding this amount as the CBB recognises that there may be situations and types of reinsurance arrangements where reinsurance in excess of this limit might be necessary. The CBB should however be notified of these cases, and the licensee should include an explanation of the reason why it believes that the excess exposure is an acceptable credit risk.

      Amended: January 2007
      Amended: October 2007

    • RM-2.1.9

      In addition to the requirements noted in Paragraph RM-2.1.7, insurance firms must evaluate the credit worthiness of individual reinsurers at the time of ceding business and on an on-going basis.

    • RM-2.1.10

      The credit worthiness of reinsurers may be established by referring to ratings provided by international rating agencies, such as Standard & Poors or AM Best.

    • RM-2.1.11

      An insurance licensee must keep its exposure to individual assets or classes of assets within prudent levels, taking into account the relationship between counterparties, geographical and sectoral concentration, duration of exposures and the exposure to single loss events (e.g. regional economic downturns). Chapter CA-4 provides additional Rules in establishing limitations in the valuation of assets.

      Amended: January 2007

    • RM-2.1.12

      Specific counterparty limits are contained in Paragraph CA-4.2.33.

      Amended: January 2007
      Amended: October 2007

    • RM-2.1.13

      An insurance licensee must take into account the risk of default in the valuation of its assets.