International Association of Insurance Supervisors

Application Paper on Regulation and Supervision
supporting Inclusive Insurance Markets

October 2012

This document was prepared in consultation with the IAIS-MicroInsurance Network Joint Working
Group and the Access to Insurance Initiative.
This publication is available on the IAIS website (www.iaisweb.org). © International Association of Insurance
Supervisors, 2012. All rights reserved. Brief excerpts may be reproduced or translated provided the source isstated.

Application paper on Regulation and Supervision
supporting Inclusive Insurance Markets
Contents
1

Introduction and background: ........................................................................................4
Summary of key points ..................................................................................................5
About inclusive financial markets and insurance ...........................................................72

Objective of providing inclusive insurance products and services within the supervised
market .........................................................................................................................12
All entities that act as insurers should be subject to licensing ...................................... 12
There is a minimum size required to retain insurance risk ........................................... 13
Mixed entities ..............................................................................................................13
Licensing pilots............................................................................................................14
Formalising the informal – managing transitional arrangements .................................. 15
Cooperation in support of transitional arrangements ................................................... 16

3

Innovation ...................................................................................................................16
Particular issues that arise when expanding the eligible entities to include mutuals,
cooperatives and other community-based organisations .................................... 19

4

Proportionality and its application to inclusive insurance markets ................................ 21
Proportionate approaches have a lower bound ........................................................... 24
Absolute minimum requirements ................................................................................. 25

5Roles and responsibilities ............................................................................................29
Financial sector policy .................................................................................................29
The insurance supervisor in a leading role .................................................................. 29
More diverse market participants impact the responsibilities of other supervisors ....... 30

6

A definition of microinsurance in regulation ................................................................. 31

Annex 1: G20 Principles for Financial Inclusion .................................................................... 33

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Application paper on Regulation and Supervision
supporting Inclusive Insurance Markets

1 Introduction and background:
1.1

The International Association of Insurance Supervisors (IAIS), through the InsuranceCore Principles (ICPs) 1, provides a globally accepted framework for the supervision of
the insurance 2 sector. Its mission is to promote effective and globally consistentsupervision of the insurance industry in order to develop and maintain fair, safe andstable insurance markets for the benefit and protection of policyholders 3; and tocontribute to global financial stability.

1.2

The ICPs prescribe the essential elements that must be present in the supervisory
regime. Standards are linked to specific ICPs and set out key high level requirementsthat are fundamental to their implementation. Guidance material typically supports the
ICPs and/or standards and provides detail regarding how they should be observed or
implemented.

1.3

The purpose of this paper is to provide application guidance supporting inclusive
insurance markets. It provides examples of how relevant principles and standards canbe practically applied. Where enhancing inclusive insurance markets is a policy
objective, this document elaborates guidance for supervisors. It is directed at theobjectives of implementing the ICPs in a manner that protects policyholders,
contributes to local and global financial stability, and enhances inclusive insurance
markets.

1.4

The IAIS considers that the ICPs apply to insurance supervision 4 in all jurisdictions
regardless of the level of development or sophistication of the insurance markets andthe type of insurance products or services being supervised. At the same time, it
recognises that supervisors need to adjust certain supervisory requirements andactions in accordance with the nature, scale and complexity of risks posed byindividual insurers (i.e. the “proportionality principle”). Accordingly, the relevant ICPs,
standards, and guidance identify areas in their text that provide supervisors with theflexibility to tailor supervisory requirements and actions so that they arecommensurate with the risks posed by individual insurers to the insurance sector or to
the financial system as a whole. While implementing and assessing the standards in ajurisdiction, it is also important to consider the domestic context, industry, structureand developmental stage of the financial system and overall macroeconomic
conditions.

1

The complete set of ICPs including introduction, Principles, Standards and Guidance can be found on the public
section of the IAIS website (http://www.iaisweb.org/ICP-on-line-tool-689)

2

Insurance refers to the business of insurers and reinsurers, including captives.

3

The IAIS Glossary defines a “customer” as a “policyholder or prospective policyholder with whom an insurer orinsurance intermediary interacts, and includes, where relevant, other beneficiaries and claimants with alegitimate interest in the policy”. The glossary does not define “policyholder” although earlier papers had notedthat “Policyholders includes beneficiaries”.

4

Supervision refers to both regulation and supervision. Supervisors include regulators. (Insurance supervision
within an individual jurisdiction may be the responsibility of more than one authority. For example, the bodythat sets out the legal framework for insurance supervision may be different from the body that implements it.
The expectation is that the ICPs are applied within the jurisdiction by all authorities in accordance with theirrespective responsibility in relation to the supervision of the insurance sector (referred to as “the supervisor”)
rather than necessarily by only one authority. It is, however, essential that in situations where multiple
authorities exist, coordination arrangements be established between them to ensure that the implementationof the ICPs within the jurisdiction occurs in an accountable framework.

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1.5

Increasingly, insurance supervisors in emerging markets and developing economies
are aware of the need to seek a healthy balance between regulation, enhancing
access to insurance services and protecting policyholders. Governments recognisethat enhanced access to insurance services helps reduce poverty and improve socialand economic development. Regulated insurers and intermediaries 5 are seeing thebusiness potential of the low-income population and are offering innovative products
and distribution models. At the same time, informal entities grow in size and numbers.

1.6

To support supervisors in their efforts to deal with these challenges, the IAIS has
been working on its “access agenda” since 2006 by way of the IAIS-Microinsurance
Network Joint Working Group and the Access to Insurance Initiative. Prior to thispaper, two issues papers have been adopted:

1.7

1.6.1

Issues in Regulation and Supervision of Microinsurance (June 2007): This
paper discussed regulation and supervision as well as providing somebackground to microinsurance concepts. The paper also contained apreliminary analysis of the ICPs that were in place at the time andconcluded that the ICPs cover the essential aspects however, when
applying these principles in practice then the outcomes could be positiveor negative for inclusive markets depending on the approach taken
whilst still observing the ICPs.

1.6.2

Issues Paper on the Regulation and Supervision of Mutuals, Cooperatives
and other Community-based Organisations in increasing access to
Insurance Markets (October 2010): Recommended as a follow-up fromthe work of the first paper, this paper discussed the key elements ofsuch organisations that are relevant to considering the approach to theirregulation and supervision.

This application paper has been prepared based on the 2011 ICPs and highlights
those matters specifically relevant to supporting inclusive insurance markets.

Summary of key points
1.8

Recognising the intent that the ICPs are universally applicable, the paper provides
more specific information on how the ICPs can be implemented consistent with efforts
to enhance the level of inclusiveness of insurance markets. It shows that someapproaches to implementation may be more conducive to enhancing inclusive
insurance markets, particularly for those that are underserved 6. The paper provides
background material and discusses solutions relevant for supervisors. It recognises
that:
1.8.1

the ICPs apply universally, including when seeking to enhance access toinclusive insurance markets, however, the application of the ICPs inpractice is important to achieving the intended outcome;5"Intermediaries" refers to any natural person or legal entity that engages in insurance intermediation. The ICPs
do not normally apply to the supervision of intermediaries but where they do, this is specifically indicated in the
ICPs, Standards and Guidance (refer paragraph 9 of the Introduction to the ICPs).

6

In this paper, the term “underserved” refers to those that have less than sufficient access to insurance services.
They may be partly or wholly “excluded”.

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1.8.2

inclusive insurance products and services should be provided within the
supervised market. In particular, all entities that act as insurers should
be subject to licensing;

1.8.3

although solutions are available that can take account of the nature, scaleand complexity of the entity and it’s risk profile, there is a minimum point
below which it will not be possible to retain insurance risk. Below this,entities should be limited to providing other services;

1.8.4

insurance risk should not be carried on the balance sheet of entities that
also do other financial or non-financial business. If small entities areoperating mixed businesses, they should transition to separation of theinsurance business into a separate legal entity;

1.8.5

pilot schemes should be licensed, at least at the level of registration, and be
subject to conditions that protect the interests of policyholders during
and, if relevant, beyond the pilot;

1.8.6

in the event that informal services exist, then formalisation is needed.
Formalisation should be clear, transparent, and based on transition
plans that provide incentives to formalise and limit excessive risk taking
before full transition;

1.8.7

if the regulation recognises a specific class of product with special
treatment, arbitrage is reduced if all existing insurers can also provide
the product to the market. Similarly, if a specific category of insurer iscreated it should be restricted to providing limited products under defined
circumstances;

1.8.8

innovations are usually needed to overcome barriers to access to insurance
markets. Such innovations may include new or different providers of
insurance protection, distribution and servicing approaches, or
technology. Primary legislation should provide supervisors with flexibility
to respond to new innovations and conditional licenses or similar
approaches can be used to implement the approaches in practical steps.
However, supervisors need to be prepared to license and supervise awider number and more varied range of entities as insurers or
distributors or both, and legal requirements need to include entry,
oversight, and exit of such entities;

1.8.9

supervisors and other agencies may need to cooperate as a result of the
inclusion of new entities in the supervisory regime. This may require
other agencies to amend their approach to confidentiality andinformation protections;1.8.10 there should be no need for “exemptions” from some or all supervisory
requirements. Instead, supervisory differences should be based on thenature, scale and complexity of the risk of the insurer and to theachievement of supervisory objectives. In some cases, the risk may be
reduced and in others, particularly consumer protection, the risk toachieving supervisory objectives may suggest increased intensity ofsupervision;
1.8.11 when a supervisory approach takes into account a more limited risk
assessed on nature, scale and complexity of the entity, as well as therisk to supervisory objectives, this should be reflected in both theapproach to and constraint on the entity to maintain the more limited
profile. Ideally, as an entity grows, the constraint should act as anincentive to develop more sophisticated approaches and seek theremoval of the constraint;
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1.8.12 as there is a minimum point beyond which insurance risk should not beretained, the paper sets out some of the “absolute minimum
requirements” that would apply at that point. As insurers increase theirrisk profile in terms of nature, scale and complexity, from this minimum
point, then the requirements should increase;
1.8.13 the insurance supervisor should be given a lead role when seeking toadvance inclusive insurance markets;
1.8.14 if a definition is needed in local laws or regulations, qualitative definitions
are preferred until a quantitative definition is absolutely needed for otherreasons, and then it should have particular characteristics.

