INTERNATIONAL ASSOCIATION OF
INSURANCE SUPERVISORSAPPLICATION PAPER ON
INFORMATION GATHERING AND ANALYSIS
26 OCTOBER 2010

This document was prepared by the Task Force on Information Gathering & Analysis in
consultation with IAIS members and observers.
This publication is available on the IAIS website (www.iaisweb.org).
© International Association of Insurance Supervisors 2010. All rights reserved. Brief excerpts
may be reproduced or translated provided the source is stated.

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Preamble

The IAIS seeks to encourage a practical application of its principles and standards.
An essential part of the standard implementation process has to do with supporting
the enhancement of institutional capabilities, which constitute a precondition for a
successful utilisation of principles and standards.
In directing its implementation efforts, it is necessary to pay particular attention to theneeds of emerging markets:enhancing the understanding of IAIS principles and standards
supporting the strengthening of supervisors’ institutional capabilities required
to adopt and implement principles and standards, andsupporting supervisors in understanding particular regulatory issues,
facilitating the exchange of experiences among IAIS members.

Therefore, the IAIS Implementation Committee prepared a “Roadmap for Standard
Implementation Activities” which outlines a work plan and time path for standard
implementation activities.
Based on the mentioned Roadmap, the Implementation Committee developed thisApplication Paper on Information Gathering and Analysis that aims to offer IAIS
emerging markets’ members a basic reference on issues such as:minimum statistical, financial and technical information required to undertakethe supervisory process
basic recommendations for collecting information, in order to ensure
consistency, comparability, accuracy, transparency and reasonablenessbasic ratios that could support financial and technical supervisionutilisation of basic analysis information techniques as part of the supervisory
process.

The Application paper attempts to improve the understanding of concepts andmethodologies for gathering information and analysing data for assisting
implementation of IAIS principles and standards.

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APPLICATION PAPER ON INFORMATION GATHERING AND ANALYSIS

Contents
1.

Introduction ……..............................................................................................7

2.

Scope of paper …….........................................................................................93.

Minimum statistical, financial and technical information required toundertake the supervisory process............................................................10
3.1 Company profile information.......................................................................11
3.1.1. General information .........................................................................11
3.1.1.1. Corporate structure............................................................11
3.1.1.2. Corporate data...................................................................11
3.1.1.3. Key functionaries ...............................................................123.1.1.4. Capital structure and shareholders....................................123.1.1.5. Corporate organisation chart ............................................133.1.1.6. Objectives, policies and management...............................133.1.1.7. Summary of selected financial data for five years .............133.1.1.8. Key performance indicators...............................................143.1.1.9. Other information...............................................................16
3.1.2. Corporate governance .....................................................................16
3.1.3. Internal control system.....................................................................16
3.1.4. Risk management............................................................................17
3.1.4.1. Technical risks...................................................................17
3.1.4.2. Investment risks.................................................................17
3.1.4.3. Non-technical risks ............................................................18
3.1.4.4. Impact of various risk transfer or risk sharing mechanism
used by the insurer ..........................................................18
3.1.5. Sensitivity, stress testing and scenario analysis ..............................18
3.1.6. Internal models ................................................................................19
3.1.6.1. Information on the risks assessed by the model andpossibly capital assessment derived from its operation ....19
3.1.6.2. Details of how the internal model is embedded within theinsurer’s corporate governance and operational processes
and risk management.......................................................19
3.1.6.3. Information to understand the structure of a model,
level of complexity of the components, reference toappropriate theory or practice, appropriateness of use,
selection assumptions ......................................................20
3.1.6.4. Information regarding test, audit, controls and storage ....20

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3.1.6.5. Use of experts ..................................................................21
3.2. Financial information..................................................................................21
3.2.1. Financial statements........................................................................21
3.2.2. Investments .....................................................................................22
3.2.2.1. Summary information on different classes ........................22
3.2.2.1.1. Equity securities.........................................................23
 By listing status (listed vs. unlisted)
3.2.2.1.2. Debt securities ...........................................................23
 By credit rating
 By maturity (up to 1 yr, from 1 to 3 yrs, from 3 to 7
yrs, from 7 to 10 yrs, + 10 yrs)
 By type of issuer (government, semi-government,
corporate securities)
3.2.2.1.3. Loans .........................................................................24
 By type (residential, commercial, etc)
 With collateral and otherwise
3.2.2.1.4. Properties...................................................................25
 By type (residential, commercial, industrial others) By geographical location (domestic, foreign) By purpose (investment property, own occupation)
3.2.2.1.5. Cash and deposits ......................................................26
3.2.2.1.6. Receivables ...............................................................26
 By ageing (less than 90 days, from 91 days up to 1 yr,+1 yr)
 By obligor (from reinsurers, from cedents, from /payable
to other insurers, from/payable to agents & brokers,
from other counterparty)
3.2.2.1.7. Receivables ...............................................................26
 By type (intangibles, others)

3.2.2.2. Derivatives.........................................................................27
 In asset class (equity securities, debt securities,
properties, other asset class) – for hedging & otherwise
 By counterparty (exchange traded –OTC) By type (swaps, options, forward & futures, others
3.2.2.3. Other Investments .............................................................28
3.2.2.4. Investments in related parties............................................28
3.2.2.5. Off-balance sheet exposures.............................................28
3.2.2.6. Detailed information on some asset classes .....................29
3.2.3. Commissions and expenses............................................................29
3.3. Audit opinion report....................................................................................29
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3.3.1. Audited financial statements ............................................................29
3.4. Statutory compliance information ..............................................................30
3.4.1. Minimum capital test ........................................................................30
3.4.2. Regulatory capital or solvency margin required...............................30
3.4.2.1. Amounts of the components and structure of capital ........31
3.4.2.2. Quality of capital ................................................................31
3.5. Asset-liability matching ..............................................................................31
3.5.1. Duration of assets and technical provisions ....................................31
3.5.2. Solvency and liquidity dimensions ...................................................31
3.6. Information on technical performance and risks ........................................31
3.6.1. Life insurance ..................................................................................31
3.6.1.1. Segmentation of data ........................................................31
3.6.1.2. Operating data...................................................................32
3.6.1.3. Technical provisions ..........................................................32
3.6.1.4. Sensitivity analysis ............................................................32
3.6.1.5. Risk concentration .............................................................33
3.6.2. Non-life insurance............................................................................33
3.6.2.1. Segmentation of data ........................................................33
3.6.2.2. Operating data...................................................................34
3.6.2.3. Technical ratios .................................................................34
3.6.2.4. Technical provisions ..........................................................35
3.6.2.5. Risk concentration .............................................................37
3.6.2.6. Reinsurance and other risk mitigation ...............................37
3.7. Actuarial reports.........................................................................................38
3.8. Statistical information.................................................................................38
3.8.1. Premiums, claims and adjustment expenses.....................................39
3.8.1.1. Unearned premiums ..........................................................39
3.8.1.2. Premiums and claims by line of business analysis of claims
paid and unpaid................................................................39
3.8.1.3. Net claims and adjustment expenses run-off ....................40
3.8.1.3.1. In non-life insurance: claims development triangles ...40
3.8.1.3.2. The nature, frequency and severity of claims ............41
3.8.1.3.3. Risk concentration (potential for aggregation of claims).42
3.8.1.4. Adjustment expenses ........................................................42
4.

Quality of information ...................................................................................424.1. Criteria to assess the quality of data..........................................................43
4.2. Time horizon ..............................................................................................43

5.

Utilisation of basic analysis information techniques as part of thesupervisory process ....................................................................................44

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6.

Basic ratios that could support financial supervision ...............................45
6.1. Trends of insurance portfolios ...................................................................45
6.2. Profitability ratios .......................................................................................46
6.3. Reserve and leverage ratios......................................................................46
6.4. Assets and liquidity ratios ..........................................................................46

7.

Resources ......................................................................................................46
7.1. Internal systems and policies.....................................................................46
7.2. Qualified supervisors users .......................................................................47

1.

Introduction

1.
Insurance business requires insurers having adequate data to calculate
losses, expenses and therefore, premiums; but information is also essential for
insurance supervisors to correctly assess, both the liabilities and the required capital.
Further, the study of each of the significant risks to which an insurer is exposed
requires the use of both assumptions about future experience and data with respect
to the business being studied. The accuracy of the results obtained and theirappropriateness in reflecting the insurer’s possible future experience will depend upon
the integrity of the data used. In summary, a well functioning insurance market andsupervisory regime need a sound system to collect, organise and make detailed data
available.
2.
Insurance supervision heavily relies on information gathering and analysis. In
this sense, it is essential to assure that the data being used by the supervisor to
obtain the mortality tables, calculate capital requirements, and fix regulatory
parameters, among others, is correct, reliable and complete.
3.
Therefore, supervisors should have in place mechanisms for the submission ofregular and systematic financial, technical and statistical information, actuarial reports
and other information from the insurers they supervise. While it is recognised that thisis a common practice in mature markets, in some emerging markets data available
might not be enough to comply with several Insurance Core Principles (ICPs) in an
appropriate manner.
4.
With this in mind, it is necessary that the standard implementation strategy
considers an explicit plan to support emerging markets' supervisors with guidelines
for the collection and basic analysis of information for supervisory purposes.
5.
This document should be read together with the IAIS Insurance core principles
and methodology (October 2003) (ICPs), in particular with ICP 12, which states thatsupervisory authorities receive the necessary information to conduct effective off-sitemonitoring, and to evaluate the condition of each insurer as well as the insurance
market. With this information, supervisors can have a clear view of the insurer’sbusiness activities and financial position and a profound understanding of the risk towhich they are exposed.
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6.
Therefore, it is essential for the supervisor to receive information which canoften identify potential problems, providing early detection and prompting corrective
action before problems become more serious. Supervisors must define what
information they require, in what form, from whom and how often. It must reflectsupervisory needs, and for this reason, it can vary according to markets structuresand situations. The kind of information needed can also vary regarding individual
insurer’s situation and the way it control its own risks. The information requested
should be current and forward-looking. The process of information gathering andanalysis has to be transparent and consistent across all insurers.
7.
As it was mentioned above, the application paper attempts to improve theunderstanding of concepts and methodologies for gathering information andanalysing data for assisting implementation of IAIS principles and standards. This
document is structured in several sections:

The section on the “Scope of the paper” makes it clear that the application
paper does not impose any obligation for supervisors. It is not prescriptive,
because it intends to provide application guidance for information gatheringand analysis.

