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Insurance Law: The Amendment of the

Insurance Law: The Amendment of the Insurance Supervision Law: Insurance Law Undergoes a Major Reform: Brokerage Market Opening Up, Less Bureaucracy, More Supervisory Powers
Introduct
ion and Overview
The current Insurance Supervision Law No. 10 of 1981 (“Insurance Law”) has undergone a number of amendments since it was passed in the early 1980s. The most significant of those amendments took place in 1991, and it led to a major liberalization of the insurance industry in Egypt. Then, in 1998, a shorter amendment allowed the privatization of Public Sector Insurance Companies to take place. The latter was, however, an enabling Law, but the actual privatization has not taken place yet. The Insurance Law is not a law that describes or regulates the commercial activity of insurance. It is actually an insurance supervision Law. To determine how insurance operations are legally treated in Egypt, we need to look elsewhere, in the Civil Law and the Code of Commerce. Accordingly, changes in the Insurance Law have an impact not on the legal relationship of insurer/insured, but rather on the supervisory framework for the insurance industry in Egypt, in other words on the relationship of insurer/regulator. On May 11th, 2008 a major new amendment to the Law was introduced (Law Number 118 of 2008 Amending Certain Articles of the Insurance Supervision and Regulation Law in Egypt Number 10 of 1981). The new amendment is an important one, and will have far reaching effects on the nature of the Egyptian insurance market. The key changes introduced pertain to:
  • The nature of the Egyptian Insurance Supervisory Authority.
  • The restructuring of the insurance industry.
  • The tightening of the prudential supervision over insurance companies.
  • The reorganization and liberalization of insurance brokerage.
The new EISA: Financial Independence and Powers to Supervise
EISA is the sole regulator of all insurance activities in Egypt. It is a public authority, and accordingly has been since its establishment in 1981 subject to the provisions governing public authorities in Egyptian Law. However, the need to bring EISA in line with other «reformed» financial regulators, and to empower it to perform its supervisory functions, required significant changes to take place in the Law. Two main changes are worth noting here: The first is that the Law now states that EISA shall undertake supervision of insurance and reinsurance activities “in accordance with the rules of risk assessment and management and of financial adequacy“. This new terminology used in the amended Article (7) of the Law (italic emphasis added) is not just a choice of fancy language; it indicates a major departure in the objectives and methods of supervision by EISA from formal criteria to risk-based and market sensitive supervision. The second is that EISA is made financially independent by explicitly stating that it shall have the right – unlike most public authorities in Egypt – to keep its surplus from one year to the next, without having to transfer the balance to the Treasury at the end of the fiscal year. This provision has already been introduced in the law with respect to a number of other agencies, including the Investment Authority, the Capital Market Authority and the Mortgage Finance Authority, and has tuned out to be of great significance in allowing these agencies to be financially sustainable, and thus be in a better standing to perform their functions.
Restructuring Overall Supervision
In addition to strengthening the role of EISA as the insurance supervisor in Egypt, the new amendment introduces a number of other key changes in the overall supervisory structure. These are:
  1. A “Union of Insurance Companies” is to be established by Law. Previously this was an option which companies could elect to undertake, and which each company was free to join. The result was a weak and ineffective NGO with no significant presence or impact.This is now a compulsory requirement of the Law, and all companies are required to join the new Union. More importantly, the Law now states that the newly organized Union is the entity responsible for issuing industry professional standards, and that it will have the power to discipline its members. This is a welcome development as it should lead to the strengthening of the Union as a self-regulatory body. The bylaws of the Union shall be issued at a later date by EISA. Although it is premature to comment on the Union until it is established and in place, it is important to note that one of the key elements of its success will be the extent to which it will have some independence vis à vis EISA, and therefore will be able to play an effective role not only in improving industry standards but also in promoting the interests of its member companies.
  2. The other key change in the overall regulatory framework is the abolition of the “Higher Council for Insurance”. This was a body established since 1981 and composed of a large number of company heads, academics, members of the judiciary, high-ranking civil servants from a number of ministries and agencies and headed by the Minister of Investment. However, it has consistently not been of much value, except to add an unnecessary layer of bureaucracy and to overburden the overall regulatory framework. Its abolition is an extremely welcome step and it indicates that the overall trend is to reduce the red tape burden and lighten the overall structure.
