Menu
Annual Report 2022
OPERATING PERFORMANCE
NOTES TO THE FINANCIAL STATEMENTS
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies adopted in the preparation of these financial statements are set out below. The accounting policies used in the preparation of these financial statements are consistent with those used in the preparation of the annual financial statements for the year ended 31 December 2021. Based on the adoption of amendments to existing standard and in consideration of current economic environment, the following accounting policies are applicable effective 1 January 2022 replacing, amending or adding to the corresponding accounting policies set out in 2021 annual financial statements.
A. Amendments to existing standards
Below amendments to accounting standards and interpretations became applicable for annual reporting periods commencing on or after
1 January 2022.
The management has assessed that the amendments have no significant impact on the Company’s financial statements.
| Standard/Amendments | Description | Effective date |
| Amendment to IFRS 16, “Leases” – COVID-19 related rent concessions Extension of the practical expedient | As a result of the coronavirus (COVID-19) pandemic, rent concessions have been granted to lessees. In May 2020, the IASB published an amendment to IFRS 16 that provided an optional practical expedient for lessees from assessing whether a rent concession related to COVID-19 is a lease modification. Lessees can select to account for such rent concessions in the same way as they would if they were not lease modifications. In many cases, this will result in accounting for the concession as variable lease payments in the period(s) in which the event or condition that triggers the reduced payment occurs. On 31 March 2021, the IASB published an additional amendment to extend the date of the practical expedient from 30 June 2021 to 30 June 2022. | Annual periods beginning on or after 1 April 2021 |
| A number of narrow-scope amendments to IFRS 3, IAS 16, IAS 37 and some annual improvements on IFRS 1, IFRS 9, IAS 41 and IFRS 16. | Amendments to IFRS 3, “Business combinations” update a reference in IFRS 3 to the Conceptual Framework for Financial Reporting without changing the accounting requirements for business combinations. Amendments to IAS 16, “Property, plant and equipment” prohibit a company from deducting from the cost of property, plant and equipment amounts received from selling items produced while the Company is preparing the asset for its intended use. Instead, a company will recognize such sales proceeds and related cost in statement of income. Amendments to IAS 37, “Provisions, contingent liabilities and contingent assets” specify which costs a company includes when assessing whether a contract will be loss-making. Annual improvements make minor amendments to IFRS 1, “First-time Adoption of IFRS”, IFRS 9, “Financial instruments”, IAS 41, “Agriculture” and the Illustrative Examples accompanying IFRS 16, “Leases”. | Annual periods beginning on or after 1 January 2022 |
B. Standards issued but not yet effective
In addition to the above-mentioned standards, the following standards and interpretations that are issued, but not yet effective, are disclosed below. The Company intends to adopt these standards, if applicable, when they become effective. Further, the Company has chosen not to early adopt the amendments and revisions to the International Financial Reporting Standards, which have been published and are mandatory for compliance for the Company with effect from future dates.
| Standard, interpretation, amendments | Description | Effective date |
| Amendments to IAS 1, Presentation of financial statements’, on classification of liabilities | These narrow-scope amendments to IAS 1, “Presentation of financial statements”, clarify that liabilities are classified as either current or noncurrent, depending on the rights that exist at the end of the reporting period. Classification is unaffected by the expectations of the entity or events after the reporting date (for example, the receipt of a waiver or a breach of covenant). The amendment also clarifies what IAS 1 means when it refers to the ‘settlement’ of a liability. |
Deferred until accounting periods starting not earlier than 1 January 2024 |
| Narrow scope amendments to IAS 1, IFRS Practice Statement 2 and IAS 8 | The amendments aim to improve accounting policy disclosures and to help users of the financial statements to distinguish between changes in accounting estimates and changes in accounting policies. | Annual periods beginning on or after 1 January 2023 |
| Amendment to IAS 12 – deferred tax related to assets and liabilities arising from a single transaction | These amendments require companies to recognize deferred tax on transactions that, on initial recognition give rise to equal amounts of taxable and deductible temporary differences. | Annual periods beginning on or after 1 January 2023 |
| IFRS 9 | Financial instruments | See note below |
| IFRS 17 | Insurance contracts | See note below |
The Company will apply IFRS 17 and IFRS 9 for the first time on 1 January 2023. These standards will bring significant changes to the accounting for reinsurance and retrocession contracts and financial instruments and are expected to have a material impact on the Company’s financial statements in the period of initial application.
There are no other relevant IFRS or IFRS interpretations that are not yet effective that would be expected to have a material impact on the Company’s financial statements except for IFRS 9 and IFRS 17 as explained below.
IFRS 17 – Insurance Contracts
IFRS 17 replaces IFRS 4 Insurance Contracts and is effective for annual periods beginning on or after 1 January 2023, with early adoption permitted. The Company expects to first apply IFRS 17 on that date. IFRS 17 establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts, reinsurance contracts and investment contracts with direct participation features (“DPF”).
Structure and status of the implementation project
The Company considers implementing IFRS 17 as a significant project and therefore has set up a multidisciplinary implementation team with members from its Actuarial, Finance, IT, Operations and other respective businesses to achieve a successful and robust implementation. The project is managed internally through a dedicated IFRS 17 team and governed by a steering committee. The preparation for IFRS 17 has required significant changes to the Company’s reporting systems. The Company is well prepared for the reporting requirements from 1 January 2023 onwards.
As part of the four-phase approach for the transition from IFRS 4 to IFRS 17 mandated by Saudi Central Bank (“SAMA”), the Company has submitted the operational gap assessment, financial impact assessment, implementation plan and multiple dry runs using the FY20, FY21 and June 2022 data to SAMA.
Significant judgments and accounting policy choices
The Company is expected to apply the following significant accounting policies in the preparation of financial statements on the effective date of this Standard i.e., 1 January 2023:
a) Contracts within/outside the scope of IFRS 17
A contract is reinsurance contract that falls under the scope of IFRS 17 if it transfers significant insurance risk or it is an investment contract with Discretionary Participation Features (“DPF”). IFRS 17 identifies reinsurance contracts as those contracts under which the Company accepts significant insurance risk from another party (the insurer), by agreeing to compensate the insurer if a specified uncertain future event (the insured event), adversely affects the insurer.
A retrocession contract held is defined as an insurance contract issued by one entity (the retrocessionaires), to compensate another entity for claims arising from one or more reinsurance contracts issued by that other entity (reinsurance contracts). Even if a retrocession contract does not expose the issuer to the possibility of a significant loss, that contract is deemed to transfer significant insurance risk if it transfers to the retrocessionaires substantially all the insurance risk relating to the reinsured portions of the underlying reinsurance contracts.
An assessment of the reinsurance contracts issued, and retrocession contracts held by the Company reveal that they all qualify for measurement and presentation under IFRS 17.
b) Combination/unbundling of contracts
At inception, the Company separates the following
components from reinsurance or retrocession contract and accounts for them as if they were stand-alone financial instruments:
– derivatives embedded in the contract whose economic characteristics and risks are not closely related to those of the host contract, and whose terms would not meet the definition of reinsurance or retrocession contract as a stand-alone instrument; and
– distinct investment components: i.e. investment components that are not highly inter-related with the insurance components and for which contracts with equivalent terms are sold, or could be sold, separately in the same market or the same jurisdiction.
– any promises to transfer distinct goods or non-insurance services: The Company separates any promises to transfer distinct goods or non-insurance services and accounts for them as separate contracts with customers (i.e., not as insurance contracts). A good or service is distinct if the insurer can benefit from it either on its own or with other resources that are readily available to the insurer. A good or service is not distinct and is accounted for together with the reinsurance component if the cash flows and risks associated with the good or service are highly inter-related with the cash flows and risks associated with the reinsurance component, and the Company provides a significant service of integrating the good or service with the reinsurance component.
The Company does not underwrite any reinsurance or retrocession contracts that contain embedded derivatives or distinct investment components. Furthermore, the Company's reinsurance portfolio does not contain any non-insurance components that will need to be unbundled from reinsurance contracts.
c) Level of aggregation
The Company identifies portfolios of reinsurance
contracts. Each portfolio comprises contracts that are subject to similar risks and managed together, and is divided into three groups:
any contracts that are onerous on initial recognition;
any contracts that, on initial recognition, have no significant possibility of becoming onerous subsequently; and
any remaining contracts in the portfolio.
Contracts within a portfolio that would fall into different groups only because law or regulation specifically constrains the Company's practical ability to set a different price or level of benefits for insurers with different characteristics are included in the same group.
As for reinsurance contracts issued, the Company identifies portfolios of retrocession contracts which are subject to similar risks and are managed together. Contracts within a portfolio are then grouped into cohorts by issue date not further than a year apart. Cohorts are divided into “groups” at inception that at least separate retrocession contracts between those that are a net gain at initial recognition, a net cost at initial recognition but have no significant likelihood of becoming a net gain and the remaining contracts.
The Company will categorize each retrocession contract as a unique portfolio. As with the reinsurance contracts, all retrocession contracts held are to be grouped into annual cohorts and split into profitability groups based on the best estimate expected profitability of the groups at inception.
d) Measurement – Overview
IFRS 17 introduces 3 new measurement models, reflecting the nature of reinsurance contracts.
General Measurement Model
IFRS 17 introduces a generalized measurement model called the General Measurement Model (GMM) which shall be applicable to all kinds of reinsurance and retrocession contracts, to the extent that they do not contain any direct participation features in any underlying invested assets.
The General Measurement Model has he following building blocks:
a) the fulfilment cash flows (FCF), which comprise:
probability-weighted estimates of future
cash flows,
an adjustment to reflect the time value of money (i.e., discounting) and the financial risks associated with those future cash flows,
and a risk adjustment for non-financial risk.
b) the Contractual Service Margin (CSM). The CSM represents the unearned profit for a group of reinsurance contracts and will be recognized as the Company provides services in the future. The CSM cannot be negative at inception; any net negative amount of the fulfilment cash flows at inception will be recorded in profit or loss immediately.
At the end of each subsequent reporting period the carrying amount of a group of reinsurance contracts is remeasured to be the sum of:
the liability for remaining coverage (LRC), which comprises the FCF related to future services and the CSM of the group at that date;
and the liability for incurred claims (LIC), which is measured as the FCF related to past services allocated to the group at that date.