The section on the “Minimum statistical, financial and technical information
required to undertake the supervisory process” points out that supervisors
should require insurers to submit the information which is necessary for the
purposes of supervision, among others: company profile (general information,
corporate governance, internal control system, risk management, stresstesting, internal models); financial information; audit opinion report; statutorycompliance information (minimum capital requirement, regulatory capital);
asset-liability matching; information on technical performance and risks;
actuarial reports and statistical information, among others.
In general terms, this information is needed to understand the insurersorganisational structure; to assess the qualitative requirements related to theirsystem of governance; to assess the risks which the insurer face or may face;to do risk assessment; to confirm ongoing compliance with the laws,
regulations and administrative requirements, in particular to review andevaluate compliance with the following: technical provisions, capitalrequirements, investment rules or investment policies, quality and quantity ofassets or own funds, requirements for internal models, if it is the case; to dofinancial analysis that enable supervisor to identify deteriorating financial
conditions in an insurer and to monitor how that deterioration could be
remedied; to assist in conducting reviews (off-site and on-site); among others.
This section also suggests that some information is needed regularly, whenreviews and evaluation should be conducted on a regular basis and thesupervisor should establish the minimum frequency and scope of the reviews,
evaluations and assessments, having regard to the nature, scale andcomplexity of the activities of the insurer. Other information will be needed on
exception basis, for instance, if there is a change or an approval is neededfrom the supervisors.

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The information referred in this section should comprise qualitative or
quantitative elements, an appropriate combination of financial data and non
financial information and historic, current and prospective data.
The section on “Quality of Information” stresses the importance of having
reliable high quality data for effective supervision.

The section on the “Utilisation of basic analysis information techniques as partof the supervisory process” states that the depth of the reviews should dependon the nature, complexity, financial strength and sophistication of the insurer.
Supervisors should conduct detailed analysis using regulatory reports,financial tools and other sources of information.



The section on ““Basic ratios that could support financial supervision” isintended to include a set of ratios that are helpful in identifying insurers likely
to experience financial difficulties.



Finally, the section on “Resources” points out the importance of requiring
insurers to have appropriate systems and structures in place to fulfil theinformation requirements for supervisory purposes and the importance of
having qualified supervisor that use the information required.

8.
In setting the information requirements, supervisors should strike a balance
between the need for information for supervisory purposes and the administrative
burden it puts on insurers. In any case, supervisory needs should prevail.
9.
Supervisors require information on a solo and a group-wide basis1. Therefore,
it may request and obtain information on any subsidiary of the supervised entity.
Where different supervisors are responsible for the supervision of different parts of agroup or conglomerate, appropriate cooperation and coordination should exist.
Supervisors should cooperate according to their respective responsibilities to ensurethat there are no supervisory gaps while avoiding unnecessary duplication. This
document is not dealing with principles and norms regarding accounting andconsolidation techniques to be used, neither particular information for group-wide
supervision purposes.2

2.

Scope of paper

10.
This paper does not impose any obligations for supervisors. The purpose ofthis paper is to provide application guidance for information gathering and analysis.
The content and recommendations of this document are based on the responses

1 See essential criteria of ICP 17, new draft ICP 23 paragraph 23.1.2.
2 For more information regarding group-wide-supervision see IAIS Principles No. 3.4 on group-wide supervision,
approved in Budapest on 17 October 2008 and Guidance Paper No. 3.7 on the role and responsibilities of a groupwider supervisor, approved in Budapest on 17 October 2008. In addition, see new draft ICP2 and 23.
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given by IAIS members to the Questionnaire “Guidance Paper on Information
Gathering and Analysis” that was prepared by the Task Force in December 2008.3
11.
In this sense, information requirements should apply to all insurers in ajurisdiction. This document aims to illustrate minimum requirements that should be
reviewed periodically. Particular information that may be required for licensing
purposes or additional information from specific insurers on a case-by-case basis is
not included.4

3.

Minimum statistical, financial, and technical information required
to undertake the supervisory process

12.
The current ICP’s establish that supervisors should set the requirements forthe submission of regular and systematic statistical and financial information, actuarial
reports and other information from all insurers in their jurisdiction. In this sense, thesupervisor might define the scope and frequency of those reports and information,
including any requirement to audit that reports and information.5
13.
The information should provide a meaningful picture of the insurers.
Therefore, the supervisor should establish information requirements that are to be
applied uniformly to all insurers, so that the financial and technical situation of thecompany can be known without any ambiguity.
14.
The information provided should be accurate, relevant, reliable andtransparent. It should also be comprehensive and should be provided with sufficientfrequency and timeliness. Considering the circumstances, some supervisors should
require ad hoc intra-period reporting.
15.
Information can be obtained by supervisors through a variety of means thatare both quantitative as well as qualitative. This can imply that supervisors use
different formats for different data or information needs and purposes. This may entailthat all data is not necessarily stored within a single database or in a single format. It
is also beneficial for supervisors to be able to process the data/information withappropriate information technology (IT) resources to effectively make use of them.
16.
The information should comprise some qualitative and quantitative elements,
historical, current and prospective, in order to reflect the nature, scale and complexityof the business operations of the insurer.
17.
The supervisor should have in place appropriate monitoring tools that support
the assessment of the strengths and vulnerabilities of insurers.
3 The main purposes of this questionnaire were to identify if the “Original Minimum statistical, financial andtechnical information proposed to undertake the supervisory process” proposed by the member of the Task Forcecorresponded to the current practices of the jurisdictions, to identify if there were missing items and to identify if
the level of details on each section was adequate. The questionnaire was responded by 47 jurisdictions. The deadline was January 30th, 2009.
4 See ICP 6. This principle lays down the criteria for the licensing of an insurer.
5 See ICP 12. Essential criteria a). IAIS. Insurance core principles and its methodology. Approved in Singapore on
3 October 2003.
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18.
The supervisor should determine the nature, scope and formats that theinsurers should use in order to submit the information required, at predefined periods;
upon occurrence of particular events; and during special situations.
19.
Insurance supervision should be exercised over the entire operations of theinsurance company undergoing control and should involve various aspects. In order
to meet this objective, in this section, we are presenting the minimum statistical,
financial and technical information that the Task Force is proposing as the information
required to undertake the supervisory process.

3.1 Company profile information20.
It is essential for the supervisor to be able to access updated information oncompany’s profile.
3.1.1

General information

21.
General information includes, among other, the corporate structure, corporate
data, key functionaries, corporate structure, capital structure and shareholders,
corporate organisation chart, objectives, policies and management, summary of
selected financial data for five years, key performance indicators and otherinformation.
3.1.1.1 Corporate structure
22.
An important element of the insurer’s supervision is the initial and on-goingassessment of the legal corporate structure of the insurer.
23.
The legal corporate structure must allow for the effective supervision of an
insurance company. It limits the objects of the business of the insurer and its related
operations.
24.
Supervisors should receive insurer’s corporate structure information at least
annually from the insurer and whenever a significant change in corporate structure
occurs.
3.1.1.2 Corporate data
25.
The supervisor establishes the corporate data that they need to undertake thesupervisory process. It should include, at least:







the name of the insurer and address of its offices
former names of the company (if applicable)
if insurer belongs to a group, the name of the organisational group, key
branches and participations
date of establishment
number of full time employees
name of the key functionaries, such as board members, senior management,
key persons in control functions (if applicable, risk managers, complianceofficers, internal auditors and appointed actuaries)

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name and address of the external auditors and actuaries
contact details.
3.1.1.3 Key functionaries6

26.
Insurers should be required to demonstrate to the supervisor the fitness andpropriety of key functionaries to fulfil their respective roles by submitting
documentation like executive biographies, and other illustrating their knowledge,
experience, skills and integrity upon request, or where there are changes in key
functionaries. The knowledge and experience required depends on the position andresponsibility of the functionary within the insurer.
27.
Insurers should provide to the supervisor general information regarding theassessment of the fitness and propriety of the insurer’s external experts, such asexternal auditors and actuaries. In some cases, supervisors might rely on professional
bodies that set and enforce professional conduct standards.
28.
The insurers should notify their supervisor if any of the persons mentioned inparagraphs 26 and 27 have been replaced because they no longer comply withsuitability requirements.
3.1.1.4 Capital structure and shareholders729.
Supervisors should receive at least annually information about significant
shareholder positions in order to know the owners in control of an insurer. It is
important to know the holding of a defined number or percentage of issued shares or
specified financial instruments above a designated threshold in an insurer or its
intermediate or ultimate beneficial owner, and the voting rights attached to the sharesor financial instruments.
30.
Upon request insurers should provide the supervisory authority withinformation on their shareholders and any other person directly or indirectly exercising
control.
31.
An important element of the supervision of insurers is the initial and on-goingassessment of the fitness and propriety of an insurer’s significant owners. Supervisor
should be satisfied that significant owners have the financial soundness and integrity
to fulfil their role.
32.
Supervisors are able to grant or deny approval to a person who wants toacquire significant ownership or a controlling interest in an insurer. For this reason,
notification should be required for changes in ownership or control according to thepercentages of an insurer’s issued shares. These established percentages typicallyrange between 5 and 10 percent. Where supervisory approval is required in addition
to notification, specific thresholds (equal to or higher than those for notification)
should be set.

