Arup Chatterjee

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IAIS Current Topics in Insurance
CAIR/CARTAC/World Bank Workshop and Conference
for Caribbean Insurance Supervisors -
Caribbean Insurance Supervisors
Initiatives Grenada, 18 June 2009

• Arup Chatterjee
• Principal Administrator
• Email Arup.Chatterjee_at_bis.org
• Website www.iaisweb.org

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Outline

• IAIS Activities Standard setting, Assessment and
  Standard implementation
• Current topics

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1. IAIS Activities - Introduction

• Founded in 1994
• Members from more than 190 jurisdictions in over
  140 countries

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1. IAIS Activities - Introduction
IAIS Members of Caribbean Association of
Insurance Regulators
Anguilla
Barbados
Belize
British Virgin Islands
Jamaica
Netherlands Antilles
St. Kitts Nevis
Suriname
Trinidad and Tobago
Turks and Caicos
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1. IAIS Activities - Introduction
Global financial stability
Efficient, fair, safe and stable insurance markets
Policyholder protection
Well-regulated insurance markets
Improved supervision
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1. IAIS Activities - Introduction
Identify key supervisory issues
Conduct assessment
Draw up action plan
Implement action plan
Review implementation
Set global standards
Identify weaknesses
Assessment
Standards implementation
Standards development

• Self-assessment
• Cooperation with FSAP

• Core Principles
• Standards (solvency, accounting, reinsurance,
  and others)

• Regional seminars
• Development of tools
• Technical Assistance
• Database and analysis

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1. IAIS Activities - Standard Setting
Supervisory papers
Supporting papers
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1. IAIS Activities - Standard Setting

• Benchmark for insurance supervisors
• Used to establish new regimes
• Used to improve existing regimes
• Used in evaluation of supervisory regimes FSAPs
• Applies to all insurers and reinsurers but not
  intermediaries, unless indicated

Insurance Core Principles and Methodology
Principles
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1. IAIS Activities - Standard Setting
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1. IAIS Activities - Assessment
Identify key supervisory issues
Conduct assessment
Draw up action plan
Implement action plan
Review implementation
Set global standards
Identify weaknesses
Assessment
Standards implementation
Standards development

• Self-assessment
• Cooperation with FSAP

• Core Principles
• Standards (solvency, accounting, reinsurance,
  and others)

• Regional seminars
• Development of tools
• Technical Assistance
• Database and analysis

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1. IAIS Activities Assessment (Self-assessment)

• What are the benefits of ICP assessments?
• Identification of extent and nature of weaknesses
• Recommendation of possible remedies
• Preparation for FSAPs
• The implementation of the ICPs should take into
  account
• Domestic context
• Industry
• Structure and state of financial system
• Overall macroeconomic conditions

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1. IAIS Activities - Assessment (FSAP)

• FSAP (Financial Sector Assessment Program) is a
  joint IMF and World Bank effort introduced in May
  1999. So far, 75 countries have completed FSAP.
• To achieve an integrated analysis of stability
  and development issues using a wide range of
  analytical tools
• Analysis of financial sector structure
• Assessment of observance and implementation of
• international standards (for insurance
  supervision - ICPs)
• Analysis of country-specific stability issues
• Reports on Observance of Standards and Codes
• Financial System Stability Assessments

Background
Objective
Assessment Tools
Outputs
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1. IAIS Activities Assessment (Self-assessment)

• Assessment methodology

• Essential criteria
• Elements intrinsic to the implementation of ICPs
• Assessment criteria

• Advanced criteria
• Components which improve essential criteria and
  enhance supervisory regime
• Not used in assessing ICPs observance
• BUT may be used to comment or make
  recommendations on supervisory framework

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1. IAIS Activities Assessment (Self-assessment)
2nd self-assessment in 2004 identified areas for
further improvement
Report on ICPs Self-Assessment Exercise
2004/2005
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1. IAIS Activities Standard Implementation
Identify key supervisory issues
Conduct assessment
Draw up action plan
Implement action plan
Review implementation
Set global standards
Identify weaknesses
Assessment
Standards implementation
Standards development

• Self-assessment
• Cooperation with FSAP

• Core Principles
• Standards (solvency, accounting, reinsurance,
  and others)

• Regional seminars
• Development of tools
• Technical Assistance
• Database and analysis

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1. IAIS Activities Standard Implementation
Varying degree of effectiveness/ directness
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1. IAIS Activities Standard Implementation
450 500 supervisors globally
10 15 seminars annually
Regional seminar Global seminar
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1. IAIS Activities Standard Implementation