The CSM is adjusted subsequently for changes in cash flows related to future services, but the CSM cannot be negative, so changes in future cash flows that are greater than the remaining CSM are recognized in profit or loss. Interest is also accreted on the CSM at rates locked in at initial recognition of a contract (i.e., discount rate used at inception to determine the present value of the estimated cash flows). Moreover, the CSM will be released into profit or loss based on coverage units, reflecting the quantity of the benefits provided and the expected coverage duration of the remaining contracts in the Group.
The GMM is also applicable for the measurement of the liability for incurred claims. However, the Companies are not required to adjust future cash flows for the time value of money and the effect of financial risk if those cash flows are expected to be paid/received in one year or less from the date the claims are incurred.
The Variable Fee Approach (VFA)
VFA is a mandatory model for measuring contracts with direct participation features (also referred to as ‘direct participating contracts’). This assessment of whether the contract meets these criteria is made at inception of the contract and not reassessed subsequently. For these contracts, in addition to adjustment under GMM, the CSM is also adjusted for:
the Company’s share of the changes in the
fair value of underlying items.
the effect of changes in the time value of
money and financial risks not relating to the underlying items.
Premium Allocation Approach (PAA)
It is permitted for the measurement of the liability for the remaining coverage if it provides a measurement that is not materially different from the General Measurement Model for the group of contracts or if the coverage period for each contract in the group is one year or less. The PAA behaves in a very similar manner as the current unearned premium and acquisition expenses approach under IFRS 4 with some notable differences as the introduction of a financing component for contracts having premiums and services more than 1 year apart as well as the method to recognize loss components.
The Company will apply the GMM to both reinsurance contracts issued, and retrocession contracts held for all the segments. When measuring liabilities for remaining coverage, the Company will now discount the future cash flows and includes an explicit risk adjustment for non-financial risk.
The GMM is also applicable for the measurement of the liability for incurred claims. However, the Companies are not required to adjust future cash flows for the time value of money and the effect of financial risk if those cash flows are expected to be paid/received in one year or less from the date the claims are incurred.
e) Significant judgments and estimates
The Company has opted to apply the GMM to all reinsurance and retrocession contracts and hence will not be required to carry out a PAA Eligibility Assessment.
ii. Discount rates
Discount rates refer to the interest rates used in discounting cash flows to determine the present value of future cash flows. Discount rates are primarily used to adjust the estimates of future cash flows to reflect the time value of money and to accrete interest on the best estimate liability, risk adjustment and contractual service margin. The discount rates applied to the estimates of the future cash flows in discounting shall:
Reflect the time value of money, the characteristics of the cash flows and the liquidity characteristics of the reinsurance contracts;
Be consistent with observable current market prices (if any) for financial instruments with cash flows whose characteristics are consistent with those of the insurance contracts, in terms of, for example, timing, currency and liquidity; and
Exclude the effect of factors that influence observable market prices but do not affect the future cash flows of the insurance contracts.
The bottom-up approach will be used to derive the discount rate. Under this approach, the discount rate is determined as the risk-free yield adjusted for differences in liquidity characteristics between the financial assets used to derive the risk-free yield and the relevant liability cash flows (known as an illiquidity premium). The yield curve will be derived from each currency’s risk-free yield curve, plus illiquidity premium as follows:
The currencies will have its own curve if the currencies current reserves is more than 1% of
the total. The remaining will be grouped into the USD currency.
The risk-free curves for each currency are local government or semi-government issued bonds denominated in local currency.
One “illiquidity premium” will be calculated and applied to all the yield curves and it is assumed 0.5% based on Solvency II.
iii. Risk adjustment for non-financial risk
The purpose of the risk adjustment for non-financial risk is to measure the effect of uncertainty in the cashflows that arise from reinsurance contracts, other than uncertainty arising from financial risk.
Risk adjustment considers the risk appetite of the Company and applies the Cost of Capital Approach based on the Company’s Internal Capital Model as base Capital Requirement to arrive at the required Risk Adjustment. The total provision including the Best Estimate Liability and Risk Adjustment are expected to fall between the 62nd to 67th percentile of the Loss Distribution.
The Company will adjust the estimate of the present value of the future cashflows to reflect the compensation that the entity requires for bearing the uncertainty about the amount and timing of the cashflows that arises from non-financial risk.
iv. CSM release pattern
The amount of the CSM recognized in the statement of income for services provided in the period is determined by the allocation of the CSM remaining at the end of the reporting period over the current and remaining expected coverage period of the group of reinsurance contracts based on coverage units.
The total number of coverage units in a group is the quantity of coverage provided by the contracts in the Group over the expected coverage period. The coverage units are determined at each reporting period-end prospectively by considering:
the quantity of benefits provided by contracts
in the Group.
the expected coverage duration of contracts
in the Group; and
the likelihood of insured events occurring, only
to the extent that they affect the expected
duration of contracts in the Group.
The Company uses the amount that it expects the insurers to be able to validly claim in each period if an insured event occurs as the basis for the quantity of benefits.
v. Onerousity determination
To facilitate aggregation and composition of groups of contracts, the Company will carry out a profitability grouping exercise of contracts at their inception. For each contract, the Company will estimate the combined ratio at initial recognition of the contract. The combined ratio considers the expected loss, attributable expenses, risk adjustment and discount factor. Based on the estimated combined ratio, the Company will use rule-based assessment to determine the onerousity grouping as follows:
Contract is onerous if combined ratio is
above 100%.
Contract is profitable with no significant
possibility of becoming onerous if combined
ratio is below 95%.
Otherwise, contract is profitable with significant possibility of becoming onerous.
vi. Provision for Doubtful Debts
The impact of expected receipts adjustment relating to reinsurance contracts written under IFRS 17 has not been finalized as at the date of these financial statements. The Company is progressing to quantify the impact of expected receipts adjustment relating to reinsurance contracts written under IFRS 17 and expects the amount to be available for first IFRS 17 and 9 financial statements for the period ended 31 March 2023.
vii. Retrocessionaire default provision
The impact of expected receipts from retrocession contracts written under IFRS 17 has not been finalized as at the date of these financial statements. The Company is progressing to quantify the impact of expected receipts adjustment relating to reinsurance contracts written under IFRS 17 and expects the amount to be available for first IFRS 17 and 9 financial statements for the period ended 31 March 2023.
viii. VAT treatment
VAT is generally made part of the fulfilment cash flows only to the extent of non-recoverable VAT paid also being recorded as part of the G&A expenses of the Company and subsequently under IFRS 17 is considered part of attributable expenses. This non-recoverable VAT is minimal compared to overall G&A Expenses.
f) Accounting policy choices
i. Length of cohorts
Under the guidance of the IFRS 17, the Company shall not include contracts issued more than one year apart in the same group in reference to grouping annual/semi-annual/quarterly/monthly cohorts of new business, since it determines a corresponding time limit.
This enables the option to further divide the groups into smaller groups based on smaller cohorts. However, having smaller cohorts would result in multiple groups and would result in increased measurement requirements.
The Company has decided the length of cohort to be on an annual basis.
ii. Use of OCI for Insurance Finance Income or Expense
In reference to the presentation in statement of income – Insurance finance income or expense, the Company has decided that the entire insurance finance income or expense for the period will be presented in the statement of income.
iii.Unwinding of discount on risk adjustment
In reference to the presentation in statement of income – Disaggregation of risk adjustment, the Company has decided that the entire change in risk adjustment will be presented in the insurance service results.
iv. Expense attribution
The expense attribution under IFRS 17 requires Companies to categorize expenses as acquisition, attributable and non-attributable expenses. In this regard, the Company allocates expenses based on activity based costing also taking in regards the recommendations made by the SAMA IFRS 17 Working Group.
v. Deferral of acquisition cost
In reference to the recognition of acquisition costs, the Company has decided to amortize the acquisition cost over the contract period instead of immediately recognizing it as an expense.
vi. Policyholder surplus accounting
The policyholder surplus being an accumulation of the 10% profit sharing with policyholders is accounted for as a deposit and kept outside the scope of IFRS 17. Currently, for the Company being a reinsurer, there is not much clarity on the treatment or use of the policyholder surplus.
g) Presentation and disclosures
In the statement of financial position, deferred acquisition costs and reinsurance-related receivables will no longer be presented separately but as part of the reinsurance liabilities. This change in presentation will lead to a reduction in total assets, offset by a reduction in total liabilities.
The amounts presented in the statement of income need to be disaggregated into an insurance service result, consisting of the insurance revenue and the insurance service expenses, and insurance finance income and expenses. Income or expenses from retrocession contracts held need to be presented separately from the expenses or income from reinsurance contracts issued.
IFRS 17 contains an accounting policy option to recognize changes in financial parameters either in statement of income or in other comprehensive income. The Company has opted to include all reinsurance finance income or expense for the year in the statement of income.
h) Transition
i. Choice of Method
For the purposes of transition, the Company will use modified retrospective approach for all lines of business which allows the companies to adjust initial recognition calculations for already written business to equal actual transactions up to the transition date and projected cash-flows thereafter without going back to adjusting the CSM roll-forward up to the transition dates based on the past estimates at interim reporting periods.
Transition Impact
The Company estimates that, on adoption of IFRS 17, the impact of these changes (before tax) is a reduction in the Company’s total equity of by SR 29.88 million to SR 59.36 million at 1 January 2022. The impact on equity at 1 January 2023 is currently being estimated and shall be disclosed in the financial reporting for the period 1 January 2023 to 31 March 2023.
| Drivers of changes in equity | Impact on equity on transition to IFRS 17 on 1 January 2022 |
| Changes in measurement of reinsurance contracts issued | Decrease by SR 42.85 million to SR 57.08 million |
| Changes in measurement of retrocession contracts held | Decrease by SR 16.51 million to increase by SR 27.20 million |
| Total impact | Decrease by SR 29.88 million to SR 59.36 million |
Impact on Liabilities and Assets
| Particulars | Impact on transition to IFRS 17 on 1 January 2022 |
| Risk adjustment | Increase by SR 22.49 million to SR 24.61 million |
| Discounting | Decrease by SR 39.68 million to SR 75.45 million |
| CSM | Increase by SR 121.70 million to SR 157.18 million |
| Other drivers | Decrease by SR 49.35 million to SR 61.67 million |
| Total impact reinsurance on liabilities |
Increase by SR 42.85 million to SR 57.08 million |
| Risk adjustment | Increase by SR 4.32 million to SR 5.01 million |
| Discounting | Decrease by SR 12.06 million to SR 17.35 million |
| Other drivers | Decrease by SR 8.77 million to increase by SR 39.55 million |
| Total impact on retrocession assets |
Decrease by SR 16.52 million to increase by SR 27.20 million |
The estimated range of change in shareholders’ equity includes the impact of risk adjustment, loss component, discounting, and conversion of numbers as per IFRS 4 to estimated cashflows as per IFRS 17. The assessment made by the Company is preliminary as not all transition work requirements have been finalized and therefore may be subject to adjustment. The actual effect of the implementation of IFRS 17 on the Company could vary from this estimated range if a different set of assumptions and policy choices are made. The Company continues to refine assumptions, methodologies and controls in advance of IFRS 17 adoption on 1 January 2023. Although dry runs were carried out in 2022, the new systems and associated controls in place have not been operational for an extended time. As a result, the Company has not finalized the testing and assessment of controls over its new IT systems and changes to its governance framework. All estimates are based on the Company’s current interpretation of the requirements of IFRS 17, reflecting industry guidance and discussions to date.
