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Insurance Core Principles (ICPs)

Insurance Core Principles (ICP)

1. ICP 1 – Objectives, Powers and Responsibilities of the Supervisor: The authority (or authorities) responsible for insurance supervision and the objectives of insurance supervision are clearly defined.

2. ICP 2 – Supervisor: The supervisor, in the exercise of its functions and powers:

− is operationally independent, accountable and transparent

− protects confidential information

− has appropriate legal protection

− has adequate resources

− meets high professional standards

3. ICP 3 – Information Exchange and Confidentiality Requirements: The supervisor exchanges information with other relevant supervisors and authorities subject to confidentiality, purpose and use requirements.

4. ICP 4 – Licensing: A legal entity which intends to engage in insurance activities must be licensed before it can operate within a jurisdiction. The requirements and procedures for licensing must be clear, objective and public, and be consistently applied.

5. ICP 5 – Suitability of Persons: The supervisor requires Board Members, Senior Management, Key Persons in Control Functions and Significant Owners of an insurer to be and remain suitable to fulfil their respective roles.

6. ICP 6 – Changes in Control and Portfolio Transfers: Supervisory approval is required for proposals to acquire significant ownership or an interest in an insurer that results in that person (legal or natural), directly or indirectly, alone or with an associate, exercising control over the  insurer. The same applies to portfolio transfers or mergers of insurers.

7. ICP 7 – Corporate Governance: The supervisor requires insurers to establish and implement a corporate governance framework which provides for sound and prudent management and oversight of the insurer’s business and adequately recognises and protects the interests of policyholders.

8. ICP 8 – Risk Management and Internal Controls: The supervisor requires an insurer to have, as part of its overall corporate governance framework, effective systems of risk management and internal controls, including effective functions for risk management, compliance, actuarial matters and internal audit.

9. ICP 9 – Supervisory Review and Reporting: The supervisor takes a risk-based approach to supervision that uses both off-site monitoring and on-site inspections to examine the business of each insurer, evaluate its condition, risk profile and conduct, the quality and effectiveness of its corporate governance and its compliance with relevant legislation and supervisory requirements.

The supervisor obtains the necessary information to conduct effective supervision of insurers and evaluate the insurance market.

Insurance
[Post Image Courtesy of Andongob at FreeDigitalPhotos.net]

10. ICP 10 – Preventive and Corrective Measures: The supervisor takes preventive and corrective measures that are timely, suitable and necessary to achieve the objectives of insurance supervision.

11. ICP 11 – Enforcement: The supervisor enforces corrective action and, where needed, imposes sanctions based on clear and objective criteria that are publicly disclosed.

12. ICP 12 – Winding-up and Exit from the Market: The legislation defines a range of options for the exit of insurance legal entities from the market. It defines insolvency and establishes the criteria and procedure for dealing with insolvency of insurance legal entities. In the event of winding-up proceedings of insurance legal entities, the legal framework gives priority to the protection of policyholders and aims at minimising disruption to the timely provision of benefits to policyholders.

13. ICP 13 – Reinsurance and Other Forms of Risk Transfer: The supervisor sets standards for the use of reinsurance and other forms of risk transfer, ensuring that insurers adequately control and transparently report their risk transfer programmes. The supervisor takes into account the nature of reinsurance business when supervising reinsurers based in its jurisdiction.

14. ICP 14 – Valuation: The supervisor establishes requirements for the valuation of assets and liabilities for solvency purposes.

15. ICP 15 – Investment: The supervisor establishes requirements for solvency purposes on the investment activities of insurers in order to address the risks faced by insurers.

16. ICP 16 – Enterprise Risk Management for Solvency Purposes: The supervisor establishes enterprise risk management requirements for solvency purposes that require insurers to address all relevant and material risks.

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

18. ICP 18 – Intermediaries: The supervisor sets and enforces requirements for the conduct of insurance intermediaries, to ensure that they conduct business in a professional and transparent manner.

19. ICP 19 – Conduct of Business: The supervisor sets requirements for the conduct of the business of insurance to ensure customers are treated fairly, both before a contract is entered into and through to the point at which all obligations under a contract have been satisfied.

20. ICP 20 – Public Disclosure: The supervisor requires insurers to disclose relevant, comprehensive and adequate information on a timely basis in order to give policyholders and market participants a clear view of their business activities, performance and financial position. This is expected to enhance market discipline and understanding of the risks to which an insurer is exposed and the manner in which those risks are managed.

21. ICP 21 – Countering Fraud in Insurance: The supervisor requires that insurers and intermediaries take effective measures to deter, prevent, detect, report and remedy fraud in insurance.

22. ICP 22 – Anti-money Laundering and Combating the Financing of Terrorism (AML/CFT): The supervisor requires insurers and intermediaries to take effective measures to combat money laundering and the financing of terrorism. In addition, the supervisor takes effective measures to combat money laundering and the financing of terrorism.

23. ICP 23 – Group-wide Supervision: The supervisor supervises insurers on a legal entity and group-wide basis.

24. ICP 24 – Macroprudential Surveillance and Insurance Supervision: The supervisor identifies, monitors and analyses market and financial developments and other environmental factors that may impact insurers and insurance markets and uses this information in the supervision of individual insurers. Such tasks should, where appropriate, utilise information from, and insights gained by, other national authorities

25. ICP – 25 Supervisory Cooperation and Coordination: The supervisor cooperates and coordinates with other relevant supervisors and authorities subject to confidentiality requirements.

26. ICP 26 – Cross-border Cooperation and Coordination on Crisis Management: The supervisor cooperates and coordinates with other relevant supervisors and authorities such that a cross-border crisis involving a specific insurer can be managed effectively.

ICP1 - Objectives, Powers and Responsibilities of the Regulator

The authority responsible for insurance regulation and the objectives of insurance regulation are clearly defined in this principle. The main objective of supervision is to promote the maintenance of a fair, safe and stable insurance sector for the benefit and protection of policyholders. Where, in the fulfillment of its objectives, the supervisor identifies conflicts between legislation and supervisory objectives, the supervisor initiates or proposes correction in legislation. This principle is fundamental to any insurance regulatory regime. Without there being a regulatory authority vested with adequate statutory powers, it will be impossible to regulate and develop a stable insurance sector. In an insurance industry there are many players like the insurance companies, the intermediaries, the policyholders etc.

