Panama- Assessing Compliance with ICP 17

Insurance Supervision Department – Self Assessment of Compliance with ICP 17

Panama - 24 May 2016

The case: key information2

The case: questions6

ICP 17Page 1 of 14

Panama- Assessing Compliance with ICP 17

Case Study: Self-Assessment of Compliance with ICP 17

The case: key information

You work for the Insurance Supervision Department in a small jurisdiction.

You have been asked to carry out an assessment of compliance with the Insurance Core Principles, as part of preparation for a World Bank/IMF Financial Sector Assessment Programme (FSAP). You are working as a part of team that has been assigned a set of standards, not the entire ICP.

The ISD

The Insurance Supervision Department (ISD) is part of a larger government department, the Department of Business and Development (DBD), which is part of the portfolio of the Minister of Finance.

The ISD was created five years ago so that staff could dedicate their time to insurance supervision.

The Insurance Supervision department is funded by the government through taxation; this is its only source of income. It does not charge fees to insurance companies for the authorisation and supervision activities it carries out, nor does it impose fines (penalties) on insurance companies as part of its enforcement activities.

The Minister of Finance is accountable for the activities of the ISD, but largely allows the ISD to operate independently.

The insurance industry

The insurance industry is active, and growing, but not large by global standards. Currently there are sixteen firms registered to carry on insurance business, as follows:

  • Four life insurers
  • Seven non-life insurers
  • Three composite insurers, undertaking both life and non-life business
  • Two reinsurers.

Several of these firms are subsidiaries or branches of insurers with their head offices in other countries.

The Insurance Industry has an active trade association and is vocal about the steps that can be taken to improve supervision and regulation.

The ISD’s regulatory framework

The ISD administers legislation made by parliament. It does not itself issue rules with the status of law. If the ISD wants to change the legislation, it would ask the Ministry of Finance to change the Insurance Laws, which would need the approval of government and parliament. This process usually takes about a year.

The ISD has a number of powers set out in the legislation, including the powers to:

  • authorise firms to carry on insurance business, based on specified criteria;
  • impose requirements on authorised firms, including requirements:
  • relating to solvency (and other prudential matters);
  • on the conduct of their insurance business;
  • on reporting to the ISD;
  • monitor whether the requirements it has imposed on authorised firms are met on an on-going basis, including requiring information from authorised firms;
  • issue Supervision Guidelines, in which the ISD can set out how it expects firms to operate. Supervisory Guidelines are not law. In previous instances, the courts have determined that the guidelines are not enforceable;
  • issue Individual Instructions to firms, which cannot be made public. Individual Instructions require the approval of the minister of finance to have the force of law and to be enforceable. Individual Instructions can be used when insurers do not respond to requests from the ISD.

Capital Requirements

The ISD’s solvency and capital Adequacy framework was developed in the 1980’s, with multiple subsequent revisions. However, a number of staff involved in the drafting of the guideline have left the ISD. Some of the key assumptions related to the capital requirements are unclear, and as such, the certainty that an insurers obligation to policyholders will continue to be met as they fall due is not clear.

A major initiative is underway within the authority to modernise the requirements, but the new guideline has not been finalised, pending passage of a series of amendments to the Insurance Law. In preparing the new legislation and supporting guidelines, the ISD held targeted consultations with the public and industry based on a relevance test (ie, it was relevant to industry and / or the public).

Currently, the Insurance Laws set out a number of basic requirements related to capital adequacy and solvency requirements. The requirements within the legislation are very general. To provide more guidance to its insurers, the ISD publishes supervisory guidelines which further elaborate on their expectation. However the guidelines have not been updated for five years.

The Insurance Law states explicitly that an insurer must hold sufficient levels of capital to meet their obligations. The supervisory guideline then elaborates on the explicit requirements for determining the sufficiency of capital requirements, reporting on their compliance with the guideline (annually) and that the capital requirements should be met at all times.

Other important features of the guideline include:

  1. The Prescribed Capital Requirement is set to ensure that the (re)insurance company will be able to meet its obligations over the next 12 months with a probability of at least 99.5%.
  2. There is no explicit minimum capital requirements in relation to the PCR. All general insurers must hold at least an amount of capital equal to $3 000 000 (USD) and life insurers $5 000 000 (USD). If an insurer falls below that level their license can be revoked.
  3. Internal models are not permitted. A standardised approach for determining capital based on a set formula that takes into account the interdependence between assets, liabilities and capital resources. Material risks that are common for the particular insurance type are included in the calculation, but these have not been reviewed since the guideline was last updated and other risks unrelated to the type of business are not included.
  4. The guideline requires that insurers report using valuation standards that have been established by the actuarial association and the accounting board within your jurisdiction.
  5. There is no explicit ‘ladder of intervention’ if jurisdictions are not meeting the PCR, aside from the revocation of the license if they fall below the quantitative requirements.
  6. Solvency control levels do not exist at the group level, and those at the legal entity level do not take account of an insurer’s membership of a group.
  7. Variation to the requirements can be approved by the supervisor. However it is entirely at the discretion of the supervisor.
  8. The criteria for assessing the quality and suitability of capital resources is based on the ability of the resources to absorb losses on a going concern basis.