IFRS 9 – Financial Instruments
IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement and is effective for annual periods beginning on or after 1 January 2018. However, the Company has met the relevant criteria and has applied the temporary exemption from IFRS 9 for annual periods before 1 January 2023. Consequently, the Company will apply IFRS 9 for the first time on 1 January 2023.
a) Financial assets – Classification
The Company conducted a preliminary IFRS 9 Classification and Measurement assessment (“C&M”) for the financial assets held as at 31 December 2021 in response to SAMA’s circular No. 239.
IFRS 9 contains three principal classification categories for financial assets: measured at amortized cost (“AC”), fair value through other comprehensive income (“FVOCI”) and fair value through statement of income (“FVSI”). This classification is generally based, except equity instruments and derivatives, on the business model in which a financial asset is managed and its contractual cash flows. Except for financial assets that are designated at initial recognition as at FVSI, a financial asset is classified on the basis of both:
a. the entity’s business model for managing the financial asset; and
b. the contractual cash flow characteristics of the financial asset.
The Company exercises judgment in determining whether the contractual terms of financial assets it originates or acquires give rise on specific dates to cash flows that are solely payments of principal and profit income on the principal outstanding and so may qualify for amortized cost measurement. In making the assessment the Company considers all contractual terms, including any prepayment terms or provisions to extend the maturity of the assets, terms that change the amount and timing of cash flows and whether the contractual terms contain leverage.
The Company classifies its financial assets in the following measurement categories:
– Fair value through statement of income (FVSI);
– Fair value through other comprehensive income (FVOCI); or
– Held at amortized cost.
The classification requirements for debt and equity instruments are described below:
Debt instruments
Classification and subsequent measurement of debt instruments depend on:
– the Company’s business model for managing the financial assets; and
– the contractual cash flow characteristics of the financial assets.
Business model
The business model reflects how the Company manages the assets in order to generate cash flows. That is, whether the Company’s objective is solely to collect the contractual cash flows from the assets or is to collect both the contractual cash flows and cash flows arising from the sale of assets. If neither of these is applicable (e.g. financial assets are held for trading purposes), then the financial assets are classified as part of ‘other’ business model and measured at FVSI.
Solely payments of principal and profit
Where the business model is to hold assets to collect contractual cash flows or to collect contractual cash flows and sell, the Company assesses whether the financial instruments’ cash flows represent solely payments of principal and profit. In making this assessment, the Company considers whether the contractual cash flows are consistent with the financing agreement i.e. profit includes only consideration for the time value of resources, credit risk, other basic lending risks and a profit margin that is consistent with a basic lending arrangement. Where the contractual terms introduce exposure to risk or volatility that are inconsistent with a basic lending arrangement, the related financial asset is classified and measured at FVSI.
Based on these factors, the Company will classify its debt instruments into one of the following three measurement categories:
– Amortized cost: Assets that are held for collection of contractual cash flows where those cash flows represent solely payments of principal and profit, and that are not designated at FVSI, are measured at amortized cost. The carrying amount of these assets is adjusted by any expected credit loss allowance recognized. Profit income from these financial assets is included in ‘Special commission income’ using the effective profit method.
– Fair value through other comprehensive income (FVOCI): Financial assets that are held for collection of contractual cash flows and for selling the assets, where the assets’ cash flows represent solely payments of principal and profit, and that are not designated at FVSI, are designated as fair value through other comprehensive income (FVOCI). Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, special commission income and foreign exchange gains and losses on the instrument’s amortized cost which are recognized in the statement of income. When the financial asset is derecognized, the cumulative gain or loss previously recognized in OCI is reclassified from equity to statement of income. Profit income from these financial assets is included in ‘Special commission income’ using the effective profit rate method. As at 31 December 2022, the Company does not have any equity instruments classified under this category.
– Fair value through statement of income (FVSI): Assets that are held for trading purpose or assets that do not meet the criteria for amortized cost or FVOCI are measured at FVSI. A gain or loss on a debt investment that is subsequently measured at FVSI presented in the statement of income in the period in which it arises.
Equity instruments
Equity instruments are instruments that meet the definition of equity from the issuer’s perspective; that is, instruments that do not contain a contractual obligation to pay and that evidence a residual interest in the issuer’s net assets. Examples of equity instruments include basic ordinary shares.
The Company will classify all equity investments at FVSI, except where the Company’s management has elected, at initial recognition, to irrevocably designate an equity investment at FVOCI. The Company’s policy is to designate equity investments as FVOCI when those investments are held for purposes other than to generate investment returns. When this election is used, transaction costs are made part of the cost at initial recognition and subsequent fair value gains and losses (unrealized) are recognized in OCI and are not subsequently reclassified to the statement of income, including on disposal. Impairment losses (and reversal of impairment losses) are not reported separately from other changes in fair value. Dividends, when representing a return on such investments, continue to be recognized in the statement of income as ‘Dividend income’ when the Company’s right to receive payments is established. As at 31 December 2022, the Company does not have any equity instruments classified under this category.
Reclassification of financial assets
The Company will reclassify the financial assets between FVTPL and amortized cost if and only if under rare circumstances and if its business model objective for its financial assets changes so its previous business model assessment would no longer apply. Financial assets are not reclassified after their initial recognition, except in the period after the entity changes its business model for managing financial assets.
b) Financial Assets – Impairment
ECL is a probability-weighted estimate of credit losses. It is measured as follows:
financial assets that are not credit-impaired at the reporting date: as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the entity expects to receive);
financial assets that are credit-impaired at the reporting date: as the difference between the gross carrying amount and the present value of estimated future cash flows;
The key inputs into the measurement of ECL are the term structure of the following variables;
Probability of default (“PD”),
Loss given default (“LGD”), and
Exposure at default (“EAD”).
IFRS 9 outlines a “three-stage” model for impairment based on changes in credit quality since initial recognition as summarized below:
– A financial instrument that is not credit-impaired on initial recognition is classified in ‘Stage 1’ and has its credit risk continuously monitored by the Company.
– If a significant increase in credit risk since initial recognition is identified, the financial instrument is moved to ‘Stage 2’ but is not yet deemed to be credit impaired.
– If the financial instrument is credit-impaired, the financial instrument is then moved to ‘Stage 3’.
– Financial instruments in Stage 1 have their ECL measured at an amount equal to the portion of lifetime expected credit losses that result from default events possible within the next 12 months. Instruments in Stages 2 or 3 have their ECL measured based on expected credit losses on a lifetime basis.
– A pervasive concept in measuring ECL in accordance with IFRS 9 is that it should consider forward looking information.
The Company incorporates forward-looking information into both its assessment of whether the credit risk of an instrument has increased significantly since its initial recognition and its measurement of ECL. Based on consideration of a variety of external actual and forecast information, the Company formulates a ‘base case’ view of the future direction of relevant economic variables as well as a representative range of other possible forecast scenarios. This process involves developing two or more additional economic scenarios and considering the relative probabilities of each outcome.
A global database of sovereign and corporate credit ratings and GDP movements was built dating from 1969 to present day, with specific emphasis placed on data post 1990. The objective of these studies was to understand the movement of credit ratings in times of economic stress and any subsequent/lagging effects. Relative movements in credit ratings and PDs were modelled rather than actual default rates given the superior model fits that could be obtained and better back-testing of model results and diagnostics.
For sovereign counterparties, S&P’s 2020 Sovereign Default Rate Study was used in the mapping of rating movements to PDs. These rating changes could then be mapped to relative changes in risk over time implied by the PDs. These PD changes were then regressed on the historical GDP growth. The period over which to fit the regression model was informed through a combination of maximizing correlation between GDP and historical growth as well as expert judgement. The final regression model forecasts future rating change movements and hence scalars to apply to sovereign PDs relevant to current risk levels.
A KSA specific model was created in addition to a peer group model and regional model. Peer group was established as all A rated entities classified as high-income segments by World Bank. The regional Group comprised primarily of Middle Eastern and North African sovereigns. In order to use the Saudi Arabian GDP forecasts in the peer and regional group forecasts, the GDP forecasts are mapped onto a normal distribution, parameterized on historical GDP growth rates, and the equivalent percentile is then used in the alternative models.
Each of the above three models produce forward-looking adjustment scalars. The model allows the user to assign weights to each of the model outputs. The final forward-looking adjustment scalar is then calculated as a weighted average of the three model outputs. Management applied judgement when assigning weights to the scalars.
c) Financial Liabilities
IFRS 9 largely retains the requirements in IAS 39 for the classification and measurement of financial liabilities. However, under IAS 39 all fair value changes of financial liabilities designated as at FVSI are recognized in the statement of income, whereas under IFRS 9 these fair value changes will generally be presented as follows:
The amount of the change in the fair value that is attributable to changes in the credit risk of the liability will be presented in Other Comprehensive Income (OCI);
The remaining amount of the change in the fair value is presented in the statement of income.
d) Transition
Changes in accounting policies resulting from the adoption of IFRS 9 have been applied retrospectively, except as described below:
Comparative periods have not been restated.
A difference in the carrying amounts of financial assets resulting from the adoption of IFRS 9 are recognized in retained earnings.
The following assessments have been made on the basis of the facts and circumstances that existed at the date of initial application.
i. The determination of the business model within which a financial asset is held.
ii. The designation and revocation of previous designated financial assets and liabilities as measured at FVSI. This category includes financial assets that were previously designated as held for trading or those that were classified as available for sale.
iii. The designation of certain investments in equity instruments not held for trading as FVOCI. In general, cash and cash equivalents, short term deposits and debt securities held until maturity have been designated as such.