6 See ICP 7.Suitability of persons. IAIS–Insurance core principles. Approved in Singapore, October 2003.
7 See ICP 8. IAIS-Insurance core principles. Approved in Singapore on 3 October 2003.
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33.
Supervisor might also require information about transactions with shareholders
and members of the management body; intra-group transactions, and distribution toshareholders.
3.1.1.5 Corporate organisation chart
34.
Insurance supervisors might require insurers to submit documents proving theorganisational or group structure with a clear allocation and segregation of
responsibilities.
35.
If the insurer belongs to a group, the information must includes the legal andorganisational group structure, considering, for example, a list of their subsidiaries,
key branches and participations; the name of the parent company, and othercontrolling parties.
36.
This information should be submitted at least annually and more frequently ifthere are material changes.
3.1.1.6 Objectives, policies and management8
37.
Supervisors require and verify that the insurer complies with corporate
governance principles. For this reason, supervisors require insurer to submit annually
information regarding insurers’ business strategy, objectives, policies and main
practices. This should include information on any changes in the management
structure and organisation.
38.
Where insurers have written policies related to risk management, internal
control and internal audit, those policies should be submitted to the supervisor at least
annually.
39.
In some jurisdictions, insurers are required to develop a written policy, toensure the on-going appropriateness of the information to be reported to thesupervisor. This policy should ensure that the information reported to the supervisor iscomplete, consistent and accurate. In these cases, this policy should be reviewed
annually and should be submitted to the supervisor.
3.1.1.7 Summary of selected financial data for five years
40.
Taking into account the responses of the Questionnaire of Information
Gathering and Analysis, the IAIS considered the need of having selected financial
information over a 5 years period. It might include, among other:






Gross premiums written (by line of business)
Net premiums written (by line of business)
Statement of income:- Net underwriting gain or loss
- Net investment gain or loss
- Dividends to policy holders- Net income
Balance sheet items:

8 See ICP 9. Idem.
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Total admitted assets (this is a concept used in some jurisdictions; if not, it
would be desirable to ask for Total assets)- Intermediaries’ balances or uncollected premiums- Total liabilities- Losses / claims paid
- Loss Adjustment Expenses- Unearned premiums- Capital paid up- Surplus as regards policyholders
Percentage distribution of Cash and Invested assets (by type of assets: bonds,
stocks, mortgage loans or real estate, among others).
Capital and surplus accounts- Net unrealised capital gains or losses- Dividends to stockholders- Change in Surplus
Gross losses paid (by line of business, including non proportional reinsurance)
Net losses paid (by line of business, including non proportional reinsurance)
Catastrophe exposure development
Operating percentages:- Premiums earned- Losses incurred- Loss expenses incurred- Other underwriting expenses- Net underwriting gain or losses

-









41.
This information should be submitted at least annually, considering that it
includes information of the last five years.
3.1.1.8 Key performance indicators 942.
Considering the responses to the IAIS- Questionnaire on Information
Gathering and Analysis, supervisors deem necessary to have more detailed key
performance indicators than those considered in point 3.1.1.7. Key performanceindicators should be submitted to the supervisor at least annually..
43.
Key performance indicators can vary from one jurisdiction to another; however
in general terms it is accepted that they should provide information on technicalperformance in the areas like pricing adequacy, provision adequacy, claims statistics,
risk concentration, reinsurance and capital.
44.

Key performance indicators on pricing adequacy might include:

loss ratio: the ratio of claims incurred to premiums earned
expense ratio: the ratio of expenses to premiums earned
combined ratio: the sum of the loss ratio (claims ratio) and the expense ratio
operating ratio: is the combined ratio adjusted by the addition of allocatedinvestment return in relation to premium income

9 Refer to IAIS - Standard on disclosures concerning technical performance and risks for non-life insurers andreinsurers, approved in Amman on 7 October 2004.
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45.

Key performance indicators on provision adequacy might include:



46.

the run off result
claims development
Key performance indicators on claims statistics might include:






47.

the trend in the number of claims and average size of claims
the ratio of the total cost of claims incurred to the number of claims
the claims frequency
the trends in mortality and morbidity experiences
supportability of bonus rates for participating policies
Key performance indicators on risk concentrations might include:







48.

the geographical concentration of premiums
the economic sectoral concentration of insurance risk
the risk concentration inherent in the reinsurance covera description of the extent to which the risk is reduced by reinsurance andother risk mitigating elements
the top-five-premium concentration ratio: the premiums ceded to an insurer’s
five largest reinsurers in aggregate, as a ratio of the total reinsurance premium
ceded
Key performance indicators on reinsurance might include:










49.

information on their objectives, policies and practices for retaining andmitigating insurance risks
the reinsurance result - the cost of reinsurance less recovery from reinsurance
of incurred claims. The cost of reinsurance should include reinsurance
premiums as well as foregone investment return from these reinsurance
premiums
the credit quality of the reinsurers, for example, by grouping reinsurance
assets by credit rating
the credit risk concentration of reinsurance assets
the proportion of the reinsurers that are supervised
the nature and amount of collateral held against reinsurance assets
the development of reinsurance assets over time
the ageing of receivables from reinsurers on settled claims.
Key performance indicators on capital might include:

information on capital adequacy in relation to solvency requirements: thegeneric solvency requirements of the jurisdiction and how insurers comply withthe requirements:- the ratio of regulatory capital to premium income- the ratio of regulatory capital to losses- the ratio of regulatory capital to technical provisions.

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3.1.1.9 Other information
50.
The supervisor might require insurer to submit for the purposes of supervision
any other relevant information. This information might include:







key assumptions about market variables, such as the inflation rate
the main sources of data used and the chief elements of methodologies
applied in measuring insurance assets and insurance liabilities
the main factors considered when calculating adjustments to the value of
insurance assets and insurance liabilities to reflect risk and uncertainty
significant pending matters that may cause a reassessment of the value of theinsurance assets and liabilities reported (for example changes in legislation or
court rulings)
on-going lawsuits and regulatory actions taken by other jurisdictions, if it is the
case.
3.1.2

Corporate governance51.
Taking into account the responses to the IAIS-Questionnaire on Information
Gathering and Analysis, most supervisors require and verify that the insurer complies
with corporate governance principles. For this reason, they require information anddocumentation regarding insurer’s corporate governance. It might include, among
others:







52.

the information necessary to assess the system of governance applied by the
insurer, the business they are carrying on, the valuation principles applied forsolvency purposes, the risks faced and the risks management system
written policies in relation to risk management, internal control, internal audit
and if it is the case, outsourcing
the information regarding the insurer’s compliance with applicable corporate
governance principles
the information to assess the capital structure, needs and management
validate that an insurer’s system of governance has not materially changed
over the year, or, if an internal reorganisation occurs, the supervisor mustreceive details on any material changes to the system of governance.
This information should be reviewed at least annually.
3.1.3

Internal control system10

53.
Insurers are required to set up a comprehensive internal control system
according to the nature, scale and complexity of the insurers' business. This requires
establishing committees where appropriate, and implementing procedures andpolicies, which clearly set out how they deal with internal control. The written policies
should be approved by the administrative or management body and be revised atleast annually or before any significant change is implemented in the system.

10 See ICP 10. IAIS- Insurance core principles. Approved in Singapore on 3 October 2003, and proposed revised
ICPs.
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54.
Supervisor should verify that relevant control functions, such as internal andexternal audit, actuarial and compliance functions exist and must test the adherence
to the internal controls as well as to applicable laws and regulations. Internal control
system should at least include administrative, accounting procedures and internal
control framework.
55.
Supervisors require having access to reports of internal audit function andreports of external audit, actuarial and compliance functions.
3.1.4

Risk management56.
As it was mentioned in paragraph 39, insurers are required to have written
policies and procedures in relation to risk management, when applicable. In addition,some supervisors require insurers to have manuals and other documentation
requiring insurers to recognise the range of risk that they face and to assess andmanage them effectively. In those cases this documentation should be submitted tothe supervisor. In most jurisdictions, relevant risk areas include: technical risks,
investment risks, non-technical risks.11 Insurers should take into account the effect ofrisk mitigation techniques, provided that credit risk and other risk arising from the useof such techniques are properly considered.
3.1.4.1 Technical risks
57.
Technical risks include various kinds of risk, which are associated with thetechnical or actuarial bases of calculation for premiums and provisions, as well as
risks associated with operating expenses and extreme growth, i.e. underwriting risk
and reserving.
3.1.4.2 Investment risks
58.
Investment risks include various kinds of risk which are associated with theinsurers’ asset management, i.e. asset risks, investment (in particular derivatives),
liquidity and concentration risk.
59.
In assessing an insurer´s investment risk management function, a supervisor
should review the insurer´s investment risk management framework and theinvestment policy.
60.
The supervisor might request, among other, the following information relating
to the management of investment risks:The insurer’s investment risk management policy, approved by the Board of
Directors, including the insurer´s tolerance and limits for managing its: 12-

market risk: is the risk to an insurer’s financial condition arising frommovements in the level or volatility of market prices. Market risk involves
the exposure to movements of financial variables such as equity prices,interest rates, exchange rates or commodity prices. It also includes the
exposure of derivatives to movements in the price of the underlying

11 See ICP 21, Essential criteria d. IAIS-Insurance core principles. Approved in Singapore on 3 October 2003.
12 Definitions provided within the current IAIS glossary.
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instrument or risk factor. Market risk also involves the exposure to otherunanticipated movements in financial variables or to movements in theactual or implied volatility of asset prices and options. Market risk
incorporates general market risk (on all investments) and specific market
risk (on each investment).
-

credit risk: the risk of financial loss resulting from default or movements inthe credit rating assignment of issuers of securities (in the company’s
investment portfolio), debtors (e.g. mortgagors), or counterparties (e.g. on
reinsurance contracts, derivative contracts or deposits) and intermediaries,
to whom the company has an exposure. Credit risk includes default risk,
downgrade or migration risk, indirect credit or spread risk, concentration
risk and correlation risk.

-

liquidity risk: the risk emerging when the insurer fails to make investments(assets) liquid in a proper manner as its financial obligations fall due.

The details of the insurer´s investment policies, including the policy guiding theworks of the investment committee, and the details of the investment
guidelines for derivatives or structured products that have the effect ofderivatives.