About inclusive financial markets and insurance
1.9“Financial inclusion” refers to a state in which all working age adults have effective
access to credit, savings, payments, and insurance from formal providers. “Effective
access” involves convenient and responsible service delivery, at a cost affordable tothe customer and sustainable for the provider, with the result that financially excluded
customers use formal financial services rather than existing informal options 7.

1.10

Inclusive insurance markets, as a contributing element of overall financial inclusion,
are characterised by:- affordable;- sustainable;- convenient; and- responsible- delivery by licensed and supervised insurers and intermediaries of all parts of theinsurance product and service.

1.11

Financial inclusion contributes to financial stability. It is an important element indelivering fair, safe and stable financial markets in a jurisdiction. Less than fully
effective inclusion can, and has, led to financial sector instability. The link between
financial inclusion and financial stability is one of the reasons for the interest of G20
leaders in this matter 8.

1.12

The Principles for Innovative Financial Inclusion (Principles), endorsed by the G20
leaders in 2010, help create an enabling policy and regulatory environment for
innovative financial inclusion. Innovative financial inclusion means improving accessto financial services for low-income populations through the safe and sound spread of
new approaches. The Principles reflect conditions conducive to spurring innovation
for financial inclusion while protecting financial stability and customers. They can beadapted to different country contexts. Annex 1 provides ideas on how the G20
Principles relate to the issue of advancing insurance coverage to low-income
populations.

7

Source: Global Partnership for Financial Inclusion (2011) Global Standard-Setting Bodies and Financial
Inclusion for the Poor: Toward Proportionate Standards and Guidance

8

G20 Financial Inclusion Action Plan: “Financial inclusion is not only an end in itself. It is also required for, andcomplementary to, financial stability and financial integrity” (p. 2, paragraph 4).

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Barriers to inclusive insurance markets
1.13

Less than fully inclusive insurance markets can reflect one or more “barriers” toaccess. Barriers can exist in many forms and are not limited to the issue of the cost of
products and services. They may include affordability, geography, culture,administration, logistics, language, and education 9. Barriers to access may relate to
the purchase of the product, ongoing premium payments and collection services,
claims, or customer service complaint handling. Barriers can affect the customers(demand side), providers (supply side), or both. Demand side barriers can arise ascustomers usually have low-incomes and/or low net worth, although the segment is
not necessarily uniformly poor. They may be often self-employed and excluded fromthe coverage of state social protection schemes for the employed sector. Patterns ofincome, savings and expenditure are different from higher income segments. Incomesare often seasonal and subject to fluctuation. Disposable incomes are small. Most of
their income is spent on basic requirements such as food and shelter. Hence,
affordability levels are low. Their understanding of financial commitments or risk
mitigation at different stages of life may be weak.

1.14

For many years, supply of insurance for low-income populations has been depressed.
Conventional insurers have focused on higher income and corporate segments astheir core business 10. Accordingly, their business models, including products, cost
structures, geographical presence, distribution networks and servicing infrastructure,
have been built with this focus. Insurers have tended not to consider low-income
segments attractive due to various reasons: individual premium sizes were perceived
as too low given per-policy fixed costs; premium calculation was seen as more
complicated due to limited available data; and the nature of the demand and risks ofthis segment was unknown. The distribution network which was more comfortableand familiar with the middle or higher income segments also did not find doing
business with the low-income persons lucrative as traditional remuneration structures
provide incentives to focus on larger premium products. Proportionate regulation
could reduce barriers.

1.15

Therefore to make existing markets more inclusive, it is necessary to overcome
barriers. The solution does not lie in simply offering policies with smaller premiums
unless cost is the only barrier. Inclusive approaches usually include innovations in
product design, coverage and service delivery as well as product sizes.
Consequently, what is often considered to be “microinsurance” is addressed in thisapplication paper but the concepts go beyond “microinsurance” as a particular
product to address inclusive insurance markets.

9

Examples of geographic barriers might include the distance between points of service and the customer or
requirements to travel that are impractical to either access the service directly or to secure other elements thatare required to access the service. A common example of the later might be the need to travel to government
offices to secure copies of legal identification documents or certificates of death to support a claim application.
Cultural barriers might include, for example, either a view held on the part of insurer management that formal
insurance is not appropriate for a particular group or when customers do not have a strong affinity with or trustof large and formal institutions considering that they are not oriented to serve their needs effectively.
Educational barriers often can include challenges of financial literacy or general literacy when processes areoriented to providing information in a format that assumes levels of one or the other.

10

In this Application paper the phrase conventional insurers is used to refer to insurers that serve the existing
market.

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Innovative approaches
1.16

To overcome barriers it is necessary to do things differently. Innovations can include
changes to product features, services delivered, channels and vehicles for delivering
the products and services, and the product provider (the insurer). This section
discusses some common innovations and illustrates some of the challenges forsupervisors when including these products, services and entities in the regulated
environment.

1.17

Generally, consumer protection needs are higher when access to insurance markets
is first extended. Protection mechanisms need to be tailored to a customer segmentwith low financial literacy, and little or no experience with insurance. While keeping
transactions costs low, it is important to address effective disclosure, simplicity of
products, fair and accessible resolution of disputes and recourse options and efficient
claims mechanisms.

1.18

Traditional regulatory frameworks, including licensing procedures for products andagents, prudential norms and supervisory mechanisms, tend to have been designed
for products and services of higher-income customers. Hoping to spur the soundgrowth of insurance products and services targeting the low-income population, somejurisdictions are now developing policy frameworks targeting insurance for thispopulation segment.

1.19

Increasingly, supervisors are facilitating an “inclusive” insurance market that works
effectively for upper as well as low-income populations. These initiatives are aimed atdeveloping legislation and supervisory practices that encourage existing insurers toserve low-income populations, or that motivate informal providers and intermediaries
to integrate with the formal insurance sector. To do this, coordination and cross-sector
cooperation is often needed between public authorities including central banks,
revenue authorities, telecommunications regulators, health authorities, anddepartments of agriculture and social protection.

1.20

Industry participants, their networks and other insurance support structures havebeen faced with a steep learning curve in finding new ways to make insurance
markets more inclusive. The same is true for supervisors striving to drive this process.

Products and services
1.21

Microinsurance products provide risk protection for the low-income population against
specific life or non-life perils, by offering a variety of tailor-made products spanning
property, life, health, credit, agriculture/livestock and catastrophe cover. The products
are designed and priced to be proportionate to the likelihood and cost of the risks
involved.

1.22

In the absence of insurance, risk protection often involves calling upon family andfriends, taking loans, depleting assets, or reducing expenses for education or evenconsumption. Many in the underserved market consider insurance a ‘sunk expense’and have a negative perception of insurance. These factors have limited the usage of
insurance among low-income populations. As a consequence, their lives and assets
are exposed to multiple risks and their ability to generate income and accumulate
wealth is undermined.

1.23

Recently, various insurers and intermediaries (among them commercial actors) havestarted to design innovative products and delivery models that fit the requirements of
low-income populations rather than simply present miniaturised versions ofconventional products. Embedded products – insurance covers tagged along withother products – and group cover proved to be effective. To achieve scale, curtail
costs and enhance access, more insurers are expected to innovate with new

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products, and distribution and servicing models. At the same time, it is also crucial to
make sure customers understand the choices they make, their duties and rights, andare empowered to exercise their rights. 11
1.24

Relative to more conventional insurance, the basic features of products oriented
toward enhanced inclusion may include:- relatively low premiums;- defined and limited cover;- short policy terms to limit risk;- few, if any, exclusions;- preference for group underwriting;- simple and rapid claims processing while still controlling for fraud.

1.25

Recent experiences have proven that customers can afford and will use insurance if“adequately offered”. Important elements of adequate offering are making terms andcontracts simple, and endeavouring to ensure the value of insurance is understood.

1.26

Because there are great variations in the underserved segments, protection needs
and preferences also vary based on such factors as occupation, community, culture
and location. For instance, while life insurance should be a priority for eachbreadwinner, cultural beliefs may impede this. Protection for dwellings, tools andlivestock should be a priority for the flood-exposed sections, while other insurances
can protect against crop-loss due to drought in rural areas. Daily wage earners may
prefer a daily or weekly premium payment whereas smallholder farmers may prefer
the payments to fall due in the harvest season.

1.27

Innovations in services might include different ways to explain products, enrol
customers, issue contracts, underwrite, collect premiums, assess claims or handle
other customer service matters. Innovations may be new approaches to doing thesetasks or could include new technologies.

Channels for delivery
1.28

Customers often live geographically far from where insurance services are available
and may migrate seasonally in search of work. This makes sales and servicing
challenging. Access to inclusive insurance markets could be enhanced by a diverse
range of intermediaries including traditional brokers/agents, bancassurance,
microfinance institutions (MFIs), non-government institutions, direct marketing (e.g.
call centres), direct mail (e.g. mail lists purchased from other mass-service providers),
alternative direct sales forces (e.g. distribution networks of telecom companies) andtechnology-based distribution (e.g. mobile phones and internet).

1.29

Delivery could also be enhanced via community-based schemes or groups, and credit
unions, as well as innovative mass-based distributers such as retail shops, post officeoutlets, religious associations or trade unions. Not only could these alternative outlets
potentially overcome geographic barriers, they can also be important in reachingcustomers more cost effectively, leveraging infrastructure, and overcoming issues of
mistrust.

11

For embedded products, customer understanding and empowerment can be helped by the requirements ofparagraph 4.41.4.

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Insurers
1.30

To overcome barriers to inclusive insurance markets, insurance may need to beoffered by a variety of insurers with different institutional forms, for example, entities
that are for-profit or not-for-profit (as defined by the insurance supervisor or any othercompetent body under the national laws). Providers could include death-benefit
associations, mutual and cooperative insurers, commercial insurers and dedicatedmicroinsurers.