Estimated Change in the Company’s Total Equity due to initial application of IFRS 9
Company has assessed the estimated impact that the initial application of IFRS 9 will have on its financial statements. Based on assessments undertaken to date, the total adjustment (before tax) to the balance of the Company’s total equity is estimated to be a reduction of SR 1.51 million at 1 January 2022, as summarized below. The impact on equity at 1 January 2023 is currently being estimated and shall be disclosed in the financial reporting for the period 1 January 2023 to 31 March 2023.
| Adjustments due to adoption of IFRS 9 | 1 January 2022 |
| Classification of financial assets | Increase by SR 0.09 million |
| Impairment of financial assets | Decrease by SR 1.60 million |
| Total impact | Decrease by SR 1.51 million |
Overall Impact on Equity due to Transition to IFRS 17 and IFRS 9
Company estimates that, on adoption of IFRS 17 and IFRS 9, the impact of these changes before tax is a reduction in the total equity of SR 31.39 million to SR 60.87 million at 1 January 2022.
| Transition to | Change in equity at 1 January 2022 |
| IFRS 17 | Decrease by SR 29.88 million to SR 59.36 million |
| IFRS 9 | Decrease by SR 1.51 million |
| Total impact | Decrease by SR 31.39 million to SR 60.87 million |
The Company has investment in ordinary shares of Probitas Holdings (Bermuda) Limited (“PHBL”) which is disclosed in Note 17. The Company has accounted for this investment as an equity accounted investee. PHBL operates in insurance and reinsurance businesses including Lloyd’s market in London, United Kingdom. PHBL is at its initial phase of carrying out the IFRS 17 and 9 implementation exercise and implementing the IFRS 17 and 9 calculation engines and IT systems. Therefore, the impact of IFRS 17 and 9 implementation of PHBL cannot be quantified at the present stage. Accordingly, the IFRS 17 and 9 transition impact on the Company’s equity disclosed above does not include the effect of any changes in PHBL’s numbers due to the adoption of IFRS 17 and 9.
C. Significant accounting policies adopted in the preparation of these financial statements
The accounting policies used in the preparation of these financial statements are consistent with those used in the preparation of the annual financial statements for the year ended 31 December 2022.
Cash and cash equivalents
Cash and cash equivalents comprise of cash in hand, cash at banks and time deposits with an original maturity of less than three months from the date of acquisition.
Gross written premiums
Gross written premiums comprise of total premiums in relation to contracts incepting during the financial year irrespective of whether they relate in whole or in part to a later accounting period. It includes an estimate of pipeline premiums, being those premiums written but not reported to the Company at the statement of financial position date. Pipeline premiums are reported as accrued reinsurance premiums in the statement of financial position.
Where contract terms require the reinstatement of coverage after a ceding Company’s loss, the mandatory reinstatement premiums are calculated in accordance with the contract terms.
Reinsurance premium receivable
Reinsurance premium receivable are recognized when notified by cedants and are measured on initial recognition at the fair value of the considerations received or receivable. Subsequently, it is measured at amortized cost. The carrying value of reinsurance premium receivable is reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable, with the impairment loss recorded in the statement of income. Reinsurance premium receivable are derecognized when the derecognition criteria for financial assets have been met.
Retrocession
The Company uses retrocession agreements to reduce its exposure to risks assumed to increase its aggregate underwriting capacity. The ceding of risk to retrocessionaires does not relieve the Company from its direct obligations to its ceding companies. Amounts receivable from retrocession is estimated in a manner consistent with the claim liability associated with the reinsured parties. An impairment review of amounts recoverable under retrocession agreements is performed at each reporting date or more frequently when an indication of impairment arises during the reporting year. Impairment occurs when objective evidence exists that the Company may not recover outstanding amounts under the terms of the contract and when the impact on the amounts that the Company will receive from the retrocessionaire can be measured reliably. The impairment loss is recorded in the statement of income.
Premiums and claims are presented on a gross basis for both assumed reinsurance and retroceded business.
Retrocession liabilities represent balances due to retrocessionaires. Amounts payable are estimated in a manner consistent with the associated retrocession contract. Retroceded assets and liabilities are derecognized when the contractual rights are extinguished or expired or when the contract is transferred to another party.
Deferred policy acquisition costs (DAC)
Direct costs incurred during the financial period arising from the writing or renewing of reinsurance contracts are deferred to the extent that these costs are recoverable out of unearned premium. Subsequent to initial recognition, deferred costs are amortized using the same basis as for unearned premiums. Amortization is recorded in the statement of income. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortization period and are treated as a change in accounting estimate.
An impairment review is performed at each reporting date or more frequently when an indication of impairment arises. When the recoverable amounts are less than the carrying value, an impairment loss is recognized in the statement of income. DAC is also considered in the liability adequacy test for each reporting period.
Deferred policy acquisition costs are derecognized when the related contracts are either settled or disposed of.
Investment in an equity accounted investee
Associates are those entities in which the Company has significant influence, but not control or joint control, over the financial and operating policies. Interests in associates are accounted for using the equity method. They are initially recognized at cost. Subsequent to initial recognition, the financial statements include the share of the profit or loss and other comprehensive income of associates, until the date on which significant influence ceases.
Investments held at fair value through income statement
Investments held at fair value through income statement are investments designated at fair value through income statement at inception. For investments designated as fair value through income statement, the following criteria must be met:
This designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets and liabilities or recognizing gains or losses on a different basis; or
The assets and liabilities are part of a group of financial assets, financial liabilities or both, such assets and liabilities are managed and their performance is evaluated on a fair value basis, in accordance with a documented risk management or investment strategy.
These investments are initially recorded at fair value. Subsequent to initial recognition, these investments are measured at fair value.
Fair value adjustments and realized gains and losses are recognized in the statement of income.
Held to maturity investments
Investments having fixed or determinable payments and fixed maturity that the Company has the positive intention and ability to hold to maturity are classified as held to maturity. Held to maturity investments are initially recognized at fair value including direct and incremental transaction costs and subsequently measured at amortized cost, less provision for impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition using an effective yield basis. Any gain or loss on such investments is recognized in the statement of income when the investment is derecognized or impaired.
Offsetting financial assets and financial liabilities
Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liability simultaneously. Income and expense is not offset in the statement of income unless required or permitted by any accounting standard or interpretation.
Trade date accounting
All regular way purchases and sales of financial assets are recognized/derecognized on the trade date (i.e. the date that the Company commits to purchase or sell the assets). Regular way purchases or sales are purchases or sales of financial assets that require settlement of assets within the time frame generally established by regulation or convention in the market place.
Impairment of financial assets
An assessment is made at each statement of financial position date to determine whether there is objective evidence that a specific financial asset or a group of financial assets may be impaired. Impairment occurs when objective evidence exists that the Company may not recover outstanding amounts under the terms of the contract and when the impact on the amounts that the Company will receive can be measured reliably. If such evidence exists, any impairment loss is recognized in the statement of income. Impairment is determined as follows:
For assets carried at fair value, impairment is the difference between cost and fair value, less any impairment loss previously recognized in the statement of income;
For assets carried at cost, impairment is the difference between carrying value and the present value of future cash flows discounted at the current market rate of return for a similar financial asset; and
For assets carried at amortized cost, impairment is the difference between carrying amount and the present value of future cash flows discounted at the original effective special commission rate.
Prepayments
Prepayments represent expenses not yet incurred but already paid in cash. Prepayments are initially recorded as assets and measured at the amount of cash paid. Subsequently, these are charged to statement of income as they are consumed or expire with the passage of time.
Property and equipment
Property and equipment is stated at cost net of accumulated depreciation and any impairment in value. When significant parts of property and equipment are required to be replaced at intervals, the Company recognizes such parts as individual assets with specific useful lives and depreciates them accordingly. All other repair and maintenance costs are recognized in statement of income as incurred. Land and capital work-in-progress are not depreciated.
The cost of all other property and equipment is depreciated on the straight-line method over the estimated useful lives of the assets as follows:
| Years | ||
| Building | 33 | |
| Computers and equipment | 3-5 | |
| Furniture and fixtures | 5 | |
| Motor vehicles | 4 | |
| Leasehold improvements | 10 |
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. The carrying values of these assets are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amount.
An item of property and equipment is derecognized upon disposal or when no further future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the statement of income or taken into income in the year the asset is derecognized.
Lease
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Company uses its incremental borrowing rate.
Lease payments included in the measurement of the lease liability comprise:
fixed lease payments (including in-substance fixed payments), less any lease incentives;
variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date;
the amount expected to be payable by the lessee under residual value guarantees;
the exercise price of purchase options, if the lessee is reasonably certain to exercise the options; and
payments of penalties for terminating the lease, if the lease term reflects the exercise of an option to terminate the lease.
The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using effective interest method) and by reducing the carrying amount to reflect the lease payments made. The Company remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever:
the lease term has changed or there is a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.
the lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using the initial discount rate (unless the lease payments change is due to a change in a floating special commission rate, in which case a revise discount rate is used).
A lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate. The Company did not make any such adjustments during the periods presented.
The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement date, less any lease incentives received and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses.
The right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use of asset reflects that the Company expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease.
Short-term leases and leases of low-value assets
The Company has elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less and leases of low-value assets, including IT equipment. The Company recognizes the lease payments associated with these leases as an expense on a straight-line basis over the lease term.
Impairment of non-financial assets
Assets that have an indefinite useful life are not subject to depreciation and are tested annually for impairment. Assets that are subject to depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest level for which there are separately identifiable cash flows (cash-generating units).
Accounts payable and accruals
Liabilities are recognized for amounts to be paid in the future for goods or services received, whether billed by the supplier or not.
Claims
Claims, comprise of amounts of claims estimates notified by ceding companies under reinsurance contracts and related loss adjustment expenses, net of recoveries and are charged to statement of income.
These include the cost of claims and claims handling expenses paid during the period, together with the movements in provisions for outstanding claims, claims incurred but not reported (IBNR) and claims handling provisions. The ultimate liability may be in excess of or less than the amount provided.
Any difference between the provisions at the reporting date and settlements and provisions in the following year is included in the statement of income for that year. The Company does not discount its liabilities for unpaid claims as substantially most claims are expected to be paid within one year of the financial reporting date.