Investment risk management reports, covering the following areas:--

details of position by asset type, concentration analysis of credit exposuresby counterparty, regulatory or internal limits breached in the period,
planned future investment activities
specific details relating to market risk types such as interest rate risk,
equity and real estate risk, commodity risk and currency riskinterest rate risk
credit risk reports
liquidity risk reports
3.1.4.3 Non-technical risks

61.
Non-technical risks include various kinds of risk which cannot be classified astechnical risks or investment risks. For example, operational risks 13 , reputationalrisks, regulatory risk.
3.1.4.4 Impact of various risk transfer or risk sharing mechanisms
used by the insurer
62.
Supervisors should request insurer’s overall risk management philosophy andpolicy. This policy should include whether and how reinsurance, derivatives,securitisation and alternative risk transfer or mitigation tools are used to manage risk.
3.1.5

Sensitivity, stress testing and scenario analysis

13 Operational risk is the risk that deficiencies in information systems of internal controls will result in unexpected
loss. This risk is associated with human error, system failures and inadequate procedures and controls.
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63.
Supervisors practice is to require insurers to undertake an annual stress test,
but the frequency is a matter for supervisors. These tests can be used to identify andquantify the impact of different stress scenarios on an insurer’s expected futurefinancial position14.
3.1.6

Internal models

64.
The IAIS recognises that the use of internal models is an important new areaof work for many insurers and an evolving area of practice for the insurance industry
worldwide. Internal models can be considered in the dual context of: a) a method bywhich an insurer determines its own economic capital needs; and b) a means todetermine an insurer’s regulatory capital requirements in the context of the solvency
regime, where appropriate15.
65.
The supervisor will likely want to be satisfied that all aspects of the model areappropriate, satisfy regulatory/supervisory requirements, and are reviewed regularly.
The choice of the type or review will depend on the specific situation of an insurer andthe supervisor’s discretion. Whichever type is chosen, there will be qualitative,
quantitative and governance requirements to be met that are defined by thesupervisor before the model will be accepted and approved for use.
In reviewing an insurer’s internal model for regulatory capital purposes, thesupervisor should require the insurer, as a minimum, to subject the model to threetests: statistical quality test, calibration test and use test.
3.1.6.1 Information on the risks assessed by the model and possibly
capital assessment derived from its operation
66.
Considering the responses to the IAIS- Questionnaire on Information
Gathering and Analysis, where an insurer calculates its regulatory capitalrequirements using an internal model, this model needs to be approved by thesupervisor. If this is the case, in any application for approval, the insurer should
submit documentary evidence that the internal models meet the requirements
established by the supervisor.
67.
The
following:

documentary evidence must demonstrate among other issues, thethat the insurer has an appropriate organisation and adequate system ofinternal controls, related to its size and characteristics and the nature andcomplexity of its risks
that the insurer is able to understand the nature of the identified risks.
3.1.6.2 Details of how the internal model is embedded within theinsurer’s corporate governance and operational processes
and risk management

14 See ICP 20, criteria g) ICP 21, criteria k, and ICP 23, criteria j).
15 For more details, see the IAIS Standard No. 2.2.7. on the use of internal models for regulatory capital purposes,
approved in Budapest on 17 October 2008 and the IAIS Guidance paper No. 2.2.6. on the use of internal models forregulatory capital purposes approved in Budapest on 17 October 2008.
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68.
If the use of internal models is allowed for regulatory capital purposes, thedocumentary evidence should demonstrate that:

The internal model is widely used and plays an important role in the insurers’
governance system, and particularly, in their risk management system andtheir decision-making processes.
The insurer has adequate resources, skills and independence of the people
responsible for developing and reviewing its internal model
3.1.6.3 Information to understand the structure of a model, level ofcomplexity of the components, reference to appropriate
theory or practice, appropriateness of use, selection
assumptions

69.
The supervisor must require the insurer to provide the following information
regarding the internal model:Documentation explaining the overall scope of the internal model anddescribing its structure.
Documentation of the various modules of the internal model and theinteractions between these modules:
-

-

-

-

-

It should enable a knowledgeable third party to ascertain, in a reasonableamount of time, whether the regulatory requirements for approval of theinternal model are satisfied.
It must explain the methodology (theories and assumptions) on which theinternal model is based. For example: assumptions for insurance risk
variables (i.e. insurance risk parameters that may be determined byrandom sampling from distributions); assumptions for financial risk
variables (parameter values may be obtained from scenario generators);assumptions for policyholder behaviour risk; assumptions on company
management actions such as asset/liability management, risk mitigation,
pricing and re-pricing actions, and expenses management among others.
The manner in which the model parameters were estimated, and thedatasets and other information sources used in the process.
It must include expected correlations in normal environments as well as
dependencies in tail scenarios; project and discount future cash flows, andassess estimates for model error, among others.
It must describe the limitations and weaknesses of the internal model. The
documentation must indicate which positions and financial instruments or
which risks have not been taken into account.
It must explain its implementation within the insurance company.
3.1.6.4 Information regarding test, audit, controls and storage

70.
Supervisors should require insurers to have detailed documentation of theinternal model structure, contents and changes. The documentation must consider:

all algorithms, relating components and assumptions in the model should bethoroughly documented
the testing of the entire model

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




the developer’s manuals if a commercial software package is used as thebasis of the modelthe documentation of each step in the designs and construction should be
integrated if the model is developed in-house
the reports of each internal and external review and the results of testingshould also be documented, andthe files, working papers, programs, and data sets that may need to beavailable for on-site audit or supervisory reviews.
3.1.6.5 Use of experts

71.
The quality and depth of the documentation should be such that it would bepossible for independent professionals, to understand the most important design
decisions and, in principle at least, to reproduce the model’s outputs with reasonableaccuracy if all parameters and exposure data were available. In this context theindependent professionals would be persons who have experience in building andassessing models for insurance or reinsurance companies and knowledge in themodeling of the relevant risks the insurer is exposed to.

3.2 Financial information
72.
Financial supervision might include the verification of the insurer’s state ofsolvency, the establishment of the assets covering technical provisions and capitalrequirements in accordance with the regulation. Supervisors require insurers to
submit information about their financial condition and performance on both a solo anda group-wide basis.
3.2.1

Financial statements

73.
Considering the responses to the IAIS-Questionnaire on Information Gatheringand Analysis, financial statements should provide an overview of an insurer’s financial
condition. In general terms, jurisdictions consider some basic financial statements: 16






Balance Sheet. It is also referred as statement of financial position orcondition, reports on an insurer’s assets, liabilities and ownership equity at agiven point in time.
Income Statement. It is also referred as profit and loss statement, reports on
an insurer´s income, expenses, and profits over a period of time.
Statement of retained earnings. It explains the changes in an insurer’s
retained earnings over the reporting period.
Statement of cash flows. It reports on insurer´s cash flows activities;
particularly it’s operating, investing and financing activities.

74.
The submission of those statements should be established by the supervisor
in a clear manner. It could be monthly, quarterly or annually. The submission should
be timely, received within three months of the close of reported period, and should be
on a standard consistent across the industry. In the case of the annual statements,
they should be audited.

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75.
For large insurers, financial statements are often complex and may include anextensive set of notes to the financial statements. The notes typically describe each
item on the balance sheet, income statement and cash flow statement in further
detail. Notes to financial statements are considered integral part of the financial
statements.
76.
The supervisor should require annual quantitative reporting templates that
contain all the financial and solvency information; and quarterly quantitative reporting
containing the core financial and solvency information such as the capitalrequirements, liabilities, including technical provisions, premiums and claims, data on
assets including investments and own funds.
3.2.2 Investments
77.
The supervisor authority should request, among other, the information listed in
the following sub-sections relating to investments. The submission of those
information should be established by the supervisor in a clearly manner. It could bemonthly, quarterly or annual.
78.
In addition to aggregate information on each asset class (§§ 3.2.2.1 to3.2.2.5), an insurer should, for various asset classes, provide the detailed list of all theassets that belong to the class (§ 3.2.2.6).
79.
This section provides an example on how the quantitative investment
requirements may be complied with. Supervisors could adopt a different format fromthat given here or further disaggregate the asset classes and provide more detailed
breakdowns. For example, supervisors could also request information on significant
investments (i.e. investments that account for more than a particular percentage of
total assets).
3.2.2.1

Summary information on different classes

80.
For each asset class, an insurer should provide the supervisor with thenecessary information to understand the nature of the asset class. This would
generally include the following:





81.

criteria for recognition as an asset
criteria for classification into that asset classmethods and assumptions used in measuring asset value
significant terms and conditions that may affect the amount, timing andcertainty of future cash flows.
There is an example of asset class segregation:17

16 The number and nomination of those financial statements can vary. However the information contained issimilar in many countries.
17 See IAIS – Standard on disclosures concerning investment risks performance for insurers and reinsurers,
Approved in Vienna on 21 October 2005
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Table 1
Breakdown by asset classMarket value
Table*
Equitysecurities
Debt
securities
Loans

4

Properties

5

Cash anddeposits
Receivables

6
7

Others8This year

Historical costs**

Last year

This year

Last year2
3* This column refers to the number of the tables provided as an example on how the quantitative aspects of thissection may be complied with.
** This document uses the term “historical cost” in accordance with the terminology used by the IAIS- Standard on
disclosures concerning investment risks performance for insurers and reinsurers.

3.2.2.1.1 Equity securities
82.
For an asset class that involves equity securities, an insurer should submit
information to the supervisor showing a breakdown of listed securities versus unlisted
securities.
83.

There is an example of details regarding equity securities:
Table 2
Details regarding equity securities
Market value
This year
Amount

As % oftotal for
this
class

Historical costs

Last year
Amount

As % oftotal forthis classThis year
AmountLast year

As % oftotal forthis class

Amount

As % oftotal forthis class

Breakdown bylisting status
TurnoverTotal bought
Total sold

3.2.2.1.2

Debt securities

84.
For an asset class that involves debt securities, an insurer should submit
information to supervisor showing:



85.

a breakdown by credit rating of the issue
a breakdown by residual maturity (up to 1 yr, from 1 to 3 yrs, from 3 to 7 yrs,
from 7 to 10 yrs, + 10 yrs)
a breakdown among government, semi-government and corporate securities
There is an example of details regarding debt securities:

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Table 3
Details regarding debt securities
Market value
This year
AmountHistorical costs

Last yearAs %of total
for thisclass

AmountAs %of total
for thisclassThis year
AmountAs %of total
for thisclass

Last year
AmountAs %of total
for thisclass

Breakdown by credit
ratingAA- or better
Worse than AA- but
not worse than AWorse than A- but not
worse than BBBWorse than BBB- but
not worse than BWorse than BUnrated
Breakdown by
residual maturity
Up to 1 year
More than 1 year and
up to 3 years
More than 3 years andup to 7 years
More than 7 years andup to 10 years
More than 10 years
Breakdown by typeof issuer
Government
Semi-government*
Corporate securities*Include debt securities issued by statutory bodies or municipalities.