How the ISD supervises insurance firms

In addition to publicly-available information, the ISD receives regular information from insurers on their business, including on their financial condition and on volumes of business. The ISD also receives, and reviews:

  • actuarial reports on relevant aspects of the insurer’s business;
  • internal audit reports;
  • selected compliance reports;
  • proposals for new products, new lines of business, or significant changes in strategy.

The ISD’s analysis of this information helps it to decide which firms it is going to carry out on-site inspections for. There are two types of on-site inspections:

  • vertical reviews, looking at a particular firm (e.g., looking at a firm’s processes for financial reporting, or at the effectiveness of a firm’s internal audit function);
  • horizontal reviews, looking at a particular aspect of business across a number of firms (e.g., a review looking at reserving practices for particular types of business across related firms).

In both cases, the ISD must have evidence of a problem, or of non-compliance, before deciding to carry out an inspection at an insurer.

Depending on the outcome of the ISD’s supervision, further action may be taken against a firm. As noted above, this can extend to issuing Individual Instructions to an insurer, to force them to do something (or to stop doing something).

The ISD can also take enforcement action against an insurer. Although it cannot impose financial penalties, it has a range of enforcement powers, ranging from requiring training for board members / senior management / key persons in control functions to revoking an insurer’s license if it is found to have contravened the legal requirements.The ISD will also tell firms, individually or collectively, as appropriate, whether it feels its expectations are being met in the way firms are running their businesses.

To take an enforcement step, the ISD must get approval from the Minister of Finance.

Over the past three years, the ISD has taken enforcement actions on a few occasions. Sometimes these enforcement actions have taken significant time, given the difficulty of capturing the attention of the Minister.

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ICP 17Page 1 of 14

Panama- Assessing Compliance with ICP 17

Case Study 2: Self-Assessment of Compliance

The case: questions

There are three parts to this exercise:

  1. Respond to the questions by selecting the most appropriate response for the ISD
  2. Based on the responses make a judgment of the ISDs observance level
  3. Identify steps that the ISD could take to improve its regulatory framework and supervision practices. For this section, please draw on your own knowledge to supplement the material in the case study.

Questions

ICP 17The supervisor establishes capital adequacy requirements for solvency purposes so that insurers can absorb significant unforeseen losses and to provide for degrees of supervisory intervention.

  1. How have thecapital adequacy requirements that are applicable to insurersfor solvency purposes been established in YOUR JURISDICTION?
  2. The requirements have been explicitly established by legislation.
  3. The requirements have been broadly established by legislation and further elaborated through supervisory guidelines.
  4. The requirements have been established through supervisory guidelines.
  5. There are no specific requirements, but YOUR AUTHORITY advises insurers when it has concerns regarding the adequacy of their capital.
  6. There are no such requirements in YOUR JURISDICTION.

17.1The supervisor requires that a total balance sheet approach is used in the assessment of solvency to recognise the interdependence between assets, liabilities, regulatory capital requirements and capital resources and to require that risks are appropriately recognised.

  1. To what extent do the requirements in YOUR JURISDICTION reflect a total balance sheet approach to the assessment of solvency?

1. Fully reflected in the requirements / 2.Largely reflected in the requirements / 3. Partly reflected in the requirements / 4. Not reflected in the requirements
a. Interdependence between assets, liabilities, regulatory capital requirements and capital resources
b. Appropriate recognition of all relevant risks

17.2The supervisor establishes regulatory capital requirements at a sufficient level so that, in adversity, an insurer’s obligations to policyholders will continue to be met as they fall due and requires that insurers maintain capital resources to meet the regulatory capital requirements.

  1. To what extent is the level of the regulatory capital requirements in YOUR JURISDICTION sufficient so that, in adversity, an insurer’s obligations to policyholders will continue to be met as they fall due?
  2. The regulatory capital requirements in its entirety have been explicitly calibrated to provide a high level of certainty that an insurer’s obligations to policyholders will continue to be met as they fall due.
  3. The regulatory capital requirements, for most of its constituents, have been explicitly calibrated to provide a high level of certainty that an insurer’s obligations to policyholders will continue to be met as they fall due, although certain elements are determined with an implicit level of prudence.
  4. The regulatory capital requirements, for most of its constituents, have been determined with an implicit level of prudence that aims to provide a high level of certainty that an insurer’s obligations to policyholders will continue to be met as they fall due, although certain elements have been explicitly calibrated to a specified level.
  5. The regulatory capital requirements in its entirety have been determined with an implicit level of prudence that aims to provide a high level of certainty that an insurer’s obligations to policyholders will continue to be met as they fall due.
  6. The regulatory capital requirements do not provide a sufficiently high level of certainty that an insurer’s obligations to policyholders will continue to be met as they fall due.
  7. The regulatory capital requirements have been determined with the objective of ensuring that an insurer’s obligations to policyholders will continue to be met as they fall due but the level of certainty is unknown.
  1. To what extent are insurers in YOUR JURISDICTION required to maintain capital resources to meet the regulatory capital requirements?
  2. Insurers are required to maintain capital resources which, at all times, are adequate to meet the regulatory capital requirements. They are required to report on their compliance more frequently than annually.
  3. Insurers are required to maintain capital resources which, at all times, are adequate to meet the regulatory capital requirements. They are required to report on their compliance annually.
  4. Insurers are required to maintain capital resources which, at the end of the financial year, are adequate to meet the regulatory capital requirements. They are required to report on their compliance annually.
  5. Insurers are required to maintain capital resources which, at the end of the financial year, are adequate to meet the regulatory capital requirements. They are required to report on their compliance less frequently than annually.