ICP 2 – Requirements as to Supervisor of the Insurance industry

• The supervisor, in the exercise of its functions and powers:

− is operationally independent, accountable and transparent

− protects confidential information

− has appropriate legal protection

− has adequate resources

− meets high professional standards

• Operational independence of a Regulator is very important to ensure that the Regulator performs its role without any bias or conflict. The internal governance procedures, including internal audit arrangements, must be in place to ensure this independence and ensure integrity of supervisory actions.

• Responsibility and independence go hand in hand. The Regulator is accountable if there is a deviation from the accepted course of action. Usually the Regulator is accountable to the Government or a Governmental body. A rationale for the decisions taken must be provided by the Regulator.

• The procedures for appointment or removal of the Head of the Regulator must be explicitly defined and members of the governing body of the insurers, if there is one. The reason for removal of a Regulator must be publicly announced.

• Another hall mark of operational independence is the absence of influence on the Regulator from any political, governmental or industry. Though operationally a Regulator might report to a Governmental body, it must be ensured that there is no interference from the bureaucrats within the Government or Politicians in the discharge of the Regulator’s duties. However, this does not mean that a Regulator’s acts should not be questioned. There must in fact be a health debate on the performance of the Regulator by the concerned Governmental agency and provide feedback to the Regulator.

• In order to ensure that the decisions taken by the Regulator are fair, there must be a process of appeal against the decisions made by the Regulator, either through a judicial process or a quasi judicial process. However, this must not undermine the role of a Regulator.

• The supervisor and its staff have the necessary legal protection against lawsuits for actions taken in good faith while discharging their duties.

• The supervisor and its staff act with integrity and observe the highest professional standards, including observing conflict of interest rules.

• Where the supervisor outsources supervisory functions to third parties, the supervisor sets expectations, assesses their competence and experience, monitors their performance, and ensures their independence from the insurer or any other related party.

ICP 3 – Information Exchange and Confidentiality Requirements

• The supervisor has the legal authority to exchange information with other relevant supervisors and authorities subject to confidentiality, purpose and use requirements.

− The information for the purpose of insurance legal entities or groups may include:

− Management and operational systems and controls operated by insurer;

− financial data relating to an insurer;

− individual holding positions or responsibility in insurers;

− regulatory investigations and reviews and restrictions imposed, if any;

− reporting information within groups;

− information on legal entity and group-wide business;

• It is essential to establish agreements and understandings between Regulators that can be used to institute a framework between supervisors to facilitate the efficient execution of requests for provision of information. Few important Agreements are MMOU (Multilateral Memorandum of Understanding), MoU(Bilateral Memorandum of Understanding). These Agreements are valuable where there is a need and set out the types of information that has to be exchanged. It is the responsibility of each supervisor within the Supervisory college to ensure the safe handling of confidential information.

Unintentional divulgence of information must be avoided and informations must be exchanged in a secure environment.

• The supervisor assesses each request for information from another supervisor on a case by case basis. Whilst requests for information should normally be made in writing, it is not necessary in an emergency situation. Timely and comprehensive manner of responding to requests from supervisors seeking information should be maintained.Before using the information for another purpose, including exchanging it with other parties, the supervisor obtains agreement of the originating supervisor.

ICP 4 – Licensing

• A legal entity which intends to engage in insurance activities must be licensed before it can operate within a jurisdiction. The requirements and procedures for licensing must be clear, objective and public, and be consistently applied.

• In India, a licensing is required for insurance companies and various intermediaries including Insurance agents, Insurance Brokers, Surveyors and Loss Assessors, Third Party Administrators etc.

• Licensing plays an important role in ensuring efficiency and stability in the insurance sector. Strict conditions governing the formal approval through licensing of insurers are necessary to protect consumers. The relevant licensing criteria should be applied to prospective entrants consistently to ensure a level playing field at the point of admission to the insurance sector. The licensing procedure is the first step towards achieving the objective of safeguarding interest of policy holders. Proper licensing procedure as per international recognised standards strengthens the confidence in the regulatory systems both in domestic as well as international level.

• To protect the interests of policyholders, a jurisdiction controls through licensing which entities are allowed to conduct insurance activities within its jurisdiction.

• In India, for example, insurance companies require a Certificate of registration from IRDA for doing insurance business under Section 3 of the Insurance Act, 1938. Also an Insurance Agent as well as Intermediaries like Insurance Brokers requires a license to conduct their business.

Methods of Licensing

• Foreign insurers may be allowed to conduct insurance activities within the jurisdiction by way of a local branch or subsidiary or on a cross border provision of services basis only.

• In some regions, a number of jurisdictions have agreed to a system of passporting as a manner of acknowledging each other’s licenses. This provides the opportunity for insurers established in one of the jurisdictions to open branches and provide insurance services across borders on the basis of their home jurisdiction authorisation to conduct insurance activities, i.e. the passport.

• In some jurisdictions, licensing of a foreign insurer that conducts cross border business without a physical presence takes the form of an authorisation to conduct insurance activities.

• The method of licensing may differ in various jurisdictions in order to take into account the nature, scale and complexity of an entity conducting insurance activities. Some jurisdictions may allow registration, which is a less formal process, for non-significant entities (e.g. limited geographic scope, limited size, and limited lines of business) for the purposes of licensing. In such situations, the legislation should state clearly the applicability, requirements and process for registration.

The Insurance legislation:

• includes a definition of regulated insurance activities which are subject to licensing;

• prohibits unauthorised insurance activities;

• defines the permissible legal forms of domestic insurers;

• allocates the responsibility for issuing licenses; and

• sets out the procedure and form of establishment by which foreign insurers are allowed to conduct insurance activities within the jurisdiction.