3.2.2.1.3

Loans

86.
For an asset class that involves loans (except policy loans to policyholders
secured by cash value of life insurance policies), the insurer should submit tosupervisor information showing:

a breakdown by types of loans (e.g. residential mortgage, commercial
mortgage, loans to natural / legal persons, loans to related entities, among
others)a breakdown of loans according to whether they are backed by collateral /mortgages or are uncollateralised.
if available, loans should be broken down into credit quality of the obligor.

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There is an example of details regarding loans:18

87.

Table 4
Details regarding loans
Market value
This year
Amount

As % oftotal forthis class

Historical costs

Last year
Amount

As % oftotal forthis classThis year
Amount

As % oftotal forthis class

Last year
Amount

As % oftotal forthis class

Breakdown by types
Residential mortgage
Commercial
mortgage
Other private loans
Other commercial
loans
Breakdown bywhether collateralexists*With collateral
Otherwise*Excludes guarantees

3.2.2.1.4

Properties

88.
For an asset class that involves properties (e.g. land and buildings), an insurer
should submit to the supervisor information showing :




89.

a breakdown by types of properties (e.g. residential, commercial, among
others)a breakdown by geographical locationa breakdown by properties according to whether they are held for investment
or are owner occupied
There is an example of details regarding properties:
Table 5
Details regarding properties
Market value
This year
AmountHistorical costs

Last year
As % oftotal forthis class

Amount

As % oftotal forthis classThis year
Amount

As % oftotal forthis class

Last year
Amount

As % oftotal for thisclass

Breakdown by
type
Residential
Commercial
Industrial Others
Breakdown bygeographicallocation
Domestic Foreign
Breakdown by
purposeInvestment
property
Own occupation

18 If information is available, loans should be broken down into credit quality of the obligor.
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3.2.2.1.5

Cash and deposits

90.
Insurers should submit information regarding cash and deposits. It could
consider:19
Table 6
Details regarding cash and deposits
Market value
This year
AmountAs %of total
for thisclass

Historical costs

Last year
AmountThis year

As % oftotal forthis class

AmountLast year

As % oftotal forthis class

Amount

As % oftotal forthis class

Breakdown
by type Cash
Deposits Cashequivalents

3.2.2.1.6

Receivables

91.
For an asset class that involves receivables, an insurer should submit to thesupervisor information showing:



92.

a breakdown of the ageing of the receivables aggregated by time bands (forexample, less than 90 days, from 91 days up to 1 yr, +1 yr)
a breakdown by types of counterparties or obligors (e.g. from reinsurers, fromcedents, from other insurers, from agents & brokers, from policyholders, fromother counterparty)
There is an example of details regarding properties:
Table 7
Details regarding receivables
Historical costs
This year
Amount

As % of total
for this class

Last year
Amount

As % of total
for this class

Breakdown by ageing
Less than 90 days
90 days up to 1 year
More than 1 year
Breakdown by obligor
From reinsurers
From cedents
From other insurers
From agents/brokers From othercounterparty
Confirmed by counterparty

3.2.2.1.7

Other assets, including intangibles

93.
For others assets classes an insurer should submit to supervisor information
by type of assets.
19 Also see section 3.2.2.6. Detailed information on some asset classes. Identity of bank should be known, as well
as location and currency of cash.
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Table 8
Details regarding other assets
Historical costs
This year
Amount

As % of total forthis class

Last year
Amount

As % of total forthis class

Breakdown
by typeIntangibles
Goodwill
Deferred tax
Otherintangibles
Others<describe>

3.2.2.2

Derivatives20

94.
In regard to derivatives, an insurer should submit information to the supervisor
showing:a breakdown of how derivatives are allocated into different asset classes(equity securities, debt securities, properties, other asset class)a breakdown of derivatives according to whether they are used for hedging
purposes or nota breakdown of exchange-traded derivatives versus over-the-counter
derivatives (exchanged traded vs. OTC)
the difference between the market value of derivative positions and the value
shown on the balance sheet
a breakdown of the main types of derivatives used (e.g. forward/futures,
versus options, versus swaps, interest rate versus equity versus debt/credit,etc.).

95.
Given the nature of insurance operations, derivatives should be usedpreferably as a risk mitigation mechanism. Supervisory authorities may restrict theuse of derivatives to the reduction of investment risks or efficient portfolio
management. Derivatives should be considered in the context of a prudent overall
asset/liability management strategy.21
96.
Supervisors should monitor the extent of an insurer’s exposure in derivatives.
Supervisors should obtain some or all of the following quantitative information:notional amounts of derivatives by broad risk category, instrument type andtrading type (over the counter or exchange traded) in order to understand thescope and nature of the of insurer’s involvement in derivatives activities

20 Where a jurisdiction completely prohibits the use of derivates and similar commitments this section clearly do
not apply.
21 See ICP. 22. Explanatory note 22.2
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




market values of derivatives, or equivalent for over the counter instruments, by
broad risk category, instrument type and trading type in order to gauge theinsurer’s exposure to financial riskfor derivatives used in relation to the management of invested assets or
liabilities, the net value of the related positions
where derivatives are held for purposes other than the management of theportfolio of assets, additional information, as appropriate.

Information may include the end-of-period position, the average position andthe maximum position over the analysis period.
97.

There is an example of details regarding derivatives
Table 9Details regarding derivatives
Market value
This year
AmountHistorical costs

Last yearAs %of total
for thatclass

AmountAs %of total
for that
class

This year
AmountAs %of total
for that
class

Last year
AmountAs %of total
for thatclass

In asset class
Equity securities - forhedging - otherwise Debt
securities - for hedging otherwise Properties - forhedging – otherwise Other
asset classes
Breakdown by
counterparty
Exchange-traded Overthe-counter
Breakdown by typeForward/futures Swaps
Options Others

3.2.2.3

Other investments

98.
The Supervisors should require any other information necessary forsupervisory purposes.
3.2.2.4

Investments in related parties

99.
Supervisors should require the amount of assets invested in, lent to, or
otherwise dependent on the operations of related parties of an insurer, including theinsurer’s parent, subsidiaries or associates as defined by the insurance supervisor orby other legislations, or a joint venture (often referred to collectively as affiliatedinvestments).
3.2.2.5 Off-balance sheet exposures100. Supervisors should require the amount of off-balance sheets assets andliabilities

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3.2.2.6 Detailed information on some asset classes
101. For some asset classes22, an insurer should provide a detailed list of all theassets that are aggregated in the asset class. These detailed lists aim at helping thesupervisor check that these assets are effectively held by the insurer.
102. These lists could be provided under tables. The form of which could be thefollowing:
Identification
number a)
a)
b)
c)
d)

f)

Name & designation of
the asset c)

Location and currency of
the asset d)e.g. for securities, the ISIN number (ISIN: International Securities Identification Numbers)
Applicable to securities.
In the case of land / buildings, this should include its complete address (city, street andnumber etc.) of the building. In the case of bank accounts, this should include name andaddress of the bank.
This should at least include the country where the asset is located: e.g., for securities,
country of the depository (bank, etc) that holds the securities owned by the insurer.

Allocation e)e)

Number of assets
held b)Market value

Historical cost

Repayment value f)This should include information such as: Is the asset without particular allocation? Is it
allocated to the coverage of capital requirements? Is it allocated to the coverage ofunspecific technical liabilities? Of specific technical liabilities (e.g. unit-link life
liabilities, specific insurance contracts, liabilities that are located outside the jurisdiction /that are assessed in foreign currency, etc.)? Was the asset provided as a collateralisation toa third party?
The insurer should provide a list of possible allocations for assets so that insurers can carryout the breakdown
For bonds, etc.

3.2.3 Commissions and expenses
103. Supervisors should require the amount of commissions and other expenses
related to insurance operations.
3.3

Audit Opinion report104. Because it is essential for the supervisor to receive the necessary informationin order to effectively monitor the insurer and identify potential problems, supervisors
should require, as a minimum, an audit opinion provided annually by an external
auditor. The supervisor requests more frequent and more detailed additional
information whenever there is a need.
105. Both internal and external audits are necessary and these constitute importantcomplements to the assessment of insurance companies by the insurance supervisor.
3.3.1

Audited financial statements

106. Supervisors should at least annually, receive audited financial statements fromthe insurer. The auditor’s report should be issued by an independent external auditor

22 Typically, this could exclude assets such as receivables. But it would normally include securities, land /buildings, loans, etc.
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as a result of an audit or evaluation performed on an insurer. This may also include areport by the responsible accountant.
107. More frequent audited financial statement may also be beneficial under
specific circumstances in order to enhance regular reporting under specificcircumstances and regarding a particular insurer.
3.4 Statutory compliance information
108. Considering the responses to the IAIS-Questionnaire on Information Gatheringand Analysis, supervisors should review that insurers comply with a prescribedsolvency regime. For this reason, insurer needs to supply supervisors with thenecessary information to review and evaluate such compliance.
109. This assessment should be performed at least annually. However, somesupervisors might require carrying out this assessment quarterly.
3.4.1

Minimum capital test

110. Supervisors should perform minimum capital tests at least annually in order toanalyse the capital adequacy of the insurer and whether capital is commensurate to
the company’s risk profile.
111. The minimum capital requirement represents a level of capital below which
policyholder’s interests would be seriously endangered if the undertaking wereallowed to continue to operate. In the event that the minimum capital requirement isbreached, supervisory action is triggered.
112. Insurers should calculate the minimum capital requirement at least quarterly
and report the results of that calculation to supervisor. Breaches of minimum capitalmust be reported as soon as they occur.
3.4.2. Regulatory capital or solvency margin required
113. Regulatory capital requirements may be determined using a range ofapproaches, such as standard formulas, or other approaches, more tailored to theindividual insurer (such as internal models), which are subject to approval by thesupervisor.
114. Insurers should be required to disclose appropriate qualitative and quantitative
information about risk exposures and the components that make up their regulatory
capital requirements. Supervisors should specify which solvency information should
be made public.23
115. Insurers should calculate the regulatory capital requirement or solvency
margin required, at least once a year, and report the result of that calculation to thesupervisor. This facilitates the determination of the actual solvency coverage.
23 For more information, see IAIS Standard on the structure of regulatory capital requirements, approved in
Budapest on 17 October 2008 and the IAIS Guidance paper on the structure of regulatory capital requirements,
approved in Budapest on 17 October 2008.
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3.4.2.1 Amounts of the components and structure of capital
116. Supervisors should receive this information at least annually from the insurer.
This is also important with regards to suitable forms of capital.
3.4.2.2 Quality of capital
117. Supervisors should receive information on the quality of capital at least
annually from the insurer. This should also include information on the quality of theassets covering the technical provisions of the insurer, if such requirements exist in
the particular regulatory regime.
3.5 Asset-liability matching
118. Supervisors should receive at least annually, information regarding insurers’
asset-liability positions to ensure that their investment activities and asset positions
are appropriate to their liability and risk profile
3.5.1

