Financial Control Authority Issues Comprehensive Update on Underwriting and Pricing Regulations for Credit and Guarantee Insurance Documents

Cairo – Nadeh Imam

Dr. Islam Azam, Chairman of the Financial Regulatory Authority (FRA), issued a decision regarding the underwriting and pricing controls for credit and guarantee insurance documents. This decision includes a comprehensive update of these controls, aiming to develop underwriting, pricing, reinsurance, and risk management policies related to the insurance sector, and to achieve the highest levels of discipline and financial stability, commensurate with the nature and complexity of the risks borne by the insurance sector.

Decision No. 3132 of 2026 applies to property and liability insurance companies licensed to conduct credit and guarantee insurance, excluding commercial credit and guarantees (domestic or export credit). It includes clear obligations for companies regarding mandatory retention and the credit grantor’s participation in the risk. The insured party or the credit grantor must retain at least 25% of the outstanding balance of the financed amount or credit facility insured with the insurance company at the time the insured event occurs. This portion cannot be insured, redistributed, or transferred to third parties, directly or indirectly, to prevent it from being rendered meaningless. The Authority may determine a higher retention percentage for certain types of risks or portfolios, based on risk indicators, loss rates, defaults, concentration, and the nature of the portfolio.

The decision prohibits side agreements with the company, the insured, or the credit grantor, whether in the form of an agreement, addendum, commitment, or arrangement, if they directly or indirectly modify the scope of coverage, reduce or eliminate the retention percentage, modify compensation eligibility conditions, or establish rights or obligations contrary to those contained in the insurance policy or its addenda approved by the Authority. No modification to coverage, rights, or obligations shall be considered valid unless in accordance with the rules prescribed for approving insurance documents and products.

The decision specifies essential elements that companies must include in their written underwriting policy for credit and guarantee insurance and obtain from their Board of Directors. These include: criteria for accepting and rejecting risks, methodology for assessing creditworthiness, retention percentages and required collateral, maximum exposure limits, concentration limits per single client, affiliated groups, credit grantor, economic sector, and financing type, rules for monitoring defaults, recovery, and collection, reinsurance policy, early warning indicators, and procedures to be taken when these indicators are exceeded.

The decision obligates companies to establish a technical and actuarial methodology setting the minimum technical rate for credit and guarantee insurance documents, ensuring that premiums are sufficient to cover associated risks and costs. When setting the minimum technical price, companies should consider several factors, including: Probability of Default (PD), Exposure at Default (EAD) if appropriate for the product nature, recovery rates, coverage ratio, retention ratio, financing or facility duration, nature and value of collateral, uncertainty margin or risk margin, expenses, commissions, and production and reinsurance costs.

The decision prohibits issuing or renewing any document at a rate lower than the minimum technical price resulting from the applied methodology; however, this does not prevent applying a higher commercial rate in accordance with the company’s policy.

Regarding creditworthiness assessment, the decision stipulates a set of elements companies must consider when estimating the probability of default for natural persons, legal entities, and project financing. At a minimum, companies must consider the credit assessment of the person issued by a licensed credit information company, the debt burden ratio, and other statistically or actuarially significant variables. Companies must calibrate the relationship between these variables and the default rate based on reliable actual data and experience.

For legal entities and project financing, companies must use indicators appropriate to the nature of the risk and consider default probability estimates, specifically: credit classification or assessment, cash flows, liquidity and solvency indicators, debt service capacity, collateral coverage ratio, economic sector and its risks.

In cases where reliable historical experience is available, companies must compare the risk cost derived from the pricing model with the company’s actual historical loss costs in similar risks or portfolios, after unifying the coverage basis and making necessary adjustments to ensure comparability. Companies must also conduct annual Back-Testing and Validation to ensure the efficiency of the price adequacy test model and the accuracy of its predictions.

To ensure the stability of the methodology and technical limits underpinning the underwriting and pricing policy, the decision requires the company’s Board of Directors to annually approve the Actuarial Expert’s report, which includes: the pricing methodology, minimum technical rate limits, assumptions and parameters used, calibration bases, and test and validation results of the model.

The company must notify the Authority before implementing the technical limits with the documents and data specifying them, including: a table of minimum technical rates by product nature, credit rating tiers, debt burden levels, collateral type, coverage ratio, retention ratio, financing duration, the Actuarial Expert’s report, calibration basis and supporting data, and supervisory test results.

The company must resubmit the study and technical limits to the Authority at least annually, or if a fundamental change occurs in: loss experience, default or recovery rates, underwriting policy, credit information methodology or source, actuarial methodology, assumptions, or parameters used.

