Public

Insurance Core Principles
andCommon Framework for theSupervision of Internationally Active
Insurance Groups
UPDATED NOVEMBER 2019

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About the IAISThe International Association of Insurance Supervisors (IAIS) is a voluntary membershiporganisation of insurance supervisors and regulators from more than 200 jurisdictions. The
mission of the IAIS is to promote effective and globally consistent supervision of the insurance
industry in order to develop and maintain fair, safe and stable insurance markets for the benefit
and protection of policyholders and to contribute to global financial stability.
Established in 1994, the IAIS is the international standard setting body responsible fordeveloping principles, standards and other supporting material for the supervision of theinsurance sector and assisting in their implementation. The IAIS also provides a forum forMembers to share their experiences and understanding of insurance supervision andinsurance markets.
The IAIS coordinates its work with other international financial policymakers and associationsof supervisors or regulators, and assists in shaping financial systems globally. In particular,
the IAIS is a member of the Financial Stability Board (FSB), member of the Standards Advisory
Council of the International Accounting Standards Board (IASB), and partner in the Access to
Insurance Initiative (A2ii). In recognition of its collective expertise, the IAIS also is routinely
called upon by the G20 leaders and other international standard setting bodies for input on
insurance issues as well as on issues related to the regulation and supervision of the global
financial sector.

International Association of Insurance Supervisors
c/o Bank for International Settlements
CH-4002 Basel
Switzerland
Tel: +41 61 280 8090 Fax: +41 61 280 9151
www.iaisweb.org
This document is available on the IAIS website (www.iaisweb.org).
© International Association of Insurance Supervisors (IAIS), 2019.
All rights reserved. Brief excerpts may be reproduced or translated provided the source isstated.

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History
The Insurance Core Principles (ICPs) were adopted on 1 October 2011. Since then,amendments have been made to various individual ICPs, the most recent being:•

ICPs 4, 5 and 23

November 2015•

ICPs 13, 18 and 19

November 2017

•

ICP 6

November 2018•

ICP Introduction and Assessment Methodology and
ICPs 1, 2, 3, 7 8, 9, 10, 12, 15, 16, 20, 22, 24, 25

November 2019

Former ICP 11 (Enforcement) has been merged with ICP 10. Therefore, there is no longer an
ICP 11; however to avoid confusion, the existing numbering of other ICPs has not changed.
The Common Framework for the Supervision of Internationally Active Insurance Groups(ComFrame) was adopted in November 2019. ComFrame is presented in blue boxes within
the ICP Introduction and Assessment Methodology as well as within the following ICPs: 5, 7,
8, 9, 10, 12, 15, 16, 23 and 25.
The IAIS Glossary has been revised in November 2019, except for terms related to ICPs 14
and 17. These terms will be revised together with the revision of ICPs 14 and 17, which willcommence after the agreement of the ICS Version 2.0 for the monitoring period.

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Contents
Contents............................................................................................................................ 4

Acronyms ............................................................................................................................ 5
Introduction and Assessment Methodology ........................................................................... 6
Objectives, Powers and Responsibilities of the Supervisor.................................17
Supervisor ..........................................................................................................20
Information Sharing and Confidentiality Requirements .......................................28
Licensing ............................................................................................................33
Suitability of Persons ..........................................................................................39
Change of Control and Portfolio Transfers .........................................................46
Corporate Governance .......................................................................................50
Risk Management and Internal Controls.............................................................74
Supervisory Review and Reporting ..................................................................100
Preventive Measures, Corrective Measures and Sanctions ..............................115.........................................................................................................................124
Exit from the Market and Resolution.................................................................125
Reinsurance and Other Forms of Risk Transfer ...............................................143
Valuation ..........................................................................................................156
Investments ......................................................................................................172
Enterprise Risk Management for Solvency Purposes .......................................183
Capital Adequacy .............................................................................................225
Intermediaries ..................................................................................................285
Conduct of Business ........................................................................................305
Public Disclosure ..............................................................................................327
Countering Fraud in Insurance .........................................................................342
Anti-Money Laundering and Combating the Financing of Terrorism .................348
Group-wide Supervision ...................................................................................359
Macroprudential Supervision ............................................................................371
Supervisory Cooperation and Coordination ......................................................379

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Acronyms
ALM

Asset-liability management

AML

Anti-money laundering

CDD

Customer due diligence

CFT
ERM

Combating the financing of terrorism
Common Framework for the Supervision of Internationally Active InsuranceGroupsEnterprise Risk Management

FATF

Financial Action Task Force

FIU

Financial intelligence unit

IAIG

Internationally Active Insurance Group

IAIG CMG

Crisis management group of the Internationally Active Insurance Group

ICP

Insurance Core Principle

ICS

Insurance Capital Standard

IDR

Independent Dispute Resolution

IFRS

International Financial Reporting Standards

IGT

Intra-group transactions

IL

Insurance liability

MCR

Minimum Capital Requirement

MIS

Management information system

ML

Money laundering

MMoU

Memorandum of Understanding

MOCE

Margin Over the Current Estimate

NCWOL

No creditor worse off than in liquidation

NRA

National Risk Assessment

ORSA

Own Risk and Solvency Assessment

PCR

Prescribed Capital Requirement

PPS

Policyholder Protection Scheme

RBA

Risk-Based Approach

SPE

Special Purpose Entity

SRO

Self-regulatory organisation

TF

Terrorist financing

TVaR

Tail value at risk

VaR

Value at risk

ComFrame

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Introduction and Assessment MethodologyA) Introduction
1. Established in 1994, the International Association of Insurance Supervisors (IAIS) is avoluntary membership organisation of insurance supervisors and regulators fromaround the globe. It is the international standard-setting body responsible fordeveloping and assisting in the implementation of supervisory and supporting material
for insurance supervision. The IAIS also provides a forum for members to share theirexperiences and understanding of insurance supervision and insurance markets.
2. The mission of the IAIS is to promote effective and globally consistent supervision of
the insurance industry in order to develop and maintain fair, safe and stable insurance
markets for the benefit and protection of policyholders and to contribute to global
financial stability. In this context, the IAIS has issued the Insurance Core Principles(ICPs), which are comprised of Principle Statements, Standards and Guidance, as a
globally accepted framework for insurance supervision. The ICPs seek to encourage
the maintenance of consistently high supervisory standards in IAIS member
jurisdictions. A sound supervisory system is necessary for the protection ofpolicyholders and promoting the stability of the financial system and should address
the broad set of risks within, and posed by, the insurance sector.
Structure
3. The ICP material is presented according to the following hierarchy:• Principle Statements – the highest level in the hierarchy which set out the essential
elements that must be present in a jurisdiction in order to protect policyholders,promote the maintenance of fair, safe and stable insurance markets and contributeto financial stability. In each ICP, the Principle Statement is numbered and presented
in a box with bold font.
• Standards – the next level in the hierarchy linked to specific Principle Statements.
Standards set out key high-level requirements that are fundamental to theimplementation of the Principle Statement and should be met for a jurisdiction todemonstrate observance with the particular Principle Statement. Standards arepresented in bold font, with the number of the applicable principle statement followedby the Standard number (for example, the second standard under Principle
Statement 3 appears as 3.2).
• Guidance – the lowest level in the hierarchy supporting the Principle Statement
and/or Standards. Guidance facilitates the understanding and application of the
Principle Statement and/or Standards; it does not represent any requirements. The
wording used in Guidance varies to reflect the intended weight of the text; forexample, the use of “should” provides more of a recommendation, whereas the useof “may” is more of a suggestion. Where appropriate, Guidance provides examplesof ways to implement the Principle Statements and/or Standards. Guidance ispresented in regular font, with the number of the Principle Statement and Standard
followed by the Guidance number (for example, the first paragraph of guidance
under Standard 3.2 appears as 3.2.1).
Overarching Concepts
4. There are a number of important overarching concepts to understand and keep in mind
when reading and implementing the ICPs. While an individual ICP may focus on one
particular subject, the ICPs need to be considered as a whole with these overarching
concepts being relevant throughout.
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Applicability
5. The ICPs apply to insurance supervision in all jurisdictions regardless of the level ofdevelopment or sophistication of insurance markets, and the type of insurance products
or services being supervised.
6. The ICPs apply to the supervision of all insurers, whether private or governmentcontrolled insurers that compete with private enterprises, wherever their business isconducted, including through e-commerce.
7. Generally, the ICPs are equally applicable to the business of insurers and reinsurers.
Where the ICPs do not apply to reinsurers, this is indicated in the text.
8. The ICPs only apply to the supervision of intermediaries where this is specificallyindicated.
Proportionality and risk-based supervision
9. The ICPs establish the minimum requirements for effective insurance supervision andare expected to be implemented and applied in a proportionate manner. Therefore,
proportionality underlies all the ICPs. Supervisors have the flexibility to tailor theirimplementation of supervisory requirements and their application of insurance
supervision to achieve the outcomes stipulated in the Principle Statements andStandards.
• Implementation - proportionality allows the ICPs to be translated in to a jurisdiction’s
supervisory framework in a manner appropriate to its legal structure, market
conditions and consumers.
• Application - proportionality allows the supervisor to increase or decrease theintensity of supervision according to the risks inherent to insurers, and the risks
posed by insurers to policyholders, the insurance sector or the financial system as
a whole. A proportionate application involves using a variety of supervisory
techniques and practices which are tailored to the insurer to achieve the outcomesof the ICPs. Such techniques and practices should not go beyond what is necessary
in order to achieve their purpose.
10. Risk-based supervision is a related concept but distinct from proportionality; it means
more supervisory activities and resources are allocated to insurers, lines of businessor market practices that pose the greatest risk to policyholders, the insurance sector,
or the financial system as a whole.
Terminology
11. In these ICPs, terms have the same meaning as set out in the IAIS Glossary.
12. The term “supervision” is used to refer to supervision and regulation. Similarly, the term“supervisor” also refers to “regulator”. The expectation is that the Principle Statements
and Standards are implemented within a jurisdiction by all authorities in accordancewith their respective responsibility in relation to insurance supervision, rather thannecessarily by only one authority. Therefore, the term “supervisor” is used to refercollectively to those authorities within a jurisdiction with such responsibility. It isessential that in situations where multiple authorities exist, arrangements beestablished between them to ensure that the implementation of the Principle
Statements and Standards within the jurisdiction occurs within a framework that makes
clear which authority is accountable for which functions.