Licensing requirements and procedures are clear, objective and public, and are consistently applied, requiring:

• the applicant’s Board Members, Senior Management, both individually and

• collectively Significant Owners and Key Persons in Control Functions to be suitable;

• the applicant to satisfy capital requirements;

• the applicant to have a sound corporate or group structure and governance framework

• that does not hinder effective supervision; and

• the applicant to have sound business and financial plans.

Licensing requirements should be publicly available and easily accessible. The rules for licensing should be neutral in application and administered in a fair and equitable manner. Application procedures should be simple and understandable.

Business plans should be projected for a minimum of three years by the applicant and reflect the business lines and risk profile, giving details of projected setting-up costs, capital requirements, projected development by business line, solvency margins and reinsurance arrangements, information on the product to be offered distribution methods and channels, information regarding primary insurance and reinsurance, information on risk management systems, outsourcing, internal control systems, information technology systems, policies and procedures.

If an insurer wishes to be licensed to underwrite life insurance business and non-life insurance business, it should demonstrate to the satisfaction of the supervisor that its risk management processes are adequate to manage the risks separately for each business stream on both a going-concern and a winding up basis.

Where the applicant is part of a group, the applicant should submit its group reporting structure, indicating all of the material entities within the group (including both insurers and other entities, including non-regulated ones). Information on the type of related party transactions and/or relationships between all material entities within the group should also be provided.

Reference to Home country Supervisor

Where an insurer is seeking to establish a branch or subsidiary in a foreign jurisdiction, the host supervisor concerned consults the home supervisor as appropriate before the issuance of a licence, ICPs and standards should be taken into account. The host supervisor should inform the home supervisor of any restrictions or prohibitions imposed on a license. Host supervisors should reject applications for a licence from foreign entities which are not subject to prudential regulation of their capital strength in the home jurisdiction. In the case of joint ventures, supervisors should reject such application if there is any lack in clear parental responsibility.

A foreign insurer may be allowed to operate through a branch or cross border provision of services, without a licence or an approval from the host supervisor where, for example, bilateral or multilateral agreements are in place which ensure that the insurer:

• is subject to supervision in its home jurisdiction which has been recognised as adequate by the host jurisdiction; and

• may be subject to sanction if it does not meet the legal provisions of the host jurisdiction.

• In such circumstances, the home supervisor should be informed.

Where an insurer is seeking to conduct cross border insurance activities without a physical presence in the jurisdiction of the host supervisor, the host supervisor concerned consults the home supervisor as appropriate before allowing such activities.

The supervisor assesses applications, makes decisions and informs applicants of the decision within reasonable time which is clearly specified. They also issue guideline on how to file license application. In case of incomplete application if any, applicant should be informed without any delay.

In assessing the application documents, the supervisor could rely on audits by external bodies, The supervisor should finalise its decision within a reasonable timeframe. A time period should be indicated to the applicant for the assessment procedure, commencing from the date on which all applicatio documentation has been submitted to the supervisor. The supervisor refuses to issue a licence where the applicant does not meet the licensing requirements. The supervisor has the authority to impose additional requirements conditions or restrictions on an applicant where appropriate and reason for the same will be explained.

ICP 5 – Suitability of Persons

The supervisor requires Board Members, Senior Management, Key Persons in Control Functions and Significant Owners of an insurer to be and remain suitable to fulfill their respective roles. Financial soundness, competence and integrity are the important criteria as to fulfill their roles.

Suitability requirements for Board Members, Senior Management and Key Persons in Control Functions:

Indicators for an individual’s assessment in terms of suitability include criminal, financial, supervisory and other aspects. The presence of any one indicator maybe determinative of a person’s suitability. All relevant indicators, such as the pattern of behavior, should be considered in suitability assessment. As to assess the suitability requirement, the Supervisor will ask for the submission of resume similar indicating the professional qualifications as well as previous and current positions and experience of the individual and any information necessary to assist in the assessment. The major information includes:

• Financial problems or bankruptcy in previous entity;

• Civil liability due to unpaid debts;

• Any suspension, dismissal or disqualification;

• Criminal cases – convictions or proceedings;

• Any other disciplinary action taken

Suitability requirements for Significant Owner:

Financial soundness; and the integrity demonstrated in personal behavior and in business conduct. As to assess the owner, the supervisor will ask for the following information:

• the nature and scope of its business;

• its Significant Owners, where necessary;

• its source of financing/funding and future access to capital;

• the group structure, if applicable, and organisation chart; and

• other relevant factors.

Insurers should be required to report forthwith any information gained about these persons that may materially adversely affect their suitability.

The supervisor should have the power to impose various measures in respect of Board Members, Senior Management and Key Persons in Control Functions who do not meet the suitability requirements. Few examples are:

• Request insurer to provide additional education and training as to achieve the compliance suitability;

• prevent, delay or revoke appointment of an individual;

• suspend, dismiss or disqualify an individual;

• order the insurer to appoint a different person for the position in question who does meet the suitability requirements,

• withdraw or impose conditions on the business licence, especially in the case of a major breach of suitability requirements etc.

The supervisor exchanges information with other authorities inside and outside its jurisdiction where necessary to check the suitability of Board Members, Senior Management, Key Persons in Control Functions and Significant Owners of an insurer.
Indian Regulations require a prior approval of IRDA for appointment of the Principal Officer of Insurance Companies alongwith the key position of Appointed Actuary. Also, IRDA have released Corporate Governance guidelines which lays down the codes of governance for insurance companies.

ICP 6 – Changes in control and Portfolio Transfers

Supervisory approval is required for proposals to acquire significant ownership or an interest in an insurer that results in that person (legal or natural), directly or indirectly, alone or with an associate, exercising control over the insurer. The same applies to portfolio transfers or mergers of insurers.

The term “control” over an insurer is defined in legislation and it addresses, at a minimum:

• holding of a defined number or percentage of issued shares or financial instruments above a designated threshold in an insurer or its intermediate or ultimate beneficial owner.