Duration of assets and technical provision

119. Supervisors should receive effective duration information at least annuallyfrom the insurer. This is also important with regards to suitable forms of capital.
3.5.2

Solvency and liquidity dimensions

120. Supervisors should receive this information at least annually from the insurer.
This is also important with regards to suitable forms of capital.
3.6 Information on technical performance and risks
121. Technical risks are the essence of insurance activity. It is therefore crucial forthe supervisor to receive the necessary information on the underwritten risks, on theirvaluation in balance sheet, other financial statements and supervisory returns, and on
their mitigation through reinsurance and other forms of risk transfer.24
3.6.1

Life insurance

3.6.1.1

Segmentation of data

122. Most of all technical data (premiums, technical provisions, among others)
should be broken down into relevant segments, taking into account the timing andnature of liabilities. These may vary across jurisdictions, depending on thecharacteristics of each market. Possible segmentations are the following:type of risks: savings without mortality or longevity risks, savings with mortality
or longevity risks, annuities25, death benefit, unit-linked contracts

24 Current IAIS disclosure standards No. 10 and 12 provide appreciable inputs on technical risks to be discloses to
the general public. These also constitute a solid basis for determining the relevant information that is to be gatheredby the supervisor.
25 This is a particular case of saving with longevity risk, which often calls for specific segmentation.
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

type of contract: individual / group, participation / non–participation
type of premiums: single / regular payment.

123. To facilitate the analysis, it is advisable that data are provided for both current
and previous years.
3.6.1.2

Operating data124. Supervisors should receive information regarding operating data. This should
also include:











gross and net premiums
investment income
other income
gross and net payments to policyholders
change in Technical provisions
policyholder bonuses
acquisition costs
acquisition costs amortised
administration and other expenses
other
3.6.1.3

Technical provisions

125. Supervisors should receive information on the calculation and valuation of thetechnical provisions. Technical provisions should be calculated by class of business.
126.











The following items should be provided:
discount rates
mortality / longevity assumptions
provision for participation
methodologies for valuing guarantees and options
value of guarantees and options as a percentage of value of liabilities
duration of technical provisions
duration of assets covering technical provisions
negative technical provisions (if any)technical provisions that are lower than the surrender value; amount of thedifference, andexpenses assumptions.

127. The supervisor might review the sufficiency of the technical provisions throughoff-site monitoring and on-site inspection.
3.6.1.4

Sensitivity analysis

128. The supervisor requires that insurers undertake regular stress testing for arange of adverse scenarios in order to assess the adequacy of capital resources, incase technical provisions have to be increased
129. The insurer should provide sensitivity analysis of its technical provisions andperformance, displaying, for example, the following items:
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effect on performance of 1% decrease / increase in Yield curve
effect of 1% decrease / increase in Mortality rates.

130. Because the technical provisions of some contracts may increase and the TPof other contracts may decrease when there is a decrease or an increase in mortality
rates, it is advisable to conduct two separate calculations:calculation on those contracts where the amount currently payable on deathexceeds the technical provisions, and therefore an increase in mortality islikely to lead to an increase of technical provisions
calculation on those contracts where there is no death benefit, or where thecurrently payable death benefit is lower than the technical provisions, andtherefore a decrease in mortality is likely to lead to an increase of technicalprovisions
Lapse/surrender risk. Lapse risk may involve a liquidity risk for the insurer, andtechnical losses when rates of surrender increase and surrender value
exceeds technical provision, or conversely when rates of surrender decrease
and surrender value is lower than the technical provisions.

The following items should also be reported:

Expected surrenders; effect of a 10% increase / decrease in surrenders:o for those contracts where the surrender value is higher than thetechnical provision: effect of a 10% increase in surrenders
o for those contracts where the technical provision is higher than thesurrender value: effect of a 10% decrease in surrenders.
3.6.1.5

Risk concentration

131. Supervisors should receive information on risk concentrations. A risk
concentration refers to an exposure with the potential to produce losses large enoughto threaten an insurer’s economic health or ability to maintain core operations.
Insurers should submit a qualitative and quantitative description of the kinds of risk
concentrations to which the insurer is exposed and how high these are, It isnecessary to understand the extent to which the risk is reduced by reinsurance andother risk mitigating tools.
132. This item is usually more relevant in non-life business than in life business.
However, concentrations relating to maximum amounts insured (gross and net ofreinsurance) may be relevant data to be provided to the supervisor.
3.6.2

Non-life insurance

3.6.2.1

Segmentation of data

133. Most or all technical data (premiums, technical provisions, among others)
should be broken down into relevant classes. Although these may vary acrossjurisdictions, depending on the characteristics of each market, segmentation could
generally include the following:

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








motor insurance
fire and other property damage
accident and health insurance
liability insurance
marine, aviation and transport insurance (including freight)
credit insurance and suretyshipother non-life insurance
non-proportional reinsurance treaties.

134. Policies combining different risks could be classified according to the mostimportant risk.
135. To facilitate the analysis, it is advisable that data are provided for both thecurrent and previous years.
3.6.2.2

Operating data

136. Supervisors should receive information regarding operating data. This should
also include:









gross and net premiums
investment income
other income
gross and net payments to policyholders
gross and net changes in technical provisions
policyholder bonuses
expensesother.
3.6.2.3 Technical ratios

137.

The following ratios should be provided:loss ratio (claims ratio): refers to the ratio of claims incurred to earned
premiums. Gives an indication of how well the pricing of an insurer matches
the risks taken in the insurance contracts.



expense ratio: the ratio of expenses to earned premiums. Expenses are thesum of commissions, administrative expenses and other technical charges.
This ratio could vary depending on the way an insurer allocates its generalcosts. It can be used to assess how well premiums cover expenses incurred.



combined ratio: the sum of the loss ratio (claims ratio) and the expense ratio.
Gives a rough indication of the profitability of an insurer’s underwriting
operations. It does not, however, take into account the allocated investment
return except to the extent that discounting takes into account future interest
rates. Since income from invested premiums also contributes to technicalperformance, the business can be profitable even if the combined ratio
exceeds 100%. The combined ratio is, amongst other factors, a function of theperiod of time premiums are invested and the return on investments.

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Furthermore, the characteristics of the class of business in question, that is,
the uncertainties concerning a particular class of business (volatility of losses,
legal framework, the time to re-establish surplus etc.) can influence the
combined ratio.


operating ratio: is the combined ratio adjusted by the addition of allocatedinvestment return in relation to earned premiums. This ratio enables theassessment of business performance after inclusion of allocated investment
return. If the operating ratio exceeds 100%, losses (claims incurred) and
expenses exceed earned premiums and allocated investment return, thereby
contributing negatively to the overall return on invested capital.
3.6.2.4 Technical provisions

138. Supervisors should receive information on the calculation and valuation of thetechnical provisions. Technical provisions should be calculated by class of business.
139. When technical provisions are discounted, information such as rates of
discount, duration of technical provisions, should be provided.
140. Technical provisions can be divided in two: one part that covers claims frominsurance events which have already taken place at the date of reporting, andanother part that should cover losses from insurance events which will take place inthe future (the sum of provision for unearned premiums and provision for unexpired
risks). Insurers should provide information on the run off results defined below foreach part of the technical provisions.
141. When the running-off period extends over more than one year, insurers should
provide the run-off results over several years, the length of the period reflecting how
long-tailed the segment is.
142. Except for short-tailed business, it is appropriate to provide run-off results in aclaims development triangle. Claims development triangles should be consistent fromone year to the following.
143. In most cases, it will be appropriate that claims development triangles data
can be reconciled with balance sheet data.
144.

The form of claims development triangles could be the following:

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Aclaims incurred in

1
2

Payments in year 2006

3

Outstanding claims as of 31.12.2006

4

ECC as of 31.12.2006

5

Payments in year 2007

6

Outstanding claims as of 31.12.2007

7

ECC as of 31.12.2007

8

Payments in year 2008

9

Outstanding claims as of 31.12.200810

ECC as of 31.12.2008

11

Payments in year 200912

Outstanding claims as of 31.12.200913

ECC as of 31.12.2009

14

Cumulative paymentsB
2005
and previous
years

C
2006

D
2007

E
2008

F
2009

(ECC= estimate of cumulative claims), where non-shaded cells should be filled in.
(IBNR is included in outstanding claims).

145.

In the above table one should have:
F11 = F14
E8 + E11 = E14,
D5 + D8 + D11 = D14, etc.;
andF13 = F12 + F14 (or alternatively F13 = F12 + F11),
E13 = E12 + E14 (or alternatively E13 = E12 + E11 +E8),
E10 = E9 + E8,
D13 = D12 + D14 (or alternatively D13 = D12 + D11 + D8 + D5),
D10 = D9 + D8 + D5, etc.

that is, estimation at a given date of cumulative claims of a given year = estimation at
this given date of outstanding claims of this given year + cumulative payments forclaims of this given year performed up to this given date.
146. In various ways, such table permits a summary assessment of the adequacyof the provisioning for outstanding claims. For instance, if E13 is higher than E10, thismeans that as of 31.12.2008 provisioning for outstanding 2008 claims wasinadequate. Similarly, if B11 + B12 is higher than B9, this means that as of
31.12.2008 provisioning for outstanding claims incurred in 2005 and previous years
was inadequate.
147. Other findings can be drawn from such run-off triangles, in particular building
on settlement rates. For instance, C2/C13 represents the 1st year settlement rate of2005 claims (estimated as of 31.12.2009); F11/F13 represents the 1st year settlement
rate for 2009 claims (estimated as of 31.12.2009). In a similar way, (D5 + D8)/D13
represents the two 1st years settlement rate for 2006 claims (estimated as of
31.12.2009); etc.
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148.




