Detailed Breakdown of Regulatory Framework - IAIS Standards and SUGESE

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In October of 2010, Fijatevos.com attended a conference sponsored by the SUGESE over the status of the insurance market and its regulation. Following is an outline of what the agency will develop as a regulatory framework over the next year or two.

The SUGESE's director of supervisory planning, Celia Gonzalez outlined the 28 Core Principles of the IAIS which are divided into 7 groups. These principles are based on globally accepted practices for the regulation and supervision of the insurance sector. They are applied to insurers and re-insurers, but not normally to intermediaries except in specified cases. The principles provide a base for analyzing the strength of the legislation, and the systems and procedures used in regulating the industry in a jurisdiction.

Key Concept: While insurance companies may complain about certain regulations or requirements, adhering to international standards and conventions allows SUGESE to stand its ground regarding its requirements. Cooperation with regulatory agencies in more mature markets is also an important facet.

At the time of this writing, much of the regulatory framework is in place, but the many of the specific procedures and mechanisms are in an implementation phase. In other words, the SUGESE has a plan of action, but it is in the process of execution. Taking as a base 2009, the SUGESE estimates that 42% of the IAIS standard are in place, with a goal of having 75% compliance during the 2011-2014 period. In some cases the market must mature before certain principles come into play. The SUGESE representative presented a chart which outlined which principles would be monitored and in what time frame.

The following is a summary of the 7 groups and the 28 core principals:

Conditions in the Marketplace

1. Conditions of the market as a whole, are they favorable to regulation? These may be factors outside the control of the regulatory body. Insurance supervision relies upon a policy, institutional and legal framework for financial sector supervision a well developed and effective financial market infrastructure efficient financial markets. In Costa Rica, for example, an unfavorable condition is the lack of of a developed securities marketplace, where it would be profitable for the insurance companies to invest the money earned from premiums. Another weakness is the slow judicial system, where cases take a long time to be resolved.

The Regulatory System

1. Objectives of the Supervision – The SUGESE has defined 4 primary objectives in the newly opened market. The inclusion of new companies and policies, regulation of the sector, definition of the supervisory model, and the diffusion of information. The IAIS states that the key objectives of the supervision promote the maintenance of efficient, fair, safe, and stable insurance markets, for the benefit of the policyholders.
2. The Superintendency – The SUGESE must be fully empowered to achieve its objectives. The principle therefore covers the following essential elements relating to a supervisory authority: its legal b asis, independence and accountability, powers, financial resources, human resources, legal protection and confidentiality.
3. Process of Supervision - The public’s knowledge of and appropriate consultation on the supervisory process is important to the effectiveness and credibility of the supervisor. Accordingly, the supervisor should make available to the public written information about its organization and activities.
4. Cooperation in the Supervision and Exchange of Information – Efficient and timely exchange of information among supervisory bodies, both within the insurance sector and across the financial services sector, is critical to the effective supervision particularly in the case of internationally active insurers, insurance groups and financial conglomerates. This is also essential in the context of the effective supervision of the financial system as a whole.

The Supervised Entities

1. Licensing – An insurer must be licensed before it can operate within a jurisdiction. The requirements for licensing must be clear, objective and public. In the case of Costa Rica a number of requirements have been detailed, these range from the operating capital the insurer must have available, down to the type of office space and installations they must have.
2. Suitability of persons – An important element of the supervision of insurers is the initial and on-going assessment of the fitness and propriety of an insurer’s significant owners and key functionaries such as board members, senior management, auditors and actuaries. In the case of significant owners, fit and proper requirements relate to the persons and their financial soundness. A significant owner is defined as a person (legal or natural) that directly or indirectly, alone or with an associate, exercises control over the insurer The main responsibility for assessment of the fitness and propriety of key functionaries lies with the insurers themselves.
3. Changes in Control and Portfolio Transfers – The supervisory authority approves or rejects proposals to acquire significant ownership or any other interest in an insurer that results in that person, directly or indirectly, alone or with an associate, exercising control over the insurer. The supervisory authority approves the portfolio transfer or merger of insurance business.
4. Corporate Governance – Insurers must be managed prudently. Corporate governance refers to the manner in which boards of directors and senior management oversee the insurers’ business. It encompasses the means by which members of the board and senior management are held accountable and responsible for their actions. Corporate governance includes corporate discipline, transparency, independence, accountability, responsibility, fairness and social responsibility. Timely and accurate disclosure on all material matters regarding the insurer, including the financial situation, performance, ownership and governance arrangements, is part of a corporate governance framework. Corporate governance also includes compliance with legal and regulatory requirements.
5. Internal Control – The supervisory authority requires insurers to have in place internal controls that are adequate for the nature and scale of the business. The oversight and reporting systems allow the board and management to monitor and control the operations.