• voting rights attached to the aforementioned shares or financial instruments

• power to appoint directors to the Board and other executive committees or remove them. The supervisor requires the insurer to provide notification of any proposed acquisitions or changes in control of the insurer. The supervisor grants or denies approval to person(s) that want(s) to acquire significant ownership or a controlling interest in an insurer, whether directly or indirectly, alone or with an associate.

They also approve any significant increase above the predetermined control levels. The supervisor requires insurers to provide appropriate information on their shareholders and any other person directly or indirectly exercising control.

To assess applications for proposed acquisitions or changes in control of insurers the supervisor establishes requirements for financial and non-financial resources. A change of a mutual company to a stock company, or vice versa, is subject to the supervisor’s approval. The supervisor satisfies itself with the new constitution or governing organisational document of the company before giving approval.

Portfolio Transfer

The transfer of all or part of an insurer’s business is subject to approval by the supervisor. The financial position of the transferee and the transferor is considered. Interests of the policyholders of both the transferee and transferor will be protected.

ICP 7 – Corporate Governance

The supervisor requires insurers to establish and implement a corporate governance framework which provides for sound and prudent management and oversight of the insurer’s business and adequately recognises and protects the interests of policyholders.

Corporate governance refers to systems (such as structures, policies and processes) through which an entity is managed and controlled. Accordingly, the corporate governance framework of an insurer promotes the development, implementation and effective oversight of policies that clearly define and support the objectives of the insurer.

The corporate governance framework also defines the roles and responsibilities of persons accountable for the management and oversight of an insurer by clarifying who possesses legal duties and powers to act on behalf of the insurer and under which circumstances. It also sets requirements relating to how decisions and actions are taken including documentation of significant or material decisions, along with their rationale. It provides for communicating, as appropriate, matters relating to the management, conduct and oversight of the insurer to stakeholders and provides for corrective actions to be taken for non compliance or weak oversight, controls or management.

Corporate governance is often referred to as a system of “checks and balances”. This recognises that an insurer has to be flexible and responsive to developments affecting its operations in making timely decisions, while at the same time being transparent and having appropriate systems, controls and limits to ensure that powers are not unduly concentrated and are used in the best interest of the insurer as a whole and its stakeholders.

Effective corporate governance supports and enhances the ability of the key players responsible for an insurer’s corporate governance; i.e. the insurer’s Board of Directors (“the Board"), Senior Management and Key Persons in Control Functions to manage the insurer’s business soundly and prudently. This allows the supervisor to place greater confidence in their work and judgment.

The corporate governance standards are designed with sufficient flexibility to apply to supervision of insurers regardless of any differences in the corporate structures and legal systems that prevail in the “jurisdiction of incorporation” or “domicile of operations” of insurers. The application of corporate governance standards in this document by both insurers and supervisors should reflect the nature, scale and complexity of the business of the insurer.

The supervisor requires the insurer’s Board to have, on an on-going basis an appropriate number and mix of individuals to ensure that there is an overall adequate level of knowledge, skills and expertise at the Board level commensurate with the governance structure and the nature, scale and complexity of the insurer’s business, appropriate internal governance practices and procedures to support the work of the Board in a manner that promotes the efficient, objective and independent judgment and decision making by the Board; and adequate powers and resources to be able to discharge its duties fully and effectively.

The Board shall institute proper risk management systems in place and also provide for a proper remuneration policy and practices. IRDA’s Corporate Governance guidelines dated 5 August 2009, which lists down the framework for governance within insurance companies. It defines the role of the Board of Directors and the various other Committees of the Board. It also defines the role of senior functionaries like Appointed Actuary, the requirement of due diligence of Directors, approval of IRDA for CEO and Appointed Actuary, removal of conflicts of interest etc.

ICP 8 – Risk Management and Internal Controls

The supervisor requires an insurer to have, as part of its overall corporate governance framework, effective systems of risk management and internal controls, including effective functions for risk management, compliance, actuarial matters and internal audit. The supervisor requires the insurer to establish, and operate within, effective systems of risk management and internal controls. Further, the supervisor requires the insurer to have effective control functions with the necessary authority, independence and resources. The supervisor requires the insurer to have effective control functions with the necessary authority, independence and resources.

The control functions are those which do not involve in the core business activities, such as Chief Risk Officer, Chief Finance Officer, Appointed Actuary etc. these functions are conscience keeping functions, which do not have core business operational responsibilities and are independent of such core business functions. In order to remove any conflict of interest, the same person does not hold responsibility both for core business function and the control function at the same time.

Each control function should have the authority and independence necessary to be effective in fulfilling its duties and attaining its goals. The Board should set or approve the authority and responsibilities of each control function. The authority and responsibilities of each control function should be set out in writing and made part of or referred to in the governance documentation of the insurer. The head of each control function should periodically review such document and submit suggestions for any changes to Senior Management and the Board for approval.

Notwithstanding the possibility for insurers to combine certain control functions, as described in Guidance 8.2.8, a control function's independence from Senior Management and from other functions should be sufficient to allow its staff to:

• serve as a further component of the insurer’s checks and balances;

• provide an objective perspective on strategies, issues, and potential violations related to their areas of responsibility; and

• implement or oversee the implementation of corrective measures where necessary. Each control function should avoid conflicts of interest. Where any conflicts remain and cannot be resolved with Senior Management, these should be brought to the attention of the Board for resolution. Each control function should have the authority to communicate on its own initiative with any employee and to have unrestricted access to such information as it needs to carry out its responsibilities. In addition, control functions should have appropriate access to Senior Management.

Board

The Board should grant the head of each control function the authority and responsibility to report periodically to it or one of its committees. The Board should determine the frequency and depth of such reporting so as to permit timely and meaningful communication and discussion of material matters. The reporting should include, among other things:

• information as to the function’s strategy and longer term goals and the progress in achieving these;

• annual or other periodic operational plans describing shorter term goals and the progress in achieving these; and

• resources (such as personnel, budget, etc.), including an analysis on the adequacy of these resources.