• Insurance Core Curriculum
• Comprehensive learning tool for insurance
  supervisors
• Developed jointly with World Bank
• Consisting of 36 basic-level modules covering all
  28 Insurance Core Principles and 5 advanced-level
  case studies
• Designed for self-paced learning
• Written and reviewed by well-known insurance
  experts and insurance supervisors
• Available to IAIS members on IAIS website

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1. IAIS Activities Standard Implementation

• IAIS Online The Proposed Plan

• Web-based learning tutorial
• Accessible at anytime from anywhere
• Interactive Core Curriculum advanced case
  studies
• Mix of text, video, audio and on-line discussion
• Translations
• Accreditation

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1. IAIS Activities Standard Implementation
Supervisory Cooperation and Information Exchange

• Growing cross-border activities and transactions
  complex corporate structures
• IAISs response is the Multilateral Memorandum of
  Understanding (IAIS MMOU)
• Adopted in 2007 optional for members to join
• Creates a platform for cooperation between all
  insurance regulators to exchange information

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Outline

• IAIS Activities Standard setting, Assessment and
  Standard implementation
• Current topics

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2. Current topics
IAIS Framework for Insurance Supervision

(October 2005)

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2. Current topics
International Solvency Requirements (ISRs)
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2. Current topics
Standard Guidance on the Structure of
Regulatory Capital Requirements (October 2008)

• Total balance sheet approach
• Recognise interdependence between assets,
  liabilities, regulatory capital requirements and
  capital resources
• Establishment of a range of solvency control
  levels
• with appropriate supervisory interventions
• Allowance of a range of approaches
• standardised approaches and more advanced
  approaches, such as internal models
• Determination of prescribed levels of RCRs
• MCRs and PCRs
• relationships between different levels
• Importance of transparency

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2. Current topics
Total balance sheet approach to recognise
interdependencies

• Both technical provisions and capital
  requirements
• should be covered by adequate and appropriate
  assets.
• The available capital should exceed the required
  capital
• for solvency purposes.

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2. Current topics

• Solvency Control Levels and Regulatory Capital
  Requirements

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2. Current topics
Progressive intervention levels to ensure timely
corrective measures an example

• Prescribed capital requirement (PCR) level
• Supervisory intervention not required

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160

• Submission of business plan to improve capital
  buffers
• Increased on-site supervision
• Additional stress and scenario testing

Capital Adequacy Ratio Capital Available
Capital Required
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• Limit shareholder dividends
• Restrict new business acquisition
• Delay approval of new products

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• Minimum capital requirement (MCR) level
• Winding-up of operation

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2. Current topics
Standard Guidance on Enterprise Risk Management
for Capital Adequacy and Solvency Purposes
(October 2008)

• Establishment of an Enterprise Risk Management
  (ERM) framework
• as part of the overall governance structure
• embedded in the ongoing operational processes
• Role of Own Risk and Solvency Assessments (ORSAs)
• Importance of the ERM and ORSA in the supervisory
  process

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2. Current topics
Standard Guidance on the Use of Internal Models
for Regulatory Capital Purposes (October 2008)

• What are internal models?
• A risk management system developed by an insurer
  to analyse and quantify its risk position and to
  determine the commensurate economic capital
• The internal model approach is suitable only if
  certain preconditions are met
• Level of sophistication of insurers / markets
• Corporate governance structures
• Competent / accountable insurance professionals
  and management
• Supervisory resources and expertise
• Standards and guidance paper applies only in
  jurisdictions where internal models are
  recognised for regulatory capital purposes

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Recent Principles and Guidance Paper provide
basis for group-wide supervision framework
2. Current topics
ICP 17 The supervisory authority supervises its
insurers on a solo and group-wide basis

• Group-wide assessment
• coordinated by group-wide supervisor
• facilitated by MMoU and supervisory colleges

Need adequate supervisory skills and
appropriate authority
Fitness propriety of Board and
senior management
Risk management and internal controls
Capital adequacy
Need provisions to enable cooperation and info
exchange
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2. Current topics

• The role of a group-wide supervisor
• Guidance on the role and responsibilities of a
  group-wide supervisor as one possible element of
  an approach to group-wide supervision
• Not intended to lessen the role of the solo
  supervisor or solo supervision
• Aim to streamline group-wide supervision and
  enhance cooperation between supervisors

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Work on group issues to follow suite of papers on
solo solvency assessment
2. Current topics
Oct 08
Mar 09
Oct 09