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13. The term “policyholder” is used to refer to a person (natural or legal) who holds aninsurance policy, and includes, where relevant, other beneficiaries and claimants witha legitimate interest in the policy.
14. The term “legislation” is used to include primary legislation (which generally requires
full legislative consent), secondary legislation and legally enforceable rules set by thesupervisor. The ICPs do not generally require a specific form of legislation but where
they do this is specifically indicated.
15. The term “insurer” means insurance legal entities and insurance groups, including
insurance-led financial conglomerates. The Principle Statements and Standards apply
to the supervision of insurance legal entities and, unless otherwise specified, toinsurance groups, including the head of the insurance group. The application may vary
and, where necessary, further guidance is provided.
Group-Wide Supervision
16. It is recognised that the implementation of the Principle Statements and Standards
relevant to group-wide supervision may vary across jurisdictions depending on the
supervisory powers and structure within a jurisdiction. There are direct and indirect
approaches to group-wide supervision.
• Under the direct approach, the supervisor has the necessary powers over the parent
and other legal entities in the insurance group and can impose relevant supervisory
measures directly on such legal entities, including non-regulated legal entities.
• Under the indirect approach, supervisory powers focus on the insurance legal
entities and supervisory measures are applied to those insurance legal entities toaddress the group-wide risks posed by other entities within the group, including nonregulated legal entities.
There may also be different combinations of elements of direct and indirect
approaches.
17. Regardless of the approach, the supervisor must be able to deliver effective groupwide supervision, including that all relevant group-wide risks impacting the insurance
entities are addressed appropriately.
Group corporate governance and materiality
18. The head of an insurance group is ultimately responsible for the group’s sound andprudent management. In doing so, it is important to take into account the risks andactivities of the individual legal entities within the group, focusing in particular on thosewhich are material for the group as a whole.
19. While the ultimate responsibility for an insurance group’s corporate governance lies
with the head of the group, the legal entities within the group are fully responsible for
their own sound and prudent management.
ComFrame Introduction
20. In the context of its mission, the IAIS has issued the Common Framework for theSupervision of Internationally Active Insurance Groups (ComFrame), which
establishes supervisory standards focusing on the effective group-wide supervisionof internationally active insurance groups (IAIGs).
21. ComFrame provides quantitative and qualitative supervisory minimum requirements
tailored to the international activity and size of IAIGs. ComFrame seeks to assist
supervisors in: addressing group-wide activities and risks; identifying and avoiding
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supervisory gaps; coordinating supervisory activities efficiently and effectively
between the group-wide and other involved supervisors. ComFrame also aims toprovide a basis for comparing IAIG supervision across jurisdictions. However, it does
not create a one-size-fits all approach to IAIG supervision as, ultimately, what is
important is that supervisors and IAIGs achieve the outcomes described by
ComFrame.
22. As part of ComFrame, the IAIS is developing an insurance capital standard (ICS),
which aims to provide a globally comparable risk-based measure of capital adequacyof IAIGs. ICS Version 2.0 is presented in a stand-alone document and is being usedduring a five-year monitoring period for confidential reporting to group-wide
supervisors and discussion in supervisory colleges. The ICS is not used as a groupwide Prescribed Capital Requirement (PCR) during the monitoring period. In thesecond phase of implementation of ICS Version 2.0, the ICS will be implemented asa group-wide PCR.
Structure
23. The ICPs are applicable to the supervision of all insurers within a jurisdiction, which
includes IAIGs. ComFrame provides additional Standards and Guidance applicable
only to the supervision of IAIGs. The qualitative requirements of ComFrame material
is presented in blue boxes within the relevant ICP material, following a similar
hierarchy to the ICPs:• ComFrame Standards – the highest level in the ComFrame hierarchy which build
on certain ICP Principle Statements and/or ICP Standards. ComFrame Standards
are outcomes-focused, specific requirements for supervisors. ComFrame
Standards are presented in bold font, and follow the numbering of the relevant
ICP Principle Statement and/or ICP Standard with the addition of “CF” and a letter(for example, the second ComFrame Standard under ICP Standard 7.2 would
appear as CF 7.2.b).
• ComFrame Guidance – the lowest level in the ComFrame hierarchy which
provides support for ComFrame Standards. ComFrame Guidance is intended tofacilitate the understanding and application of a ComFrame Standard; it does not
represent any requirements. Where appropriate, ComFrame Guidance provides
examples of ways to implement a ComFrame Standard. ComFrame Guidance ispresented in regular font, with the number and letter of the ComFrame Standard
followed by the ComFrame Guidance number (for example, the first paragraph of
ComFrame Guidance under ComFrame Standard CF 7.2.b would appear as CF
7.2.b.1).
Overarching Concepts
24. The overarching concepts identified in the ICP Introduction are equally applicable to
ComFrame, in particular proportionality. Additionally, there are several, ComFramespecific overarching concepts to understand and keep in mind when reading andimplementing ComFrame.
Allocation of roles
25. The group-wide supervisor takes responsibility for the supervision of the IAIG as awhole, on a group-wide basis. Other involved supervisors are responsible for thesupervision of the IAIG’s individual insurance legal entities in their respective
jurisdictions and take into account the effect of their supervisory actions on the restof the IAIG.
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Governance structures
26. IAIGs have different models of governance (ie more centralised or more
decentralised). ComFrame does not favour any particular governance model and isintended to be read to apply to all models. The organisation of an IAIG can be
structured in various ways as long as the outcomes are achieved.
Group-Wide Supervision
27. Similar to the ICPs, ComFrame, for the most part, is neutral as to direct or indirect
approaches to group-wide supervision, so long as the intended outcomes of thegroup-wide supervision are achieved. Where ComFrame uses a direct approach forcertain powers, it is indicated in the relevant ComFrame Standards.
B) Assessment Methodology
28. The IAIS strongly encourages implementation of the ICPs as a means to ensure eachjurisdiction has a framework for effective insurance supervision. Assessment of ajurisdiction’s observance of the ICPs can facilitate effective implementation byidentifying the extent and nature of strengths and weaknesses in a jurisdiction’s
supervisory framework – especially those aspects that could affect policyholder
protection and financial stability.
29. The framework described by the ICPs is general. When implementing the ICPs in ajurisdiction, it is important to take into account the domestic context, characteristics of
the insurance sector and developmental stage of the financial system and overallmacroeconomic conditions. How the ICPs are implemented will vary acrossjurisdictions. While established implementation practices should be kept in mind, there
is no mandated method of implementation. When carrying out an assessment, it isimportant to take into account factors that have shaped the implementation choices
made in the jurisdiction.
30. Assessments against the ICPs can be conducted in a number of contexts including:• self-assessments performed by the jurisdiction itself. These may be performed withthe assistance of outside experts and/or followed by peer review and analysis;• reviews conducted by third parties; or• reviews in the context of the Financial Sector Assessment Program (FSAP)
conducted by the International Monetary Fund (IMF) and World Bank.
31. The methodology that should be followed when carrying out an assessment of ajurisdiction’s observance of the ICPs is set out below. Following the methodology
should result in greater consistency between assessments, especially assessments ofdifferent jurisdictions performed by different assessors. While the results of anassessment may not always be made public, it is still important for their credibility thatsimilar types of assessments are conducted in a broadly uniform manner fromjurisdiction to jurisdiction.
Scope of assessments
32. An assessment may be conducted on a system-wide jurisdictional basis or focus on
specific areas. While thematic assessments have a role, the IAIS has designed the
ICPs as a comprehensive and holistic framework, with each ICP being integral in thecreation of a sound supervisory system.

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33. Where more than one authority is involved in a jurisdiction’s insurance supervision
process, the allocation and interaction of supervisory roles should be clearly describedin the assessment. If an assessment is conducted in the context of an individual
authority within a jurisdiction, a Standard may be not applicable if responsibility (either
for its implementation or its delivery on a day-to-day basis) lies with another authority
within that jurisdiction. However, the authority responsible for the observance of that
Standard should be indicated in the report.
34. The ICPs are written to be equally applicable to both life and non-life sectors. However,where there are material differences between the life and non-life sectors, such that it
would give rise to different results had they been assessed separately, the assessor
may consider assigning separate levels of observance for each sector accordingly. Insuch cases, the distinction should be clearly identified and explained in any assessment
report.
Use of experts
35. The process of assessing observance of the ICPs requires a judgmental weighing of
numerous elements. It is important, therefore, that assessors are well qualified with
relevant background, professional knowledge and practical experience. Assessors notfamiliar with insurance supervision, the insurance sector or entities and products that
may be unique to the jurisdiction being assessed, could come to incorrect or misleading
conclusions.
Access to information
36. When conducting an assessment, assessors need to have access to a range of
information and people. The required information may include published information(such as the legislation and administrative policies) as well as non-publishedinformation (such as self-assessments performed and operational guidelines used by
the supervisor). The supervisor may provide confidential information to the assessors,
provided confidentiality is preserved. Information should be provided to and analysedby the assessors in advance, to the extent possible, to ensure that any on-site visits
are efficient and derive the most value. The assessors may need to meet with various
individuals and organisations, including the supervisor, other domestic supervisory
authorities, relevant government ministries, insurers and insurance industry
associations, consumer groups, actuaries, auditors, and other financial sector
participants.
Assessment process
37. Assessments should be based solely on the legislation and supervisory practices thatare in place at the time. As a result, it is important to recognise when an assessment isconducted and to record this in the report. Nevertheless, improvements alreadyproposed or scheduled for implementation by the supervisor should be noted in theassessment report by way of additional comments so as to provide recognition for
efforts that are important, but not yet fully implemented. Additionally, the assessment
should consider whether supervisory practices adequately meet the outcomes provided
for in legislation and whether the supervisor enforces compliance. Having legislation
without the necessary corresponding supervisory practices is not sufficient todemonstrate full observance.
38. Performing an assessment is not an exact science. Assessors should perform acomprehensive assessment of the degree and effectiveness of implementation foreach Principle Statement and Standard rather than a checklist approach. The goal of
the assessment should not be simply to apply a grade to the level of observance but to
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identify areas that need attention in order for the jurisdiction to achieve the outcomes
identified in the ICPs.
Assessment of Standards
39. The Standards set requirements that are fundamental to the implementation of eachPrinciple Statement. They also facilitate assessments that are comprehensive, precise
and consistent. In making an assessment, each of the Standards under a Principle
Statement has to be considered. As noted in the ICP Introduction, Guidance is intended
to facilitate the understanding and application of the Principle Statement and/orStandard and does not prescribe any requirements, therefore it should not be assessedfor observance.
40. The Standards should be assessed using five categories:• Observed – for a Standard to be considered observed it is necessary that thesupervisor has and exercises, when required, the legal authority and supervisory
practices to effectively perform the requirements of the Standard. Having legislation
without supervisory practices to implement a Standard is insufficient to beconsidered observed, except for those Standards that are specifically focused on
legislation itself and what it contains. For supervisory practices which may lack
explicit legal authority, the assessment should be considered as observed if thepractice is clearly substantiated by the supervisor and is generally accepted bystakeholders. Having the necessary resources is essential for the supervisor to
implement Standards effectively.
• Largely observed – for a Standard to be considered as largely observed, it isnecessary that only minor shortcomings exist which do not raise any concerns about
the supervisor’s ability and intent to achieve full observance with the Standard withina prescribed period of time. The assessment of largely observed can be used when
the jurisdiction does not meet all the criteria, but the overall effectiveness issufficiently good and no material risks are left unaddressed.
• Partly observed – for a Standard to be considered partly observed, there aresufficient shortcomings to raise doubts about the supervisor’s ability to achieveobservance.
• Not observed – for a Standard to be considered not observed, there is no
substantive progress toward achieving observance.
• Not applicable – for a Standard to be considered not applicable, the Standard does
not apply given the structural, legal and institutional features of a jurisdiction.
Assessment of Principle Statements
41. As noted above, the level of observance for each Principle Statement reflects theassessments of its Standards. The Principle Statements should be assessed using fivecategories:• Observed – for a Principle Statement to be considered observed, all the Standards
must be considered observed (except any Standards that are considered not
applicable).
• Largely observed – for a Principle Statement to be considered largely observed, it
is necessary that only minor shortcomings exist which do not raise any concerns
about the supervisor’s ability to achieve full observance with the Principle Statement.