In addition to periodic reporting, the head of each control function should have the opportunity to communicate directly and to meet periodically (without the presence of management) with the chair of any relevant Board committee (e.g. Audit or Risk Committee) and/or with the Chair of the full Board.

The Board should periodically assess the performance of each control function. This may be done by the full Board, by the Chair of the Board, by the committee of the Board to which the head of the control function reports, or by the Chair of such committee.

ICP 9 – Supervisory Review and Reporting

The supervisor takes a risk-based approach to supervision that uses both off-site monitoring and on-site inspections to examine the business of each insurer, evaluate its condition, risk profile and conduct, the quality and effectiveness of its corporate governance and its compliance with relevant legislation and supervisory requirements. The supervisor obtains the necessary information to conduct effective supervision of insurers and evaluate the insurance market.

For example, in India, IRDA conducts regular onsite and offsite inspection of insurance companies as well as other intermediaries within the insurance industry. They check compliance of such regulated entities with reference to the applicable regulations and issue necessary regulatory orders which are aimed at correcting the course of action of such insurance companies.

The supervisor has the necessary legal authority, powers and resources to perform off-site monitoring and conduct on-site inspections of insurers, including monitoring and inspecting services and activities outsourced by the insurer.13 The supervisor also has the power to require insurers to submit information necessary for supervision.

The supervisor has a documented framework for supervisory review and reporting which takes into account the nature, scale and complexity of insurers. The framework encompasses a supervisory plan15 that sets priorities and determines the appropriate depth and level of off-site monitoring and on-site inspection activity.

The supervisor has a mechanism to check periodically that its supervisory framework pays due attention to the evolving nature, scale and complexity of risks which may be posed by insurers and of risks to which insurers may be exposed. In particular, the supervisor requires insurers to report:

• off-balance sheet exposures;

• material outsourced functions and activities; and

• any significant changes to their corporate governance.

The supervisor also requires insurers to promptly report any material changes or incidents that could affect their condition or customers.

The supervisor periodically reviews its reporting requirements to ascertain that they still serve their intended objectives and to identify any gaps which need to be filled. The supervisor sets any additional requirements that it considers necessary for certain insurers based on their nature, scale and complexity.

Off-site monitoring

The supervisor monitors and supervises insurers on an on-going basis, based on regular communication with the insurer, information obtained through supervisory reporting and analysis of market and other relevant information.

On-site inpection

The supervisor sets the objective and scope for on-site inspections, develops corresponding work programmes and conducts such inspections.

Supervisory feedback and follow-up

The supervisor discusses with the insurer any relevant findings of the supervisory review and the need for any preventive or corrective action. The supervisor follows up to check that required actions have been taken by the insurer.

ICP 10 – Preventive and Corrective Measures

The supervisor takes preventive and corrective measures that are timely, suitable and necessary to achieve the objectives of insurance supervision.

ICP 11 – Enforcement

The supervisor enforces corrective action and, where needed, imposes sanctions based on clear and objective criteria that are publicly disclosed. The supervisor has the power to enforce corrective action in a timely manner where problems involving insurers are identified. The supervisor issues formal directions to insurers to take particular actions or to desist from taking particular actions. The directions are appropriate to address the problems identified.

The supervisor has a range of actions available in order to apply appropriate enforcement where problems are encountered. Powers set out in legislation should at a minimum include restrictions on business activities and measures to reinforce the financial position of an insurer.

At a minimum, the supervisor should have the power to issue the following:

• restrictions on business activities

• prohibiting the insurer from issuing new policies

• withholding approval for new business activities or acquisitions

• restricting the transfer of assets

• restricting the ownership of subsidiaries

• restricting activities of a subsidiary where, in its opinion, such activities jeopardise the financial situation of the insurer.

• directions to reinforce financial position

• requiring measures that reduce or mitigate risks

• requiring an increase in capital

• restricting or suspending dividend or other payments to shareholders

• restricting purchase of the insurer’s own shares.

• other directions

• arranging for the transfer of obligations under the policies from a failing insurer to another insurer that accepts this transfer

• suspending or revoking the licence of an insurer

• barring individuals acting in responsible capacities from such roles in future

After necessary corrective action has been taken or remedial measures, directions or sanctions have been imposed, the supervisor checks compliance by the insurer and assesses their effectiveness.

The supervisor has effective means to address management and governance problems, including the power to require the insurer to replace or restrict the power of Board Members, Senior Management, Key Persons in Control Functions, significant owners and external auditors.

Where necessary and in extreme cases, the supervisor imposes conservatorship over an insurer that is failing to meet prudential or other requirements. The supervisor has the power to take control of the insurer, or to appoint other specified officials or receivers for the task, and to make other arrangements for the benefit of the policyholders.

There are sanctions by way of fines and other penalties against insurers and individuals where the provisions of the legislation are breached. The sanctions are proportionate to the identified breach. In some cases it may be appropriate to apply punitive sanctions against insurers or individuals.

The legislation provides for sanctions against insurers and individuals who fail to provide information to the supervisor in a timely fashion, withhold information from the supervisor, provide information that is intended to mislead the supervisor or deliberately misreport to the supervisor.

The process of applying sanctions does not delay necessary preventive and corrective measures and enforcement.

The supervisor, or another responsible body in the jurisdiction, takes action to enforce all the sanctions that have been imposed.

The supervisor ensures consistency in the way insurers and individuals are sanctioned, so that similar violations and weaknesses attract similar sanctions.

ICP 12 – Winding-up and Exit from the Market

The legislation defines a range of options for the exit of insurance legal entities from the market. It defines insolvency and establishes the criteria and procedure for dealing with insolvency of insurance legal entities. In the event of winding-up proceedings of insurance legal entities,the legal framework gives priority to the protection of policyholders and aims at minimising disruption to the timely provision of benefits to policyholders.

This ICP is applicable only to individual legal entities. The focus of this ICP is on insolvency and run-off under distressed conditions. However policyholder protection also applies for financially sound run-offs.