1.31

To illustrate the potential for variation from conventional market practices, thefollowing examples are provided of entities that may help remove barriers to inclusion.
1.31.1 Large insurers - operating in the more conventional market seeking toprovide services to the underserved market segment;
1.31.2 Insurers of a smaller size - Some of whom may already exist but are
informal. While this paper takes the position that access should be toformal insurance products provided by formal insurers, it also recognisesthat informality needs to be addressed and may require both regulatory
responses that reflect the size, nature and complexity of the risks
involved, as well as the need for well-designed transition periods. Bothare discussed in more detail below. Some jurisdictions recognise smaller
insurers that are dedicated to providing services and products tounderserved markets and, as a result, operate a license that is limited inscope and are sometimes referred to as “dedicated microinsurers”.
1.31.3 Entities that also have non-insurance financial or non-financial services leveraging other relationships with potential customers or with service
delivery mechanisms already in place can overcome barriers to access.
There are cases where large entities become involved in insurance
services and the insurance business is very small compared to the total
operations, for example, telecom companies that have found success inproviding other financial services through phone handsets and networks.
Smaller entities may have both insurance and non-insurance businessthat is not substantial. Examples would include cooperatives engaged inagriculture that also become involved in insurance services related totheir member’s crops, health providers that offer health insurance-type
benefits, or funeral providers that offer funeral insurance arrangements.
As a result, the paper discusses the implications of mixed entities
providing insurance as well as the roles and relationships of othersupervisors who may have a different responsibility to that of theinsurance supervisor.
1.31.4 Pilots – this refers to innovations advanced through experimentation. Some
projects can lead to confirmed innovations that are then ‘scaled-up’,others may fail and cease. Pilots are currently being conducted by abroad range of entities, sometimes with the support of sponsors that canbring substantial resources to the project. Other pilots may be lessformal or less substantial.

Microinsurance Definition in IAIS Papers
1.32

The IAIS has defined “microinsurance” as insurance that is accessed by low-income
populations, provided by a variety of different entities, but run in accordance withgenerally accepted insurance practices (which include the ICPs). Importantly, thismeans that the risk insured under a microinsurance policy is managed based on
insurance principles and funded by premiums. Premiums can be privately or publicly

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funded, or a combination of both. The microinsurance activity itself should therefore
fall within the purview of the relevant domestic insurance supervisor.
1.33

Explanatory note: Microinsurance does not include government social welfare as thisis not funded by premiums relating to the risk, and benefits are not paid out of a poolof funds that is managed based on insurance and risk principles. For the same
reason, it does not include emergency assistance provided by governments, forexample, in natural disasters (floods, fires) in low-income townships. However, as risk
manager of last resort, the State may determine that there is a need to sponsor
access to microinsurance for the most underprivileged through redistributive
practices. There are cases where the State plays a stronger role in fully funding
schemes, but these would only be considered microinsurance if they are run
according to insurance principles.

2 Objective of providing inclusive insurance products and services
within the supervised market
2.1

The interpretation of how the ICPs are applied consistent with inclusive insurance
markets reflects:- the objective of including insurance services within the insurance supervisory
regime;- the reality that there is a minimum point below which it is not possible to effectively
retain and manage insurance risk; and- the need for appropriate transitional arrangements where insurance schemes had
operated outside the supervisory system in the past.

All entities that act as insurers should be subject to licensing
2.2

Barriers making it uneconomic for formal insurers to provide products and services
result in insufficiently inclusive insurance markets where a part of the market isunderserved, and without “effective access” (as defined in paragraph 1.9). Someargue that there is a case for exemptions to be made because regulatory burdens
are, themselves, a barrier. Informal risk management approaches may exist(insurance services provided in a manner that are either illegal or are legally excluded
from the definition of insurance in the jurisdiction 12).

2.3

Standard 4.1 indicates that insurance activities should be conducted by licensedentities. When defining regulated insurance activities (Standard 4.2), jurisdictions may
decide that some limited activities are not “regulated insurance activities” (Guidance
4.2.1). Such exclusions, however, should take into account the need for appropriate
alternative safeguards to protect policyholders (Guidance 4.2.2).

2.4

Enhancing inclusive insurance markets should not create a system where customers
have increased access but only to products and services that are of a materiallylesser quality. The products and services delivered should not have an unacceptableprobability of not delivering the promised benefits.

12

Refer Standard 4.2 of the ICPs that requires the insurance legislation to define regulated insurance activities
and prohibit unauthorized activities.

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2.5

Everyone should be offered the opportunity to be part of the formal financial system.
Customers should be accorded the benefits of prudential supervision and fairtreatment. Innovations in services and providers do not usually occur in a manner thateliminates risk and, as such, innovations that enhance inclusive markets should be
subject to appropriate supervision. When seeking to enhance inclusive insurance
markets, bringing the underserved and unregulated into the formal financial systemfacilitates inclusion in a safe and orderly manner.

2.6

When considering the possibility of unlicensed or exempt activities, the overall
objectives of supervision are an important guide. Exemptions should reflect insurance
business activities that do not raise issues with respect to promoting the maintenanceof a fair, safe and stable insurance sector for the benefit and protection ofpolicyholders (Standard 1.3). When seeking to enhance inclusive insurance markets,
it is usual that the underserved customer group is not only deserving of effective
insurance services that are fair, safe and stable but that they may be even more
vulnerable. Services not provided within the regulated sector may give rise to unfair,unsafe or unstable outcomes. The failure of informal or exempt delivery to make goodon promises to customers, if perceived to be insurance, not only affects vulnerable
customers but also impacts the stability of the formal market and sets back thedevelopment of the sector.

2.7

For these reasons, it is unlikely that the objectives of insurance supervision (Standard
1.3) will be advanced by providing exemptions that increase access to non-regulated
and non-supervised insurance services. All entities that act as insurers for products
directed at supporting inclusive insurance markets should be subject to licensing andsupervision. The licensing of innovative “insurers” should consider the proportionate
nature of the licensing method and process, the possibility of using a registration
option (see Guidance 4.1.6 for both of these), and the potential for the license to beconditional restricted (Standard 4.8) or limited in scope (Standard 4.9).

There is a minimum size required to retain insurance risk
2.8

There will be situations where an entity that is proposed to be licensed cannot retain
and manage insurance risk consistent with the objectives of insurance supervision set
out in Standard 1.3. Specifically, there is a minimum size below which it is notpossible. The minimum size reflects the need for (a) risk pooling to exist (technicalcharacteristics) and (b) a minimum of effective business processes to manage
retained risk (business characteristics).

2.9

There should not be a necessity for exemption from the application of the ICPs. Welldesigned proportionate solutions may be needed but should be sufficient. This isdiscussed further in section 4 below. Every effort should be made to find solutions,and provide transitional arrangements. However, it needs to be recognised that someentities will simply be too small to retain insurance risk on their own balance sheet.

Mixed entities
2.10

Some entities involved in other business activities may provide or intend to provide
insurance. Given the goal that insurance is provided within the formal sector,
supervisors need to consider special issues that may arise in these cases.

2.11

The ICPs recognise the risks associated with mingling insurance and non-insurance
businesses together in the one legal entity and stress the importance of effectively
managing risks even when life and non-life insurances are issued by the one insurer(refer Guidance 4.3.4).

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2.12

Establishing a separate legal entity to act as the insurer is the most appropriate
solution rather than to accept mixed operations as an operating model.

2.13

For larger entities, the requirement for a separate legal entity should not be a material
barrier. Larger mixed entities may, however, start their efforts with a “pilot”. Pilot
situations can be part of a transitional arrangement.

2.14

Smaller mixed entities also should establish a separate entity for the insurance
business. This is likely to be the most effective way to ensure that insurance assets
and liabilities are properly managed. When pre-existing mixed schemes exist,
however, a transitional approach may be required.

Licensing pilots
2.15

Pilot schemes should be considered to be entities that need to transition to a morenormal status. It is most likely that consideration can be given to a registration
process for pilots (Guidance 4.1.6). When developing the registration requirements, itwill be important to consider the nature of the risks and the expected volumes ofbusiness.

2.16

In seeking to include pilot schemes in the formal system, the motivation is:- the protection of the interests of customers; recognising that issues covering the fullrange of protections may arise regardless of the fact that the project is a pilot;- the need for the scheme promoters to be aware of, and actively considering themodalities for the operation of the scheme after it has become successful; and- the potential that pilots that prove unsuccessful may still have residual promises tocustomers.

2.17

Pilot schemes are initiated to test an approach and learn what modifications, if any,
may be needed. Regulatory arrangements or less central legal issues may not be
considered. Supervisors will be interested, however, in whether the customers haveaccess to normal insurance supervisory protections ranging from adequate security tofair treatment from point of sale to claim and, if necessary, complaint resolution. In theevent that the pilot does not go beyond the pilot phase, and outstanding obligations
remain, supervisors will want to know how these obligations will be managed ortransferred.

2.18

One option would be to ensure that the customers are made aware of the fact thatthey are participating in a pilot and that some normal protections are not available
directly; alternatively to require the promoters to provide them in other ways. This is
likely to be a complex and disproportionate solution.

2.19

Another option would be to amend the law to allow all pilot schemes to be covered
under the conventional processes. This may be complex and time consuming andcould hold up the conduct of a worthwhile pilot.

2.20

A preferable option might be to put in place some temporary and equivalentarrangements. Some examples might include requiring a deposit in lieu of capital in a
separate legal entity or separately identified assets.

2.21

Guidance 4.1.6 provides guidance in applying the licensing regime to pilot schemes.
Supervisors may introduce a registration arrangement that can be used on an interim
basis. Following the successful conclusion of the defined pilot phase, however,promoters must be required to apply for a more conventional license or wind up the
pilot in an orderly manner protecting any remaining customer interests.

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Formalising the informal – managing transitional arrangements
2.22

Given the overall objective, that informal insurance is undesirable, the existence of an
informal sector may need to be formalised to give effect to this objective. It is notexpected that such a process need necessarily occur without transitionalarrangements and processes. Transitional arrangements may be necessary to allow
informal insurance to migrate to a regulated environment. They may also be relevant
when regulatory arrangements anticipate that insurers will form and build capacity
over time, or when pilots are conducted.