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• Partly observed – for a Principle Statement to be considered partly observed, there
are sufficient shortcomings to raise doubts about the supervisor’s ability to achieveobservance.
• Not observed – for a Principle Statement to be considered not observed, there isno substantive progress toward achieving observance.
• Not applicable – for a Principle Statement to be considered not applicable, all theStandards must be considered not applicable.
Reporting
42. The IAIS does not prescribe a set format or content of reports that result from anassessment. However, it is recommended that an assessment report should:• be in writing;• identify the scope and timing of the assessment;• identify the assessors;• provide an assessment of observance;• refer to the information reviewed and meetings conducted, and note when any
necessary information was not provided and the impact that this may have had on
the accuracy or completeness of the assessment;• include any formal comments provided by the supervisor in response to theassessment; and• include prioritised recommendations for improving observance of the ICPs
assessed.
43. While encouraged, it is the jurisdiction’s discretion whether to publish the results of anassessment. Nevertheless, it is important for the credibility of assessments that they
are conducted in a broadly uniform manner across jurisdictions.
ComFrame Assessment Methodology
44. As with the ICPs, the IAIS strongly encourages implementation of ComFrame as ameans to ensure that jurisdictions to which ComFrame is applicable have aframework for effective supervision of IAIGs. In general, the assessment
methodology described for the ICPs is applicable to ComFrame. However, given thenature of ComFrame, which provides quantitative and qualitative supervisory
requirements tailored to the international activity and size of IAIGs, there are some
additional considerations that should be taken into account when assessing
observance of ComFrame requirements.
Role of involved supervisors
45. ComFrame seeks to assist supervisors in coordinating supervisory activities
efficiently and effectively between the group-wide and other involved supervisors,
thus a number of ComFrame Standards address coordination. However, it isrecognised that having efficient and effective coordination depends on all involved
supervisors. The group-wide supervisor relies on the other involved supervisors to
do their part and vice versa. Where there are shortcomings with an involved
supervisor doing their part for coordination, there are limits to what the othersupervisors can do to improve the situation. When assessing parts of ComFrame
that focus on coordination, this should be taken into account.
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46. The type of assessment of a jurisdiction’s implementation of ComFrame will depend
on whether, in that jurisdiction, there is: a group-wide supervisor of an IAIG; an other
involved supervisor; or both. Most ComFrame Standards are addressed to the groupwide supervisor and describe the outcomes they are expected to achieve, whereassome ComFrame Standards also include the other involved supervisors. Therefore,
an assessment of a jurisdiction’s implementation of ComFrame should reflect therole it has in the supervision of an IAIG. A jurisdiction where there is only an other
involved supervisor will not be assessed on the implementation of ComFrame
Standards that are addressed only to the group-wide supervisor.
47. For ComFrame Standards that are addressed to both the group-wide supervisor andother involved supervisors, the assessment of those Standards should be based on
the role of the jurisdiction’s supervisor. An assessment of a group-wide supervisor
jurisdiction should focus on whether it has put in place the necessary legislation andsupervisory practices for coordination with the other involved supervisors, whereas
an assessment of an other involved supervisor jurisdiction would focus on its role
within this context (for example, coordinating with the group-wide supervisor on
processes, exchanging information).
Reporting
48. Involved supervisors are encouraged to share the results of an assessment within
the supervisory college for information.
Assessment process
49. As some ComFrame Standards focus on coordination and information exchange
between the group-wide supervisor and other involved supervisors, in demonstrating
observance of such Standards there may be more emphasis on supervisory
practices rather than legislation. While legislation provides the authority to coordinate
and exchange information, the supervisor, more importantly, needs to haveappropriate supervisory practices for coordination in place that facilitate effective
supervision of an IAIG.
Interaction with assessments of ICPs
50. The ICPs are applicable to the supervision of all insurers within a jurisdiction, which
includes IAIGs. ComFrame provides additional Standards and Guidance applicable
only to the supervision of IAIGs. As the ICPs provide the necessary foundation for
ComFrame, an assessment of ComFrame Standards cannot be done in isolation. Itshould be determined in advance of an assessment whether the level of observanceof ComFrame Standards is included when assessing the level of observance of therelevant Principle Statements within the ICPs or whether an assessment of the levelof observance of ComFrame Standards is treated separately.
Preconditions for effective insurance supervision
51. An effective system of insurance supervision requires a number of preconditions to bein place, as they can have a direct impact on supervision in practice. An assessmentof a jurisdiction’s observance of the Principle Statements and Standards may involve a
review of preconditions for effective insurance supervision.
52. This section provides a number of categories of preconditions and descriptions of howeach precondition may be reviewed. The preconditions include:• sound and sustainable macroeconomic and financial sector policies;
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• a well-developed public infrastructure;• effective market discipline in financial markets;• mechanisms for providing an appropriate level of protection; and• efficient financial markets.
53. As these preconditions are normally outside the control or influence of the supervisor,and because they are beyond the scope of the ICPs, an assessment should notevaluate a jurisdiction’s observance of the preconditions. Instead, the objective of areview of preconditions is to help inform an assessment of observance of the ICPs
because the preconditions can directly impact the effectiveness of supervision. Where
shortcomings exist, the supervisor should make its government aware of these andtheir actual or potential repercussions for the achievement of supervisory objectives
and seek to mitigate the effects of such shortcomings on the effectiveness ofsupervision.
54. Any report on a review of preconditions should:• be descriptive and not express an opinion on the adequacy of policies in these areas,other than through reference to analyses and recommendations in existing official
documents;• include an analysis of the linkages between these factors and the resilience of theinsurance sector, when relevant;• give a clear picture of the adequacy of the preconditions within the jurisdiction andthe interaction of the preconditions with the assessment of observance with the
ICPs; and• flag any individual ICPs which are most likely to be affected by any material
weakness in the preconditions.
Sound and sustainable macroeconomic and financial sector polices
55. Sound macroeconomic policies are the foundation of a stable financial system. This is
not within the mandate of supervisors, although they will need to react if they perceivethat existing policies are undermining the safety and soundness of the financial system.
In addition, financial sector supervision needs to be undertaken within a transparent
government policy framework aimed at ensuring financial stability, including effective
supervision of the insurance and other financial sectors.
56. A review of this precondition should include a review of the relevant government
financial sector policies, including whether there is a clear and published frameworkassigning responsibility to different bodies involved in financial stability and supervisory
work.
Well-developed public infrastructure
57. A well-developed public infrastructure contains the following elements which, if notadequately provided, can contribute to the weakening of the financial system or
frustrate their improvement:• a system of business laws, including corporate, insolvency, contract, consumer
protection and private property laws, which is consistently enforced and provides amechanism for the fair resolution of disputes;• an efficient and independent judiciary;
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• use of comprehensive and well-defined accounting principles and rules thatcommand wide international acceptance;• a system of independent audits for companies to ensure that users of financial
statements, including insurers, have independent assurance that the accounts
provide a true and fair view of the financial position of the company and are preparedaccording to established accounting principles, with auditors held accountable for
their work;• the availability of skilled, competent, independent and experienced actuaries,
accountants and auditors, whose work complies with transparent technical andethical standards set and enforced by official or professional bodies in line withinternational standards and is subject to appropriate oversight;• well defined rules governing, and adequate supervision of, other financial sectors;• access to a secure payment and clearing system for the settlement of financialtransactions where counterparty risks are controlled; and• the availability to the supervisor, financial services and public of basic economic,
financial and social statistics.
58. A review of the public infrastructure should focus on elements relevant to the insurance
sector.
Effective market discipline in financial markets
59. Effective market discipline depends, in part, on adequate flows of information to market
participants, appropriate financial incentives to reward well-managed institutions, andarrangements that ensure investors are not insulated from the consequences of theirdecisions. Among issues to be addressed are the existence of appropriate corporate
governance frameworks and ensuring that accurate, meaningful, transparent andtimely information is provided by issuers and borrowers to investors and creditors.
60. A review of the effectiveness of market discipline could cover issues such as:• the presence of rules on corporate governance;• transparency and audited financial disclosure;• appropriate incentive structures for the hiring and removal of managers and Board
Members;• protection of shareholders’ and other stakeholders’ rights;• adequate availability of market and consumer information; and• an effective framework for new entrants, mergers, takeovers, and acquisition ofequity interests, including those involving foreign entities.
Mechanisms for providing an appropriate level of policyholder protection
61. In general, deciding on the appropriate level of policyholder protection is a policyquestion to be addressed by each jurisdiction. Protection mechanisms could include,for example, a hierarchy of claims or a policyholder protection scheme. Provided suchmechanisms are transparent and carefully designed to limit moral hazard, they cancontribute to public confidence. For issues such as crisis management or the resolutionof an insurer, the supervisor should have a role to play given its in-depth knowledge ofthe entities involved.
Efficient financial markets
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62. Efficient financial markets are important to provide investment and risk management
opportunities for insurers. Insurers benefit by having access to domestic and global
financial markets.
63. A review of whether there are efficient financial markets could cover, for example, therange of instruments and issuers (eg is there a spread of public sector issues, indexlinked as well as conventional government bonds) and the spread of available
maturities. A review could take note of how liquidity has been affected in markets inperiods of stress. A review should focus on relevant issues for the carrying on of
insurance business, taking into account the products offered, such as whether annuities
or other long term contracts of insurance are provided.
Objectives, Powers and Responsibilities of the Supervisor
Each authority responsible for insurance supervision, its powers and the objectivesof insurance supervision are clearly defined.
1.0
Introductory Guidance

1.1

1.2

1.0.1

Publicly defined objectives foster transparency. Based on this,government, legislatures and other stakeholders, including insurance
industry participants and consumers, can form expectations about
insurance supervision and assess how well the supervisor is achieving
its objectives and fulfilling its responsibilities.

1.0.2

Responsibilities and objectives of the supervisor should be stable overtime. However, when those responsibilities and objectives are updated
periodically, it should be done in a manner that avoids creating instability,
as a stable business environment is important for the insurance sector
and consumer confidence. Objectives and key aspects of the supervisor
responsibilities should be defined in primary legislation to the extent thatit needs the effect of law. Aspects that should undergo frequent updating
due to changing circumstances should be supplemented as needed with
updated legally enforceable rules and guidance.

Primary legislation clearly defines the authority (or authorities) responsiblefor insurance supervision.
1.1.1

Primary legislation should clearly define responsibilities of each authority
involved in insurance supervision at both the insurance legal entity level
and the group-wide level.

1.1.2

Institutional frameworks for insurance supervision vary acrossjurisdictions. For example, there may be separate authorities forprudential and market conduct supervision, for macro and micro
prudential supervision, for licensing and ongoing supervision, andresolution.

1.1.3

Where there are multiple authorities responsible for insurance
supervision, the institutional framework, the main responsibilities of therespective authorities and a basis for cooperation and coordination
should be clearly set out in primary legislation.

Primary legislation clearly determines the objectives of insurance
supervision and these include at least to:

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• protect policyholders;• promote the maintenance of a fair, safe and stable insurance
market; and• contribute to financial stability.

1.3

1.4

1.2.1

The precise supervisory objectives and their respective priority may varyby jurisdiction depending on the level of development of the insurance
markets, market conditions and consumers. Supervisory objectives
could also include promoting insurance market development, financial
inclusion, financial consumer education, and contributing to fighting
financial crime.

1.2.2

The policyholders to be considered in defining supervisory objectives
include past, present and future policyholders.

