The Structure of the ICPs
The ICPs consist of 28 principles in total, grouped into seven categories.21 The principles cover all aspects of a supervisory framework—from licensing to closure of activities. The seven groupings reflect commonality of purpose among the principles in each group, ranging from preconditions to prudential requirements and market conduct. See Annex 5.C for a summary of the scope of each of the principles.
The first ICP addresses the general conditions needed for effective supervision and is similar in nature to the BCP “preconditions.” This ICP addresses elements that are most usually not the direct responsibility of the insurance supervisory authority. The elements relate to the overall policy settings for the financial sector, as well as the infrastructure of financial markets and their efficient operation. Effective policy settings are critical to the supervisors’ task because they provide the backdrop against which the institutional risk is assessed. Infrastructure in markets includes not only the broader financial policy aspects but also the legal and professional services that enable the supervisory process to function. The role of accounting, auditing, and actuarial professions shows examples of particular relevance to insurance supervision. The efficiency of financial markets influences the extent to which institutions are exposed to liquidity risk and market risk, as well as the options they have to address those risks. The first ICP is also concerned with the extent to which companies are able to access statistical data to enable those data to assess market risks and liability risks.
The second group of ICPs (ICPs 2-5) deals with the organizational structure and governance aspects of the supervisory authority. Those ICPs cover the objectives of the supervisor, the legal standing of the supervisory authority, the independence, the confidentiality requirements, and the existence of a transparent supervisory process. Information sharing is also covered in this group of ICPs, which makes it consistent with the issue of confidentiality.
The third group of ICPs (ICPs 6-10) focuses on the establishment and operations of the insurance companies as supervised entities. The fundamental licensing obligation and the effective stewardship of the organization under the continuing control of owners with integrity is emphasized through tests for fitness and propriety, as well as through control of changes in ownership and transfers of portfolios.22 Overall policies and obligations with respect to corporate governance and internal controls also form part of this group.
Ongoing supervision is the focus of the fourth group of ICPs (11-17). The principles in this group set out the process for supervision and its key components at a high level and then elaborate on key elements of the supervisory process. First, to establish the basis for sound assessment of individual institutions and prompt supervisory actions, ICP 11 stresses the role of an overall analysis of the market and identifies the potential risks and vulnerabilities that affect insurance firms and markets23 and that arise as a result of the overall environment in which they operate. The ICPs that follow cover the reporting obligations of companies, including the regular and ad hoc information requirements; the assessment of returns received by the supervisor; the conduct of onsite inspections; the taking of action through preventative measures; the active enforcement and sanction powers; and, if necessary, the closeout of the insurer. In particular, ICP 12, which focuses on reporting, also establishes the main obligations with respect to external audit and
accounting standards. ICP 12 largely focuses on the content and completeness of supervisory reporting24 and includes a substantive role of offsite supervisory assessment as one of the criteria. ICP 16 includes the definition of insolvency, or at least the point at which intervention is obligated to protect policyholders, and ICP 17 addresses the assessment of groupwide risks.
The group of insurance core principles that cover “prudential requirements” (ICPs 18-23) focuses on insurers’ obligations with respect to the key areas of sound risk management, which includes understanding the nature of insurance risks, liabilities, assets, risk instruments, and capital. However, there is no internationally uniform capital requirement or set of rules for assets and liabilities in the insurance sector at this stage. The most important characteristics of a capital adequacy and solvency regime are covered at a fairly high level in the standard. Therefore, a wide range of approaches to capital adequacy and solvency are in use, some of which may be deficient in their ability to identify and require capital for significant risks to financial stability or to the solvency of an insurer. For example, capital required under the regime used in the EU and other jurisdictions does not depend on the composition of the investment portfolio. The IAIS and other organizations are working toward greater uniformity of capital adequacy standard.25 The ICPs within this group emphasize the need for a sound assessment of risk and adequate resources to meet the risks assessed. The IAIS had already issued other supervisory standards that are relevant and related to these ICPs. Because the ICPs themselves were being revised, the supervisory standards available at the time were incorporated into the ICPs; some guidelines and issue papers were also under preparation at the time of the issuance of ICPs, and those, too, would be relevant for the assessment.26
The remaining two groups (ICPs 24-28) deal with markets and consumers (the oversight of insurance intermediaries, customer protection, disclosure to the wider market, and fraud prevention) and with AML-CFT. The oversight of intermediaries (most commonly, insurance agents and brokers) is an important element of insurance sector soundness that does not always have a direct equivalent in other sectors. The failure of an intermediary can have a direct effect on those customers who have dealt with the insurer through the intermediary. The fitness and the propriety of intermediaries are also an important element in the maintenance of a sound system that preserves public confidence in the sector. Customer protection goes beyond the customer’s dealings with intermediaries to include (a) the requirements for information disclosure to explain the product and services to the customer and (b) the manner by which a customer may seek to have complaints resolved. Complaint resolution needs to be accessible, to be timely, and not to impose an undue cost, recognizing that customers have relatively limited financial and technical resources available. In some jurisdictions, this role is played by self-regulatory organizations (SROs). In others, it is played by companies with supervisory oversight or even by the supervisors themselves. Wider market disclosure focuses on broader and less-specific disclosure than is involved with individual customers and their individual products. The intent of this wider disclosure is to impose market discipline on companies. Again, it can be more or less effective and needs to reflect the market structures as the system needs to consider all companies, not just those that are publicly listed.
Claims fraud is a key issue in the insurance sector and is addressed in the newly introduced ICP 27. Claims fraud, wherein customers might submit inflated or invalid claims,
has an insidious effect on companies and can ultimately bring the solvency of a company into question. As one addresses this issue, the diligence and integrity of the company is emphasized, as well as the linkages between the supervisory and prosecuting authorities.
The principles themselves have been deliberately drafted at a general level, and those principles should be interpreted according to the additional explanation provided for each principle. Each principle is elaborated with an explanatory note and followed by a set of criteria. The explanatory note is intended to provide elaboration and clarification, setting out the rationale for the particular principle and sometimes referring to specific examples. The criteria are divided between the so-called “essential criteria” and “advanced criteria.” Essential criteria are considered necessary for all markets to be fully functional and effective. Advanced criteria are considered either for particularly advanced and complex markets or, more likely, to provide a sense of direction for further improvement as markets and practices evolve.