• Standard and guidance paper on enterprise risk
  management
• Standard and guidance paper on structure capital
  requirements
• Standard and guidance paper on internal models
• Principles of group-wide supervision
• Guidance paper on the role of group supervisor

• Issues paper on group solvency assessment

• Standard on valuation of assets liabilities
• Standard and guidance paper on capital resources
• Guidance paper on role of a supervisory college

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2. Current topics

• Regulation and supervision of captive insurers
• Provides guidance to insurance supervisors on the
  aspects of regulation and supervision that are
  specifically relevant to captive insurers or
  reinsurers.
• Assists supervisors to develop an appropriate
  supervisory approach to captives.
• Follows the IAIS Insurance Core Principles and
  highlights those matters specifically relevant to
  captive supervision.

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2. Current topics

• Mutual recognition of reinsurance supervision
• Provides guidance on cross-border recognition of
  reinsurance supervision, which strengthens trust
  and cooperation between supervisors
• Identifies criteria that supervisors should
  consider when making judgments on whether to
  recognise supervision of reinsurers by other
  jurisdictions
• Includes aspects to be evaluated in the course of
  creating any supervisory recognition arrangements

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2. Current topics

• Mutual recognition of reinsurance supervision
• Facilitate cross-border supply of reinsurance by
  developing a framework for efficient and
  effective international supervision
• Allow a supervisor to recognise the quality of
  the supervision exercised by another jurisdiction
• Results in reducing unnecessary requirements

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2. Current topics

• Draft Issues paper on corporate governance
• An insurer corporate governance focus
• How an insurer governs itself can affect its
  decisions, practices and risk profile?
• Relevant issues
• Whether governance is sound and appropriate for
  the nature, scale and complexity of the business
  and its overall risk profile and
• To assess if it is being adequately implemented

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2. Current topics

• Foundations of corporate governance
• Governance structures
• The functions of the board
• Control functions (including risk management,
  compliance and reporting/whistleblowing)
• The actuary
• The external auditor
• Disclosure and transparency
• Relationship with stakeholders
• Interaction with the supervisor

• Lessons learned from the crisis
• Board members need more in depth knowledge,
  clearer responsibilities and closer involvement
  in the oversight of the insurer and in setting
  its risk appetite
• The position of board members needs to be further
  professionalised
• The issue of remuneration needs to be
  reconsidered
• The role of control functions needs to be
  enhanced
• Investment or other decisions or risk management
  should not be based solely on third party
  assessment, such as credit ratings

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2. Current topics

• Market Conduct
• Building on existing IAIS work on market conduct,
  including the Insurance Core Principles and IAIS
  Framework for Insurance Supervision
• Analyse market conduct of insurers and
  intermediaries towards existing and potential
  policyholders and beneficiaries and propose the
  development of supervisory papers and supporting
  papers
• Disclosure and transparency of relevant
  information to policyholders
• Consumer protection, such as dealing with
  customers in the selling and handling of
  insurance policies and claims, handling of
  consumer complaints, or other areas such as
  insurance supervisors role in consumer
  empowerment and enhancing consumer capability

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2. Current topics

• New focus will explore the supervision of
  internationally active insurance groups
• Explore group solvency regime based on the
  current work of the IAIS on solo solvency
  requirements
• Consider the need for greater convergence and
  comparability of solvency standards on an
  international basis
• Recognise the importance of appropriate
  qualitative supervision - to supplement
  quantitative measures - and establishes a global
  framework for governance and risk management
• Analyse the practical aspects of regulatory
  reliance and assessment of supervisory regimes
  (equivalence/supervisory recognition)

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2. Current topics
IAIS actions to reinforce insurance regulation in
support of the G20 Declaration on strengthening
the financial system (IAIS press release on 7
April 2009)

• Enhancing group and cross sectoral supervision
  where the IAIS is charting a new focus on
  internationally active insurance groups
• Incorporating lessons drawn from the crisis in
  IAIS standards particularly in respect of
  solvency and investment, risk management,
  corporate governance and compensation
• Developing supervisory guidance on the use of
  supervisory colleges for insurance groups
  consistent with the FSB protocols
• Taking steps to expedite the operation of the
  IAIS MMOU for the exchange of information between
  insurance supervisors
• Facilitating the implementation of standards by
  providing supervisory assessment mechanisms and
  implementation programmes

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IAIS Current topics in insurance (Recap)

• IAIS Activities Standard setting, Assessment and
  Standard implementation
• Current topics

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International Association of Insurance
Supervisors (IAIS)

• Questions and Answers
• Arup. Chatterjee_at_bis.org