1.2.3

Depending on the evolution of the jurisdiction’s insurance or financial
markets, the supervisor may emphasise temporarily one or more of theobjectives. Regardless, the supervisor should take into account the otherobjectives in fulfilling its function. In such circumstances, this should be
explained to stakeholders, including insurance industry participants,
consumers and the general public.

Primary legislation gives the supervisor adequate powers to meet its
responsibilities and objectives.
1.3.1

Primary legislation should give the supervisor the necessary powers toachieve its responsibilities and objectives, and the ability to takesupervisory action adequately. The supervisor should have the powers
needed to implement a framework for effective insurance supervision,
which is described by the ICPs in general.

1.3.2

Legislation should clearly address insurance legal entity and group-wide
supervision, providing the supervisor with sufficient powers to achieve
the respective responsibilities and objectives.

1.3.3

The supervisor should have sufficient powers in place to perform the roleof a group-wide supervisor, including coordination and collaboration withother relevant supervisors. Additionally, the legislation should empower
the supervisor of an insurance legal entity which is part of a group tocontribute to the supervision of that group on a group-wide basis.

The supervisor initiates or proposes changes in legislation where current
responsibilities, objectives or powers are not sufficient to meet the intended
supervisory outcomes.
1.4.1

It is important that supervisory responsibilities, objectives and powers
are aligned with actual challenges faced by the insurance market toeffectively protect policyholders, maintain a fair, safe and stable
insurance market and contribute to financial stability.

1.4.2

Market changes can mean that the legislation is no longer adequate forthe supervisor to achieve its intended outcomes. The supervisor may
identify changes in the economy, society or business environment ingeneral that affect insurance supervisions that are not currently or
sufficiently addressed by legislation. When the supervisory outcomes

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may not be achieved with the current legislation, the supervisor should
initiate or propose changes in legislation.
1.4.3

If supervisory responsibilities, objectives or powers assigned by primarylegislation become obsolete, the supervisor should initiate or proposechanges to the legislation.

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Supervisor
The supervisor is operationally independent, accountable and transparent in theexercise of its responsibilities and powers, and has adequate resources todischarge its responsibilities.
2.0
Introductory Guidance
2.0.1

Operational independence, accountability and transparency by thesupervisor contribute to the legitimacy and credibility of the supervisory
process. As explained in this introductory guidance, the three concepts
of independence, accountability and transparency are closelyinterconnected and mutually dependent.

2.0.2

Operational independence means the supervisor should be able to takeactions and make decisions in the exercise of its supervisory
responsibilities without interference from any part of the government,
including other governmental bodies, the legislature, and the insurance
sector. The supervisor should be able to carry out the supervisory
process, take supervisory measures and impose sanctions as it deems
necessary to fulfil its objectives. However, this independence should bebalanced with accountability.

2.0.3

The supervisor should be accountable for the actions it takes in theexercise of its supervisory responsibilities to the government, including
other governmental bodies and the legislature, which delegated various
responsibilities to the supervisor, as well as to those it supervises andthe public at large. Accountability means that the supervisor operates
within the bounds of its delegated authority, in a fair and equitablemanner that is open to scrutiny and review by the government and the
public, and that the actions of the supervisor may be challenged as partof a judicial appeal process. Strong internal governance processes,
sufficient and skilled human resources and maintenance of highstandards of integrity and professionalism underpin the accountability ofthe supervisor.

2.0.4

Transparency reinforces accountability. Transparency increases thepredictability of supervision and shapes the expectations of supervised
entities, which enhances supervisory effectiveness. For these reasons,supervisory requirements, supervisory processes as well as information
about the supervisor’s responsibilities should be publicly disclosed, in amanner consistent with any confidentiality requirements imposed on the
supervisor.

2.0.5

The structures of supervisors vary across jurisdictions. For example, asupervisor can be structured as a separate independent entity governedby a Board of Directors, as a commission or as a body overseen by one
appointed individual. No one single structure is appropriate for all
supervisors. Regardless of their structure, all supervisors should haveprocesses and safeguards that allow them to be operationallyindependent, accountable and transparent.

2.0.6

Given the differences in structures between supervisors, in this ICP, the“governing body” refers to the body of individuals that exercises

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oversight of the supervisory organisation, such as a Board orcommission, or in the case of a supervisor overseen by an appointed
individual, to that individual. The “head of the supervisor” refers to theindividual who is an employee of the supervisor and who leads the
management team and exercises full management responsibility for the
day-to-day functioning and decisions of the supervisor. The head of thesupervisor may or may not also be a member of the governing body.
Independence
2.1

The supervisor is operationally independent and free from undue
government or industry interference that compromises that independence.
2.1.1

Operational independence of the supervisor includes having thediscretion to allocate its resources, including financial and humanresources, and to carry out the supervisory process in accordance with
its objectives and the risks the supervisor perceives. Having thisdiscretion, which underpins operational independence, should berecognised in primary legislation.

2.1.2

The supervisor should be financed in a manner that does not undermine
its independence. A wide variety of financing models exist, such as
financing by government, levies imposed on supervised entities andcombinations thereof. To help ensure the supervisor’s independence is
not compromised, the method in which it is financed should be stable,
predictable and transparent, and prevent interference from its funding
source.

2.1.3

The institutional relationships and accountability frameworks between
the supervisor and the government should be clearly defined inlegislation. It is important to specify the circumstances and processes forsharing information, consultation or approval between the supervisor andthe government. This may include establishing what information should
be provided, how each entity should consult on matters of mutual interest
and when approval from relevant authorities is necessary. The daily
operations of the supervisor should not be subject to consultation with orapproval by the government. In exceptional circumstances, thesupervisor may choose to consult with the government in relation to asupervisory decision where there are major socio-economic implicationsof that decision.

2.1.4

In addition to independence from the government, the supervisor should
not permit excessively close relationships, or even the appearance
thereof, with industry participants, in particular supervised entities. Such
relationships can compromise the supervisor’s ability to enforce the law
strictly or to control the behaviour of supervised entities as intended bylaw. These relationships can also lead the supervisor to make policy oroperational decisions to benefit supervised entities, whether a particular
entity or supervised entities as a whole, rather than in furtherance of its
supervisory objectives. The supervisor’s policies, for example, postemployment, anti-corruption and accountability in decision-making,should seek to avoid such close relationships.

2.1.5

The legislation should define the responsibilities of the governing body.
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composition of the governing body should be sufficiently diverse toprevent such representatives from controlling the supervisor.
2.1.6

2.2

2.3

The supervisor’s staff and members of its governing body can also
experience pressures that could compromise their independence.
Generally, the staff of the supervisor should not hold any consultancies,
directorships or financial interests, expect any future benefit from, or be
involved in any capacity in the entities it supervises, other than in asupervisory role or as a customer, and should not accept gifts or
hospitality from these entities in excess of a low monetary value. The
supervisor should have policies and processes or a code of conduct toavoid or manage real, potential or perceived conflicts of interests. The
supervisor should require its staff and members of its governing body toreport conflicts of interests. Staff and members of the governing body ofthe supervisor should exclude themselves from decisions where they
have a conflict of interest.

Legislation governing the supervisor provides the necessary legal
protection from legal action against the supervisor and its staff for actions
taken in good faith while discharging their duties. In addition, thesupervisor’s staff is adequately protected against the costs of defending
their actions.
2.2.1

Having necessary legal protection from legal action promotes theindependence of the supervisor by enabling its staff to make decisions
and take action against a regulated legal entity even though such action
or decision may be contested by that entity.

2.2.2

In this context, legislation should protect the supervisor and its staff from
criminal or civil liability for decisions made and actions taken in thecourse of discharging their supervisory responsibilities, provided that theaction or decision was not taken in bad faith or illegally.

Procedures regarding the appointment and dismissal of the head of thesupervisor and members of its governing body (if such a governing body
exists) are transparent.
2.3.1

Public procedures regarding the appointment and dismissal of the headof the supervisor enhance independence, as they limit the potential forgovernment interference in the management of the supervisor. Those
procedures should be codified in legislation.

2.3.2

Those procedures should disclose, for example, who appoints the headof the supervisor and members of the governing body, the length of those
appointments and the reasons for which the head of the supervisor or
members of the governing body can be dismissed before the end of theirterm, if applicable.

2.3.3

Legislation should disclose the general criteria for appointing membersof a governing body, including that they possess relevant qualifications,knowledge and experience to oversee the activities of the supervisor, as
well as the mechanism for their remuneration (for example, salary, daily
allowance or voluntary work). The procedures regarding the appointmentof the members of the governing body should result in a balance of skills,
knowledge and experience amongst the members of the governing bodyas a whole.

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Accountability
2.4

2.5

2.6

The supervisor has effective internal governance structures, processes andprocedures to preserve the integrity of its actions and decisions and toenable it to account to its stakeholders.
2.4.1

A well-defined internal governance structure and strong internal
governance processes support the accountability and integrity of thesupervisor. The supervisor’s internal governance includes its
organisational structure and management arrangements, lines of
responsibility, and systems of risk management and internal controls. In
this context, integrity refers to the supervisor always acting with probity,
respectability and lawfulness, and within the bounds of its delegatedauthority.

2.4.2

Regardless of the supervisor’s governance structure, the responsibilitiesof the governing body, the responsibilities of Senior Management,
communication channels and decision making authorities, including
delegation thereof, should be documented in writing to facilitate
compliance with internal controls, including proper authorisation ofactions taken by or on behalf of the supervisor. In addition, well-definedcommunication channels help ensure prompt escalation of significant
issues to appropriate levels within the supervisor.

2.4.3

The supervisor should have a process to develop and implement a
strategic plan that sets out its goals and priorities, given the
responsibilities and objectives assigned to it by legislation. Such a planshould cover a specific period of time, such as two or three years. The
supervisor should report on its performance against that plan to thegovernment and other stakeholders, including insurance industry
participants, consumers and the general public.

2.4.4

The supervisor should identify the individual or group of individuals
responsible for the implementation and review of the internal governancearrangements. The internal governance processes and proceduresshould be subject to regular independent review, for example by aninternal audit function or a public auditor.

The supervisor applies requirements and supervisory proceduresconsistently and equitably.
2.5.1

The supervisor should have internal mechanisms to help ensure that it
is consistent in the actions and decisions it takes.

2.5.2

Cases where circumstances are similar should lead the supervisor totake similar actions or decisions. Actions taken in a particular case in thepast should be considered in new cases where the circumstances are
similar, unless a change in the requirements or supervisory procedures
occurred in the time between the two cases.

There are processes to appeal against supervisory decisions which do not
unduly impede the ability of the supervisor to make timely interventions inorder to protect policyholders’ interests or contribute to financial stability.
2.6.1

Procedural fairness enhances public confidence in the supervisory
process. Parties subject to a decision made by the supervisor should be
able to receive the written reasons for the decision and to appeal the

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decision to an impartial review body or tribunal. The manner in which thesupervisor’s decision could be subject to judicial review, or in which
decisions can be appealed, should be defined and transparent, andincluded in the notification of the decision.
2.6.2

2.7

The existence of an appeal or review mechanism helps ensure that thesupervisor’s decisions are made within the law as consistently as
possible and are well reasoned. Appeal processes should be specificand balanced to preserve supervisory independence and effectiveness.
However, these processes should allow the supervisor to exercise its
powers quickly in cases where expeditious action is required. In certain
cases, these processes may provide that the decision of the supervisor
remains in force until the appeal or review mechanism has produced afinal decision on the appeal, unless otherwise ordered by a court.