If F11/F13 is higher than C2/C13, this may mean that:the settlement of 2009 claims is quicker than the settlement of 2005 claims.
This may be due to a variety of factors: because the insurer’s settlement
policy has quickened; because one huge 2005 claim was not settled in 2005;
because one huge 2009 claim was settled in 2009, etc;
outstanding 2009 claims (cell F13) may be underestimated as of 31.12.2009.

Such changes in claims settlement rates may thus lead the supervisor to investigate
more on the issue — e.g. through meetings with the insurer’s managers, through onsite inspections, etc.
3.6.2.5 Risk concentrations
149. The insurer should provide information on risk concentrations, which could
include, when relevantthe geographical concentration of the risks considering the concentration ofpremiums taking into consideration where the insured risk is locatedthe economic sectoral concentration of insurance risk
concentrations relating to maximum amounts insured (gross and net ofreinsurance)other concentrations. For example, risk concentration inherent in thereinsurance cover, the top-five concentration ratios.
3.6.2.6 Reinsurance and other risk mitigation

150. Insurers should provide the supervisor with information on their objectives,
policies and practices for retaining and mitigating insurance risks. They should
provide information about reinsurance and other risk mitigation tools. They should
provide information on the adequacy of their reinsurance cover, how reinsurance isobtained —e.g. though brokers or directly—, information on their reinsurers and on
the credit risk of the reinsurance.
151.


152.







Balance sheet information should show separately:
the reinsurers’ share of technical provisions andreceivables from reinsurers on settled claims.
Further quantitative information on reinsurance should be given including:the credit quality of the reinsurers, for example, by grouping reinsurance
assets by credit rating
credit risk concentration of reinsurance assets
the proportion of the reinsurers that are supervised
the nature and amount of collateral held against reinsurance assets
the ageing of receivables from reinsurers on settled claims
the development (run-off) of reinsurance assets over time.

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153. Credit risk concentration of reinsurance assets could include the following
data, for each of the top ten reinsurers (sorted according to the amount of credit theinsurer has on each):







name of reinsurer
ceded technical provision
receivables
receivables aged more than one year
collaterals and other guarantees (if they are established in the regulation)
ratio of uncollateralised assets (ceded technical provisions plus receivables)
over insurer’s own funds (if they are established in the regulation).

154. Run-off of reinsurance assets could be provided in the form of a development
triangle, which could be divided into 6 time-bands: current year; current year minus 1;...; current year minus 4; current year minus 5 and previous years.
3.7 Actuarial reports
155. In some jurisdictions, actuaries have a clearly defined statutory role withrespect to insurers.
156. Where the use of an actuary is adopted, supervisor should have access toactuarial reports. The actuary’s report may be supported by appropriate
documentation in the form of work papers and/or electronic files. The actuary’s
documentation may include not only the actuary’s conclusions, but also a descriptionof the process followed by the actuary.
3.8 Statistical information
157. The supervisor should set the requirements for the submission of regular andsystematic statistical information from all insurers licensed in the jurisdiction.
158. The statistical information should be separated by line of business, group ofclasses.
159. Statistical Information might have a lot of purposes. For example, to analyse
the solvency of the company, particular products, the development of the markets or
to develop the regulation, among others.
160. In order to develop a quantitative analysis of the market, the information
required could include, the number of insurers and reinsurers subdivided byownership structure whether a branch, domestic or foreign; the number of insurers
and reinsurers entering and exiting the market; market indicators such as premiums,
balance sheet totals and profitability; investment structure; new product developments
and market share; distribution channels, and; use of reinsurance, among others.
161. The market information should include historical data and current situation, butalso aims to identify trends and possible future scenarios and issues, so that thesupervisor is well prepared to take action at an early stage, if required.

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162. The supervisor requires market-wide systematic reporting to analyse andmonitor particular market-wide events of importance for the financial stability of
insurance markets.
3.8.1

Premiums, claims and adjustment expenses

3.8.1.1 Unearned premiums
163. Supervisors should receive information regarding unearned premiums. Thissection should include, for each significant line of business, information of the portionof the policy premiums written that has not yet been "earned" by the company
because the policy still has some time to run before expiration. The amount on thebalance sheet represents that part of premiums written which is to be allocated to thefollowing financial year, or to subsequent financial years.
164. Supervisors should receive information regarding the unearned commissions.
This is the estimated amount of commission revenue on ceded premiums coverage
period beyond the current year end. Unearned Commissions ceded business mustnot be reduced by Deferred Commissions arising assumed business, and must be
estimated by class of insurance.
3.8.1.2

Premiums and claims by line of business analysis ofclaims paid and unpaid

165. Supervisors should receive information on the premiums and claims by line ofbusiness, and analyse claims paid and unpaid.
166. Jurisdictions define the lines of businesses based on the classes of non-lifeand life insurance generally accepted. The follow classification of Premiums andClaims by line of business should be requested where available:Non-life insurance premiums: Non-life insurance premiums comprise both theactual premiums payable by policyholders to obtain insurance cover during theaccounting period (premiums earned) and the premium supplements payable
out of the property income attributed to insurance policyholders, but excluding
social contributions.



Gross Premiums: total premiums written, excluding any premium taxes orother charges, but before deduction of commission or reinsurance outwards. It
is acknowledged that the inclusion or reinsurance will mean that there is someelement of double-counting in the figures provided.
Gross premiums could be required by source of business/distribution channels
such as direct, corporate, agents, brokers, bancasurance, among others.

Premiums Ceded: Includes all premiums (reinsurance and retrocession)ceded.



Reinsurances Accepted: Includes all reinsurance business accepted.
Facultative reinsurance may be included under Direct business orReinsurances Accepted according to practice in the reporting country.

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

Net Written Premiums: are total premium retention and normally Net Written
Premiums should be equal to total Gross Premiums less Premiums Ceded.



Acquisition Expenses: policy acquisition expenses are those renewal
businesses. They include items allocation of operating expenses.



Non-life insurance claims: Non-life insurance claims are the amounts payable
in settlement of claims that become due during the current accounting period(claims become due at the moment when the eventuality occurs which gives
rise to a valid claim accepted by the insurance enterprise), but excluding
payments to households in the form of social insurance benefits.

Claims Incurred: an insurer’s total liability arising from insurance events
related to an accounting period either on an accident year basis or on anunderwriting year basis.

Claims provision: amount set aside on the balance sheet to meet the total
estimated ultimate cost to an insurer of settling all claims arising from events
which have occurred up to the end of the reporting period, whether reported ornot, less amounts already paid in respect of such claims.

Gross Claims Payments amount set aside on the balance sheet to meet thepaid claims by an insurer up to the end of the reporting period.
3.8.1.3 Net claims and adjustment expenses run-off

167. The Run-off result: is the difference between a provision made at the
beginning of the financial year and the sum of the payments made during the year on
account of that provision and the provision for the same claims shown at the end of
the year.
168. Net Claims and Adjustment Expenses Run-off are related to an accounting
period either on an accident year basis or on an underwriting year basis. Lossadjustment expenses are assignable or allocable to specific claims.
3.8.1.3.1

In non-life insurance: claims development triangles

169. This section should include numeric information that will constitute a summary
database and a set of derived exhibits for each significant line of business.
170. It is important that each exhibit and table identify clearly on which basis thefigures are presented (direct, assumed and net).
171. For each line of business, the summary database should include accurate,
historical information that can be readily reconciled to the records of the company.
More specifically, the summary database of claim information should include, for eachline of business, on a direct, assumed and net basis, the following data triangles byaccident year:

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




the cumulative paid losses, including paid adjustment expenses whereappropriate, for each accident year, observed at regular intervals
the case reserves, including reserves for adjustment expenses whereappropriate, for each accident year, observed at regular intervals
the cumulative number of claim units reported, for each accident year,
observed at regular intervals
the number of claim units still unsettled, for each accident year, observed atregular intervals.

172. Whenever large retention limits are used (i.e. excess loss, large or aggregate
deductibles, self-insured retentions, etc.) the "ground up" loss figures, when available,
should be included in the report.
173. In exceptional cases, the summary database may be different from thesituation described here, only to the extent that such differences are necessary for theproper valuation of the policy liabilities.
174. For each line of business, the derived exhibits should include any necessary
modifications, adjustments, combination and analysis, derived from the summary
database or from prior exhibits.
3.8.1.3.2

The nature, frequency and severity of claims

175. This section should include numeric information for each significant line ofbusiness, including the frequency and severity of large losses; any significant trends
in the severity and frequency of claims.
Frequency: Number of times that an accident occurs. It is used in predicting
losses upon which premiums are based.



Severity: Extent of the loss caused by accidents. Used in predicting theamount of losses upon which the premiums are based.

Claims Ratio: With respect to any particular period, for any policies issued byan insurer for a particular class of insurance, the ratio of claims incurred,
including adjustment expenses, during that period under those policies, to net
premiums earned during that period for those policies, expressed as apercentage.



Claims Ratio - By Year of Accident: The claims ratio determined when claims
and premiums used in the calculation are those which pertain to a specificaccident year.

Claims Ratio - By Year of Account: The claims ratio determined when claims
and premiums used in the calculation are those which pertain to a specificcalendar year.

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3.8.1.3.3

Risk concentration (potential for aggregation of claims)

176. Insurers should report information on risk concentrations. A risk concentrationrefers to an exposure with the potential to produce losses large enough to threaten an
insurer’s economic health or ability to maintain core operations. It includes:
a qualitative and quantitative description of the kinds of risk concentrations towhich the insurer is exposed and how high these are (including a descriptionof the methods used and assumptions made in arriving at the quantitativedata). If it is not possible to provide quantitative data, it should be explained
why it is not possible;

a description of the extent to which the risk is reduced by reinsurance andother risk mitigating elements.

177. The description of the insurer's risk concentrations should, as a minimum,
include information on the geographical concentration of insurance risk, the economic
sectoral concentration of insurance risk, and if relevant, and the risk concentration
inherent in the reinsurance cover.
3.8.1.4 Adjustment expenses
178. Loss Adjustment Expenses (LAE): LAE are expenses incurred while
determining the value of a claim, over and above the cost of the claim. These can
include fees from doctors, trial lawyers, and adjusters. Loss adjustment expenses are
divided into two categories: Allocated loss adjustment expenses and unallocated loss
adjustment expenses.

4.



Allocated loss adjustment expenses (ALAE): ALAE are loss adjustment
expenses that are assignable or allocable to specific claims. Fees paid to
outside attorneys, experts, and investigators used to defend claims areexamples of ALAE.