2.23

When seeking to formalise an informal sector, a clear and transparent pathway
should be provided. As a first step, all informal entities providing insurance services
should, at least, be registered through a process that is clear and transparent (seeGuidance 4.1.6) and meet minimum requirements.

2.24

Once registered, entities should operate a restricted business model reflecting theextent that their business is lower risk, smaller, and less complex. Conditional
licenses could be used (as envisaged under Standard 4.7). The granting ofconditional licenses is an important power to provide to supervisors when seeking to
expand access to insurance markets whether transitional issues are relevant or not.

2.25

Accepting (imposing) restricted business models with commensurate recognition of
the impact on the nature, scale and complexity of the risk should be implemented toencourage the path to a more formal status. The “restriction with recognition”
approach should incorporate incentives to formalise as organisations grow

2.26

As an example, consider a very small insurer that may be limited to a defined productand to investing in assets in licensed banks – matching its business model. Given
these conditions, the requirements regarding investment policies or asset oriented
Enterprise Risk Management (ERM) systems can be less onerous and could appear
to be a “concession” but would be consistent with this prohibition.

2.27

As the organisation gets larger, it may feel that it would be better able to serve its
customers if it was to offer some additional types of cover, and would provide a better
value if it was able to adopt a more aggressive investment portfolio to enhanceinvestment returns – both would require investment in risk management systems
similar to what would be expected of larger insurers. The “concession” regarding
investment policies and ERM would be lost at the same time as the “restriction” oninvestments and product mix were lifted.

2.28

Regulatory arbitrage (decision making primarily resulting from regulatory
considerations that may be counter to economic considerations independent ofregulation) may be a concern when a dual system exists in the market. This can beperceived to occur when existing insurers are competing with the new entities that
operate with different conditions because they are subject to rules introduced as partof an innovation or a transitional arrangement.

2.29

One option is to restrict the new approach to the new players. This, however, may not
facilitate full innovation because it could place an additional and inefficient cost on
existing players. For example they may need an additional license to offer the
product. Also it could act as a barrier to access if existing insurers or intermediaries
are prohibited from entering a business line that they would be interested in. It is
undesirable to prohibit existing insurers or intermediaries who wish to make efforts toenhance inclusive insurance markets because of a regulatory restriction.

2.30

Therefore supervisors need to avoid approaches that are inconsistent and could leadto regulatory arbitrage. This challenge can arise with transitional arrangements, or
specially tailored regulation. In such instances, attention is needed to ensure that

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perverse incentives are not created and differentiation is limited only by the naturescale and complexity of the risk.

Cooperation in support of transitional arrangements
2.31

Material transitional issues that involve a large number of entities may create
challenges for supervisors. Some entities may not be familiar with the supervisor’s
expectations.

2.32

It can be difficult to design and implement new supervisory systems and infrastructure
when a large number of entities operate under transitional arrangements, but only
some are expected to emerge as insurers. Others chose to exit the business or focus
on distribution and servicing of products issued by other insurers. In such cases, it
may not be clear how many entities will be supervised once the transition is complete.

2.33

Supervisory coordination and cooperation in such cases can be helpful, especially ifother authorities have longer experience, or deeper interaction, with the transitionalgroup. They may have existing systems that can facilitate access to entities or datacollection in an interim period. Some (for example, fiscal authorities) may also have
options for leverage or enforcement actions that could be efficient or effective in thetransitional period.

3 Innovation
3.1

When seeking to enhance inclusive insurance markets, it is necessary to facilitate
innovative practices. This section focusses on innovations in the types of entities andbusiness models that may become involved.

3.2

By definition, when the market is less accessible to a group of customers,
conventional approaches have not succeeded in overcoming the barriers to access.
In situations where access to insurance markets is impeded, innovation is required.
Innovation is important to bring down costs, reduce a lack of affordability, extend thereach of providers, or recognise innovations in technology or processes, to name justa few. At the same time, innovations can make the provision of the products andservices not only attractive to customers, but economically viable 13.

3.3

Regulation and supervision needs to permit innovative approaches while protecting
policyholders. The primary law 14 should be as broad and permissible as possible
recognising, or not prohibiting, a wide range of business models, processes, potential
market participants and service providers. Although the flexibility of the primary law
may be implemented progressively through subsidiary regulations and guidance as13

Different approaches may include products that provide different benefit packages more relevant to the target
market, facilitate premium collection more aligned to the ability and manner that the target group may havefunds available to make such payments, different distribution approaches that better reach the customers,
different service delivery such as those associated with premium collection or claim payment, and claim
processing practices that better meet the needs of customers in economically more vulnerable situations.

14

Primary law generally requires full legislative consent. In the ICPs, the term “legislation” is used to include
primary legislation and ‘secondary and other forms of legislation’, including rules and regulations, which havethe legal, force of law but are usually the responsibility of the supervisor. (Note footnote will not be carried into
final text as it is defined elsewhere in the ICPs – it is included for clarity in the consultation phase only)

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well as supervisory policy, the overall flexibility in the primary law ensures thatsupervisors can deal with useful innovations as they become available without delay.
3.4

Consistent with Standard 1.2, the primary law should provide supervisors with thetools and delegated powers to develop more detailed rules that are not materiallylimited in the scope. Limitations in scope tend to provide limited flexibility andaccommodate specific innovations – by definition those that have been thought ofalready. It is preferable to be able to provide guidance in a flexible fashion specific toeach innovation as it emerges.

3.5

Some supervisors are able to implement arrangements for enforceable detailed rules
through a general rule making power whereas other are able to do so throughalternative means such as broadly applying license conditions. The ICPs recognisealternate means of achieving the same results as part of the assessment criteria(refer paragraph 25 of the ICP Assessment Methodology).

3.6

Limitations in the defined institutional form may curb competition, encourage
regulatory arbitrage, or hinder formalisation and integration of unregulated or informal
providers into the regulated financial sector.

3.7Standard 4.2 addresses the definition of permissible legal forms of domestic insurers.
Permissible defined legal forms should be as broad as possible and practical.
Intermediaries should also be sufficiently flexibly defined in terms of their legal form
(Guidance 18.0.10 recognises some of these forms) functions and qualities. In somejurisdictions, for example, insurers have to be incorporated, and listed entities andintermediaries have to be residents or citizens – both definitions have the potential tomaterially limit innovations.

3.8

Powers to apply conditions or limitations to licenses (Standards 4.7 and 4.9) can be
useful tools. Through these tools, the broad facilitation of the primary law in terms ofentities and legal forms can be made more focussed in practice. For example,
conditions or limitations could be used to create a “dedicated microinsurer” license
option.

3.9

Depending on the nature of the challenges to access to inclusive insurance markets
in a jurisdiction, it can be useful to recognise the role that can be played by mutuals,
cooperatives and other community based organisations (MCCOs) for the provision ofsuch services to particular segments of the population. These organisations may be
relevant as either insurers or as intermediaries or both.

3.10

As a wider range of entities may be licensed, it is also important that arrangements forwinding-up entities of these newly eligible legal forms are reviewed. If necessary, therequirements for winding-up may need to be updated to ensure that they are
consistent with the obligations of the ICP 12.

3.11

When seeking to enhance access to inclusive insurance markets, innovative
approaches to premium collection and claims payment – for example, by using
different technological solutions - may require special attention (Standard 18.6 may
require careful implementation in this respect).

3.12

Sometimes an inability to bundle life and non-life products in the same insurer is cited
as a barrier to access because of increased costs. Innovative approaches may
include bundling together various life and non-life products, including health benefits.
Depending on the nature of the market, this may represent a way to enhance accessto insurance services.

3.13

How bundling is done varies. In some cases it can be achieved through packaged
distribution of products from different insurers (within the same group or not). Thisapproach requires the premiums, once collected, to be separated between the lifeand non-life components and for claims to be identified separately.

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3.14

Another way would be to allow life insurers to issue some non-life products on thesame balance sheet (and vice versa). In many jurisdictions, for example, somepersonal accident products are issued by both life insurers and non-life insurers. In
others, recognising the limited risk to the supervisory objectives, supervisors have thepower to deem a product of one class to be acceptable under the other. As is noted in
Guidance 4.3.4, this should involve adequately separating risks.

3.15

For requirements to reflect the nature, scale and complexity of the risks, less onerous
obligations may be imposed on composite insurance where this is permitted only withrespect to limited products than those that would be imposed on a composite insurer
with no limitation.

3.16

A separate issue can arise when implementing Standard 4.2. Under this standard
insurance activity (or insurance) is defined and unauthorised activity is prohibited.
Sometimes admissible insurance can oblige risks and customers to be in particularplaces. These requirements present barriers to access, for example, to migrant
workers. Supervisors should review the impact of such rules when seeking toenhance access to inclusive insurance markets where migrant workers are commonand numerous.

3.17

When seeking to enhance access to inclusive insurance markets, the absolute
minimum bound for the Minimum Capital Requirement (MCR) may be revised to alower level reflecting a lower risk profile and more limited need for detailed
governance and risk management. This allows a wider range of entities to participate
in the provision of insurance services. Lower levels for the minimum bound may also
be part of a transitional arrangement. In both these situations, see Guidance 17.4.6.
In some instances a lower level may be balanced by more emphasis on governanceand risk management.

3.18

The supervision of intermediaries applies equally when seeking to enhance access toinclusive insurance markets. Intermediation between insurers and customers takes awider variety of forms. To better reach underserved customers, intermediaries could
include an insurer´s direct sales staff, independent or exclusive agents, banks andtheir correspondents, retailers, microfinance institutions, post office agencies, NGOs,
mutuals, cooperatives, social and religious associations, utility service providers(electricity, gas, telephone and mobile) and specialized microinsurance brokers or
agents, or electronic means

3.19

Standard 18.1 envisages both individual and other forms of intermediation, andusefully identifies the benefits of conditional, limited or more specific licenses.
Approaches that are consistent with the nature scale and complexity of the risk toachieving supervisory objectives will be important to ensuring the objectives of ICP 18
are achieved when seeking to enhance access to inclusive insurance markets.

3.20

Intermediaries often play an important role beyond their traditional functions. In
particular, their role tends to be more critical in terms of promoting public trust andconfidence in insurance, conveying information in a more accessible manner tocustomers, promoting insurance awareness, and supporting the development offinancial education. They may also be fulfilling some administrative functions beyond
what a broker or agent would typically do.