An insurer may no longer be financially viable or may be insolvent. In such cases, the supervisor can be involved in resolutions that require a take-over by or merger with a healthier institution. When all other measures fail, the supervisor should have the ability to close or assist in the closure of the troubled insurer having regard to the objective of the protection of policyholder interests.

The objective of these regulations is to protect the interests of Policyholders

ICP 13 – Reinsurance and Other Forms of Risk Transfer

Reinsurance is a mechanism through which insurance companies transfer the risks they assume on insurance policies to another insurer, called Reinsurer. Accordingly a Reinsurance contract is entered into with the Reinsurer by the primary insurer.

The supervisor sets standards for the use of reinsurance and other forms of risk transfer, ensuring that insurers adequately control and transparently report their risk transfer programmes. The supervisor takes into account the nature of reinsurance business when supervising reinsurers based in its jurisdiction.

The supervisory focus should be on expectations of the Board and Senior Management of the cedant (insurer which is ceding the risks with the reinsurer), discussions with them about their approach and an assessment of that approach and how it is executed. This focus does not preclude other activities which supervisors should undertake, both as part of the initial licensing process (where applicable) and as part of ongoing supervision.


The assessment of reinsurance arrangements by the supervisor should be based on a number of factors, which need to be reviewed on a case-by-case basis, including:

• the relative financial strength and claims payment record of the reinsurers in question (both in normal and stressed conditions);

• the soundness of the risk and capital management strategy;

• the appropriateness of the reinsurance strategy given the underlying insurance portfolios;

• the structure of the programme including any alternative risk transfer mechanisms;

• the extent to which relevant functions are outsourced, either externally or within the same group of companies;

• the levels of aggregate exposure to a single reinsurer or different reinsurers being part of the same group;

• the proportion of business ceded so that the net risks retained commensurate with the cedant’s financial resources;

• the level of effective risk transfer;

• the resilience of the reinsurance programme in stressed claims situations;

The supervisor requires that cedants have reinsurance and risk transfer strategies appropriate to the nature, scale and complexity of their business, and which are part of their wider underwriting and risk and capital management strategies. The supervisor also requires that cedants have systems and procedures for ensuring that such strategies are implemented and complied with, and that cedants have in place appropriate systems and controls over their risk transfer transactions.

ICP 14 – Valuation

The supervisor establishes requirements for the valuation of assets and liabilities for solvency purposes. Valuation is the process of evaluation of assets and liabilities of an insurance company to determine the solvency of an insurer. This process can be conducted only by a qualified Actuary.

The following principles shall be kept in mind by the Supervisor while framing regulations on valuation:

(a) The valuation addresses recognition, derecognition and measurement of assets and liabilities. – the method of valuation, assets to be considered, what is the weightage, liabilities to be considered etc. must be laid down by the supervisor

(b) The valuation of assets and liabilities is undertaken on a consistent basis – Consistency in the valuation methodology must be ensured so that there is uniformity in approach across the years and across various regulated entities

(c) The valuation is conducted in a reliable, decision useful and transparent manner

(d) An economic valuation of assets and liabilities is undertaken.

Detailed regulations have been framed by IRDA under the IRDA (Assets, Liabilities and Solvency Margin of Insurance) Regulations, 2000.

ICP 15 – Investment

The supervisor establishes requirements for solvency purposes on the investment activities of insurers in order to address the risks faced by insurers.

(a) The supervisor establishes requirements that are applicable to investment activities of the insurer;

(b) The supervisor is open and transparent as to the regulatory investment requirements that apply and is explicit about the objectives of those requirements;

(c) The regulatory investment requirements address at a minimum; the

− Security;

− Liquidity; and

− Diversification;

of an insurer’s portfolio of investments as a whole.

(d) The supervisor requires the insurer to invest in a manner that is appropriate to the nature of its liabilities

(e) The supervisor requires the insurer to invest only in assets whose risks it can properly assess and manage

(f) The supervisor establishes quantitative and qualitative requirements, where appropriate, on the use of more complex and less transparent classes of assets and investment in markets or instruments that are subject to less governance or regulation

ICP 16 – Enterprise Risk Management for Solvency Purposes

The supervisor establishes enterprise risk management requirements for solvency purposes that require insurers to address all relevant and material risks.

(a) The supervisor requires the insurer’s enterprise risk management framework to provide for the identification and quantification of risk under a sufficiently wide range of outcomes using techniques which are appropriate to the nature, scale and complexity of the risks the insurer bears and adequate for risk and capital management and for solvency purposes.

(b) Enterprise risk management framework - documentation

The supervisor requires the insurer’s measurement of risk to be supported by accurate documentation providing appropriately detailed descriptions and explanations of the risks covered, the measurement approaches used and the key assumptions made.

(c) Enterprise risk management framework - risk management policy

The supervisor requires the insurer to have a risk management policy which outlines how all relevant and material categories of risk are managed, both in the insurer’s business strategy and its day-to-day operations.

(d) The supervisor requires the insurer to have a risk management policy which describes the relationship between the insurer’s tolerance limits, regulatory capital requirements, economic capital and the processes and methods for monitoring risk.

(e) The supervisor requires the insurer to have a risk management policy which includes an explicit asset-liability management (ALM) policy which clearly specifies the nature, role and extent of ALM activities and their relationship with product development, pricing functions and investment management.

(f) The supervisor requires the insurer to have a risk management policy which is reflected in an explicit investment policy which:

− specifies the nature, role and extent of the insurer’s investment activities and how the insurer complies with the regulatory investment requirements established by the supervisor; and

− establishes explicit risk management procedures within its investment policy with regard to more complex and less transparent classes of asset and investment in markets or instruments that are subject to less governance or regulation.

(g) The supervisor requires the insurer to perform its own risk and solvency assessment (ORSA) regularly to assess the adequacy of its risk management and current, and likely future, solvency position.

(h) The supervisor requires the insurer’s Board and Senior Management to be responsible for the ORSA

ICP 17 – Capital Adequacy

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

The 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. The 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

The 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

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.

In 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.

