- Insurance Core Principles
The IAIS has published Insurance Supervisory Principles to serve as guidelines for the regulation and supervision of insurance markets and is in the process of developing guidelines or standards in the areas of licensing, use of derivatives, on-site inspections, solvency, reinsurance, market conduct, and investment policies. The IAIS has enunciated general principles that identify subject areas that should be addressed in the laws of each jurisdiction, with further guidance specifically tailored to the needs of emerging markets.
In October 2003, IAS released the Insurance Core Principles , which comprise essential principles that need to be in place for an insurance supervisory system to be effective. These principles set out the framework for insurance supervision, identify subject areas that should be addressed in legislation or regulation in each jurisdiction, and provide a framework for the IAIS on which to develop more detailed international standards.
Under the IAIS Principles, an insurance supervisor is expected to protect policyholders by ensuring that companies comply with the laws governing the business of insurance, intervening as necessary using the powers available under the legislation. Specific responsibilities (presented in more detailed general principles) include licensing and changes of control. Standards of corporate governance and internal controls should be established. Prudential rules should cover assets, liabilities, capital adequacy and solvency, derivatives and "off-balance sheet" items, and reinsurance. Supervisors should have monitoring and inspection powers, including financial reporting, and on-site inspection and access to information. Supervisors should also be given appropriate sanctions powers. Finally, supervisors must be able to coordinate their activities, not only with other financial supervisors in their own jurisdiction and in other jurisdictions but also in the context of appropriate confidentiality.
The principles identify key issues for the insurance supervisors are as follows:
- Organization of an insurance supervisor. The insurance supervisor of a jurisdiction must be organized so that it is able to accomplish its primary task, i.e., to maintain effective, fair, safe, and stable insurance markets for the benefit and protection of policyholders. It should at any time be able to carry out this task effectively in accordance with the Insurance Core Principles.
- Licensing and changes in control. Companies that wish to underwrite insurance in the domestic insurance market should be licensed and the insurance supervisor should ensure that all domestic or foreign establishments are under supervision. Also, the supervisory authority must be informed of any acquisitions or changes in control.
- Corporate governance and internal controls. It is desirable that standards be established in the jurisdiction, which deal with corporate governance. The supervisor should be able to review the internal controls and require the board of directors to provide suitable prudential oversight.
- Prudential rules. Insurance companies should meet prudential standards established to limit or manage the amount of risk that they retain. Standards should be established in the areas of assets, liabilities, capital adequacy and solvency, derivatives, and "off-balance-sheet" items and reinsurance.
- Market conduct. Insurance supervisors should ensure that insurers and intermediaries exercise the necessary knowledge, skills, and integrity in dealing with their customers.
- Monitoring and on-site inspection. Insurance supervisors should get the information they need to properly form an opinion on the financial strength of the operations of each insurance company in their jurisdiction.
- Sanctions. Insurance supervisors must have the power to take remedial action where problems involving licensed companies are identified.
- Cross-border business operations. The insurance supervisor should ensure that (a) no foreign insurance establishment escapes supervision; (b) all insurance establishments of international insurance groups and international insurers are subject to effective supervision; (c) the creation of a cross-border insurance establishment is subject to consultation between host and home supervisors; and (d) foreign insurers providing cross-border coverage are subject to effective supervision.
- Coordination. In order to share relevant information with other insurance supervisors, adequate and effective communications should be developed and maintained.
- Cooperation. In developing or implementing a regulatory framework, insurance supervisors should develop cooperation with any other supervisor or relevant body both in other jurisdictions and in other sectors of the industry (i.e., insurance, banking, or securities).
- Confidentiality. All insurance supervisors should be subject to professional secrecy constraints in respect of information obtained in the course of their activities.
- Consumer protection. The supervisory authority must set minimum requirements for consumer protection, particularly on disclosure of information.
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- Other International Standards
In addition to the Insurance Core Principles, the FSF Compendium—like the sections addressing banking and securities—includes a range of other guidance. Specifically, it includes standards in five subcategories:
- General supervision. Includes guidance regarding fit and proper standards, group coordination, a core principles methodology, insurance activities on the internet, conduct of insurance business, on-site inspections, licensing, and emerging market economies.
- Capital adequacy
- Cross-border supervision. Covers exchange of information, international insurance companies, and model MoUs.
- Disclosure and transparency. Addresses public disclosure and money laundering.
- Risk management. Includes evaluation of reinsurance cover , asset management by insurance companies , and derivatives .
Unlike the Basel Committee and IOSCO, the IAIS has prepared an integrated set of insurance principles and methodology that provides a single comprehensive and easy accessible resource in this area.
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- Implementation
A review in December 2002 of 45 assessments undertaken under the FSAP in the area of insurance supervision reached a number of key conclusions, of which two are most significant for present purposes:
First, satisfactory observance was generally seen in a number of areas, including financial reporting, cross-border business operations, capital adequacy and solvency, sanctions, prudential rules, liabilities, and confidentiality.
Second, common weaknesses included
- weak organization of the supervisor,
- no clear criteria for denying changes in control,
- weaknesses in corporate governance and internal controls,
- weak prudential rules on investment and exposure limits,
- inadequate supervisory power to review or set standards for the use of reinsurance,
- inadequate market conduct and complaint handling systems, and
- weak rules for use of derivatives and related disclosures.
Some of these FSAP/ROSCs were under the 1997 ICP, with the remainder under the 2000 ICP. These concerns therefore were taken into account in the revised 2003 ICP.
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