Unallocated loss adjustment expenses (ULAE): ULAE are adjustment
expenses that result from a broad array of claims or that result from thegeneral process of determining the amount of claims payments. All external,
internal, and administrative claims handling expenses, including determinationof coverage, that are not included in ALAE.

Quality of information

179. Availability of reliable, high quality data is also essential for effective market
discipline. In particular, insurance premiums are calculated on the basis of the law oflarge numbers. For this reason, establishment of reliable policy data such as loss
frequency and loss severity is fundamental in calculating correct insurance premiums
and the technical provisions. This is crucial for maintaining the solvency of insurancecompanies and the stability of insurance markets. Reliable mortality tables are alsoessential for life insurance products. In the case of some emerging market
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economies, insurance companies often do not have enough experience of insurance
policies to create a reliable historical data basis, and in some cases a comprehensive
data collecting system has not yet been properly established. Thus the collection ofclaims information through cooperation of insurers should be encouraged. The
insurance supervisory authorities should ensure a reliable claims database to assist
insurers and supervisors exists. Such a database can be established either bysupervisory authorities or other appropriate institutions.
4.1 Criteria to assess the quality of data180. The quality of information is viewed as a multi-variable concept. The mostimportant quality characteristics depend on supervisory perspectives, needs andpriorities. As stated in the document Quality Guidelines for OECD Statistics, quality isdefined as “fitness for use” in terms of user needs. In accordance with the quality
framework, it is viewed as having seven dimensions, namely, relevance, accuracy,
credibility, timeliness, accessibility, interpretability and coherence. The quality
characteristics of most importance depend on user perspectives, needs and priorities,
which vary across groups of users. 26
181. An assessment of the quality data should be carried out on the basis of thefollowing criteria: accuracy, appropriateness, completeness and timeliness.
182. In order to ensure on a continuous basis a quality of the insurer data, theinsurer should have in place suitable governance, approvals, controls, internal audit
and periodic independent review.
183. Supervisors should confirm the quality of the information they are receiving
through many means, for example, validation rules, and verifying the integrity of theinformation.
184. To guarantee quality, the information should be understood across theinsurance industry, and has to be consistent across all insurers.
4.2 Time horizon
185. A reasonable period for solvency assessment time horizon, for purposes ofdetermining an insurer’s current financial position, is about one year. However, it
should not be confused with the need to consider, in such assessment, the full term of
all of the assets and obligations of the insurer.
26 Eurostat defines the quality of statistics taking into account six criteria: 1) Relevance: an inquiry is relevant if itmeets users' needs. The identification of users and their expectations is therefore necessary. In the European
context, domains for which statistics are available should reflect the needs and priorities expressed by the users of
the European Statistical System (completeness); 2) Accuracy: accuracy is defined as the closeness between theestimated value and the (unknown) true value; 3) Timeliness and punctuality in disseminating results: most users
want up-to-date figures which are published frequently and on time at pre-established dates; 4) Accessibility andclarity of the information: statistical data have most value when they are easily accessible by users, are available in
the forms users desire and are adequately documented; 5) Comparability: statistics for a given characteristic havethe greatest usefulness when they enable reliable comparisons of values taken by the characteristic across space andtime. The comparability component stresses the comparison of the same statistics between countries in order toevaluate the meaning of aggregated statistics at the European level, and 6) Coherence: when originating from asingle source, statistics are coherent in that elementary concepts can be combined reliably in more complex ways.

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186. It may also refer to the length of time for which data are collected. It isextremely important define the period of time for which data have been collected.
187. Time horizons can range from monthly, all the way up to quarterly or annually.
There is no "right" time frame - it depends on the supervisor authority objectives.
188. Financial statements, including reports on capital, are usually prepared byinsurance companies at the end of each fiscal year or the end of each quarter.
Producing these statements is a considerable task that requires significant
preparation and time. Often there will be a delay of several months between thestatement date and the actual receipt of the statement by the supervisor. The
company management may also require some time to implement possible corrective
actions. The supervisor, having many companies to oversee, may need several
additional months to fully analyse a particular company’s results. If this analysis
shows a company’s position to be weak, it will take additional time to formulate actionplans and issue appropriate directions to the company. If it were necessary to remove
a company’s licence and “wind it up,” the formalities of governmental and legal
systems could introduce considerable delays before the supervisor’s objectives areachieved. During the period until final action against a weak or insolvent company istaken, the company would continue to operate and conduct business, including thesale of new insurance and/or annuity contracts.
In formulating a capital requirement in a particular jurisdiction, a supervisor must take
into account the time horizon between the date as of which company financial
statements are prepared and the expected date by which a supervisor could takecontrol of the insurer, if this was deemed to be necessary. Since this time horizon
depends upon local business practices, the supervisor’s resources, legislation and thelegal system, this horizon will vary from one jurisdiction to another. However, it would
be rare to assume this time horizon could be considerably shorter than one year.

5.

Utilisation of basic analysis information techniques as part of thesupervisory process

189. Regulatory requirements are of little value if there is no mechanism to monitor
insurers’ compliance with those requirements. Thus, solvency monitoring
encompasses a broad range of regulatory activities including: Financial Reporting;
Financial Analysis; and, Examinations. The primary purpose of financial analysis is toassess the financial condition and compliance of the insurer as of a date in time, andto identify and assess risks and prospective risks evidenced in the insurer’s financial
reports and activities. To accomplish this task, supervisors should conduct detailed
financial analysis on a quarterly basis using regulatory financial reports, financial tools
and other sources of information. Sources utilised in the analysis include annual andquarterly financial statements, independent auditors report, SEC filings, corporate
reports, financial statements of ultimate controlling individual/corporation orreinsurers, market conduct reports, rate and policy form filings, consumer complaints,

When originating from different sources, and in particular from statistical surveys of different frequencies, statistics
are coherent in so far as they are based on common definitions, classifications and methodological standards.
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independent rating agency reports, correspondence from agents and insurers, andbusiness media.
190. Financial analysis should include follow up on risks identified during theprevious quarter’s analysis and examination. Additionally, the depth of the review
should depend on the nature, complexity, financial strength and sophistication of theinsurer and/or group. As risks are identified, additional work should be performed tounderstand and evaluate the potential impact.
191. Regulators should generally prioritise the review of their insurers based on asystem of financial ratios, other screening analytical tools and criteria that are both
qualitative and quantitative in form. When insurers with anomalous results (e.g.,
insurers experiencing significant variations or negative financial results) that may
impact financial solvency are identified, regulators should allot necessary resources
and prioritise further analysis of these insurers (relative to other non-priority insurers).
The results of the ongoing financial analysis can then be used to help prioritise andprovide focus to future quarterly financial analysis activities and/or any examination
efforts.
192. Generally, regulators should enhance their financial analysis activities tofacilitate more timely regulatory action against troubled insurers. For example,
financial analysis should occur every quarter on all insurers within each jurisdiction.
Jurisdictions should prioritise the review of their domiciliary companies to ensure
potentially troubled companies are reviewed promptly. Some jurisdictions might also
perform analysis on foreign and alien insurers who write business in their jurisdiction.
193. The financial analysis process should be the collection and analysis of insurerand “group” financial information. Financial analysis also involves the review of nonfinancial information regarding insurance companies that is routinely collected byother department units within the regulatory jurisdiction (e.g. market, legal, licensing,rates and forms, etc.). In situations where the insurer has been identified as atroubled insurance company, the regulator will determine an appropriate regulatory
course of action as well as communicating results of regulatory actions to otherjurisdictions. If the insurer has submitted a corrective action plan outlining proposed
steps to correct the underlying issues, the financial analyst will be involved in
evaluating and monitoring the progress of corrective plans. If a financial examination
resulted in findings that required correction, the analysis function could be involved infollowing-up on those findings.

6.

Basic ratios that could support financial supervision

194. Ratios and trends are helpful in identifying insurers likely to experiencefinancial difficulties. In general, ratios and range comparisons are computergenerated.
195. Key financial ratios designed to highlight potential risks in such areas as
profitability, liquidity, and leverage, include the following:
6.1

Trends of insurance portfolios

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Premium growth rates
Renewal rates
6.2

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6.3
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6.4
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Profitability ratios

Loss Ratio (or claims ratio): the ratio of claims incurred to premiums earned
Expense Ratio: the ratio of expenses to premiums earned
Combined Ratio; the sum of the loss ratio (claims ratio) and the expense ratio
Operating ratio:is the combined ratio adjusted by the addition of allocatedinvestment return in relation to premium income
Return on Revenue
Net Investment Yield
Interest Margin
Return on Equity (ROE)
Return on Assets (ROA)
Reserve and leverage ratios
Surplus Aid to Policyholder’s Surplus
Reserves to Policyholder’s Surplus
Gross or Net Premiums to Policyholder’s Surplus
Reserve Development to Policyholder’s Surplus
Surplus arising by different sources in life insurance (mortality, investment,
expenses)
Asset and liquidity ratios
Adjusted Liabilities to Liquid Assets
Non-Investment grade bonds to Policyholder’s Surplus
Risky Assets to Capital and Surplus
Problem Real Estate and Mortgage Loans to Capital and Surplus
Affiliated Investments & Receivables to Policyholder’s Surplus
Surrenders to Net Premiums

196. Supervisors should collect the supporting data for calculating those ratios. In
the case of reserves and leverage ratios, it would be important to control theiranalysis process.

7.

Resources
7.1

Internal systems and policies

197. Supervisors should require insurers to have appropriate systems andstructures in place to fulfil the requirements laid down in the guidance paper
198. In order to achieve confidential treatment of information received forsupervisory purposes, the supervisor requires that supervisory staff and all persons
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gaining access to information in the course of their duties are bound by an obligationof professional secrecy. The professional secrecy requirements should apply to any
person currently or previously employed by or acting on behalf of the supervisor.

7.2

Qualified supervisors users

199. Supervisors must be sure that the supervisory body is provided with thenecessary means, and have the relevant expertise and capacity, and mandate toachieve the main objective of supervision, namely the protection of policyholders andbeneficiaries
200. Appropriate ability can generally be judged from the level of a person’s
professional or formal qualifications or relevant experience within the insurance andfinancial industries or other related businesses.

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