  3. The third and last key change in the structure of regulation is that Public Sector Insurance Companies no longer have their governance rules determined in the Insurance Law and their annual profits will not be transferred to the Treasury. The reason is that the ownership of such Companies has been transferred early this year to a newly established Insurance Holding Company, and thus they are subject to the provisions of Public Enterprise Companies Law. Again, irrespective of the merits of the latter Law, reducing the amount of “exceptional” rules will lead to a better level playing field.
Prudential Supervision over Companies
Prudential supervision is used in this context to denote any measures of standards aimed at maintaining the safety and soundness of the market. The new amendments in the insurance law introduce a number of measures in this respect:
  1. The minimum capital requirement for the insurance company upon establishment is raised. Whereas it was thirty million Egyptian Pounds, 50% of which to be paid upon incorporation, it is now sixty million Egyptian Pounds again 50% minimum paid upon establishment.
  2. More significantly, Article (27) as amended introduces a new concept in the Law by stating that the above minimum capital requirement shall be “without prejudice to the capital adequacy rules to be issued by (EISA’s) board of directors.” This is important because it indicates that regulation of insurance companies is moving away from the formal paid-up capital requirement to more risks-based criteria, in the same manner that such shift has occurred in the capital market regulations over the last few years.
  3. Insurance companies were so far required to either undertake life/personal business or property insurance. However, an important exception to this rule was stated in Article (27) whereby companies doing both types of business at the time of issuing of the original Law – i.e. in 1981 – were allowed to continue operating in both types of business. This gave Public Sector Insurance Companies an unfair competitive advantage over all other new comers. The new amendment in the law departs from this principle by eliminating the exception referred to above. Thus all insurance companies will have, within two years from May 2008 extendable for exceptional circumstances for a further two years, to liquidate one of the two types of business. This will certainly lead to the transfer of portfolios within the Public Sector Insurance Companies in order for each one to comply with the new requirement. This is a positive development. Irrespective of the reasons for not allowing the same company to undertake both types of business, leveling the playing field among all companies is an important sign that the regulatory environment is tending towards a fairly competitive standard.
The Reorganization of Insurance Brokerage
The most sweeping changes in the Law are introduced in the regulation of insurance brokers. This is an important aspect of the Law because so far insurance brokers were not sufficiently supervised. The key changes are:
  1. Insurance brokers are explicitly stated to be either normal or juridical personalities. This puts to rest a debate about whether under the old Article (71) insurance brokerage companies were permitted to exist or not, and now it is clear that they are.
  2. Insurance brokerage companies are required to take the form of joint stock companies and to have a minimum capital of two million Egyptian Pounds, 50% of which must be paid-up upon incorporation. In addition, the company’s managing director must fulfill the professional requirements which shall be stated in the Executive Regulations (not yet issued). Finally, the insurance brokerage company must either operate in the insurance or re-insurance business.
  3. Article (72) no longer requires insurance brokers for property insurance operations to be exclusively Egyptian, thus allowing for the first time foreign brokers to be registered in the Brokers’ Registry with EISA in non-life business. And since the previous Article (71) allows both normal and juridical personalities to be insurance brokers, we should expect foreign insurance companies to become present in Egypt and be licensed as non-life brokers.
  4. All insurance brokers – whether individuals or companies – are required to maintain a professional insurance policy.
  5. A new Article (74 bis 1) introduces a new and crucial provision stating that “The (Insurance Law) Executive Regulation shall determine the conditions and provisions for the marketing of insurance products by banks”. This is an important provision because it deals with the interaction of two types financial institutions: banks and insurance companies. Egyptian Law in general is silent with respect to this type of interaction, usually leaving it to the practice of each regulator to look after its scope of activity. In this case, however, the Law is explicit in giving the insurance regulator the upper hand with respect to any activity by banks in selling or marketing insurance products. This is in line with international best practice.
  6. Insurance brokers are not permitted to undertake certain activities related to the insurance business, specifically damage assessment and actuarial expertise.
  7. Insurance and reinsurance companies are not permitted to have equity participation in insurance brokerage companies nor to manage them. In other words, a total segregation should be maintained between the insurance and the insurance brokerage businesses.