The regulatory capital requirements are established in an open and transparent process, and the objectives of the regulatory capital requirements and the bases on which they are determined are explicit. In determining regulatory capital requirements, the supervisor allows a set of standardised and, if appropriate, other approved more tailored approaches such as the use of (partial or full) internal models.

The supervisor addresses all relevant and material categories of risk in insurers and is explicit as to where risks are addressed, whether solely in technical provisions, solely in regulatory capital requirements or if addressed in both, as to the extent to which the risks are addressed in each. The supervisor is also explicit as to how risks and their aggregation are reflected in regulatory capital requirements.

The supervisor sets appropriate target criteria for the calculation of regulatory capital requirements, which underlie the calibration of a standardised approach. Where the supervisor allows the use of approved more tailored approaches such as internal models for the purpose of determining regulatory capital requirements, the target criteria underlying the calibration of the standardised approach are also used by those approaches for that purpose to require broad consistency among all insurers within the jurisdiction.

ICP 18 – Intermediaries

The supervisor sets and enforces requirements for the conduct of insurance intermediaries, to ensure that they conduct business in a professional and transparent manner. The supervisor ensures that insurance intermediaries are required to be licensed. The supervisor ensures that insurance intermediaries licensed in its jurisdiction are subject to ongoing supervisory review. The supervisor requires insurance intermediaries to possess appropriate levels of professional knowledge and experience, integrity and competence. The supervisor requires that insurance intermediaries apply appropriate corporate governance. The supervisor requires insurance intermediaries to disclose to customers, at a minimum:

• the terms and conditions of business between themselves and the customer;

• the relationship they have with the insurers with whom they deal; and

• information on the basis on which they are remunerated where a potential conflict of interest exists.

The supervisor requires an insurance intermediary who handles client monies to have sufficient safeguards in place to protect these funds. The supervisor takes appropriate supervisory action against licensed insurance intermediaries, where necessary, and has powers to take action against those individuals or entities that are carrying on insurance intermediation without the necessary licence.

ICP 19 – Conduct of Business

The supervisor sets requirements for the conduct of the business of insurance to ensure customers are treated fairly, both before a contract is entered into and through to the point at which all obligations under a contract have been satisfied Fair treatment of customers. The supervisor requires insurers and intermediaries to act with due skill, care and diligence when dealing with customers.

The supervisor requires insurers and intermediaries to establish and implement policies and procedures on the fair treatment of customers that are an integral part of their business culture.

The supervisor requires insurers to take into account the interests of different types of customers when developing and marketing insurance products.

The supervisor requires insurers and intermediaries to promote products and services in a manner that is clear, fair and not misleading.

The supervisor sets requirements for insurers and intermediaries with regard to the timing, delivery, and content of information provided to customers at point of sale.

The supervisor requires insurers and intermediaries to ensure that, where customers receive advice before concluding an insurance contract, such advice is appropriate; taking into account the customer’s disclosed circumstances.

The supervisor requires insurers and intermediaries to ensure that, where customers receive advice before concluding an insurance contract, any potential conflicts of interest are properly managed.

The supervisor requires insurers to:


• service policies appropriately through to the point at which all obligations under the policy have been satisfied;

• disclose to the policyholder information on any contractual changes during the life of the contract; and

• disclose to the policyholder further relevant information depending on the type of insurance product.

The supervisor requires that insurers have policies and processes in place to handle claims in a timely and fair manner.

The supervisor requires that insurers and intermediaries have policies and processes in place to handle complaints in a timely and fair manner.

Legislation identifies provisions relating to privacy protection under which insurers and intermediaries are allowed to collect, hold, use or communicate personal information of customers to third parties.

The supervisor requires insurers and intermediaries to have policies and procedures for the protection of private information on customers.

The supervisor publicly discloses information that supports the fair treatment of customers.

ICP 20 – Public Disclosure

The supervisor requires insurers to disclose relevant, comprehensive and adequate information on a timely basis in order to give policyholders and market participants a clear view of their business activities, performance and financial position. This is expected to enhance market discipline and understanding of the risks to which an insurer is exposed and the manner in which those risks are managed.

Insurers disclose, at least annually, appropriately detailed quantitative and qualitative information in a way that is accessible to market participants on their profile, governance and controls, financial position, technical performance and the risks to which they are subject. In particular, information disclosed must be:

• decision useful to decisions taken by market participants;

• timely so as to be available and up-to-date at the time those decisions are made;

• comprehensive and meaningful;

• reliable as a basis upon which to make decisions

• comparable between different insurers operating in the same market; and

• consistent over time so as to enable relevant trends to be discerned.

Disclosure about the financial position of the insurer includes appropriately detailed quantitative and qualitative information about the determination of technical provisions. Technical provisions are presented by appropriate segment. This disclosure includes, where relevant to policyholders and market participants, information about the future cash flow assumptions, the rationale for the choice of discount rates, and risk adjustment methodology where used or other information as appropriate to provide a description of the method used to determine technical provisions.

Disclosure about the financial position of the insurer includes appropriately detailed quantitative and qualitative information about capital adequacy. An insurer discloses information that enables users to evaluate the insurer’s objectives, policies and processes for managing capital and to assess its capital adequacy. This information encompasses the generic solvency requirements of the jurisdiction(s) in which the insurer operates and the capital available to cover regulatory capital requirements. If an internal model is used to determine capital resources and requirements, information about the model must be provided, having due regard to proprietary or confidential information.

Disclosure about the financial position of the insurer includes appropriately detailed quantitative and qualitative information about financial instruments and other investments by class. In addition, information disclosed about investments includes:

• investment objectives;

• policies and processes;

• values, assumptions and methods used for general purpose financial reporting and solvency purposes, as well as an explanation of the differences (where applicable); and

• information concerning the level of sensitivity to market variables associated with

• disclosed amounts

Disclosure about the financial position of the insurer includes appropriately detailed quantitative and qualitative information about enterprise risk management (ERM) including asset-liability management (ALM) in total and, where appropriate, at a segmented level. At a minimum, this information includes the methodology used and the key assumptions employed in measuring assets and liabilities for ALM purposes and any capital and/or provisions held as a consequence of a mismatch between assets and liabilities.