The supervisor, including its staff and any third party acting on its behalf(presently or in the past), are required by legislation to protect confidential
information in the possession of the supervisor.
2.7.1

The type of information that the supervisor is required to keep
confidential should be specified in legislation. Generally, any non-public
information received relating to a supervised entity would be considered
confidential, as well as information received from another supervisor(see ICP 3 Information Sharing and Confidentiality Requirements).
Legislation should also specify the circumstances under which thesupervisor is allowed to disclose confidential information and to whom it
can be disclosed.

2.7.2

The supervisor should protect confidential information. Safeguards
should apply to information maintained in any format, including inphysical form as well as electronic. The supervisor should assess thesensitivity of various categories of information in its possession, andidentify the appropriate data protection requirements applicable to eachcategory, including the duration of the retention period for information ineach category.

2.7.3

The supervisor and its staff, including former staff, and all persons acting
on its behalf (presently or in the past) should be liable to penalties forunlawful access to, use of, or disclosure of, confidential information. This
includes any outside experts hired by the supervisor and persons towhich the supervisor outsourced any supervisory function. The penalties
for such conduct should be specified in legislation and may include
disciplinary actions, up to and including termination of employment, andcriminal or legal proceedings. The duty of confidentiality should survive
the termination of employment of a staff member or other third party
engaged by the supervisor.

Transparency
2.8

The supervisor is transparent to the public, supervised entities and thegovernment about how it exercises its responsibilities.
2.8.1

Transparency reinforces accountability of supervisors. The supervisor
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• its objectives and responsibilities;• its goals and priorities for the future;• its activities in light of its goals and priorities in the previous
year;• its resources, including human, technological and financial;• data and analysis about the state of the insurance sector; and• supervisory measures taken in relation to problem or failed
insurers, subject to confidentiality considerations and in so far
as it does not jeopardise other supervisory objectives or
prejudice another case pending before the supervisor.
2.8.2

2.9

The supervisor should seek to publish a report at least annually that
contains the elements listed above as well as its audited financial
statements. This type of report is a key document by which a supervisor
accounts to its stakeholders.

The supervisor publishes its requirements, policies and supervisory
procedures. The supervisor consults publicly on significant changes that it
makes to requirements, policies and supervisory procedures.
2.9.1

The supervisor publishes and regularly reviews requirements, policies
and supervisory procedures to ensure they remain appropriate for thecharacteristics of the industry, emerging risks and evolving international
standards. Some requirements may be contained in primary legislation,
while others may be contained in instruments issued by the supervisor,such as guidance and industry advice. The supervisor should ensure
these instruments are made available to the public, for example on the
supervisor’s website.

2.9.2

A critical element of transparency is for the supervisor to provide theopportunity for meaningful public consultation on proposed requirements
and supervisory procedures. Meaningful public consultation benefits
from participation by a diversity of stakeholders. Consequently, thesupervisor should have methods in place to encourage and solicit
stakeholder participation.

2.9.3

The supervisor should have written procedures on the types of
documents that are subject to public consultation as well as the process
and timelines for consultation. Some documents used in the supervisory
process may not be suitable for consultation, such as detailed proceduralmanuals that are used to guide staff of the supervisor in the performanceof their day-to-day duties.

2.9.4

In some jurisdictions, the development and issuance of requirements
may be outside of the control of the supervisor; for example, the power
to enact legislation may be vested in another government body or
supranational bodies that have a direct role in the legislation in force intheir member countries. In such cases, the consultation process may
also be outside the remit of the supervisor. To the extent possible, thesupervisor should be involved in the development of the requirements,for example, by participating in consultations, and the supervisor should
keep the public and the industry informed of proposed changes.

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Resources
2.10

2.11

The supervisor has sufficient resources, including human, technologicaland financial resources, to enable it to conduct effective supervision.
2.10.1The supervisor’s financial resources and staffing policies should enable
it to attract and retain highly skilled, competent and experienced staff
with the necessary professional qualifications, where required. The
supervisor should have the ability to hire or contract the services ofexternal experts when necessary.

2.10.2The supervisor should have a process for regularly reviewing its humanresources needs, the skills and experience of existing staff and its
projected human resource requirements over the short to medium term.

2.10.3This review could lead the supervisor to implement initiatives to bridge
gaps in numbers and/or skills. These could include more flexible hiring
policies or schemes for secondment of staff from industry or othersupervisory authorities within the jurisdiction or internationally. These
initiatives may help in providing access to specialist skills on a temporary
basis. Secondments for supervisory staff to industry or other supervisory
authorities enhance the skills and experience of staff particularly to better
understand industry practices. When implementing such initiatives, thesupervisor should have safeguards in place to avoid conflicts of interest
and protect confidential information, such as by restricting access tocertain information.

2.10.4The supervisor should provide adequate training opportunities for its staff
to ensure that their skills and supervisory practices remain up to datewith evolving supervisory and regulatory developments and changes in
the industry.

2.10.5The technological resources available to the supervisor should enablesupervisory staff to collect and store securely, quickly access, andefficiently analyse information about the entities it supervises.

Where the supervisor outsources supervisory activities to third parties, thesupervisor:• sets expectations for their role and work;• monitors their performance;• ensures their independence from the supervised entity or any
other related party; and• subjects them to the same confidentiality rules and professional
standards as the staff of the supervisor.
2.11.1

Outsourcing of selected supervisory activities to third parties cancomplement the supervisor’s resources with valuable expertise.
However, supervisory activities are primarily the responsibility of thesupervisor. The supervisor should retain accountability for and oversightof any outsourced activities to the same degree as non-outsourced
activities. Outsourcing should not adversely affect the supervisor`s ability
to conduct effective supervision or meet its objectives.

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to information regarding the process. Prior to engaging a third party, thesupervisor should assess the proposed provider’s competence andexperience and the safeguards for the handling of data, including
treatment of confidential information. The decision to select a provider
should be made free from conflicts of interest, or where such conflicts
cannot be avoided, they should be managed.
2.11.3A written agreement should govern the relationship between the
supervisor and the third party provider. The agreement should describe
all material aspects of the outsourcing arrangement, including theservices to be provided, remuneration of the third party provider,resolution of disputes and procedures governing the sub-contracting ofservices.

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Information Sharing and Confidentiality Requirements
The supervisor obtains information from, and shares information with, relevantsupervisors and authorities subject to confidentiality, purpose and use
requirements.
3.1

The supervisor requests information, including non-public information,from relevant supervisors and authorities with respect to insurers.
3.1.1

Information requested by a supervisor from a relevant supervisor or
authority may include:• information on strategy, business activities and businessmodels including prospective and recent acquisitions or
disposals of insurance business;• financial data relating to an insurer;• organisational
structure;

structure,

both

legal

and

management• information on the management and operational systems andcontrols used by insurers;• information on individuals holding positions of responsibility ininsurers such as Board Members, Senior Management, Key
Persons in Control Functions and Significant Owners;• information on individuals or insurers involved, or suspectedof being involved, in criminal activities;• information on any failures to comply with supervisory
requirements, regulatory investigations and reviews, and on
any restrictions imposed on the business activities of insurers;• information concerning regulated entities related to theinsurance group, whether undertaking insurance business orother financial business which is subject to regulation, andinformation concerning non-regulated entities related to theinsurance group such as service companies or holding
companies;• specific information requested and gathered from a regulated
entity; and• reporting information within groups to meet group supervisory
requirements, including subsidiaries and non-regulated
holding companies.
3.1.2

Relevant supervisors and authorities, whether in the same or a different
jurisdiction, may include:• other insurance supervisors;• supervisors responsible for banks and other credit institutions;• supervisors responsible for investments, securities, pensions,financial markets and other sectors;

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• authorities responsible for the recovery or resolution of
insurers;• authorities responsible for anti-money
combating the financing of terrorism; andlaunderingor• law enforcement agencies.
3.2

The supervisor shares information, including non-public information, with
relevant supervisors and authorities at its sole discretion and subject toappropriate safeguards.
Agreements on information sharing
3.2.1

Supervisors and authorities are responsible for ensuring the safe
handling of confidential information. Although the existence of anagreement or understanding on providing requested information may not
be a prerequisite for sharing information, the supervisor is encouraged
to use agreements, including memoranda of understanding (MoUs), tofacilitate information sharing between relevant supervisors andauthorities. Such agreements are important to information sharing
among supervisors and authorities to establish a framework to facilitate
the efficient exchange of confidential information and document thetypes of information that may be shared as well as the terms andconditions under which the information can be shared and passed on toother relevant supervisors and authorities. Such agreements may be
distinguishable from coordination agreements used in supervisory
colleges (see ICP 25 Supervisory Cooperation and Coordination).

3.2.2

The supervisor should use bilateral or multilateral agreements tofacilitate information sharing because they provide the basis for a twoway flow of information and the basis for confidential treatment of theinformation shared. The IAIS MMoU is an example of a multilateralmemorandum of understanding for cooperation and exchange of
information between supervisors related to the supervision of insurance
legal entities and insurance groups. All signatories to the IAIS MMoU
undergo a validation of their laws and regulations to demonstratecompliance with the MMoU’s strict confidentiality regime. For this reason,
if all relevant parties are signatories to the IAIS MMoU, it is the preferredframework for multilateral information exchange.

Information Sharing in Supervisory Colleges
3.2.3

Supervisory colleges can provide a framework for supervisory
cooperation and crisis management in which information sharing
between involved supervisors occurs on an ongoing basis.

3.2.4

Information sharing is particularly important for the operation of asupervisory college. For a supervisory college to be effective there needs
to be mutual trust and confidence among supervisors, particularly in
relation to exchange and protection of confidential information.

3.2.5

Each member of the college should take measures necessary to avoid
the unintentional divulgence of information or the unauthorised releaseof confidential information. It is important that appropriate informationexchange agreements or other arrangements are in place between the

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members of the supervisory college to ensure that information can beexchanged in a secure environment.
3.2.6

Where confidential information exchanged within a supervisory college
is communicated to relevant supervisors or authorities who are not
involved in the college, supervisors should:• have a formal mechanism in place between the group-wide
supervisor and the other supervisors or authorities to ensure
the protection of the confidential information. Suchmechanisms could be included in the relevant information
sharing agreements; and• obtain the prior consent of the supervisor having provided
such information.

3.3

The supervisor requesting confidential information (the requestingsupervisor) has a legitimate interest and valid supervisory purpose related
to the fulfilment of its supervisory functions in seeking information fromanother relevant supervisor or authority.
3.3.1

A legitimate interest is derived from the powers and responsibilities therequesting supervisor has in relation to the subject matter of the request.
For example:• if the requesting supervisor only has the power andresponsibility to supervise intermediaries and not insurers, it
may not have a legitimate interest in requesting information
relating to an insurer; or• if the requesting supervisor requests information relating to an
insurer that has no current or planned operations or otherconnections to the requesting supervisor’s jurisdiction, it may
not have a legitimate interest in requesting such information.

3.3.2

A valid supervisory purpose is relevant to the requesting authority’s
performance of a supervisory task. Valid supervisory purposes may
include information requested for the purposes of:• licensing;• suitability criteria;• intra-group transactions such as loans and extensions ofcredit, parental guarantees, management agreements,
service contracts, cost-sharing arrangements, reinsurance
agreements, dividends and distributions;• prevention of financial crime, such as fraud, anti-money
laundering or combating the financing of terrorism;• ongoing supervision, including preventive and corrective
measures and sanctions; and• exit from the market and resolution.