3.21

It may be necessary to ensure that the primary law facilitates a wide range of forms ofintermediation and that supervisory rules are established covering the functional
details for each permissible form of intermediary. Requirements relating to individuals
should not prohibit other legal forms such as corporate entities or cooperatives acting
as intermediaries. Intermediation options should be considered based on economic
principles rather than regulatory bias or arbitrage (Standard 18.1).

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3.22

Restrictions on commissions that create a disincentive to provide services to theunderserved segment of the population should be avoided. Additionally, particularly
when intermediaries have an increased role in other areas such as ongoing servicing
functions, remuneration should encourage effective servicing beyond the point ofsale. In some innovative models, the role of the intermediary may not be principally toprovide insurance services. Instead they may be oriented to providing some otherservice or product to the customer as their primary focus. However, through this otherrole, insurance services can be effectively delivered. Requirements may need toreflect the fact that the distributor’s main source of income is not from the sale ofinsurance. In all cases, the key challenge is to ensure that requirements related toremuneration take account of a range of situations and are designed so as to createsound incentives (Standard 18.5).

3.23

In the case of a specific intermediary class being established that focuses on theunderserved sector, expectations of the supervisory regime should reflect businessexpectations, including both more limited and additional functions that might be askedof intermediaries (Standard 18.3).

3.24

The form and content of disclosures should reflect the specific circumstances of themarket including how such disclosures should be made, what language is used, andthat the form takes account of the levels of financial and general literacy (Standard
18.5).

3.25

In these circumstances supervisors need to take a proactive approach to monitoring(Standard 18.6). Although the scope of issues may be similar, supervisors should
recognise that customers from the underserved markets may not raise issues and, infact, they may face barriers to doing so. One indicator of potential problems could be
low claims ratios. In the case of products that appear to offer low value to customers,
low ratios should be investigated to understand if other services are being used or if
there are situations or practices that should be stopped. Supervisors should also
analyse complaints against insurers and intermediaries, identifying inappropriate
conduct.

3.26

Finally, to encourage innovation and various business models, regulations thatprevent insurers from providing risk bearing capacity to innovative distribution
channels should be reviewed. Risk bearing capacity should be able to be provided toinnovative distribution channels regardless of form, while protecting policyholders.

Particular issues that arise when expanding the eligible entities to include
mutuals, cooperatives and other community-based organisations
3.27

In some situations, MCCOs can play an important role in the delivery of services andproducts. Where this is a new development in the insurance market, there are someissues that supervisors should be aware of in the implementation of the ICPs. These
are discussed more fully in the Issues Paper, but key items are discussed below.

3.28

Several standards relate to the board. Standard 5.2 highlights the need for board
members to be “suitable” including their individual competence. Some MCCOs may
find it challenging to maintain adequate board level expertise if the organisation’s
rules result in a lack of continuity of directors or when directors are drawn from amembership that cannot be expected to have the range of expertise necessary.
Standard 7.3 highlights the need for boards to have an appropriate mix of individuals.
This is referred to as “collective suitability”. To ensure boards are made up ofindividuals with the necessary competence (individually and collectively), someinsurers (and the supervisory arrangements) have considered reinforcing training of
directors, increasing direct access by board members to specific expertise, including

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allowing non-member experts on boards, and/or avoiding coincident terms for allboard members 15.
3.29

Conforming with Standard 7.4 which deals with duty of care and potential for conflictsof interest, unique issues can arise for MCCOs. In comparison to other insurers,
MCCO board members may be representative of the policyholder / member body, willusually feel a stronger link and obligation to policyholders, and be less subject totypes of conflicts of interest between shareholders and policyholders.

3.30

To this extent, these issues could be less of a supervisory concern provided thedemocratic process works effectively. Some supervisory approaches recognise thestrength of democratic processes whilst, at the same time, requiring these processes
to meet specific conditions.

3.31

As organisations become very large the processes may be less effective. Thisrequires constant scrutiny from the supervisor. Additionally, although theseorganisations do not have to balance the interests of policyholders and shareholders,
there will still be similar needs to balance the interests of different groups ofpolicyholders.

3.32

Whether members can effectively exercise their responsibilities as owners and voterswill depend on the information disclosed to them. This may be subject to specificobligations. It may also be subject to specific requirements as part of the effective
implementation of the requirements of public disclosure under ICP 20. Since theeffectiveness of disclosure underpins the effectiveness of the democratic element ofsuch organisations, it should be subject to supervisory assessment.

3.33

Under Standard 16.11, MCCOs may need to align their capital needs with available
resources more carefully than entities that can raise capital more flexibly and thisshould be a matter of attention in their own risk and solvency assessment.

3.34

Given the nature of the MCCO structure, capital will also be an area where therequirements will need to be considered and possibly adapted if MCCOs are new tothe market. Standard 17.11 should be applied such that any reliance on guarantees
should be of a limited duration during a start-up period and be quickly replaced withretained surpluses. Some regulatory and supervisory systems also recognise
guarantees from third parties; this has been the way many small mutual insurance
entities started.

3.35

Normally, regulatory or supervisory arrangements do not permit capital that can beraised through future calls on members as “callable but unpaid capital or reserve
items” to be eligible to meet regulatory capital requirements. This may be permitted

15

For example, a Mutual, Cooperative or Community based Organisation (MCCO) based on membership of aparticular profession or industry may not automatically draw a board with experience in commercial andinsurance related matters. Many MCCOs are conscious of this issue and provide regular training for new
directors and on an ongoing basis although it may not always be easy to access such training without
significant effort. Some MCCOs also indicated their boards are only constituted by members elected and notby any members who also hold management responsibilities and as such are “wholly independent”. In
addition, the access of the board to independent expert at the board’s own initiative; the ability of individual
directors to initiate investigations or to secure advice; or very robust processes whereby directors can obtain
access to management to inquire and understand issues, can enhance their oversight role and help these
directors to carry out the responsibilities expected of them. In some markets, MCCOs are obliged to or
spontaneously adopt the practice of having some appointed independent directors who bring particularexpertise to the board. In others, MCCOs may have access to technical service providers as a cost effective
way to build and maintain expertise. Importantly for supervisors, however, even if all these steps are taken, it
still should be recognised that the selection of governing bodies could present issues in some cases.

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for MCCOs if, among other things it can be demonstrated that such calls had been
met in practice and there is very strong solidarity amongst members.
3.36

The balance between retaining capital to support business growth and distributing
profits demands consideration of fairness and equity between generations ofpolicyholder members. Supervisors should have an interest in capital adequacy andfairness and equity between generations of policyholders. Conflicts can arise whentrying to find a balance between retaining capital to support business growth anddistributing profits (Standard 19.2).

3.37

Regarding Change of Control under Standard 6.9, when the market includes, or
potentially includes, MCCOs supervisors must determine how demutualisation would
be implemented should it arise.

3.38

Finally, proportionate approaches to supervision, the potential for standardised
approaches developed across the sector, and accommodative consideration oforganisational structures such as apex organisations 16 and service providers, canensure that the supervisory burden is balanced against the risks associated withbroader and more accessible inclusive insurance markets. There is a tendency for
apex organisations to be a feature of cooperative and mutual sectors. As a result,they provide opportunities for the supervisory arrangements to leverage thesestructures to deliver both more effective supervisory oversight and lower cost.

4 Proportionality and its application to inclusive insurance markets
4.1

An important implication that “inclusive finance should be effectively supervised” is theappropriate application of the “proportionality principle” in practice.

4.2

Throughout this paper, when discussing the need for supervision to be proportionate,
there are references to the goal of using proportionate approaches to enhance
inclusive insurance markets. In some cases, the motivation is to ensure that therelevant supervisory objective is available or achieved effectively in practice. In
contrast, disproportionate obligations can sometimes be ineffectively implemented
and not deliver the intended result.

4.3

In some cases, proportionality may be used to ensure that costs are “not prohibitive inpractice”; that is, cost is not an undue and material barrier to inclusive insurance
markets.

4.4

Consideration should be given to how the principle of proportionality should beapplied in each of the following contexts:- designing and implementing regulatory requirements;- assessing insurers’ and intermediaries’ adherence to regulatory requirements; and- exercising supervisory powers.

4.5

16

Where relevant and appropriate, requirements laid down in the ICPs should beapplied in a manner that takes into account the nature, scale and complexity of therisks inherent in the individual insurance business. An insurer should employ systems,

Apex organisations are entities that are formed to provide services to groups of mutual organisations or tofacilitate groupings of such organisations or both. They can be owned or operated by the group oforganisations that they provide services to or be more independent in legal terms.

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processes and measures that are proportionate to the risks it is exposed to, or
alternatively, reduce the risks it faces.
4.6

The supervisor, when assessing the nature of the risks, considers, among otherthings:- the type of business from which risks originate (e.g. life insurance business or crop
insurance business); or- the specifics of the insurer’s portfolio; or- any risk mitigation instruments (such as reinsurance or derivatives) applied, andtheir impact on the underlying risk profile.

4.7

When assessing the scale of a risk, the supervisor takes regard to both the likelihoodof the risk being realized and the impact of that risk when realized.

4.8

The supervisor uses more sophisticated and elaborated tools to analyse and quantify
more complex risks. The management of risks by insurers would also be expected tobe more sophisticated when risks and risk profiles are more complex.

4.9

In assessing what is proportionate, the focus needs to be on the combination of all
three criteria. For instance, a business may be small scale but still include complex
risks; in this case it should not be allowed to use simplified methods. Simplified
methods may be appropriate under very specific circumstances, however, for a large
scale business with a simple risk profile (uncomplicated, supporting only limited risk).
By way of example, for reinsurers operating in the market generally, supporting
inclusive insurance initiatives or not, their business is likely to be complex. This
complexity would not be reduced by adding participation in initiatives to improveaccess so there would not be a material change to the supervisory approach.

4.10

Similar considerations would apply when considering the application of the relevant
ICPs to obligations on intermediaries and for consumer protection.