Disclosure includes appropriately detailed quantitative and qualitative information on financial performance in total and by segmented financial performance. Where relevant, disclosures must include a quantitative source of earnings analysis, claims statistics including claims development, pricing adequacy, information on returns on investment assets and components of such returns.

Disclosure about the financial position of the insurer includes appropriately detailed quantitative and qualitative information on all reasonably foreseeable and relevant material insurance risk exposures and their management. This disclosure must include information on its objectives and policies, models and techniques for managing insurance risks (including underwriting processes). At a minimum, disclosures must include:

• information about the nature, scale and complexity of risks arising from insurance contracts;

• how the insurer uses reinsurance or other forms of risk transfer;

• an understanding of the interaction between capital adequacy and risk; and

• a description of risk concentrations

Disclosure includes appropriately detailed information about the company profile, including the nature of its business, a general description of its key products, the external environment in which it operates and information on the insurer’s objectives and the strategies in place to achieve them.

Disclosures include the key features of the insurer’s corporate governance framework and management controls including how these are implemented.

Subject to the nature, scale and complexity of an insurer, supervisors require insurers to produce, at least annually, audited financial statements and make them available to market participants

ICP 21 – Countering Fraud in Insurance

The supervisor requires that insurers and intermediaries take effective measures to deter, prevent, detect, report and remedy fraud in insurance.

Fraud in insurance is addressed by legislation which prescribes adequate sanctions for committing such fraud and for prejudicing an investigation into fraud.

The supervisor has a thorough and comprehensive understanding of the types of fraud risk to which insurers and intermediaries are exposed. The supervisor regularly assesses the potential fraud risks to the insurance sector and requires insurers and intermediaries to take effective measures to address those risks.

The supervisor has an effective supervisory framework to monitor and enforce compliance by insurers and intermediaries with the requirements to counter fraud in insurance.

The supervisor regularly reviews the effectiveness of the measures insurers and intermediaries and the supervisor itself are taking to deter, prevent, detect, report and remedy fraud. The supervisor takes any necessary action to improve effectiveness.

The supervisor has effective mechanisms in place, which enable it to cooperate, coordinate and exchange information with other competent authorities, such as law enforcement authorities, as well as other supervisors concerning the development and implementation of policies and activities to deter, prevent, detect, report and remedy fraud in insurance.

ICP 22 – Anti-Money Laundering and Combating the Financing of Terrorism

The supervisor requires insurers and intermediaries to take effective measures to combat money laundering and the financing of terrorism. In addition, the supervisor takes effective measures to combat money laundering and the financing of terrorism.

The supervisor has a thorough and comprehensive understanding of the ML/FT risks to which insurers and intermediaries are exposed and uses available information to assess the ML/FT risks to the insurance sector in its jurisdiction on a regular basis.

The supervisor:

• issues to insurers and intermediaries enforceable rules on AML/CFT obligations consistent with the FATF Recommendations, for matters which are not in law or regulation;

• establishes guidelines that will assist insurers and intermediaries to implement and comply with their respective AML/CFT requirements; and

• provides insurers and intermediaries with adequate and appropriate feedback to promote AML/CFT compliance.

The supervisor has an effective supervisory framework to monitor and enforce compliance by insurers and intermediaries with AML/CFT requirements.

The supervisor regularly reviews the effectiveness of the measures that insurers and intermediaries and the supervisor itself are taking on AML/CFT. The supervisor takes any necessary action to improve effectiveness.

The supervisor has effective mechanisms in place which enable it to cooperate, coordinate and exchange information with other domestic authorities, such as the financial intelligence unit, as well as with supervisors in other jurisdictions for AML/CFT purposes.

Where the insurance supervisor is not a designated AML/CFT competent authority

The supervisor is aware of and has an understanding of ML/FT risks to which insurers and intermediaries are exposed. It liaises with and seeks to obtain information from the designated competent authority relating to AML/CFT by insurers and insurance intermediaries.

The supervisor has effective mechanisms in place which enable it to cooperate, coordinate and exchange information with other domestic authorities, such as the financial intelligence unit, as well as with supervisors in other jurisdictions for AML/CFT purposes

ICP 23 – Group-wide Supervision

The supervisor supervises insurers on a legal entity and group-wide basis. The supervisor, in cooperation with other involved supervisors as necessary, identifies the scope of the group to be subject to group-wide supervision.

The identified group, regarded as an insurance group for the purpose of group-wide supervision by insurance supervisors, covers all relevant entities. In deciding which entities are relevant, consideration should be given to, at least:

• operating and non-operating holding companies (including intermediate holding companies);

• insurers (including sister or subsidiary insurers);

• other regulated entities such as banks and/or securities companies;

• non-regulated entities (including parent companies, their subsidiary companies and companies substantially controlled or managed by entities within the group); and

• special purpose entities. taking into account, at a minimum, the following elements related to the insurance activities:

• (direct or indirect) participation, influence and/or other contractual obligations;

• interconnectedness;

• risk exposure;

• risk concentration;

• risk transfer; and/or

• intra-group transactions and exposures.

ICP 24 – Macroprudential Surveillance and Insurance Supervision

The supervisor identifies, monitors and analyses market and financial developments and other environmental factors that may impact insurers and insurance markets and uses this information in the supervision of individual insurers. Such tasks should, where appropriate, utilise information from, and insights gained by, other national authorities.

ICP 25 – Supervisory Cooperation and Coordination

The Supervisor cooperates and coordinates with other relevant coordinators subject to confidentiality requirements.

ICP 26 – Cross-border Cooperation and Coordination on Crisis Management

The supervisor cooperates and coordinates with other relevant supervisors and authorities such that a cross-border crisis involving a specific insurer can be managed effectively.

Insurance Law And Practice - ICSI

About Author Mohamed Abu 'l-Gharaniq

when an unknown printer took a galley of type and scrambled it to make a type specimen book. It has survived not only five centuries.

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