Observance in Law and Practice
The methodology for the assessment of the ICPs calls for observance both in law and in actual practice. For most criteria, it is not sufficient simply to consider whether or not the law or other legal obligations cover the necessary material. “Observance” usually requires the practices to be recognized in the law or legislation and to be enforced effectively. Here is a useful set of questions to consider:
• Is the practice or power specified in the law, the regulations, or both?
• How do the authorities know it is followed in practice?
The assessment is not clear-cut when the desirable practices are in the law but have not been used because the circumstance for their use has not arisen. For example, particular winding-up provisions may appear adequate but may not have had the benefit of any testing. A more clear-cut example arises when a well-constructed solvency margin regulation exists but is not observed by the firms in practice. This situation will not be assessed as “observed,” given the lack of implementation of the regulation. Similarly, if a regulation or criterion cannot be monitored or implemented because the financial reporting or supervisory staffing does not permit it, then it would be difficult to rate the mere existence of a rule in the rule book as sufficient for a rating of “observance.”
The requirement of clarity of the law, as well as practice, in the current ICPs is onerous; however, it is possible to consider observance by other means (as suggested in IAIS 2003a, 52). This suggestion is intended to bring an additional flexibility to the assessment. It may be that the approach taken in a jurisdiction is not consistent with the wording of the criteria but the effective result is the same in terms of actual results. For example, the principle of establishing clear priority to policyholders in the event of winding-up an insurer is discussed in the explanatory notes to ICP16 (IAIS 2003a, 30), where the alternative priorities for other stakeholders are recognized. At the same time, essential criteria “c” seeks a high level of priority to the policyholder. This example indicates that a low priority in the winding-up provisions of the law may be effectively erased in effect for policyholders by a policyholder protection scheme, which provides additional or alternative protection. Another example of observance by other means could be represented by the operation of custom or by the role of SROs. In those cases, the custom or practice needs to be considered by the assessor. It should be undisputed and robust.
When using the term legislation, the ICPs are not taking a prescriptive view on whether or not an obligation is in the primary insurance law or whether it is in a subsidiary regulation, instrument, or circular. This approach provides flexibility within the context of the legal system. There are, however, some places where the use of the word law is taken to
mean the primary law. In those cases, the ICPs consider that it is of particular importance to include the specified feature in the primary insurance law.