4.11

In order to be considered proportionate, a measure has to be, at least, suitable,
necessary and appropriate to attain the supervisory objectives of a jurisdiction. Itshould not go beyond what is necessary to achieve the objectives (be“disproportionate”).

4.12

Risk of, or to, the insurer is only one part of the consideration. Risk to the overall
supervisory objectives (as identified in Standard 1.3) is also very relevant. In somesituations, for example, the supervisor may consider that the risk to the supervisoryobjectives does not exist with respect to a particular issue even though the technicalrisk is complex.

4.13

Appropriateness requires that the drawbacks of a supervisory measure are not totallydisproportionate to the benefits. The measure should not be adjusted for
proportionality however, if by doing so it will result in a supervisory objective not being
met. A supervisory measure is necessary if there is no less onerous method available
that is equally or even better suited to serve the objective.

4.14

Supervisory measures should not lead to undue costs for insurers or cause otherdisadvantages that are disproportionate to the supervisory aims. When seeking toenhance accessible insurance markets, where there is a choice between several
appropriate measures that are similarly effective in reaching supervisory objectives,
the least onerous measure should be applied.

4.15

The proportionality principle works two ways: it justifies simpler and less burdensome
ways of meeting requirements for low risk activities; and it also justifies applying moresophisticated methods and techniques for more complex risk situations. Usually small
and medium-sized insurers find relief in the application of the proportionality principle
but proportionality is not always size-based.

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4.16

Proportionality does not mean the introduction of automatic and systematic
simplifications for certain insurers or intermediaries. The principle will be applied
where it would be disproportionate to the nature, scale and complexity of the insurer’s
or intermediary’s business to apply the general rules (quantitative and qualitative)
without adjustment. The individual risk profile and the impact on supervisoryobjectives should be the primary guides in assessing the need to apply the
proportionality principle.

4.17

Regardless, the system must remain supervisable. Standard requirements should be
proportionate to avoid any un-level playing field. Finally, the application of the
proportionality principle should ensure that the same level of protection is guaranteed
for all customers. A lack of resources should not be a justifying reason forproportionality.

4.18

There are a number of areas where specific attention to the application of
proportionate requirements can be relevant. These are discussed below.

4.19

Administrative procedures can be a barrier to access if they are not well designed,
thereby limiting the amount of innovation or forcing innovations to remain in theinformal sector. Examples of areas where “procedural proportionality” would be
relevant include:
4.19.1 Applying for a license (Standard 4.3) - information required and procedures
may be different for different entities;
4.19.2 Demonstrating that Board Members, Senior Management and Key Persons
in Control Functions, and Significant Owners are suitable (Standard 5.3):
4.19.3 Notifications of changes in Board Members, Senior Management, Keypersons in Control Functions and Significant Owners, and of any
circumstances that may materially adversely affect the suitability of its
Board Members, Senior Management, Key Persons in Control Functions
and Significant Owners (Standard 5.4);
4.19.4 Requirements regarding corporate governance (ICP 7);
4.19.5 Expectations for risk management (ICP 8) - limited risk management
obligations should be coupled with restrictions on activities that limit risk
to consistently appropriate levels.
4.19.6 Procedures for valuation (ICP 14) - when including a wider range ofpotentially smaller institutions, it may be necessary to consider applying
standards that leverage sector-wide expertise to develop valuation
guidance capable of being economically implemented for small, low risk,
less complex insurers.
4.19.7 When including a wider range of potentially smaller institutions, it may benecessary to consider applying the standards of “Enterprise Risk
Management for Solvency Purposes” ICP 16 by specifically limiting
activities and prescribing specific requirements focused on the nature ofrisks undertaken and capable of being economically implemented forsmall, low risk, less complex insurers so as to deliver the intent of ICP
16. Such limitations in activities could then be reflected in the obligations
arising through the balance of ICP 16 to the extent that they remain
relevant.
4.19.8 Intermediary regulation (ICP 18) - particularly relevant in terms ofcompliance obligations for applications (Guidance 18.1.5). Requirements
regarding professional knowledge, financial resources, codes of conduct,
etc. should also be consistent with the focus of the intermediaries.
Requirements should ensure that intermediaries have sufficient

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incentives to reach and service the underserved and are skilled to carryout the task effectively while maintaining the obligations for policyholder
protection.
4.20

The solvency regime (ICP 17) should apply to all insurers. However, the special
characteristics of products that may increase access to inclusive insurance markets
for the underserved, requires an approach that reflects the nature scale andcomplexity of the risks, in particular the fact that very small undertakings typicallyhave less complex risk profiles.

4.21

Given the nature of the lower risk profile, the costs of interpreting, applying andchecking compliance with requirements should not be disproportionately high.
Requirements need to take account of managerial capacity and expertise.

4.22

It may be necessary to recognise that some actuarial functions might be supported ina shared fashion across insurers or the insurance market, specifically actuarial
approaches used in setting technical provisions, premiums, and pricing. Whenenhanced access is accompanied by an increased number of entities providing
defined products then insurers may only be able to meet the intention of Standard 8.5
by applying collective or standard methods that have been subject to actuarial
development. This should be acceptable when the nature scale and complexity of therisks justify it. Some of the functions in Guidance 8.5.5 may be formula-based at theinsurer level and may be rendered unnecessary by specific restrictions (such as
strong restrictions on investments), or other regulations or conditions.

Proportionate approaches have a lower bound4.23

As noted when discussing licensing of entities, there will be situations where an entitythat is proposed to be licensed cannot retain and manage insurance risk reflecting (a)technical characteristics, and (b) business characteristics.

4.24

The economic benefits of insurance arise when risks that are not perfectly correlated
are pooled together. Without this, there would be no insurance risk benefit fromtransferring the risk to the insurer. As the number of less than perfectly correlatedrisks in the pool increases, the effectiveness of the risk pooling increases.

4.25

So there is a level below which the benefits from risk pooling are insufficient. This
minimum level will depend on the nature of the risks themselves, their volatility, andthe extent that they are even partly correlated. The small size of a risk pool can act asa barrier to providing effective insurance. It will also impact the regulatory
requirements for effective risk management.

4.26

For risks to be properly managed, insurers need adequate resources in terms ofpeople, processes, and infrastructure. These requirements can reflect soundpractices, but some may also arise from regulatory requirements. The appropriate
levels of business resources will vary depending on the nature, scale and complexityof the risks retained.

4.27

The minimum point where an insurer can operate regardless the extent that therequirements reflect the nature, scale and complexity of the insurer is shown in Figure
1 as point “A”. A perception as to what is the appropriate risk management or theminimum required infrastructure in such situations can vary and there will be a range
of opinions. In this application paper, some suggestions regarding the absolute
minimum requirements that would be applicable in all situations have been suggested
in the section on “Absolute minimum requirements”.

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Supervisory Intensity

Figure 1: Representation of Minimum Point to Retain Insurance Risk

A
Zone of noretention

Nature, Scale and Complexity
4.28

These “Absolute minimum requirements” can be considered to be requirements thatare not able to be waived even in the most limited, smallest or simplest of risk
situations. As an entity, of whatever form, increases in nature, scale and complexity, it
would be expected to exceed these minimum requirements.

4.29

Regulation would be a barrier to access where the minimum requirements imposedby supervisors are disproportionate. In such situations, the regulations raise theminimum size that an entity would need to support the requirements due to thebusiness characteristics imposed by regulation over and above that required bysound practices.

Absolute minimum requirements
4.30

There are some requirements where there appears to be an effective absolute
minimum requirement that would apply to some of the ICPs and Standards in thesmallest, simplest cases. These would appear to be universal.

4.31

For example, registration, (Guidance 4.1.6), and its application in either a pilot or in atransitional system (for entities that were previously informal) should include
requirements to identify the organisation, its form, and to report to the supervisor after
registration.

4.32

Guidance 9.2.3 elaborates on minimum reporting requirements. It is important that thedesign of minimum requirements is effective in securing the necessary supervisoryobjectives. Given the potential diversity of entities that may be involved in theinsurance market through innovations, additional guidance regarding the minimum
requirements may have to be considered.

4.33

For example, while the entity may produce a balance sheet and income statement,
they may not be sufficient for supervisory purposes. The supervisor needs to haveaccess to information that includes an income statement and balance sheet (or otherinformation that is equivalent in terms of outcome) that:

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4.33.1 identifies the effects of reinsurance on income statement and balance sheet
items so as to facilitate the analysis of the insurance business on a“gross” and “net” or reinsurance basis;
4.33.2 relates to the insurance business specifically when the enterprise isinvolved in both insurance and non-insurance activities;
4.33.3 separately identifies expenditure associated with claims payments fromthose of operating and other expenses;
4.33.4 are provided not less frequently than annually or on request. Standard 9.4
refers to annual statements.
4.34

The requirements in paragraph 4.32 are intended to facilitate a minimum analysis forsupervisors below which it is not considered to be prudent. As it is necessary tosecure a view of the whole market, and as this application paper advocates that all
insurance operations be included in the supervisory regime, these requirements
should cover all entities that act as insurers. When a registration approach is taken
either to facilitate pilot innovations or transitional arrangements, the requirements ofparagraph 4.32 are also expected to be met.

4.35

Supervisors should consider collecting information from insurers beyond theminimum, for example, collecting information that would facilitate analysis of customer
experiences. For example, customer experience measures could mean collecting
information on new business flows so that renewal rates could be calculated.
Discontinuance rates could be collected for some longer duration products. Statistics
associated with claim payment times can be important particularly when dealing withcustomer groups with more limited financial resources. Complaints measures tend to
be a main focus among market conduct supervisors. (refer ICP 19)

4.36

Supervisors often cannot collect some policy related measures without being
disproportionate or mis-targeting. This includes collecting information about insurance
access and use by historically underserved subgroups of the population. For manyreasons, insurers cannot be expected to collect, retain and maintain information thatwould facilitate reporting these measures to supervisors. As a result, any effort to do
so will be imperfect as a measure of access or reach. The extent that going beyond a
premium based penetration measure provides material added value should beconsidered carefully against the costs and limited benefit from the additional
refinement. To truly understand the situation on this issue, customer survey data
would normally be more reliable even if it is less frequent 17.