Furthermore, companies are obligated to establish approved internal limits for concentration risks, covering at least: single client, affiliated group, credit grantor, economic sector, financing type, and reinsurer, adhering to specific controls and ratios. A company’s commitment to a single client or affiliated group must not exceed 10% of the credit and guarantee insurance amounts for the existing or active portfolio or the funds allocated for the branch’s obligations, whichever is lower.

Business assigned to the company from a single credit grantor must not exceed 50% for banks and 30% for other grantors of the branch’s insurance amounts, unless prior approval is obtained from the Authority. The volume of credit and guarantee insurance premiums must not exceed 25% of the company’s total premiums at the end of the year, unless prior approval is obtained from the Authority.

The Authority may approve exceeding any of the aforementioned limits based on a technical and actuarial study including at least: the impact of the exceedance on solvency, stress test results, reinsurance quality, concentration level, loss and default rates, and the company’s capacity to absorb risk.

To further mitigate risk concentration and achieve credit stability, the decision requires companies to ensure that their reinsurance program for the credit and guarantee insurance portfolio is consistent with the nature and size of the risks they bear. When designing the reinsurance program and selecting reinsurers, each company must consider the reinsurer’s solvency and credit rating, exposure size, recoverability of due amounts, and concentration risks, while preventing unjustified major concentration with a single reinsurer.

Relating to the new controls and their intended impact on the insurance market in Egypt, Dr. Islam Azam, Chairman of the Financial Regulatory Authority, stated that the decision was issued following an extensive social and technical dialogue with insurance and reinsurance companies. This reflects the Authority’s commitment to continuously developing and improving insurance sector regulations, ensuring the financial stability of companies, enhancing their ability to face market risks, and increasing their technical and professional efficiency, especially since credit insurance documents play a vital role in managing credit risks.

The Chairman added that the new controls are characterized by detail, clarity, and strict standards, fully taking into account the provisions of the Unified Insurance Law No. 155 of 2024 and regulatory decisions issued by the Authority in the last three years, as well as keeping pace with economic changes and developments in the sector by providing a regulatory framework for more tools supporting operational efficiency.

In this context, he pointed out that the decision obligates companies to conduct stress tests and scenario analyses for the credit and guarantee insurance portfolio at least semi-annually and whenever a fundamental change occurs in the size or nature of risks. The goal is to assess default and recovery rates, losses, the extent of concentration with a single financier, and the default or downgrade of a major reinsurer. This also enables the Authority to compel the company to present and implement a corrective plan if indicators of portfolio deterioration appear.

Dr. Islam Azam emphasized the companies’ commitment to assigning responsibility for underwriting, pricing, claims, and risk management of the credit and guarantee insurance portfolio to personnel possessing the appropriate technical expertise and qualifications for the nature, size, and complexity of the activity. He clarified that the Authority will issue a subsequent decision detailing the requirements related to expertise and qualifications to enhance technical efficiency. The Authority will also issue necessary decisions to determine the fundamental rules and standards required to apply these controls, including defining loss rates, net commitment, affiliated group, net branch portfolio, early warning indicators, concentration limit calculation methodology, default-related definitions, and basic actuarial methodology requirements.

For his part, Dr. Taref Saif, Vice Chairman of the Financial Regulatory Authority, stated that the new controls include many important innovations contributing to the balance of insurance companies’ portfolios, early detection of risks regardless of their nature, continuous updates on clear technical bases approved by the Authority, and reduced loss rates.

He added that the Egyptian Insurance Companies Union will play a significant role in enforcing this decision. The Union will prepare a draft of standard terms and minimum conditions required in credit and guarantee insurance documents in all their forms, including basic definitions, scope of coverage, retention percentages, exclusions, compensation eligibility conditions, and other terms. This draft will be submitted to the Authority for review and approval before implementation, facilitating the process for companies and enabling them to apply the new controls optimally.

Regarding the decision’s requirement for companies to obtain credit information about the client before issuing or renewing an insurance document and using the result in the risk assessment, acceptance, and pricing process, Dr. Taref Saif stated that the Authority will subsequently issue a decision defining default, restructuring cases, debt dispute rules, correction, update, and deletion procedures, data retention periods, and confidentiality and availability controls. This is in preparation for registering default or non-payment data and updating it immediately via an electronic platform to be designated by the Authority.

It is noted that companies are obligated to align their status with the provisions of this decision within six months starting from its publication in the "Egyptian Gazette." The decision’s provisions will apply to documents issued for the first time or renewed after the expiration of the alignment period, without affecting rights and obligations arising from documents already in force.