3.3.3

A supervisor may voluntarily provide information to other relevantsupervisors so as to better enable the supervisors’ fulfilment of theirsupervisory functions. In such cases, the supervisor providing

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information should adhere to the same requirements as though theinformation had been requested by a requesting supervisor.
3.4

The supervisor that has received a request for confidential information (therequested supervisor) from another relevant supervisor or authority:• assesses each request for information on a case-by-case basis;and• responds to requests in a timely and comprehensive manner.
3.4.1

In principle, the requested supervisor is expected to share information
with a requesting supervisor with a legitimate interest and for a valid
supervisory purpose.

3.4.2

In deciding whether and to what extent to fulfil a request for information,
the requested supervisor may take into account matters including:• the nature of the information to be provided;• the purpose for which the information will be used;• the ability of the requesting supervisor or authority to maintainthe confidentiality of any information received, taking accountof the IAIS MMoU or other existing agreements in eachjurisdiction;• whether, in the context of supervisory college or otherwise,
the request is covered by a coordination agreement;• whether it would be contrary to the interest of the jurisdictionof the requested supervisor; and• relevant laws and regulations in each jurisdiction (in particular
those relating to confidentiality and professional secrecy, dataprotection and privacy, and procedural fairness).

3.5

3.4.3

While requests for information should normally be made in writing, therequested supervisor should not insist on written requests in an
emergency situation, and should not unreasonably delay a response to
an oral request for information made for a valid supervisory purpose bya requesting supervisor.

3.4.4

The requested supervisor may receive a request for information which is
not already in their possession. In such circumstances, the requested
supervisor should, if it considers it reasonable, obtain that informationfrom the insurer or other entities from which it has the power to obtain
information.

3.4.5

If the requested supervisor denies a request, it should explain its reason
for the denial to the requesting supervisor or authority.

3.4.6

Lack of strict reciprocity should not be used by the requested supervisor
as the reason for not sharing information that would otherwise beappropriate to share, particularly in an emergency or other crisis
situation. Strict reciprocity in terms of the level, format and detailed
characteristics of information requested is not required.

The requesting supervisor uses confidential information received from therequested supervisor or authority only for the purposes specified when the

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information was requested. Unless otherwise agreed, before using theinformation for another purpose or passing it on to others, the requestingsupervisor obtains agreement of the requested supervisor or authority.
3.5.1

The requesting supervisor should specify the intended purposes of theinformation sought. Additionally, MoUs may address purposes for which
the requested information may be used by the requesting supervisor.

3.5.2

The requesting supervisor first obtains agreement with the requested
supervisor or authority before passing on requested information.
Supervisors and authorities are encouraged to request information
directly from the requested supervisor, rather than from the requestingsupervisor, to provide an opportunity for direct dialogue and further
consultation. Requesting supervisors should ensure that appropriate
confidentiality requirements are in place and the information is only
passed on to another relevant supervisor or authority with a legitimate
interest and – in case of a supervisory authority – for valid supervisory
purposes.

3.5.3

There are specified circumstances within the IAIS MMoU where
signatories are expected to consent to the passing on of information toother relevant supervisors and authorities. This includes situations where
passing on information will assist:• other IAIS MMoU signatories in the fulfilment of theirsupervisory functions; and• other relevant domestic financial sector bodies such as central
banks, law enforcement agencies, relevant courts and otherauthorities (see Annex B of the IAIS MMoU).

3.5.4

3.6

Conditions imposed by the requested supervisor on the passing on of
information to third parties should not prevent the requesting supervisor
or authority from being able to use the information for its own valid
supervisory purposes.

In the event the requesting supervisor has received notice of proceedings,
which may legally compel it to disclose confidential information which it
has received from the requested supervisor, the requesting supervisor:• to the extent permitted by law, promptly notifies the requested
supervisor; and• where consent to disclosure is not given, uses all reasonablemeans to resist the demand and to protect the confidentiality of
the information.
3.6.1

Where allowed by the laws and practices of the jurisdiction, a requestingsupervisor required to disclose confidential information by legal
compulsion should place, or seek to place, protections from disclosureon that information. Such protections could include:• a protective order placing restrictions on use or further
distribution of the confidential information; or• limitations on the means and location of the disclosure of theconfidential information.

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Licensing
A legal entity which intends to engage in insurance activities must be licensed
before it can operate within a jurisdiction. The requirements and procedures forlicensing must be clear, objective and public, and be consistently applied.
4.0
Introductory Guidance
4.0.1

Licensing contributes to efficiency and stability in the insurance sector.
Strict conditions governing the formal approval through licensing of
insurance legal entities are necessary to protect consumers. The
relevant licensing criteria should be applied to prospective entrants
consistently to promote a level playing field at point of admission to theinsurance sector. Licensing requirements and procedures should not be
used inappropriately to prevent or unduly delay access to the market.

4.0.2

The role of the supervisor in licensing is to assess whether insurance
legal entities are able to fulfil their obligations to policyholders on an
ongoing basis. The licensing procedure is the first step towards
achieving this objective.

4.0.3

Licensing is distinct from approval granted in terms of general domestic
company, trade or commercial law. Apart from applying for a supervisory
licence, other requirements pertaining to company, trade or commercial
law should be met (eg filing incorporation documents or applying to theregistrar of commerce).

Licensing requirements
4.1

The insurance legislation:• includes a definition of insurance activities which are subject tolicensing;• prohibits unauthorised insurance activities;• defines the permissible legal forms of domestic insurance legal
entities;• allocates the responsibility for issuing licences; and• sets out the procedure and form of establishment by which
foreign insurers are allowed to conduct insurance activities
within the jurisdiction.
4.1.1

Jurisdictions may decide to exclude some activities from the definition of
insurance activities subject to licensing. Any such activities should be
explicitly stated in the legislation. Jurisdictions may do this for various
reasons, such as:• the insured sums do not exceed certain amounts;• losses are compensated by payments in kind;• activities are pursued following the idea of solidarity between
policyholders (eg, small mutuals, cooperatives and other

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community-based organisations, especially in the case of
microinsurance); or• the entities’ activities are limited to a certain geographicalarea, limited to a certain number or class of policyholders
and/or offer special types of cover such as products notoffered by licensed domestic insurance legal entities.

4.2

4.1.2

Given the principle that all entities engaged in insurance activities mustbe licensed, the exclusion of limited insurance activities from licensing
requirements should give due regard to having appropriate alternative
safeguards in place to protect policyholders.

4.1.3

Similarly, jurisdictions may allow a simplified process for non-significant
entities (eg limited geographic scope, limited size, and limited lines ofbusiness) for the purposes of licensing. In such situations, the legislation
should state clearly the applicability, requirements and process for such
authorisation.

4.1.4

In jurisdictions where an authority other than the insurance supervisor is
responsible for issuing licences, the insurance supervisor should be able
to give input and recommend conditions or restrictions (including refusal)
on a licence where appropriate to the licensing authority.

A jurisdiction controls through licensing which entities are allowed to
conduct insurance activities within its jurisdiction.
4.2.1

Entities should neither be allowed to present themselves nor act aslicensed insurance legal entities without or before having been granted
a licence.

4.2.2

Depending on the legal forms that are permitted in a jurisdiction, foreign
insurers may be allowed to conduct insurance activities within thejurisdiction by way of a local branch or subsidiary or on a cross-borderprovision of services basis. A subsidiary is a domestically establishedlegal entity that needs to be licensed. A branch is not separate from theinsurance legal entity, and can be established in a jurisdiction other than
the insurance legal entity's home jurisdiction. A host jurisdiction may
require that branches of foreign insurance legal entities be licenced orotherwise authorised by the host supervisor. Cross-border provision ofservices does not require a local establishment but may requireauthorisation from the host supervisor.

4.2.3

In some regions, a number of jurisdictions have agreed to a system ofpassporting as a manner of acknowledging each other’s licences. This
provides the opportunity for insurance legal entities established in one of
the jurisdictions to open branches or provide insurance services acrossborders on the basis of their home jurisdiction authorisation to conduct
insurance activities. Where a foreign insurer may be allowed to operate
through a branch or cross-border provision of services without a licenceor other authorisation from the host supervisor, it is important thatbilateral or multilateral agreements are in place which ensure that theinsurer:• is subject to supervision in its home jurisdiction which has
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• may be subject to sanction or other supervisory measures if it
does not meet the legal provisions of the host jurisdiction. In
such circumstances, the home supervisor should be informed.
4.3

Licensing requirements and procedures are clear, objective and public, andare consistently applied. The applicant is required at least to:• have sound business and financial plans;• have a corporate or group structure that does not hinder
effective supervision;• establish that the applicant’s Board Members, both individuallyand collectively, Senior Management, Key Persons in Control
Functions and Significant Owners are suitable;• have an appropriate governance framework; and• satisfy capital requirements.
4.3.1

In addition to being publicly available, licensing requirements should also
be easily accessible. Supervisors should issue guidelines on how to filean application for a licence, which include advice on the required formatof documents and the expected time it would take to process anapplication upon the receipt of all relevant documents.

4.3.2

Supervisors should assess the applicant’s business and financial plans
to ascertain that the proposed business lines will be soundly managed
and adequately capitalised. Business and financial plans should be
projected for a minimum of three years by the applicant and include
information such as the products to be offered, distribution methods andchannels to be used, risk profile, projected setting-up and development
costs by business line, capital requirements and solvency margins.
Information regarding insurance and reinsurance should also be
provided.

4.3.3

Where the applicant is part of a group, the applicant should submit its
corporate and group structure, indicating all of the material entities within
the group (including both insurance legal entities and other entities,
including non-regulated entities). Information on the type of related party
transactions and/or relationships between all material entities within thegroup should also be provided.

4.3.4

The applicant should also provide information to demonstrate theappropriateness of its systems of risk management and internal controls,
including contracts with affiliates, outsourcing arrangements, information
technology systems, policies and processes.

4.3.5

If applying to be licensed to underwrite both life insurance business andnon-life insurance business (where such is allowed), the applicant should
demonstrate to the satisfaction of the supervisor that its systems of risk
management and internal controls are adequate to manage the risks
separately for each business stream.

4.3.6

Further guidance on suitability, governance and capital requirements canbe found in ICP 5 (Suitability of Persons), ICP 7 (Corporate Governance),
ICP 8 (Risk Management and Internal Controls) and ICP 17 (Capital
Adequacy).

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Requirements on the supervisor
4.4

The supervisor assesses applications, makes decisions and informs
applicants of the decision within a reasonable time, which is clearlyspecified, and without undue delay.
4.4.1

The supervisor should require a legal entity to submit an application if it
proposes to conduct insurance activities. The application should include
information on the types of business to be written and contain all the
documents and information required by the legislation to confirm that thelicensing requirements are met.

4.4.2

In instances where the application is deemed not complete, thesupervisor should inform the applicant without delay, and the applicant
should be given the opportunity to provide additional information tocomplete the application.

4.4.3

In assessing the application, the supervisor could rely on audits byexternal bodies, actuarial reports, or in the case of branches or foreignsubsidiaries on the opinion of other supervisors. Supervisors should
consider the reports or opinions from these various sources carefully andapply their own judgment in making the final decision on the application.
Before placing reliance on reports from external auditors or actuaries,
supervisors should consider:• whether the external auditors and actuaries have thenecessary expertise and experience to perform the roles; and• their independence from the legal entity and the consideration
they give to the protection of policyholders’ interests.