Continuing Supervision

1. Market Analysis – Making use of all available sources, the supervisory authority monitors and analyses all factors that may have an impact on insurers and insurance markets. It draws conclusions and takes action as appropriate.
2. Reporting to supervisors and off-site monitoring – The supervisory authority receives necessary information to conduct effective off-site monitoring and to evaluate the condition of each insurer as well as the insurance market.
3. On-site inspection – The supervisory authority carries out on-site inspections to examine the business of an insurer and its compliance with legislation and supervisory requirements.
4. Preventive and corrective measures – The supervisory authority takes preventive and corrective measures that are timely, suitable and necessary to achieve the objectives of insurance supervision.
5. Enforcement or sanctions – the supervisory authority enforces corrective action and, where needed, imposes sanctions based on clear and objective criteria that are publicly disclosed.
6. Winding-up and exit from the market – The legal and regulatory framework defines a range of options for the orderly exit of insurers from the marketplace. It defines insolvency and establishes the criteria and procedure for dealing with insolvency. In the event of winding-up proceedings, the legal framework gives priority to the protection of policyholders.
7. Group-wide supervision – The supervisory authority supervises its insurers on a solo and on a group-wide basis. Insurers who are part of a wider insurance group or conglomerate, whether domestic or international, should not be limited to the solo supervision of that insurer. The fact that such an insurer is part of a group generally alters, often considerably, its risk profile, its financial position, the role of its management, and its business strategy. As a consequence, there should be legal provisions and effective supervision that adequately meet the changed profile of the insurer, ensuring adequate group wide assessment and supervisory action as appropriate.

Prudential Requirements

1. Risk Assessment and Management – An insurer should identify, understand, and manage the significant risks that it faces. Effective and prudent risk management systems appropriate to the complexity, size and nature of the insurer’s business should identify and measure against risk tolerance limits the risk exposure of the insurer on an on-going basis in order to indicate potential risks as early as possible. This may include looking at risks by territory or by line of business.
2. Insurance activity – Since insurance is a risk taking activity, the supervisory authority requires insurers to evaluate and manage the risks that they underwrite, in particular through reinsurance, and to have the tools to establish an adequate level of premiums. . There is a need to ensure that embedded options have been identified, properly priced and an appropriate reserve has been established.
3. Liabilities – The supervisory authority requires insurers to comply with standards for establishing adequate technical provisions and other liabilities, and making allowance for reinsurance recoverables. The supervisory authority has both the authority and the ability to assess the adequacy of the technical provisions and to require that these provisions be increased, if necessary.
4. Investments – The supervisory authority requires insurers to comply with standards on investment activities. These standards include requirements on investment policy, asset mix, valuation, diversification, asset-liability matching, and risk management.
5. Derivatives and similar commitments – The supervisory authority requires insurers to comply with standards on the use of derivatives and similar commitments. These standards address restrictions in their use and disclosure requirements, as well as internal controls and monitoring of the related positions.
6. Capital adequacy and solvency – The supervisory authority requires insurers to comply with the prescribed solvency regime. This regime includes capital adequacy requirements and requires suitable forms of capital that enable the insurer to absorb significant unforeseen losses.

Markets and Consumers

1. Intermediaries – The supervisory authority sets requirements, directly or through the supervision of insurers, for the conduct of intermediaries.
2. Consumer protection – The supervisory authority sets minimum requirements for insurers and intermediaries in dealing with consumers in its jurisdiction, including foreign insurers selling products on a cross-border basis. The requirements include provision of timely, complete and relevant information to consumers both before a contract is entered into through to the point at which all obligations under a contract have been satisfied.
3. Information, disclosure & transparency towards the market – The supervisory authority requires insurers to disclose relevant information on a timely basis in order to give stakeholders a clear view of their business activities and financial position and to facilitate the understanding of the risks to which they are exposed.
4. Fraud – The supervisory authority requires that insurers and intermediaries take the necessary measures to prevent, detect and remedy insurance fraud.