The Company estimates its claims provisions based on previous experience. Independent loss adjusters normally estimate property claims. In addition, a provision based on management’s judgment and the Company’s prior experience, is maintained for Incurred But Not Reported (‘IBNR’) claims as well as for the cost of settling pending claims at the statement of financial position date. The IBNR amount is based on estimates calculated using widely accepted actuarial techniques such as Chain Ladder, Bornhuetter Ferguson Method and loss ratios which are reviewed at regular intervals by the Company’s appointed actuary. The techniques generally use projections, based on past experience of the development of claims over time, to form a view on the likely ultimate claims to be experienced. Regard is given to the variations in the business portfolio accepted and the underlying terms and conditions. Thus, the critical assumptions used when estimating provisions are that past experience is a reasonable predictor of likely future claims development and that the rating and business portfolio assumptions are a fair reflection of the likely level of ultimate claims to be incurred for the more recent years.
The outstanding claims are shown on gross basis and the related share of retroceded is shown separately.
Liability adequacy test
At each statement of financial position date, a liability adequacy test is performed to ensure the adequacy of the reinsurance contracts liabilities net of related deferred acquisition costs. In performing these tests, management uses current best estimates of future contractual cash flows, claims handling and administration expenses. Any deficiency in the carrying amounts is immediately charged to the statement of income initially by writing off related deferred acquisition costs and subsequently, by establishing a provision for losses arising from liability adequacy tests.
End of service benefits
The Company operates an end of service benefit plan for its employees based on the prevailing Saudi Labor Laws. Accruals are made at the present value of expected future payments in respect of services provided by the employees up to the end of the reporting period using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of the reporting period of high-quality corporate bonds with terms and currencies that match, as closely as possible, the estimated future cash outflows. The benefit payments obligation is discharged as and when it falls due. Remeasurements (actuarial gains/ losses) as a result of experience adjustments and changes in actuarial assumptions are recognized in statement of comprehensive income.
Short term employee benefits
Short term employee benefits obligation are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognized for the amount expected to be paid under short term cash bonus or any other benefits if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.
Zakat
The Company is subject to Zakat in accordance with the regulations of the Zakat, Tax and Customs Authority (“ZATCA”). Zakat expense is charged to the statement of income. Zakat is not accounted for as income tax and as such no deferred tax is calculated relating to Zakat.
Adjustments arising from the final zakat assessments are recorded in the period in which such assessments are made.
Income tax
The income tax expense or credit for the year is the tax payable on the current year’s taxable income, based on the applicable income tax rate for each jurisdiction.
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company, its subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions, where appropriate, on the basis of amounts expected to be paid to the tax authorities.
Adjustments arising from the final income tax assessments are recorded in the period in which such assessments are made.
Withholding tax
The Company withholds taxes on certain transactions with non-resident parties in the Kingdom of Saudi Arabia as required under Saudi Arabian Income Tax Law. Withholding taxes paid on behalf of non-resident parties, which are not recoverable from such parties, are expensed.
Value Added Tax (VAT)
Output VAT related to revenue is payable to tax authorities on the earlier of:
(a) collection of receivables from customers or
(b) delivery of services to customers.
Input VAT is generally recoverable against output VAT upon receipt of the VAT invoice. The tax authorities permit the settlement of VAT on a net basis. VAT related to sales/services and purchases is recognized in the consolidated statement of financial position on a gross basis and disclosed separately as an asset and a liability.
VAT that is not recoverable is charged to statement of income as expense
Provisions
Provisions are recognized when the Company has an obligation (legal or constructive) as a result of past events, and it is more likely than not that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated.
Premiums earned and commission income
Premiums and commission income are earned over the periods to which they relate to cover the reinsurance risk. Unearned premiums and commission income represent the portion of premiums written and commission income relating to the unexpired period of coverage and are deferred based on the following methods:
Actual number of days for facultative reinsurance, non-proportional reinsurance treaties and portfolio transferred from insurance companies.
For proportional reinsurance treaties under consideration of the underlying exposure in relation to the line of business as follows:
| Line of business | Years |
| Engineering | 4 |
| Others | 2 |
| Special contracts | Based on underlying terms and nature |
The change in the provision for unearned premiums and commission income is taken to the statement of income in order to recognize revenue over the period to cover the reinsurance risks.
Deferred excess of loss premiums
The Company uses non-proportional excess of loss retrocession agreements on loss occurring basis to reduce its exposure arising from per risk, catastrophic losses on risks assumed and to manage underwriting capacity. The costs related to these agreements are amortized over the period of underwriting contracts and charged to statement of income.
Special commission income
Special commission income is recognized on an effective yield basis taking account of the principal outstanding and the applicable special commission rate.
Dividend income
Dividend income is recognized when the right to receive payment is established, which is generally when shareholders approve the dividend.
General and administrative expenses
All expenses incurred during the fiscal year not directly relating to underwriting are classified as general and administrative expenses.
Foreign currencies
Transactions in foreign currencies are recorded in Saudi Riyals at the exchange rate in effect at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the rate of exchange ruling at the statement of financial position date. All differences are taken to the respective statements of income.
Segmental reporting
An operating segment is a component of the Company that is engaged in business activities from which it may earn revenues, incur expenses and which is subject to risk and rewards that are different from those of other segments. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the chief executive officer that makes strategic decisions. The Company is organized into business units based on their products, services and has seven reportable operating segments as follows:
Engineering is a comprehensive insurance cover that is available to the insured in respect of contingencies which may happen on a construction or erection site. It provides an all risks cover for the works as well as a liability cover towards third parties for material damage or injury sustained as a result of the work being undertaken. The cover is also available for machinery.
Fire insurance pays for specific losses when a property is damaged due to fire, flood, earthquake and other external perils. It may also provide indemnity for loss of profit in case of an industrial
or commercial activity.
Marine insurance covers the loss or damage to cargo, terminals and or damage of ships or other means of transport of cargo by which property is transferred between the points of origin and final destination.
Motor insurance pays for loss or damage to own motor vehicles involved in accidents. It also pays for losses caused by its use to third party properties and bodily injuries
Protection includes term and credit life insurance. Term life insurance is used to provide financial aid for dependents in case of death and in certain cases of illness or disability. It can be an individual or a group policy with set duration limit on the coverage with the option to renew the policy or not. Credit life insurance is used to pay off a borrower’s debt if that borrower dies, with set duration limit on coverage with the option to renew the policy or not.
General accident covers a variety of events/properties such as money, liabilities and personal accident whether for individual or group.
Speciality includes Company’s participation in Lloyd’s market which specializes in writing worldwide property, marine, energy, speciality and non-U.S. liability insurance.
Others include following business segments:
– Whole accounts covers ceding Company’s retention (mainly in property, engineering, marine hull, marine cargo and sometimes include general accident and/or motor) on excess of loss basis
– Aviation
(covers aviation hull,
aviation liabilities and spare parts)
– Energy
(covers property damage,
liabilities and business interruption)
– Agriculture
(covers standing crops)
– Political Risk
(covers political violence,
sabotage and terrorism)
Segment performance is evaluated based on profit or loss which, in certain respects, is measured differently from profit or loss in the financial statements.
No inter-segment transactions occurred during the year. If any transaction were to occur, transfer prices between business segments are set on an arm’s length basis in a manner similar to transactions with third parties. Segment income, expense and results will then include those transfers between business segments which will then be eliminated at the level of financial statements of the Company.
Contingencies and commitments
Contingent liability is:
(a) a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or
(b) a present obligation that arises from past events but is not recognized because:
(i) it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation; or
(ii) the amount of the obligation cannot be measured with sufficient reliability.
Contingent assets are not recognized in the consolidated financial statements and are disclosed, unless the probability of an outflow of resources embodying economic benefits is remote.
Commitments represent binding agreements of the Company to carry out specified courses of action involving in a transfer of cash or other asset to the respective counterparties.
4. SIGNIFICANT ACCOUNTING ESTIMATES AND ASSUMPTIONS
The preparation of the Company’s financial statements requires management to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, the disclosure of contingent assets and liabilities, at the reporting date. However, uncertainty about these estimates and assumptions could result in an outcome that could require a material adjustment to the carrying amount of the asset or liability affected in the future.
The key assumptions concerning the future and other key sources of estimation uncertainty at the statement of financial position date, that have a significant risk of causing a material adjustment to the carrying amounts of the assets and liabilities within the next financial year are discussed below:
Accrued reinsurance premium
Estimates have to be made for expected future premium for policies already written but not reported at the reporting date. Due to the nature of reinsurance business, it takes a significant period of time before all premiums are reported for a given underwriting period. The accrued reinsurance premium at the reporting date is determined by using actuarial techniques therefore, considerable judgement, experience and knowledge of the business is required by management in the estimation of accrued premiums due from contract holders. Actual results may differ resulting in positive or negative change in estimated accrued premium income.
The accrued premium estimates are reviewed regularly by the management by using various methods, but primarily by using historical reporting trends as a base for assessing future premium amounts. Historical premiums developments are mainly analyzed by underwriting year, by type and line of business.
Determination of whether control exist over associate
The Company has investment in an associate which is not ‘controlled’ by the Company and therefore, the associate is not consolidated in these financial statements. Determining whether the Company controls the associate usually focuses on the assessment whether the Company is exposed to, or has the right to, variable returns from its involvement with the associate and has the ability to affect those returns through its power over the investee. The Company reassesses whether it has control if there are changes to one or more of the elements of control.
The ultimate liability arising from claims made under reinsurance contracts
The estimation of the ultimate liability arising from claims made under reinsurance contracts is the Company's most critical accounting estimate. There are several sources of uncertainty that are needed to be considered in estimating the liability that the Company will ultimately pay for such claims. The provision for claims incurred but not reported (IBNR) is an estimation of claims which are expected to be reported subsequent to the statement of financial position date, for which the insured event has occurred prior to the end of financial reporting date.
The primary technique adopted by management in estimating the cost of notified and IBNR claims, is that of using the past claims settlement trends to predict future claims settlement trends. Claims requiring court or arbitration decisions are estimated individually. Independent loss adjusters normally estimate property claims. Management reviews its provisions for claims incurred, and claims incurred but not reported, on a quarterly basis. The Risk and Underwriting Committee, in conjunction with the Company’s external actuaries, compares the changes in the technical reserves, to determine whether the change is reasonable.
Deferred policy acquisition costs
Commission and other costs directly and indirectly related to the acquisition and renewal of reinsurance contracts are recorded as deferred acquisition costs (“DAC”) and are amortized in the statement of income over the related period of policy coverage. If the assumptions relating to future profitability of these policies are not realized, the amortization of these costs could be accelerated and this may also require additional impairment.