4.4.4

4.5

The supervisor should make its assessment and finalise its decision
within a reasonable timeframe and without undue delay. A time period
should be indicated to the applicant for the assessment procedure,commencing from the date on which all complete application
documentation has been submitted to the supervisor. Within this period,
the supervisor should decide on the acceptability of the application for alicence. However, this does not preclude the supervisor from conducting
additional due diligence if necessary. If the supervisor has not come to adecision within the indicated timeframe and the licence cannot be
granted, the supervisor should communicate the reason for the delay tothe applicant.

The supervisor refuses to issue a licence where the applicant does not meetthe licensing requirements. Where the supervisor issues a licence, it
imposes additional requirements, conditions or restrictions on an applicant
where appropriate. If the licence is denied, conditional or restricted, theapplicant is provided with an explanation.
4.5.1

In general, requirements, conditions or restrictions that are imposed on
an applicant at the point of issue of the licence deal with the scope ofactivities that an insurance legal entity is permitted to conduct or thenature of its customers (eg retail versus sophisticated customers). If
necessary, the supervisor should impose additional requirements,
conditions or restrictions on an applicant not only at the point of issue ofthe licence, but also as part of its ongoing supervision of the insurance

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legal entity (see ICP 9 (Supervisory Review and Reporting) and ICP 10(Preventive Measures, Corrective Measures and Sanctions).
4.5.2

4.6

4.7

The denial of a licence or conditions or restrictions on a licence should
be confirmed in writing to the applicant. The explanation should be
provided to the applicant in a transparent manner. Supervisors should
convey their concerns with regard to an applicant’s proposed insurance
activities and explain the reasons for imposing licensing conditions or
restrictions.

A licence clearly states its scope.
4.6.1

A licence should clearly state the classification of insurance activities thatthe insurance legal entity is licensed to conduct. Regarding classification,
legislation should categorise insurance business into types and classes
of insurance (at least into life and non-life).

4.6.2

Before adding new classes of insurance to the list of classes alreadygranted to the insurance legal entity, the supervisor should consider allof the above mentioned licensing requirements, as applicable.

The supervisor publishes a complete list of licensed insurance legal entities
and the scope of the licences granted.
4.7.1

The supervisor should publish the complete list of licensed insurance
legal entities and clearly state the scope of licence that has been granted
to each insurance legal entity. This would provide clarity to the public as
to which entities are licensed for specific classes of business.

4.7.2

If the conditions or restrictions to the license would impact the public or
any person dealing with the insurance legal entity, the supervisor should
either publish these conditions or restrictions or require the insurance
legal entity to disclose these conditions or restrictions accordingly.
Conditions or restrictions that would impact the public could include, forexample, the lines or classes of insurance business an insurance legal
entity is permitted to conduct.

Foreign operations
4.8

In deciding whether and if so on what basis, to license or continue to license
a branch or subsidiary of a foreign insurer in its jurisdiction, the supervisor
consults the relevant supervisor(s) as necessary.
4.8.1

As part of the consultation, supervisors should use the modes available
for supervisory cooperation, in particular, the ability to exchange
information relevant for the application (eg check of suitability of directors
and owners) with domestic or foreign authorities. The exchange of
information may be governed by law, agreement or memorandum of
understanding, especially if the information is deemed confidential.
Having such arrangements in place is important so as to not unduly delay
the processing of an application.

4.8.2

Before making a decision to grant the licence, the host supervisor shouldhave an understanding of how the home supervisor supervises theinsurer on an ongoing basis.

4.8.3

Host supervisors should consult home supervisors on relevant aspectsof any licensing proposal, but in any event they should always consider

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checking that the home supervisor of the insurance legal entity has no
objection before granting a licence. The home supervisor should assess
the risks posed to the insurer of establishing an insurance legal entity ina foreign jurisdiction and highlight any material reservations or concerns
to the host supervisor as soon as practicable. The host supervisor should
inform the home supervisor of the scope of the licence, including any
restrictions or prohibitions imposed on the licence.
4.8.4

4.9

Host supervisors should reject applications for a licence from foreign
entities which are not subject to regulation and supervision in the homejurisdiction. In the case of joint ventures, if there is lack of clear parental
responsibility, the supervisor should reject such applications.

Where an insurance legal entity is seeking to conduct cross-borderinsurance activities without a physical presence in the jurisdiction of thehost supervisor, the host supervisor concerned consults the homesupervisor, as necessary, before allowing such activities.
4.9.1

Jurisdictions or regions may have a system or cooperation agreements
in place whereby such consultation is not necessary or required.

4.9.2

Information exchanged as part of a consultation should include:• confirmation from the home supervisor that the insurance
legal entity is authorised to conduct the proposed types of
insurance activities; and• confirmation from the home supervisor that the insurance
legal entity meets all the insurance regulatory requirements in
the home jurisdiction.

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Suitability of Persons
The supervisor requires Board Members, Senior Management, Key Persons inControl Functions and Significant Owners of an insurer to be and remain suitableto fulfil their respective roles.
5.1

Legislation identifies which persons are required to meet suitability
requirements. The legislation includes at least Board Members, Senior
Management, Key Persons in Control Functions and Significant Owners.
5.1.1

5.2

Suitability requirements may extend to other individuals (eg financial
controllers and treasurers) to account for the roles of such individuals
that may differ depending on the jurisdiction and the legal form andgovernance structure of the insurer.

The supervisor requires that in order to be suitable to fulfil their roles:• Board Members (individually and collectively), Senior
Management and Key Persons in Control Functions possess
competence and integrity; and• Significant Owners possess the necessary financial soundness
and integrity.
Suitability requirements for Board Members, Senior Management and Key Persons inControl Functions

CF 5
CF 5.25.2.1

Competence is demonstrated generally through the level of anindividual’s professional or formal qualifications and knowledge, skills
and pertinent experience within the insurance and financial industries orother businesses. Competence also includes having the appropriate
level of commitment to perform the role. Refer to ICP 7 (Corporate
Governance) with regard to competence and commitment and to ICP 8(Risk Management and Internal Controls) with regard to control
functions.

5.2.2

Integrity is demonstrated generally through character, personal
behaviour and business conduct.

5.2.3

The supervisor should require the insurer to take the necessary
measures to ensure that these requirements are met by setting highinternal standards of ethics and integrity, promoting sound corporate
governance and requiring that these individuals have pertinent
experience, and maintain a sufficient degree of knowledge and decision
making ability.

5.2.4

To ensure an appropriate level of suitability, Board Members, Senior
Management and Key Persons in Control Functions should acquire,
maintain and enhance their knowledge and skills to fulfil their roles, forexample, by participating in induction and ongoing training on relevant
issues. Sufficient time, budget and other resources should be dedicatedfor this purpose, including external expertise drawn upon as needed.
More extensive efforts should be made to train those with more limited
financial, regulatory or risk-related experience.
g

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CF 5.2.a

The group-wide supervisor requires the IAIG Board Members(individually and collectively), Senior Management, and Key Persons
in Control Functions, to have the necessary competence to fulfil theirrole, taking into account the complexity and international nature of
the IAIG, any specific features of the jurisdictions where the IAIG
operates, and the risks to which it is exposed.

CF 5.2.a.1

Appropriate competencies include, for example, knowledge of andexperience with international business and processes, as well as withdifferent business models.

Suitability requirements for Significant Owners
5.2.5

The necessary qualities of a Significant Owner relate at least to:• financial soundness demonstrated by sources
financing/funding and future access to capital; andof• integrity demonstrated in personal or corporate behaviour.
5.3

The supervisor requires the insurer to demonstrate initially and on an
ongoing basis, the suitability of Board Members, Senior Management, Key
Persons in Control Functions and Significant Owners. The suitability
requirements and the extent of review required by the supervisor dependon the person’s role.
5.3.1

The supervisor should assess the suitability of Board Members, Senior
Management, Key Persons in Control Functions and Significant Ownersof an insurance legal entity as part of the licensing procedure before theinsurance legal entity is permitted to operate (see ICP 4 Licensing).

5.3.2

The supervisor should assess the suitability of Board Members, Senior
Management, Key Persons in Control Functions and Significant Ownersof insurers either prior to changes in the positions or as soon as possible
after appointment. The supervisor should also require the insurer toperform internal suitability assessments of Board Members, Senior
Management and Key Persons in Control Functions on an ongoingbasis, for example on an annual basis or when there are changes in thecircumstances of the individuals. The supervisor may require the insurer
to certify that it has conducted such assessments and demonstrate how
it reached its conclusions.

5.3.3

With regard to Control Functions, the individual(s) to be assessed shouldbe the Key Persons in Control Functions.

5.3.4

The supervisor should have sufficient and appropriate information toassess whether an individual meets suitability requirements. The
information to be collected and the supervisor’s assessment of suchinformation may differ depending on the role.

5.3.5

For the purpose of the assessment, the supervisor should require thesubmission of a résumé or similar indicating the professional
qualifications as well as previous and current positions and experienceof the individual and any information necessary to assist in theassessment, such as:

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• evidence that the individual has sufficient relevant
knowledge and pertinent experience within the insurance
and financial industries or other businesses; and• evidence that the individual has the appropriate level ofcommitment to perform the role.
5.3.6

The application of suitability requirements relating to competence for
Board Members, Senior Management and Key Persons in Control
Functions of an insurer may vary depending on the degree of theirinfluence and on their roles. It is recognised that an individual considered
competent for a particular position within an insurer may not be
considered competent for another position with different responsibilities
or for a similar position within another insurer. When assessing thecompetence of the Board Members, regard should be given to respective
duties allocated to individual members to ensure appropriate diversity ofqualities and to the effective functioning of the Board as a whole.

5.3.7

In assessing the integrity of an individual Board Member, Senior
Management, Key Person in Control Functions and Significant Owner,
the supervisor should consider a variety of indicators such as:• Legal indicators: These provide information on possible legal
misconduct. Such indicators could include civil liability,
criminal convictions or pending proceedings:
for breaches of law designed to protect members of the
public from financial loss, eg dishonesty, or
misappropriation of assets, embezzlement and other fraud
or other criminal offences (including anti-money launderingand the combating of the financing of terrorism.
against the individual in his/her personal capacity;
against a legal entity in which the individual is or was a
Board Member, a member of the Senior Management, a
Key Person in Control Functions or a Significant Owner; orincurred by the individual as a consequence of unpaid
debts.

• Financial indicators: These provide information on possible
financial misconduct, improper conduct in financial
accounting, or negligence in decision-making. Suchindicators could include:
financial problems or bankruptcy in his/her private
capacity; or
financial problems, bankruptcy or insolvency proceedingsof a legal entity in which the individual is or was a Board
Member, a member of the Senior Management or a Key
Person in Control Functions.

• Supervisory indicators: These provide information gatheredby or that comes to the attention of supervisors in theperformance of their supervisory duties. These supervisors
could also be authorities with supervisory responsibility insectors other than insurance. Such indicators could include:
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the withholding of information from public authorities orsubmission of incorrect financial or other statements;
conduct of business transgressions;prior refusal of regulatory approval for key positions;preventive or corrective measures imposed (or pending)on entities in which the individual is or was a Board
Member, a member of the Senior Management, or a Key
Person in Control Functions; oroutcome of previous assessments of suitability of anindividual, or sanctions or disciplinary actions taken (orpending) against that individual by another supervisor.

