December 25, 2007
New frontiers in the Insurance supervision world
Wishing everyone merry Christmas, happy holidays and a very happy new year too !
Whilst reading up on the convergence of supervision practices for financial conglomerates operating across Banking, Capital Markets and Insurance, I came across some interesting developments in the Insurance supervision world led by International Association of Insurance Supervisors (IAIS). There is a BIS Joint Forum comprising IAIS, Basel II, IOSCO to deal with issues common to the banking, securities and insurance sectors, including the regulation of financial conglomerates.
Supervisors undoubtedly being key influencers of Risk mgmt practices globally. This article focuses on the developments in the supervision world and its impact on Risk mgmt in the Insurance industry.
Background: Established in 1994, the IAIS represents insurance supervisors from 190 jurisdictions in nearly 140 countries constituting 97% of the world's insurance premiums. The IAIS issues global insurance principles, standards and guidance papers, provides training and support on issues related to insurance supervision, and organizes meetings and seminars for insurance supervisors.
Website: http://www.iaisweb.org/
A global climate for change: The Future of Insurance Regulation - IAIS forum, 2007
In Oct 2007, the 14th annual IAIS forum was held in in Florida with the above theme. It was attended by over 600 senior level Insurance regulators (e.g. FFSA, FSA, NAIC, OSFI, CIRC, IRDA) and Insurance executives globally. I am sure some of our own PRMIA C-suite members would have attended too.
Insurance being one of the fastest growing sectors specially in the BRIC economies. Insurance supervisors face the challenge of improving supervisory expertise to cope with pace of emerging regulatory initiatives and the increasing complexity of risk assessment.
One of the key challenges identified being the need for a paradigm shift both within regulatory authorities and insurance entities to cope with the rapidly evolving financial landscape, including the move towards principles-based requirements and in the area of cross-border mutual recognition of supervisory regimes.
Some interesting top line discussion points at IAIS forum being:
(Source: Summarized from IAIS newsletter)
Regulatory challenges - striking the right balance and the need to change mindsets
The need for insurance regulators to strike the right balance from a number of perspectives, including: differing interests of key stakeholders; potentially conflicting regulatory objectives; and rules-based versus principles-based supervision.
Convergence in supervisory regimes to cope with globalization -
Insurance regulators need to enhance cross-border supervisory efforts as insurance markets and operations become more inter-dependent and transcend geographical boundaries.
Supporting the development of emerging markets -
Establish international supervisory standards for the rapidly emerging Microinsurance sector. Microinsurance provides low income populations in emerging markets with access to insurance. The development of supervisory standards is expected to contribute to greater financial inclusion in developing economies.
The above becomes critical with the BRIC nations emerging as the growth engines for the Insurers. Many global players are already engaged or in advanced stages of entry plans into these markets. The local players are also readying themselves for the ensuing competition as well as strategic tie-ups. The scale of these markets may seem intimidating to those players that are accustomed to more sedate growth rates and market aggressiveness.
For e.g., the Indian insurance sector had a CAGR of 175% over the last few years. Both life and no-life sector in India alone are forecasted to grow by over 200% and private insurers by 140% in the coming 3-4 years. In most BRIC countries, largely state owned insurance firms are now losing market share to private insurers. With the private insurers aggressively offering higher rate of return to its policy holders against state owned firms, the nature of insurance business is dramatically changing and this poses a big challenge to the supervisors.
Whilst admittedly achieving global regulatory convergence and creating a common structure on insurer solvency still have a long way to go, my top 8 KIV (Keep in view) list for its Risk mgmt impact would be as follows:
1. Stress Testing: Focus on enhanced use of stress-testing to demonstrate value of cross border operations. Jurisdiction boundaries are an issue for the companies & regulators. So in addition to internal models, would use of stress testing be one way to for firms to reassure local regulators, that in face of a major catastrophe, which potentially could wipe out many balance sheets of insurers around the world, the required capital sitting in each country will not be enough and cross border operations would become critical for capital to be tapped.
2. Sophistication of Actuarial Models and Risk Analytics – Increased demand for more sophisticated computational actuarial and risk analytics-related computing capacity.
3. A global Minimum Capital Requirement (MCR)- Is this possible & more importantly result in equitable treatment for all players in the market?
4. Solvency based Supervision to Principle based supervision -
The debate around solvency-based supervision being not nimble enough to keep pace vis-à-vis the contrarian view that the principle-based supervision may involve more financial investment to comply with, which could impact smaller firms. But largely, most supervisors are slowly but surely moving towards a principle-based supervision.
5. Mutual Recognition Agreements (MRA) for global firms to avoid duplication - To avoid duplication of regulations, effective use of mutual recognition agreements (MRA) as a possible way to streamline regulation.
6. Business Records Retention compliance: Insurance being a documentation-intensive industry, increased regulatory focus on retention and retrieval of business records, for legal discovery process as a key internal control and operational risk requirement.
7. Reinsurance being an important risk mitigation tool for insurers, improvements in supervisory
approaches to facilitate global diversification of reinsurance risk.
8. Focus on Improved supervisory expertise to cope with emerging regulatory initiatives and
the increasing complexity of risk assessment. Specially to cope with the expertise required to
effectively monitor principles-based practices and assess internal models.
Source: Research based on IAIS website, IAIS newsletter, Business Standard & PTI articles.
Posted by spachava at 12:31 PM
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