4.37

Similarly disclosure to the market (ICP 20) should not be materially different in scope.
Specifically it should be sufficient for market participants to be able to benchmark theirperformance against the market as a whole and to a limited subset. Benchmarking
should be possible, at least, with respect to premium volumes and growth, expenseand claims ratios and would be facilitated by the disclosure of the balance sheet andincome statements with the information set out in paragraph 4.32.

17

To measure the proportion of the subgroup population that uses insurance in a particular market, contrasted tohaving access to the products, it is necessary to identify the number of people who are in the particular market
subgroup – something that would not be known to any insurer but could only be estimated. When examining
the number of people in the subgroup who, for example, own policies, the number of policies in a particulardefinition is only a proxy as some of them may be purchased by people who were never in the subgroup, areno longer in the group but still maintain the policies, or have more than one policy, possibly with multiple
insurers such that it is not possible in practical terms to use policy counts from insurers to provide a properly
corresponding measure.

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4.38

The implementation of ICP 19 on Conduct of Business is very important whenseeking to enhance access to inclusive insurance markets. Because there is usually adiversity of customer situations not only between countries but also within countries,
the way ICP 19 should be implemented cannot be prescribed in detail. Nevertheless,a clear focus on both outcomes and objectives is common across all markets.

4.39

The intention is to accommodate and facilitate increased access in a way that will
increase financial inclusion while adequately protecting policyholders. Since
customers that have not historically had access to inclusive insurance markets tend tohave limited incomes and a low level of financial literacy, special care must be taken
in dealing with the underserved.

4.40

When considering the need to inform customers, the form and content may need to
be varied so that the objective is achieved. It may be the case that providing
documentation is not always the most useful way to achieve the objectives and, insome cases, may be counterproductive (Standard 19.2). The objectives should
include that:

4.41

customers are treated fairly (Guidance 19.2.4 refers and so does Standard 19.4 and19.9 but the following are additional and specific), including:
4.41.1 realistically representing what the insurer, its products and services offerand balancing the commercial objectives of increasing sales with theobjective of treating customers fairly. When giving advice to thecustomer, intermediaries and insurers should ensure it is fair andobjective, recognises the benefits and costs of their product and theadvantages and disadvantages of alternatives;
4.41.2 providing clear and appropriate information regarding not only the productbenefits but also the costs and obligations associated with the productand any restrictions or limitations;4.41.3 providing service in response to changes in the wider environment that may
affect products and impact on customers, and giving service after the
point of sale that includes keeping customers and intermediaries
informed; and4.41.4 ensuring policyholders are aware that they have an insurance product, theidentity of the insurer (or insurers as might be the case for bundled
products), and the manner that the services 18 should be accessed.
Equally, when the insurance service ceases, whether it be through theactions of the policyholder or otherwise such as wind up or exit of theinsurer, it is important that policyholders are made aware when theirinsurance is no longer effective.

4.42

Communication requirements are usually most effective when they are provided in thelocal language and in the context of a trusted interface/intermediary relationship.

4.43

Regardless of the regulatory and supervisory framework in place, customers musthave a means to verify whether an insurer is regulated and/or supervised.

4.44

Standards and guidance encourage supervisors to understand the money launderingand terrorism financing risks in the insurance sector and to follow a risk-based
approach. Rules should be enforceable and guidelines should be issued to assist

18

Services and benefits under insurance products includes not only the claim coverage but, for example, rights tofair resolution of complaint mechanisms and, in the case or participating contracts issued by mutual entities,
may include the exercise of mutual democratic rights.

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insurers and intermediaries to implement and comply with requirements directed at
anti money laundering and combating the financing of terrorism (AML/CFT).
Furthermore, there should be an effective supervisory framework to monitor
compliance with AML/CFT requirements.
4.45

Where the supervisor is not the responsible authority for AML/CFT, it should
effectively coordinate with the competent authority, e.g. a financial intelligence unit.
Guidance relating to ICP 22 recognises a risk-based approach 19. However, some
additional guidance may be useful.

4.46

The Issues Paper in Regulation and Supervision of Microinsurance recognised thatthe possibility for money laundering in microinsurance is low. The main reasons why
microinsurance presents low money laundering risk are that:
4.46.1 The highest risk insurance products are investment-based products or highvalue non-life insurance where insurance fraud could be committed tolaunder funds.
4.46.2 Microinsurance tends to be a low-premium, low-benefit product withfrequent rather than one-off premiums. There is therefore a mismatch
between microinsurance and the “transaction needs” of money
launderers.
4.46.3 The types of risks normally included in microinsurance are not typicallytargeted for money laundering.

4.47

As financial service, microinsurance is, however, subjected to a country’s anti-money
laundering regime. If this is done without recognition of its potential low-risk profile,
this may increase transaction costs and create barriers to the take-up of insurance. In
particular, obtaining Customer Due Diligence (CDD) documents such as proof ofidentity or address, or providing a photograph from prospective customers may posea real barrier. When customers of microinsurance cannot provide conventional CDD
records, alternative approaches should be developed.

4.48

When seeking to enhance access to inclusive insurance markets, supervisors should(Standard 22.1):
4.48.1 Determine the level of money laundering / terrorism financing risk posed byproducts targeted toward underserved markets in the jurisdiction; and4.48.2 Based on the assessment, tailor the AML/CFT regime applicable to theparticular risk level. This may entail a simplified in CDD requirements oralternative approaches.
4.48.3 The AML/CFT regulations for microinsurance need to provide for controls,
which are risk-based and, therefore, not unnecessarily burdensome on
the supervisors, insurers or public.

4.49

19

Regulations relating to AML/CFT need to allow for agents acting as the customer
interface and as the extended servicing-arm of the insurers. They may need to allow
for electronic transactions and documentation, which simplify, economise and speed
up insurance activities.

The IAIS references the Financial Action Task Force paper Risk-Based Approach: Guidance for the Life
Insurance Sector (October 2009) with respect to Guidance 22.1.1.

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5 Roles and responsibilities

Financial sector policy
5.1

The introduction to the ICPs discusses preconditions for effective insurance
supervision (paragraphs 19 to 25 of the introduction) giving specific attention to therole of a financial sector policy.

5.2

The G20 Principles point to leadership in cultivating a broad-based government
commitment to financial inclusion to help alleviate poverty. In many jurisdictions,general financial sector policies promote financial inclusion for underserved
segments. Access to insurance markets could be assisted by having that overall
policy address insurance markets directly.

5.3

When seeking to enhance inclusive insurance markets, governments should include
developing accessible insurance markets for underserved segments as part offinancial sector policies in line with the G20 Principle 1.

The insurance supervisor in a leading role
5.4

ICP 1 “Objectives, Powers and Responsibilities of the Supervisor” states “Theauthority (or authorities) responsible for insurance supervision and the objectives of
insurance supervision are clearly defined”. ICP 1 applies when seeking to enhancemore inclusive insurance markets. Supervisors require the same clarity of mandate,legal foundation, and legal powers.

5.5

When seeking to enhance access to inclusive insurance markets, however, the rolesof policymaking, regulation and supervision may often be shared among various
agencies. Where there are shared roles, the insurance supervisor would be the mostappropriate supervisory body to be given a leading mandate and role, as theinsurance supervisor would normally have the necessary skills and expertise.

5.6

When such a ‘development mandate’ is given to the supervisor, this mandate should
be explicit and subject to the same considerations as other mandates and objectives(Standard 1.2). The primary legislation may provide general support that is elaborated
further in subsidiary statements (Guidance 1.2.2). These same considerations
include, in particular, the importance of supervisors explaining how they interpret andimplement their objectives especially when supervisors have both a development
mandate and a prudential mandate (Standard 2.7 and Guidance 2.7.2).

5.7

The ICPs also discuss the need for:- available technical expertise; and- available appropriate dataas part of the preconditions for effective insurance supervision (paragraphs 19 to 25of the introduction).

5.8Country experience has indicated that these conditions are particularly relevant whenseeking to enhance inclusive insurance markets. Preconditions (paragraph 22 of theintroduction) recognise the need for skilled, competent, independent and experienced
actuaries, accountants and auditors. Specific expertise with regard to a particularunderserved segment of the market may need to be developed, the supply of
professionals may need to be expanded, or other mechanisms put in place to ensure
capable professionals play a role where their skills are needed and not only in moreconventional market segments.

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5.9

Limitations on available data (paragraph 22 of the introduction) may be a barrier tothe inclusive provision of insurance products. This can be the result of data being
insufficient or because data that is available is not specific to the risks faced byunderserved segment. When the absence of appropriate data induces high margins
of conservatism in prices, it can restrict access to insurance services by making them
unaffordable or uneconomic.

5.10

Limitations of data may be more general, particularly information on the underserved
market itself including the key barriers to access, the key risks faced by theunderserved, and the manner that they look to address these risks. It is important thatthose developing policy and supervisory initiatives intended to enhance access tomore inclusive insurance markets are able to understand these issues.

5.11

When limitations of skills and information have a material impact on access toinclusive insurance markets, supervisors should improve or alleviate the shortcomings
by sponsoring projects, encouraging others to do so, or raising the need for projects
to the attention of others.

5.12

When seeking to enhance access to inclusive insurance markets, it is important toconsider both issues of financial security and maintenance of access to insurance
services for policyholders involved in a portfolio transfer (Standard 6.10).

More diverse market participants impact the responsibilities of othersupervisors
5.13

If a wider range of entities become involved in the insurance sector, this brings with ita wider range of government agencies that are involved. Several aspects of the ICPs
address cooperation and collaboration between supervisors and would be usefully
applied in these situations. Other government agencies would be responsible forother laws and regulations. However, it is unlikely that the other agencies’ incentives
and obligations are fully aligned with the ICPs. In the absence of specific attention,
they may not be subject to the enhanced confidentiality and cooperation requirements
expected from financial sector supervisors.