17.3The regulatory capital requirements include solvency control levels which trigger different degrees of intervention by the supervisor with an appropriate degree of urgency and requires coherence between the solvency control levels established and the associated corrective action that may be at the disposal of the insurer and/or the supervisor.

  1. To what extent do the regulatory capital requirements in YOUR JURISDICTION include solvency control levels which trigger different degrees of intervention by the supervisor?
  2. Multiple solvency control levels have been established and the required or typical corrective action associated with each solvency control level has been clearly identified.
  3. Multiple solvency control levels have been established and the corrective action associated with each solvency control level has been identified in general terms.
  4. Multiple solvency control levels have been established, but the corrective actions associated with one or more of the solvency control levels are unclear.
  5. A single solvency control level has been established and the required or typical corrective action associated with it has been clearly identified.
  6. A single solvency control level has been established and the corrective action associated with it has been identified in general terms.
  7. A single solvency control level has been established, but the corrective action associated with it is unclear.
  8. No solvency control level has been established.

17.4In the context of insurance legal entity capital adequacy assessment, the regulatory capital requirements establish: a solvency control level above which the supervisor does not intervene on capital adequacy grounds. This is referred to as the Prescribed Capital Requirement (PCR). The PCR is defined such that assets will exceed technical provisions and other liabilities with a specified level of safety over a defined time horizon; a solvency control level at which, if breached, the supervisor would invoke its strongest actions, in the absence of appropriate corrective action by the insurance legal entity. This is referred to as the Minimum Capital Requirement (MCR). The MCR is subject to a minimum bound below which no insurer is regarded to be viable to operate effectively.

  1. A solvency control level above which the supervisor does not intervene on capital adequacy grounds is referred to in the ICPs as the Prescribed Capital Requirement (PCR). (The PCR is not the solvency control level at which, if breached, the supervisor would invoke its strongest actions in the absence of appropriate corrective action by the insurance legal entity, which is referred to in the ICPs as the Minimum Capital Requirement (MCR).) Do the regulatory capital requirements in YOUR JURISDICTION include a PCR for insurers, in the context of insurance legal entity capital adequacy assessment?
  2. The requirements explicitly include a PCR.
  3. A PCR exists, but is established by YOUR AUTHORITY individually for each insurer and is communicated only to the insurer.
  4. A PCR exists, but primarily as internal guidance for YOUR AUTHORITY. It is not necessarily communicated to the insurer.
  5. No PCR exists.
  1. To what extent is the PCR defined such that assets will exceed technical provisions and other liabilities with a specified level of safety over a defined time horizon?
  2. The PCR is defined such that assets will exceed technical provisions and other liabilities with a specified level of safety over a defined time horizon.
  3. The PCR is intended to provide a high but unspecified level of safety over a defined time horizon.
  4. The PCR is intended to provide a high but unspecified level of safety over an undefined time horizon.
  5. This question is not applicable, because no PCR exists.
  1. A solvency control level at which, if breached, the supervisor would invoke its strongest actions in the absence of appropriate corrective action by the insurance legal entity, is referred to in the ICPs as the Minimum Capital Requirement (MCR). Do the regulatory capital requirements in YOUR JURISDICTION include an MCR for insurers, in the context of insurance legal entity capital adequacy assessment?
  2. The requirements explicitly include an MCR.
  3. An MCR exists, but is established by YOUR AUTHORITY individually for each insurer and is communicated only to the insurer.
  4. An MCR exists, but primarily as internal guidance for YOUR AUTHORITY. It is not necessarily communicated to the insurer.
  5. No MCR exists.
  1. How does the level of the MCR compare to the level below which no insurer would be regarded by YOUR AUTHORITY as being viable to operate effectively?
  2. The MCR is higher than the level below which no insurer would be regarded by YOUR AUTHORITY as being viable to operate effectively.
  3. The MCR represents the level below which no insurer would be regarded by YOUR AUTHORITY as being viable to operate effectively.
  4. The MCR is lower than the level below which no insurer would be regarded by YOUR AUTHORITY as being viable to operate effectively.
  5. This question is not applicable, because no MCR exists.

17.5In the context of group-wide capital adequacy assessment, the regulatory capital requirements establish solvency control levels that are appropriate in the context of the approach to group-wide capital adequacy that is applied.