A number of key provisions in the Law will not become operative until the issuance of an amendment to the Executive Regulations by the Minister of Investment. This should be forthcoming and will be commented upon by Egypt Legal Update in due course.
Introduct
ion and Overview
The current Insurance Supervision Law No. 10 of 1981 (“Insurance Law”) has undergone a number of amendments since it was passed in the early 1980s. The most significant of those amendments took place in 1991, and it led to a major liberalization of the insurance industry in Egypt. Then, in 1998, a shorter amendment allowed the privatization of Public Sector Insurance Companies to take place. The latter was, however, an enabling Law, but the actual privatization has not taken place yet. The Insurance Law is not a law that describes or regulates the commercial activity of insurance. It is actually an insurance supervision Law. To determine how insurance operations are legally treated in Egypt, we need to look elsewhere, in the Civil Law and the Code of Commerce. Accordingly, changes in the Insurance Law have an impact not on the legal relationship of insurer/insured, but rather on the supervisory framework for the insurance industry in Egypt, in other words on the relationship of insurer/regulator. On May 11th, 2008 a major new amendment to the Law was introduced (Law Number 118 of 2008 Amending Certain Articles of the Insurance Supervision and Regulation Law in Egypt Number 10 of 1981). The new amendment is an important one, and will have far reaching effects on the nature of the Egyptian insurance market. The key changes introduced pertain to:
  • The nature of the Egyptian Insurance Supervisory Authority.
  • The restructuring of the insurance industry.
  • The tightening of the prudential supervision over insurance companies.
  • The reorganization and liberalization of insurance brokerage.
The new EISA: Financial Independence and Powers to Supervise
EISA is the sole regulator of all insurance activities in Egypt. It is a public authority, and accordingly has been since its establishment in 1981 subject to the provisions governing public authorities in Egyptian Law. However, the need to bring EISA in line with other «reformed» financial regulators, and to empower it to perform its supervisory functions, required significant changes to take place in the Law. Two main changes are worth noting here: The first is that the Law now states that EISA shall undertake supervision of insurance and reinsurance activities “in accordance with the rules of risk assessment and management and of financial adequacy“. This new terminology used in the amended Article (7) of the Law (italic emphasis added) is not just a choice of fancy language; it indicates a major departure in the objectives and methods of supervision by EISA from formal criteria to risk-based and market sensitive supervision. The second is that EISA is made financially independent by explicitly stating that it shall have the right – unlike most public authorities in Egypt – to keep its surplus from one year to the next, without having to transfer the balance to the Treasury at the end of the fiscal year. This provision has already been introduced in the law with respect to a number of other agencies, including the Investment Authority, the Capital Market Authority and the Mortgage Finance Authority, and has tuned out to be of great significance in allowing these agencies to be financially sustainable, and thus be in a better standing to perform their functions.
Restructuring Overall Supervision
In addition to strengthening the role of EISA as the insurance supervisor in Egypt, the new amendment introduces a number of other key changes in the overall supervisory structure. These are:
  1. A “Union of Insurance Companies” is to be established by Law. Previously this was an option which companies could elect to undertake, and which each company was free to join. The result was a weak and ineffective NGO with no significant presence or impact.This is now a compulsory requirement of the Law, and all companies are required to join the new Union. More importantly, the Law now states that the newly organized Union is the entity responsible for issuing industry professional standards, and that it will have the power to discipline its members. This is a welcome development as it should lead to the strengthening of the Union as a self-regulatory body. The bylaws of the Union shall be issued at a later date by EISA. Although it is premature to comment on the Union until it is established and in place, it is important to note that one of the key elements of its success will be the extent to which it will have some independence vis à vis EISA, and therefore will be able to play an effective role not only in improving industry standards but also in promoting the interests of its member companies.
  2. The other key change in the overall regulatory framework is the abolition of the “Higher Council for Insurance”. This was a body established since 1981 and composed of a large number of company heads, academics, members of the judiciary, high-ranking civil servants from a number of ministries and agencies and headed by the Minister of Investment. However, it has consistently not been of much value, except to add an unnecessary layer of bureaucracy and to overburden the overall regulatory framework. Its abolition is an extremely welcome step and it indicates that the overall trend is to reduce the red tape burden and lighten the overall structure.