Fair values of financial instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:
in the principal market for the asset or liability, or
in the absence of a principal market, in the most advantageous market for the asset or liability
The principal or the most advantageous market must be accessible to by the Company. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.
A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
Level 1: Quoted (unadjusted) market prices in active markets for identical assets or liabilities.
Level 2: Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.
Level 3: Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.
For assets and liabilities that are recognized in the financial statements on a recurring basis, the Company determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
For the purpose of fair value disclosures, the Company has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above.
The Investment Committee, in conjunction with the Company’s external fund managers, evaluates the performance of each investment to determine whether the same is reasonable in comparison to the market.
The Company’s management evaluates the changes in the fair value of each of the other assets and liabilities, to determine whether the applied methodology is reasonable.
Going concern
The financial statements have been prepared on a going concern basis. The Company’s management has made an assessment of the Company’s ability to continue as a going concern and is satisfied that the Company has the resources to continue in business for the foreseeable future. Furthermore, the management is not aware of any material uncertainties that may cast significant doubt upon the Company’s ability to continue as a going concern.
31. RISK MANAGEMENT
Risk governance
The Company’s risk governance is manifested in a set of established policies, procedures and controls which uses the existing organizational structure to meet strategic targets. The Company’s philosophy revolves on willing and knowledgeable risk acceptance commensurate with the risk appetite and a strategic plan approved by the Board of Directors. The Company is exposed to insurance, retrocession, special commission rate, credit, liquidity and currency risks.
Risk management structure
A cohesive organizational structure is established within the Company in order to identify, assess, monitor and control risks.
Board of Directors
The apex of risk governance is the centralized oversight of the Board of Directors providing direction and the necessary approvals of strategies and policies in order to achieve defined corporate goals.
Senior management
Senior Management is responsible for the day to day operations towards achieving the strategic goals within the Company’s pre-defined risk appetite.
The risks faced by the Company and the way these risks are mitigated by Management are as follows:
31.1 Reinsurance risk
The risk resulting from reinsurance business written is the risk that an insured event will occur including the uncertainty of the amount and timing of any resulting claim. The principal risk the Company faces under such reinsurance contracts is that the actual claims and benefit payments exceed the carrying amount of reinsurance liabilities. This is influenced by the frequency of claims, severity of claims, actual benefits paid being greater than originally estimated and subsequent development of long-term claims.
The variability of risks is improved by the diversification of the risks written and the build-up of a large portfolio of reinsurance contracts, (inward business) as a more diversified portfolio is less likely to be affected across the board by change in any subset of the portfolio. The variability of risks is also improved by a careful selection of inward business, by the underwriting guidelines as well as the use of retrocession protection. The Company’s underwriting strategy includes, but is not limited to, the following:
Diversification in the type of accepted risks, and within each of these categories to achieve sufficiently large population of risks to reduce the variability of the expected outcome.
Diversification of the underwriting risks in terms of type and amount of risk, industry and geographical location.
In order to minimize its financial exposure arising from large claims, the Company in the normal course of business, enters into retrocession agreements with other parties. Such retrocession agreements provide for higher underwriting capacity, and allow management to contain exposure with the risk appetite of the Company. The retrocession is effected under proportional treaties such as quota share and surplus and non-proportional treaties such as excess of loss for risk and catastrophe to ensure its net retention is aligned with its risk tolerance.
Although the Company has retrocession agreements, it is not relieved of its direct obligations to its ceding companies and thus a credit exposure exists with respect to its retrocessionaires, to the extent that any retrocessionaire is unable to meet its obligations assumed under such retrocession agreements.
Geographical concentration of risk
The Company accepts reinsurance business from insurance companies in the Kingdom of Saudi Arabia, the Middle East, Africa and Asia. The written premiums are distributed geographically as follows:
| For the year ended 31 December 2022 | Amount SR | Percentage % |
| Kingdom of Saudi Arabia | 788,029,729 | 56 |
| Asia | 280,321,144 | 20 |
| Other Middle Eastern Countries | 137,458,815 | 10 |
| Africa | 38,794,793 | 3 |
| Others | 158,676,439 | 11 |
| 1,403,280,920 | 100 |
| For the year ended 31 December 2021 | Amount SR | Percentage % |
| Kingdom of Saudi Arabia | 482,157,923 | 43 |
| Asia | 321,286,167 | 29 |
| Other Middle Eastern Countries | 91,740,808 | 8 |
| Africa | 37,913,985 | 4 |
| Others | 182,780,817 | 16 |
| 1,115,879,700 | 100 |
The Company monitors concentration of risk by evaluating multiple risks covered in the same geographical location or by same party. For flood or earthquake risk, a complete city is classified as a single location. For fire and property risk a particular building and neighboring buildings, which could be affected by a single claim incident, are considered as a single location. Similarly, for individual marine risk, multiple risks covered in a single vessel voyage are considered as a single risk while assessing concentration of risk, however, for treaties where there are multiple risks are covered, there are limits for unknown accumulation. The Company evaluates the concentration of exposures to individual and cumulative insurance risks and establishes its reinsurance policy to reduce such exposures to the levels acceptable to the Company.
Key assumptions
The key assumptions underlying the liability estimates are the Company’s estimated ultimate loss ratio. The ultimate loss ratio was determined using actuarial methods.
Sensitivities
The analysis below is performed for reasonably possible movements in key assumptions such as the ultimate loss ratio with all other assumptions held constant showing the impact on net liabilities and net income as follows:
| 31 December 2022 | Change in assumptions | Impact on net liabilities SR | Impact on net income SR |
| Ultimate loss ratio | +10% | 59,504,424 | (59,504,424) |
| -10% | (59,504,424) | 59,504,424 |
| 31 December 2021 | Change in assumptions | Impact on net liabilities SR | Impact on net income SR |
| Ultimate loss ratio | +10% | 56,531,201 | (56,531,201) |
| -10% | (56,531,201) | 56,531,201 |
31.2 Retrocession risk
In order to minimize its financial exposure arising from large claims, the Company in the normal course of business, enters into retrocession agreements with other parties. Amounts recoverable from retrocessionare are estimated and recognized in a manner consistent with the amounts associated with the underlying accepted policy benefits and in accordance with the terms of the respective retrocession treaties and are presented in the statement of financial position as reinsurance assets.
To minimize its exposure to significant losses from retrocessionaire insolvencies, the Company evaluates the financial condition of its retrocessionaires and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the retrocessionaire.
Retrocessionaires are selected using the following parameters and guidelines set by the Company’s Board of Directors and Risk and Underwriting Committee. The criteria may be summarized as follows:
a. Minimum acceptable credit rating by recognized rating agencies (e.g. Standard & Poors) that is not lower than BBB (S&P) or equivalent.
b. Reputation of particular retrocessionaire companies.
c. Existing or past business experience with the retrocessionaire.
Furthermore, the financial strength, managerial and technical expertise as well as historical performance, wherever applicable, are thoroughly reviewed by the Company and matched against a list of requirements pre-set by the Company’s Board of Directors and Risk and Underwriting Committee before approving them as retrocessionaires.
Retrocession contracts do not relieve the Company from its obligations to ceding companies and as a result the Company remains liable for the portion of outstanding claims reinsured to the extent that the retrocessionaire fails to meet the obligations under the retrocession agreements. The net credit exposure in this connection is SR 248.3 million (due from retrocessionaires) (2021: SR 116.1 million).
31.3 Regulatory framework risk
The operations of the Company are subject to local regulatory requirements in the Kingdom of Saudi Arabia. Such regulations not only prescribe approval and monitoring of activities but also impose certain restrictive provisions such as capital adequacy to minimize the risk of default and insolvency on the part of the reinsurance companies and to enable them to meet unforeseen liabilities as these arise. The Company has stipulated risk management framework policy wherein the policies and procedures are defined to control and mitigate risk.
31.4 Claims management risk
Claims management risk may arise within the Company in the event of inaccurate or incomplete case reserves and claims settlements, poor service quality or excessive claims handling costs. These risks may damage the Company and undermine its ability to win and retain business, or incur punitive damages. These risks can occur at any stage of the claims life cycle.
The Company’s claims teams are focused on delivering quality, reliable and speed of service. Their aim is to adjust and process claims in a fair, efficient and timely manner, in accordance with the policy’s terms and conditions, the regulatory environment, and the business’ broader interests. Prompt and accurate case reserves are set for all known claims liabilities, including provisions for expenses, as soon as a reliable estimate can be made of the claims liability.
31.5 Reserving and ultimate reserves risk
Reserving and ultimate reserves risk occurs within the Company where established insurance liabilities are insufficient through inaccurate forecasting, or where there is inadequate allowance for expenses and reinsurance bad debts in provisions. To manage reserving and ultimate reserves risk, the Company actuarial team uses a range of recognized techniques to project ultimate claims, monitor claims development patterns and stress-test ultimate insurance liability balances.
The objective of the Company’s reserving policy is to produce accurate and reliable estimates that are consistent over time and across classes of business (See Note 4).
31.6 Credit risk
Credit risk is the risk that one party will fail to credit risk is the risk that one party will fail to discharge an obligation related to a financial instrument and cause the other party to incur a financial loss. For all classes of financial assets held by the Company, the maximum exposure to credit risk to the Company is the carrying value as disclosed in the statement of financial position. 45% of the Company’s receivables is due from two ceding and three broker companies as at 31 December 2022 (31 December 2021: 37%). The Company does not provide for reinsurance premium receivable from local ceding companies. However, the following policies and procedures are in place to mitigate the Company’s exposure to credit risk:
To minimize its exposure to significant losses from retrocessionaires insolvencies, the Company evaluates the financial condition of its retrocessionaires counterparties. Accordingly, as a pre-requisite, the parties with whom retrocession is effected are required to have a minimum acceptable security rating level affirming their financial strength.
The Company, with respect to credit risk arising from other financial assets, only deals with commercial banks with strong financial position and credit ratings.
The Company enters into inward insurance contracts with recognized, creditworthy third parties. In addition, receivables from ceding companies are monitored on an ongoing basis
in order to reduce the Company’s exposure to
bad debts.
The Company seeks to limit credit risk with respect to ceding companies through monitoring outstanding receivables.
The credit ratings of the retrocessionaires ranges from B+ to AA.
