Insurance Regulatory Framework and Supervision
Insurance Regulatory Framework and Supervision covers why insurance is licensed and how a regulator supervises insurers and intermediaries: entry standards, solvency, governance, market conduct and intervention.
Objectives and standards
- Core objectives: policyholder protection, market confidence, financial stability, and fair, transparent markets.
- International benchmarks include the IAIS Insurance Core Principles, covering licensing, governance, risk management, capital adequacy, market conduct and cross-border cooperation.
- Regulation is increasingly risk-based: more supervisory attention goes to the risks and firms that pose the greatest potential harm.
Entry and ongoing requirements
- Insurers need a licence for each class or line they write; writing outside the licence is a breach.
- Fit-and-proper tests apply to directors, senior managers and key control functions: competence, honesty and financial soundness.
- Capital and solvency: available capital must exceed the required solvency margin after liabilities and technical provisions are valued prudently. Assets must be admissible and diversified.
- Governance: board responsibility, risk management, internal controls, audit, outsourcing controls, and an own risk and solvency assessment for larger firms.
- Reinsurance reduces retained risk, but the regulator checks reinsurer security and may cap reliance.
Supervision and intervention
- Off-site supervision: statutory returns, financial statements, solvency calculations and actuarial reports.
- On-site inspections: governance, underwriting, claims, conduct and AML controls.
- Supervisory ladder: from monitoring and remedial directions to restrictions on new business, asset freezes, administration, portfolio transfer or licence withdrawal.
- Policyholder protection funds may pay claims if an insurer fails, usually subject to caps.
Worked example
An insurer reports assets of 120 million and liabilities of 90 million, giving available capital of 30 million. The required solvency margin is 15 million. The solvency ratio is 30/15 = 200%, comfortably above the 100% minimum. If liabilities rose by 20 million, available capital would fall to 10 million and the ratio to about 67% - a breach requiring an immediate restoration plan and supervisory notification.
Traps
Confusing solvency with profitability. Assuming one licence covers all classes. Forgetting that technical provisions, not just accounting liabilities, drive the margin.