  3. The third and last key change in the structure of regulation is that Public Sector Insurance Companies no longer have their governance rules determined in the Insurance Law and their annual profits will not be transferred to the Treasury. The reason is that the ownership of such Companies has been transferred early this year to a newly established Insurance Holding Company, and thus they are subject to the provisions of Public Enterprise Companies Law. Again, irrespective of the merits of the latter Law, reducing the amount of “exceptional” rules will lead to a better level playing field.
Prudential Supervision over Companies
Prudential supervision is used in this context to denote any measures of standards aimed at maintaining the safety and soundness of the market. The new amendments in the insurance law introduce a number of measures in this respect:
  1. The minimum capital requirement for the insurance company upon establishment is raised. Whereas it was thirty million Egyptian Pounds, 50% of which to be paid upon incorporation, it is now sixty million Egyptian Pounds again 50% minimum paid upon establishment.
  2. More significantly, Article (27) as amended introduces a new concept in the Law by stating that the above minimum capital requirement shall be “without prejudice to the capital adequacy rules to be issued by (EISA’s) board of directors.” This is important because it indicates that regulation of insurance companies is moving away from the formal paid-up capital requirement to more risks-based criteria, in the same manner that such shift has occurred in the capital market regulations over the last few years.
  3. Insurance companies were so far required to either undertake life/personal business or property insurance. However, an important exception to this rule was stated in Article (27) whereby companies doing both types of business at the time of issuing of the original Law – i.e. in 1981 – were allowed to continue operating in both types of business. This gave Public Sector Insurance Companies an unfair competitive advantage over all other new comers. The new amendment in the law departs from this principle by eliminating the exception referred to above. Thus all insurance companies will have, within two years from May 2008 extendable for exceptional circumstances for a further two years, to liquidate one of the two types of business. This will certainly lead to the transfer of portfolios within the Public Sector Insurance Companies in order for each one to comply with the new requirement. This is a positive development. Irrespective of the reasons for not allowing the same company to undertake both types of business, leveling the playing field among all companies is an important sign that the regulatory environment is tending towards a fairly competitive standard.
The Reorganization of Insurance Brokerage
The most sweeping changes in the Law are introduced in the regulation of insurance brokers. This is an important aspect of the Law because so far insurance brokers were not sufficiently supervised. The key changes are:
  1. Insurance brokers are explicitly stated to be either normal or juridical personalities. This puts to rest a debate about whether under the old Article (71) insurance brokerage companies were permitted to exist or not, and now it is clear that they are.
  2. Insurance brokerage companies are required to take the form of joint stock companies and to have a minimum capital of two million Egyptian Pounds, 50% of which must be paid-up upon incorporation. In addition, the company’s managing director must fulfill the professional requirements which shall be stated in the Executive Regulations (not yet issued). Finally, the insurance brokerage company must either operate in the insurance or re-insurance business.
  3. Article (72) no longer requires insurance brokers for property insurance operations to be exclusively Egyptian, thus allowing for the first time foreign brokers to be registered in the Brokers’ Registry with EISA in non-life business. And since the previous Article (71) allows both normal and juridical personalities to be insurance brokers, we should expect foreign insurance companies to become present in Egypt and be licensed as non-life brokers.
  4. All insurance brokers – whether individuals or companies – are required to maintain a professional insurance policy.
  5. A new Article (74 bis 1) introduces a new and crucial provision stating that “The (Insurance Law) Executive Regulation shall determine the conditions and provisions for the marketing of insurance products by banks”. This is an important provision because it deals with the interaction of two types financial institutions: banks and insurance companies. Egyptian Law in general is silent with respect to this type of interaction, usually leaving it to the practice of each regulator to look after its scope of activity. In this case, however, the Law is explicit in giving the insurance regulator the upper hand with respect to any activity by banks in selling or marketing insurance products. This is in line with international best practice.
  6. Insurance brokers are not permitted to undertake certain activities related to the insurance business, specifically damage assessment and actuarial expertise.
  7. Insurance and reinsurance companies are not permitted to have equity participation in insurance brokerage companies nor to manage them. In other words, a total segregation should be maintained between the insurance and the insurance brokerage businesses.
A number of key provisions in the Law will not become operative until the issuance of an amendment to the Executive Regulations by the Minister of Investment. This should be forthcoming and will be commented upon by Egypt Legal Update in due course.