The table below shows the maximum exposure to credit risk for the financial assets of the statements of financial position.
| 31 December 2022 | 31 December 2021 | |||
| Reinsurance operations SR | Shareholders’ operations SR | Reinsurance operations SR | Shareholders’ operations SR | |
| Bank balances | 20,447,316 | 11,049,678 | 21,815,318 | 5,939,195 |
| Time deposits | 461,780,732 | 285,174,970 | 94,818,411 | 148,563,674 |
| Reinsurance premium receivables, gross | 324,354,438 | – | 244,929,293 | – |
| Retroceded share of outstanding claims | 167,700,801 | – | 149,332,878 | – |
| Retroceded share of claims incurred but not reported |
31,630,743 | – | 38,033,087 | – |
| Retrocession balances receivable | 23,730,685 | – | 13,063,654 | – |
| Accrued special commission income from time deposits |
1,911,342 | 5,763,345 | 310,793 | 1,999,309 |
| Accrued income on statutory deposit | – | 22,084,429 | – | 20,962,172 |
| Accrued reinsurance premium | 1,077,466,601 | – | 680,469,900 | – |
| Held to maturity investments | 25,000,000 | 362,652,522 | 25,000,000 | 273,022,312 |
| Accrued dividends and special commission income from bonds and sukuk and held to maturity investments | 344,544 | 4,831,351 | 38,656 | 6,771,817 |
| Investments held at fair value through income statement |
156,476,356 | 89,534,608 | 440,425,260 | 321,841,092 |
| Other assets | 64,138,256 | 38,064,151 | 1,159,530 | 37,754,216 |
| 2,354,981,814 | 819,155,054 | 1,709,396,780 | 816,853,787 | |
The used rating grades for investments are being adopted by Standard & Poors.
The credit quality for investments held at fair value through income statement is as follows:
| Reinsurance operations | Shareholders’ operations | |||||
| Credit quality |
Credit rating agency | Financial instruments | 2022 SR | 2021 SR | 2022 SR | 2021 SR |
| A | S&P/ Moody’s/ Fitch |
Bonds/Sukuks | 18,076,731 | 7,916,163 | 29,082,479 | 46,926,547 |
| A- | Bonds/Sukuks | 11,174,357 | 13,278,319 | 9,013,878 | 10,173,322 | |
| A+ | Bonds/Sukuks | 11,449,096 | 5,090,338 | 9,235,499 | 3,900,015 | |
| AA | Bonds/Sukuks | 1,499,497 | 1,723,969 | 1,209,581 | 1,320,837 | |
| AA- | Bonds/Sukuks | 2,960,914 | – | 2,388,443 | – | |
| BBB | Bonds/Sukuks | 13,884,426 | 18,079,110 | 11,199,976 | 13,851,498 | |
| BBB- | Bonds/Sukuks | 6,940,286 | 9,461,479 | 5,598,433 | 7,249,010 | |
| BBB+ | Bonds/Sukuks | 14,013,829 | 17,756,522 | 11,304,359 | 13,604,344 | |
| Unrated | Bonds/Sukuks | 4,916,571 | 24,072,092 | 1,110,760 | 18,434,390 | |
| Unrated | Money Market Funds/Investment Funds | 71,560,649 | 343,047,268 | 9,391,200 | 206,381,129 | |
| 156,476,356 | 440,425,260 | 89,534,608 | 321,841,092 | |||
The credit quality for held to maturity investments are as follows:
| Reinsurance operations | Shareholders’ operations | |||||
| Credit quality |
Credit rating agency | Financial instruments | 2022 SR | 2021 SR | 2022 SR | 2021 SR |
| A- | S&P/ Moody’s/ Fitch |
Bonds/sukuks | – | – | 29,312,357 | – |
| A1 | Bonds/sukuks | – | – | 37,500,000 | 37,500,000 | |
| A-1 | Bonds/sukuks | – | – | 4,112,115 | 4,110,447 | |
| BBB+ | Bonds/sukuks | 25,000,000 | 25,000,000 | 170,321,199 | 127,674,304 | |
| BB- | Bonds/sukuks | – | – | 72,080,536 | 92,958,228 | |
| B+ | Bonds/sukuks | – | – | 48,019,065 | 10,779,333 | |
| Unrated | Bonds/sukuks | – | – | 1,307,250 | – | |
| 25,000,000 | 25,000,000 | 362,652,522 | 273,022,312 | |||
31.7 Liquidity risk
Liquidity risk is the risk that the Company will encounter difficulty in raising funds to meet commitments associated with its financial liabilities.
Liquidity requirements are monitored on a monthly basis and management ensures that sufficient liquid funds are available to meet any commitments as they arise.
All time deposits held by the Company at the statement of financial position date had original maturity periods less than five years.
Maturity profiles
The table below summarizes the maturity profile of the financial liabilities of the Company based on remaining expected undiscounted contractual obligations. Maturity profiles are determined based on estimated timing of net cash outflows from the recognized insurance liabilities.
| 31 December 2022 | ||||||
| Reinsurance’ operations | Shareholders’ operations | |||||
| Up to one year SR | More than one year SR | Total SR | Up to one year SR | More than one year SR | Total SR | |
| Liabilities | ||||||
| Accounts payable | 70,482,781 | – | 70,482,781 | – | – | – |
| Retrocession balances payable | 136,373,790 | – | 136,373,790 | – | – | – |
| Accrued retroceded premiums | – | 333,253,698 | 333,253,698 | – | – | – |
| Outstanding claims | 822,404,823 | – | 822,404,823 | – | – | – |
| Claims incurred but not reported |
533,120,986 | – | 533,120,986 | – | – | – |
| Accrued expenses and other liabilities | 80,368,203 | – | 80,368,203 | 4,652,862 | – | 4,652,862 |
| Margin loan payable | – | – | – | – | 56,797,019 | 56,797,019 |
| 1,642,750,583 | 333,253,698 | 1,976,004,281 | 4,652,862 | 56,797,019 | 61,449,881 | |
| 31 December 2021 | ||||||
| Reinsurance’ operations | Shareholders’ operations | |||||
| Up to one year SR | More than one year SR | Total SR | Up to one year SR | More than one year SR | Total SR | |
| Liabilities | ||||||
| Accounts payable | 44,041,910 | – | 44,041,910 | – | – | – |
| Retrocession balances payable | 48,771,678 | – | 48,771,678 | – | – | – |
| Accrued retroceded premiums | – | 35,491,960 | 35,491,960 | – | – | – |
| Outstanding claims | 782,990,731 | – | 782,990,731 | – | – | – |
| Claims incurred but not reported |
427,396,736 | – | 427,396,736 | – | – | – |
| Accrued expenses and other liabilities | 15,704,756 | – | 15,704,756 | 4,354,427 | – | 4,354,427 |
| Margin loan payable | – | – | – | – | 56,797,019 | 56,797,019 |
| 1,318,905,811 | 35,491,960 | 1,354,397,771 | 4,354,427 | 56,797,019 | 61,151,446 | |
Liquidity profile
Maturity analysis on expected maturity bases
| 31 December 2022 | ||||||
| Reinsurance’ operations | Shareholders’ operations | |||||
| Current SR | Non-current SR | Total SR | Current SR | Non-current SR | Total SR | |
| Assets | ||||||
| Cash and cash equivalents | 20,507,026 | – | 20,507,026 | 11,049,678 | – | 11,049,678 |
| Time deposits | – | 461,780,732 | 461,780,732 | 25,397,213 | 259,777,757 | 285,174,970 |
| Accrued special commission income from time deposits | 1,911,342 | – | 1,911,342 | 5,763,345 | – | 5,763,345 |
| Reinsurance premium receivables, net | 320,974,537 | – | 320,974,537 | – | – | – |
| Investments held at fair value through income statement |
156,476,356 | – | 156,476,356 | 130,677,937 | – | 130,677,937 |
| Accrued dividends and special commission income from bonds, sukuk and held to maturity investments | 344,544 | – | 344,544 | 4,831,351 | – | 4,831,351 |
| Accrued reinsurance premiums | – | 1,077,466,601 | 1,077,466,601 | – | – | – |
| Retroceded share of outstanding claims | 167,700,801 | – | 167,700,801 | – | – | – |
| Retroceded share of claims incurred but not reported | 31,630,743 | – | 31,630,743 | – | – | – |
| Held to maturity investments | – | 25,000,000 | 25,000,000 | 32,918,372 | 329,734,150 | 362,652,522 |
| Other assets | 64,138,256 | – | 64,138,256 | 38,064,151 | – | 38,064,151 |
| 763,683,605 | 1,564,247,333 | 2,327,930,938 | 248,702,047 | 589,511,907 | 838,213,954 | |
| 31 December 2022 | ||||||
| Reinsurance’ operations | Shareholders’ operations | |||||
| Current SR | Non-current SR | Total SR | Current SR | Non-current SR | Total SR | |
| Liabilities | ||||||
| Accounts payable | 70,482,781 | – | 70,482,781 | – | – | – |
| Retrocession balances payable | 136,373,790 | – | 136,373,790 | – | – | – |
| Accrued retroceded premiums | – | 333,253,698 | 333,253,698 | – | – | – |
| Outstanding claims | 822,404,823 | – | 822,404,823 | – | – | – |
| Claims incurred but not reported |
533,120,986 | – | 533,120,986 | – | – | – |
| Accrued expenses and other liabilities |
80,368,203 | – | 80,368,203 | 4,652,862 | – | 4,652,862 |
| Margin loan payable | – | – | – | – | 56,797,019 | 56,797,019 |
| 1,642,750,583 | 333,253,698 | 1,976,004,281 | 4,652,862 | 56,797,019 | 61,449,881 | |
| Gap | (879,066,978) | 1,230,993,635 | 351,926,657 | 244,049,185 | 532,714,888 | 776,764,073 |
| 31 December 2021 | ||||||
| Reinsurance’ operations | Shareholders’ operations | |||||
| Current SR | Non-current SR | Total SR | Current SR | Non-current SR | Total SR | |
| Assets | ||||||
| Cash and cash equivalents |
21,868,099 | – | 21,868,099 | 5,939,195 | – | 5,939,195 |
| Time deposits | 94,818,411 | – | 94,818,411 | 148,563,674 | – | 148,563,674 |
| Accrued special commission income from time deposits | 310,793 | – | 310,793 | 1,999,309 | – | 1,999,309 |
| Reinsurance premium receivables, net | 242,229,593 | – | 242,229,593 | – | – | – |
| Investments held at fair value through income statement |
440,425,260 | – | 440,425,260 | 363,159,336 | – | 363,159,336 |
| Accrued dividends and special commission income from bonds, sukuk and held to maturity investments | 38,656 | – | 38,656 | 6,771,817 | – | 6,771,817 |
| Accrued reinsurance premiums | – | 680,469,900 | 680,469,900 | – | – | – |
| Retroceded share of outstanding claims | 149,332,878 | – | 149,332,878 | – | – | – |
| Retroceded share of claims incurred but not reported |
38,033,087 | – | 38,033,087 | – | – | – |
| Held to maturity investments | – | 25,000,000 | 25,000,000 | – | 273,022,312 | 273,022,312 |
| Other assets | 1,159,530 | – | 1,159,530 | 37,754,216 | – | 37,754,216 |
| 988,216,307 | 705,469,900 | 1,693,686,207 | 564,187,547 | 273,022,312 | 837,209,859 | |
| 31 December 2021 | ||||||
| Reinsurance’ operations | Shareholders’ operations | |||||
| Current SR | Non-current SR | Total SR | Current SR | Non-current SR | Total SR | |
| Liabilities | ||||||
| Accounts payable | 44,041,910 | – | 44,041,910 | – | – | – |
| Retrocession balances payable | 48,771,678 | – | 48,771,678 | – | – | – |
| Accrued retroceded premiums | 35,491,960 | 35,491,960 | – | – | – | |
| Outstanding claims | 782,990,731 | – | 782,990,731 | – | – | – |
| Claims incurred but not reported |
427,396,736 | – | 427,396,736 | – | – | – |
| Accrued expenses and other liabilities |
15,704,756 | – | 15,704,756 | 4,354,427 | – | 4,354,427 |
| Margin loan payable | – | – | – | – | 56,797,019 | 56,797,019 |
| 1,318,905,811 | 35,491,960 | 1,354,397,771 | 4,354,427 | 56,797,019 | 61,151,446 | |
| Gap | (330,689,504) | 669,977,940 | 339,288,436 | 559,833,120 | 216,225,293 | 776,058,413 |
31.8 Currency risk
Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Company’s transactions are carried out in local and foreign currencies. Management believes that there is no significant foreign currency exposure since most of the Company’s transactions that are not denominated in Saudi Riyals were undertaken in foreign currencies which are pegged to USD. Furthermore, Saudi Riyals are pegged to USD.