5.14

The content of ICP 3 on Cooperation and Information Exchange is equally relevant
when seeking to enhance access to inclusive insurance markets. Supervisory efforts
to ensure cooperation, coordination and to facilitate information exchange are equallyimportant and the obligations on the insurance supervisor remain (Standard 3.2.
notes that the supervisor has to have the power, at its sole discretion, to exchange
information with other relevant supervisors and Guidance 3.2.1 defines these“relevant supervisors” to include some of the organisations that would likely arise in
the case of efforts to enhance inclusive insurance markets). Guidance 3.2.1 is,however, a list that is not exhaustive and innovations in markets may imply that othersupervisors such as those responsible for agricultural cooperatives ortelecommunications carriers could also be candidates to be “relevant supervisors”.

5.15

Where multiple agencies are involved in the supervisory process, they should ensurethat there is sufficient coordination, cooperation and information sharing necessary forthe discharge of their duties. The roles of policymaking, regulation and supervision
are often shared between a range of government ministries and agencies. Whenconsidering underserved markets, the entities that may be involved in reaching themarkets can be of interest to a wider range of social and economic policy areas. It isalso possible that oversight of the supervisory elements included in the ICPs may beallocated to one or more agencies and that this could differ depending on the legal
form of the insurer, example between mutuals, cooperatives and other community
based organisations and for other insurers. A wider range of agencies may also
extend to taxation, payment systems, or telecommunications supervisors within the

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jurisdiction. The process of formalizing previously informal sectors may also require
coordination with a more diverse group or on more diverse topics.
5.16

It is important that the supervisory power to obtain and exchange information(Standard 3.1) is sufficient in scope and flexible in application subject toconfidentiality, purpose and use requirements. Such flexibility may provide effective
opportunities to achieve supervisory objectives in a proportionate and cost effective
manner. The wider range of agencies within the jurisdiction that will need to be part ofcoordination and information exchange should be included with the necessary
safeguards in place.

5.17

These arrangements should include the other authorities being able to inform theinsurance supervisor of any issues in a proactive manner (Standards 26.8 and 26.9
are relevant here) while respecting confidentiality rules (Standard 26.2) andcoordinating public communication (Standard 26.13).

5.18

It is unlikely that the microinsurance business, even when entirely successful, would
lead to “serious domestic or international financial instability that could have an
adverse impact on the real economy” so the intent and aims of ICP 26 regarding
cross-border cooperation and coordination on crisis management are not expected tobe applied materially differently.

6 A definition of microinsurance in regulation
6.1

When seeking to enhance inclusive insurance markets, it may be useful or necessary
to have a definition of microinsurance. The definition can be related to the product or
the underserved customer group. It can be qualitative or quantitative. An example of aqualitative definition that encompasses both is “insurance for low-income
populations”. Qualitative definitions are usually appropriate for broader financial
sector policy statements. A quantitative definition can define a monetary amount for
the income level of the underserved customer group, or for the cover. Delineating thecustomer group in monetary terms might be of little benefit for insurers and could becostly and complex to implement. However, a quantitative definition of the cover(premium or face amount/cover) may be desirable to delineate a microinsurance
business line from other insurance.

6.2

When a proposed regulatory measure introduces differential treatment, then adefinition may be necessary to determine what precisely falls into the microinsurance
category. Differential measures may relate to insurance regulation and supervision or
another aspect of regulation, for example, taxation. In such cases, differentiation of
measures could be between one category and another, such as “microinsurance
products” and other products or “microinsurers” and insurers that do not provide“microinsurance”. It is considered optimal that:
6.2.1

Definitions focus on products recognizing that, although there may be thepotential for dedicated microinsurers, all insurers should be eligible toissue microinsurance products;

6.2.2

Definitions that focus on microinsurers should clearly delineate
microinsurance business from others and will require a definition of a risk
category/product.

6.2.3

Quantitative elements of definitions should be set at the highest possiblelevel to ensure the defined product is as inclusive as possible;

6.2.4

Quantitative elements should consider the need to align the resulting
business profiles with the expected proportionate regulation andsupervision.

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6.3 A regulatory definition may inadvertently exclude target customers, providers,
products and innovations, so needs to be carefully considered.

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Annex 1:
G20 Principles for Financial Inclusion

Innovative financial inclusion means improving access to financial services for low-income
households through the safe and sound spread of new approaches. The Principles forInnovative Financial Inclusion endorsed by G20 leaders in Toronto (27th June 2010) aim to
help create an enabling policy and regulatory environment for innovative financial inclusion.
The are based on the understanding that enabling environment will critically determine thespeed at which the financial services access gap will close for the more than two billion
people currently excluded. These principles derive from the lessons learned frompolicymakers throughout the world, especially leaders from developing countries.
The principles are a reflection of the conditions conducive to spurring innovation for financial
inclusion while protecting financial stability and customers. They are not a rigid set of
requirements but are designed to help guide policymakers in the decision making process.
They are flexible enough so they can be adapted to different country contexts.
The IAIS considers that the ICPs, when appropriately implemented, are consistent with andreinforce the G20 Principles for Innovative Financial Inclusion and other development work inthis regard.
G20 Principles
1. Leadership: Cultivate a broad-based
government commitment to financial
inclusion to help alleviate poverty

2. Diversity: Implement policy approaches
that promote competition and provide
market-based incentives for delivery ofsustainable financial access and usage ofa broad range of affordable services(savings, credit, payments and transfers,
insurance) as well as a diversity ofservice providers.

3. Innovation: Promote technological andinstitutional innovation as a means to
expand financial system access andusage, including by addressing
infrastructure weaknesses

4. Protection: Encourage a comprehensive
approach to consumer protection thatrecognizes the roles of government,

Application to Microinsurance
Governments can provide leadership to ensurethat policy frameworks include access toinsurance. They can coordinate with other actors
and drive an inclusion agenda that includes
insurance for the low-income segment (see also
Principle 6).
Supervisors can enable diversity of delivery
structures which respond to the living situation of
the low-income segment, while ensuring that they
are sustainable, efficient and promote competitionin the insurance market. The can also enable theindustry to sell innovative products that fit therequirements of target segments rather thanpushing miniaturized versions of conventional
products. Embedded products – insurance covers
tagged along with other products – and group
covers could be a painless and inexpensive wayof quickly introducing insurance cover to large
numbers.
Recent innovations in wireless internet access,mobile telephones and applications for hand-helddevices are beginning to revolutionize financial
markets. Biometric identification has assistedfool-proof identity verification with the help ofelectronic devices. Instant updating of insurer
records for receipts, payouts and service
requests is now possible even from the mostremote locations thanks to the devices connectedon the wireless networks. These innovations haveobviated the need for a large network of physicaloffices to provide services to customers and havelowered insurer costs significantly.
Low-income population are often not financially,or generally, literate. They are extremely
vulnerable to mis-selling and fraud and not awareof the insurance concept. Supervisors therefore

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providers and consumers

5. Empowerment: Develop financial literacy
and financial capability

6. Cooperation: Create an institutional
environment with clear lines ofaccountability and co-ordination withingovernment; and also encourage
partnerships and direct consultation
across government, business and otherstakeholders

7. Knowledge: Utilize improved data to
make evidence based policy, measureprogress, and consider an incremental“test and learn” approach acceptable toboth regulator and service provider

8. Proportionality: Build a policy andregulatory framework that is proportionate
with the risks and benefits involved insuch innovative products and services
and is based on an understanding of thegaps and barriers in existing regulation

9. Framework: Consider the following in theregulatory framework, reflecting
international standards, national
circumstances and support for acompetitive landscape: an appropriate,flexible, risk-based Anti-Money
Laundering and Combating the Financing

need to pay extra attention to consumer
protection issues that may arise at different
stages of the process such as advertising,collection and issue of disclosures, advice, sale,
enrolment, servicing and claims.
Poorer communities can be much more
vulnerable in the face of exposure to all kinds ofrisks. They are more seriously impacted bynatural and man-made disasters. They are also
beset by twin problems of lack of affordability andlack of awareness. Societies therefore need toinvest adequate resources in educating andpopularising the use of insurance as a tool for
protection against risks surrounding the lives andassets of the low-income segments.
Expansion of microinsurance involves multiple
initiatives such as awareness building, funding,design of suitable products, developing requisite
infrastructure and leveraging on networks andfacilities of other businesses for the sake of
economy and speed. Different institutions
within and outside the government haveabilities, skills and specialisations pertaining todifferent sub-domains of microinsurance. An
active cooperation and partnership between suchinstitutions is therefore desirable. In the process,there is also a need for total role-clarity andaccountability. Insurance supervisors should be
the key driver to push and coordinate themicroinsurance agenda in the jurisdiction.
Providing choices of suitable products anddelivery models customised to the needs of the
low-income segment is crucial for ensuring
successful take-off of microinsurance. It isimperative that authorities and providers avail
recent and sufficient data, which is often noteasily available. Investments in research anddata collection, and learning of all stakeholders
are important requirements.
Microinsurance is distinct from conventional
insurance in many respects. Generally, thecoverage is smaller, distribution is costly in termsof percentage of premiums given the hightransaction cost, economic capital thresholds arelower and consumer protection needs higher in
microinsurance compared to conventional
insurance. Therefore, supervisors and regulatorsneed to tailor certain supervisory requirements
and actions in accordance with the nature, scaleand complexity of individual insurers (i.e. apply
the principle of proportionality to be suitable tomicroinsurance needs)
To develop effective policy solutions for
microinsurance, a thorough analysis ofgovernment policy frameworks (both regulatory
and non-regulatory) are required to ascertain
existence of any known barriers. Relevant
question are:
 Which types of institutions are favoured
or hindered by the present regulatory

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of Terrorism (AML/CFT) regime;
conditions for the use of agents as acustomer interface; a clear regulatory
regime for electronically stored value

framework?
How adequate are the present
regulations and systems in terms ofsafeguarding the interests of
microinsurance customers?

Is there sufficient flexibility within theregulatory framework to reduce
regulatory requirements or otherwise
apply proportionality to microinsurance
providers, where appropriate?

What can the regulatory frameworkcontribute in order to motivate informal
insurers to legally provide microinsurance
services?

What can be done to motivate formal
insurers to serve low-income population?

How can the cost of regulation andsupervision be minimized, and at thesame time high quality services beensured?



Are regulatory areas in the wider
environment conducive (e.g. taxation,
telecommunication)?

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