The table below represents the Company’s assets and liabilities denominated in major currencies as follows:
| 31 December 2022 | USD SR | QAR SR | AED SR | EUR SR | KWD SR | INR SR | Others SR | Total SR |
| Assets | ||||||||
| Cash and cash equivalents | 11,562,369 | – | 601,632 | 988,821 | – | – | 2,214,355 | 15,367,177 |
| Reinsurance premium receivables, net | 19,801,158 | 651,837 | 39,776,730 | 1,637,254 | 9,922,070 | 27,741,886 | 97,351,739 | 196,882,674 |
| Investments held at fair value through income statement | 150,558,366 | – | – | – | – | – | – | 150,558,366 |
| Held-to-maturity investment | 327,652,522 | – | – | – | – | – | – | 327,652,522 |
| Accrued reinsurance premiums | – | (55,136) | 352,487 | 402,706 | 16,115 | 20,151,715 | 13,588,300 | 34,456,187 |
| Retroceded share of unearned premiums | (90,048) | – | (3,038) | – | – | – | 536,352 | 443,266 |
| Retroceded share of outstanding claims | – | – | – | – | – | – | – | – |
| Deferred policy acquisition costs | 7,055,608 | 53,948 | 2,030,639 | 18,178 | 1,134,232 | 573,803 | 9,697,277 | 20,563,685 |
| Accrued dividends and special commission income from bonds sukuk and held to maturity investments |
2,452,667 | – | – | – | – | – | – | 2,452,667 |
| Investment in an equity accounted investee | 156,802,667 | – | – | – | – | – | – | 156,802,667 |
| 675,795,309 | 650,649 | 42,758,450 | 3,046,959 | 11,072,417 | 48,467,404 | 123,388,023 | 905,179,211 |
| 31 December 2021 | USD SR | QAR SR | AED SR | EUR SR | KWD SR | INR SR | Others SR | Total SR |
| Assets | ||||||||
| Cash and cash equivalents | 13,343,794 | – | 55,893 | 209,844 | – | – | 484,324 | 14,093,855 |
| Reinsurance premium receivables, net | – | 436,630 | 26,356,855 | 8,759,658 | 9,542,796 | 18,978,020 | 93,461,929 | 157,535,888 |
| Investments held at fair value through income statement | 171,976,458 | – | – | – | – | – | – | 171,976,458 |
| Held-to-maturity investment | 238,022,312 | – | – | – | – | – | – | 238,022,312 |
| Accrued reinsurance premiums | 3,218,478 | 28,892 | 304,114 | 578,200 | 170,344 | 9,146,848 | 13,371,205 | 26,818,081 |
| Retroceded share of unearned premiums | 21,748,524 | – | – | – | – | – | 8,120,657 | 29,869,181 |
| Retroceded share of outstanding claims | 358,579 | – | – | – | – | – | – | 358,579 |
| Deferred policy acquisition costs | 6,155,113 | 42,485 | 1,792,639 | 16,954 | 1,035,227 | 1,537,025 | 12,309,414 | 22,888,857 |
| Accrued dividends and special commission income from bonds sukuk and held to maturity investments |
3,158,204 | – | – | – | – | – | – | 3,158,204 |
| Investment in an equity accounted investee | 142,000,373 | – | – | – | – | – | – | 142,000,373 |
| 599,981,835 | 508,007 | 28,509,501 | 9,564,656 | 10,748,367 | 29,661,893 | 127,747,529 | 806,721,788 |
| 31 December 2022 | USD SR | QAR SR | AED SR | EUR SR | KWD SR | INR SR | Others SR | Total SR |
| Liabilities | ||||||||
| Accounts payable | 19,949,038 | 1,503,158 | 379,028 | (4,550,165) | 1,300,025 | 1,492,503 | 3,485,746 | 23,559,333 |
| Unearned premiums | 46,101,362 | 306,482 | 9,595,541 | 1,246,436 | 4,127,116 | 4,998,878 | 40,648,618 | 107,024,433 |
| Outstanding claims | 192,539,080 | 11,224,818 | 48,126,724 | (2,776,770) | 11,113,071 | 82,556,130 | 248,524,808 | 591,307,861 |
| Margin loan payable | 56,797,019 | – | – | – | – | – | – | 56,797,019 |
| 315,386,499 | 13,034,458 | 58,101,293 | (6,080,499) | 16,540,212 | 89,047,511 | 292,659,172 | 778,688,646 |
| 31 December 2021 | USD SR | QAR SR | AED SR | EUR SR | KWD SR | INR SR | Others SR | Total SR |
| Liabilities | ||||||||
| Accounts payable | 18,488,873 | 1,832,563 | (1,108,111) | 1,026,386 | 269,405 | (240,670) | 8,809,117 | 29,077,563 |
| Unearned premiums | 40,343,794 | 254,170 | 7,274,479 | 84,940 | 4,267,068 | 10,952,454 | 48,372,332 | 111,549,237 |
| Outstanding claims | 215,974,638 | 12,327,847 | 39,998,319 | 3,156,212 | 15,006,014 | 85,782,023 | 211,380,454 | 583,625,507 |
| Margin loan payable | 56,797,019 | – | – | – | – | – | – | 56,797,019 |
| 331,604,324 | 14,414,580 | 46,164,687 | 4,267,538 | 19,542,487 | 96,493,807 | 268,561,903 | 781,049,326 |
31.9 Special commission rate risk
The Company is exposed to special commission rate risk on its bonds and sukuk investments. Special Commission rate risk arises on bonds and sukuk which are exposed to the fluctuations in special commission rates.
The Company manages special commission rate risk by investing in various long and short duration financial assets, along with cash and cash equivalents. The investment committee monitors the duration of these assets on a regular basis. Duration of reinsurance operations and Shareholders operations’ investments in bonds and sukuk portfolios as at 31 December 2022 is around 3.7 years (31 December 2021: 5.1 years). A hypothetical increase/decrease of 10 basis points in yield curve will entail decrease/increase in bond/sukuk portfolio values of reinsurance operations and Shareholders operations’ investments by SR 2.02 million as at 31 December 2022 (31 December 2021: SR 2.35 million).
a. Market price risk
Market price risk is the risk that the fair value of a financial instrument will fluctuate caused by the factors (other than those arising from commission rate risk or currency risk), that affect all financial instruments traded in the market.
Efficient management of market price risk is key to the investment of Company assets. Appropriate levels of investment risk is determined by risk/return profile of the assets. The Company has a diversified portfolio of investments, including investment in the listed equities securities. The Company manages the equity market price risk through diversification and by placing limits on individual and total equity instruments. A 5% change in the fair value of these investments, with all other variables held constant, would impact the statement of income by increase/decrease of SR 2.52 million (2021: 5.67 million).
31.10 Capital management risk
Capital requirements are set and regulated by the Saudi Arabian Monetary Agency. These requirements are put in place to ensure sufficient solvency margins. Further objectives are set by the Company to maintain healthy capital ratios in order to support its business objectives and maximize shareholders’ value.
The Company manages its capital requirements by assessing shortfalls between reported and required capital levels on a regular basis. Adjustments to current capital levels are made in light of changes in market conditions and risk characteristics of the Company’s activities. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders or issue shares.
The table below summarizes the minimum regulatory capital of the Company and the total capital held:
| 2022 SR | 2021 SR | |
| Total capital held | 1,000,016,169 | 963,996,157 |
| Minimum regulatory capital | 200,000,000 | 200,000,000 |
In the opinion of the management, the Company has fully complied with the externally imposed capital requirements during the reported financial year.
b. Fair value of financial instruments
Financial instruments consist of financial assets and financial liabilities. Fair value is the amount for which an asset could be exchanged, or a liability settled between knowledgeable willing parties in an arm’s length transaction. Underlying the definition of fair value is a presumption that an enterprise is a going concern without any intention or need to liquidate, curtail materially the scale of its operations or undertake a transaction on adverse terms. The Company’s financial assets consist of cash and cash equivalents, receivables, investments and accrued income and its financial liabilities consist of payables, accrued expenses and gross outstanding claims. The fair values of financial assets and liabilities are not materially different from their carrying values at the statement of financial position.