• Other indicators: These may provide other information that
could reasonably be considered material for the assessmentof the suitability of an individual. Examples include:
suspension, dismissal or disqualification of the individualfrom a position as a Board Member or a member of the
Senior Management of any company or organisation;
disputes with previous employers concerning incorrect
fulfilment of responsibilities or non-compliance withinternal policies, including code of conduct, employment
law or contract law;disciplinary action or measures taken against an individual
by a professional organisation in which the individual is or
was a member (eg, actuaries, accountants or lawyers); or
strength of character, such as the ability and willingness tochallenge, as an indicator of a person’s integrity as well ascompetence to perform the respective role.

The presence of any one indicator may, but need not in and of itself,
determine a person’s suitability. All relevant indicators, such as thepattern of behaviour, should be considered in a suitability assessment.
Consideration should also be taken to the lapse of time since a particular
indicator occurred and its severity, as well as the person’s subsequent
conduct.
5.3.8

For Significant Owners, the supervisor sets out minimum standards offinancial soundness. If the Significant Owner that is to be assessed is alegal person or a corporate entity, the supervisor should collect sufficientand appropriate information such as:• the nature and scope of its business;• its ownership structure, where relevant;• its source of finance/funding and future access to capital;• the group structure, if applicable, and organisation chart; and• other relevant factors.

5.3.9

In determining the financial soundness of Significant Owners, thesupervisor should assess their source of financing/funding and future

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access to capital. To do so, the supervisor may consider financial
indicators such as:• Financial statements and exhibits. If the Significant Owner isa legal person, financial statements may include annual
financial statements; for a natural person, it may include
financial information (such as tax accounts or personal
wealth statements) that are reviewed by an independent
public accountant; and• Transactions and agreements such as: loans; investments;
purchase, sale or exchange of securities or other assets;
dividends and other distributions to shareholders;management agreements and service contracts; and tax
allocation agreements.
5.3.10Additionally the supervisor should also consider matters such as,
whether:• Significant Owners understand their role as potential futuresources of capital, if needed;• there are any indicators that Significant Owners will not beable to meet their debts as they fall due;• appropriate prudential solvency requirements are met if the
Significant Owner is a financial institution;• Significant Owners have been subject to any legally valid
judgment, debt or order that remains outstanding or has notbeen satisfied within a reasonable period;• Significant Owners have made arrangements with creditors,
filed for bankruptcy or been adjudged bankrupt or had assets
sequestered; and• Significant Owners have been able to provide the supervisor
with a satisfactory credit reference.
The presence of any one indicator may, but need not in and of itself,
determine a person’s suitability. All relevant indicators, such as thepattern of behaviour, should be considered in a suitability assessment. If
the Significant Owner is regulated by another supervisor, the suitability
assessment done by the latter may be relied upon to the extent that thisassessment reasonably meets the requirements of this standard.

5.4

The supervisor requires notification by insurers of any changes in Board
Members, Senior Management, Key persons in Control Functions andSignificant 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.
5.4.1

Insurers should be required to report promptly any information gained
about these persons that may materially affect their suitability, forexample, if a Board Member is convicted of a financial crime. See
guidance under Standard 5.3 for additional examples of indicators ofcircumstances that may materially affect the suitability of an individual.

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5.5

The supervisor takes appropriate action to rectify the situation when Board
Members, Senior Management and Key Persons in Control Functions or
Significant Owners no longer meet suitability requirements.
5.5.1

The supervisor should impose measures in respect of Board Members,
Senior Management and Key Persons in Control Functions who do notmeet the suitability requirements. Examples of such measures include:• requesting the insurer to provide additional education,coaching or the use of external resources in order to achievecompliance with suitability requirements by an individual in aposition as Board Member, member of the Senior
Management or Key Person in Control Functions;• preventing, delaying or revoking appointment of an individual
in a position as Board Member, member of the Senior
Management or Key Person in Control Functions;• suspending, dismissing or disqualifying an individual in aposition as a Board Member, Senior Management or Key
Person in Control Function, either directly or by ordering theinsurer to take these measures;• requiring the insurer to appoint a different person for the
position in question who does meet the suitability
requirements, to reinforce the sound and proper
management and control of the insurer;• imposing additional reporting requirements and increasing
solvency monitoring activities; or• withdrawing or imposing conditions on the business licence,
especially in the case of a major breach of suitability
requirements, taking into account the impact of the breach or
the number of members of the Board, Senior Management
or Key Persons in Control Functions involved.

5.5.2

The supervisor should impose measures of a preventive and corrective
nature in respect of Significant Owners who do not meet suitability
requirements. Examples of such measures include:• requiring the Significant Owners to dispose of their interestsin the insurer within a prescribed period of time;• the suspension of the exercise of their corresponding voting
rights; or• the nullification or annulment of any votes cast by the
Significant Owners.

5.5.3

There can be circumstances where a Board Member, a member of the
Senior Management or a Key Person in Control Functions is unable tocarry out his/her role and a replacement needs to be appointed on short
notice. In jurisdictions where the supervisor approves the post-licensing
appointment of Board Members, Senior Management or Key Persons inControl Functions, it may be appropriate for the supervisor to permit thepost to be filled temporarily until the successor’s suitability assessment
is affirmed. In such circumstances, a supervisor may require that these

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temporary replacements meet certain suitability requirements,
depending on his/her position or responsibilities within the insurer.
However, such assessment should be conducted and concluded in atimely manner.
5.6

The supervisor exchanges information with other authorities inside andoutside its jurisdiction where necessary to check the suitability of Board
Members, Senior Management, Key Persons in Control Functions andSignificant Owners of an insurer.
5.6.1

Supervisors should use the modes available for supervisory cooperation,in particular, the ability to exchange information relevant to checksuitability with domestic or foreign authorities. Having sucharrangements in place is important so as to not unduly delay relevantsupervisory processes and/or affect the insurers’ ability to satisfy
composition requirements for the Board or make necessary changes to
its management team(see ICP 3 Information Exchange andConfidentiality Requirements.

5.6.2

The supervisor may use this information as an additional tool to assess
effectively the suitability of, or to obtain information about, a Board
Member, a member of the Senior Management or a Key Person inControl Functions.

5.6.3

If a Significant Owner that is to be assessed is a legal person or a
corporate entity regulated in another jurisdiction, the supervisor shouldseek confirmation from the relevant authority that the entity is in goodstanding in that other jurisdiction.

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Change of Control and Portfolio Transfers
The supervisor assesses and decides on proposals:•

to acquire significant ownership of, or an interest in, an insurer that
results in a person (legal or natural), directly or indirectly, alone or withan associate, exercising control over the insurer; and•for portfolio transfers.

6.0
Introductory Guidance
6.0.1

The supervision of change of control and portfolio transfers supports
supervisory objectives, in particular:• licensing regimes are not undermined by control being
obtained or retained by those who would not get a licenceordinarily; and• insurers should continue to be held in corporate or otherarrangements that allow them to be effectively supervised.

6.0.2

To assist in understanding the content of this ICP, it is emphasised that:• change of control extends beyond the immediate controllinginterest, such as the ownership of equity in an insurer, andincludes other actions that have the potential to change theexercise of control over the insurer;• change of control is relevant, both at the insurance legal entity
and intermediate and ultimate beneficial owner levels;• change of control may take place in a variety of forms, suchas mergers, acquisitions or (de)mutualisations;• control includes the exercise of influence over decisions suchas those on strategic, operating, investing and financing
policies of an insurer. It may also include the power to appoint
or remove members, or otherwise influence the compositionof, the Board or of Board committees;• control may be exercised by a person individually, or acting inconcert with associates or others, and directly or indirectly
through corporate structures or other mechanisms; and• significant owners and the transactions that determine orchange control may be outside of a jurisdiction, but the impact
on the ultimate control of the insurer in that jurisdiction meansthat they remain relevant to effective supervision of control.

6.0.3

Supervisory requirements and practices regarding change of control andportfolio transfers may vary, taking into account the nature, scale andcomplexity of the transactions and the risk posed to achievement ofsupervisory objectives. For example, portfolio transfers between
reinsurers, internal restructuring transactions within a group that does
not change the ultimate beneficial ownership of the entity, anddemutualisation, are different types of transactions. Their nature may

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warrant different supervisory approaches and/or different levels ofintensity of supervision.
6.0.4

There may be transactions where a portfolio transfer or a change ofcontrol is cross-border in nature. In such cases, the supervisor should
coordinate and exchange information with the relevant supervisors (seeICP 3 Information Exchange and Confidentiality Requirements and ICP
25 Supervisory Cooperation and Coordination).

Change of Control
6.1

Legislation addresses change of control of insurers, including:• having a definition of control; and• oversight and enforcement of requirements related to change ofcontrol.
6.1.1

The definition of "control" should address, at least:• holding of a defined number or percentage of issued sharesor financial instruments above a designated threshold in an
insurer or its intermediate or ultimate beneficial owner or thehead of the insurance group or head of the financial
conglomerate as may be the case; and/or• having a defined percentage of voting rights attached toshares or financial instruments.

6.2

6.1.2

Financial instruments other than shares that should be of interest to thesupervisor are those that have the potential to impact the levels of control
over an insurer, including those that may convert in the future into aninterest that leads to a change of control through that conversion.

6.1.3

The definition of a threshold for control is not necessarily the same as
the definition that may apply for accounting consolidation or otherpurposes.

The supervisor requires the insurer to provide notification of a proposedchange of control of the insurer. The supervisor assesses and decides on
proposals for change of control.
Notification
6.2.1

The supervisor should require notification of proposals that would leadto increased (or decreased) control.

6.2.2

The supervisor should establish thresholds for notification. Suchthresholds may improve transparency and compliance with related
requirements while avoiding immaterial notifications. The supervisor
typically establishes lower thresholds (such as between 5 and 10
percent) for initial notification of acquiring control, and a higher
percentage for approval and for increased control also requiring
approval.

6.2.3

The supervisor may also be informed by notifications made to otherauthorities such as corporate law supervisors or under rules for publicly
traded companies.

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6.2.4

Notifications should be submitted to the supervisor in a reasonable time.
Changes that arise because of actions of the insurer should be subject
to advance notification. Actions of others are usually made “subject to”
relevant approvals so are not effective until approved.

Assessment
6.2.5

The supervisor should assess both actions that lead to new controllinginterests and those that lead to material increases in existing controllinginterests. Material increases may arise, for example, when existing
significant owners increase their interest, when associates increase theirinterest, or when a significant owner acquires a new associate who has
a plan to acquire an interest (directly or indirectly) in the insurer.

6.2.6

The supervisor should obtain the information necessary to assess thechange of control. The supervisor may seek such information from theinsurer, its significant owners, shareholders or other relevant persons.
The information obtained should be proportionate to the complexity of
the change of control. Regardless, the supervisor should have sufficient
information to understand the impact of the change of control on theinsurer and be able to identify the ultimate beneficial owner.

6.2.7

When considering whether to approve a change of control that leads to
a new significant owner, the supervisor should verify that the approval
would not lead to a control arrangement that would not have been
approved as part of the jurisdiction’s licensing requirements in similar
circumstances (see ICP 4 Licensing).

6.2.8

The supervisor should assess whether a new significant owner issuitable to fulfil its role. A significant owner should possess at least thenecessary qualities relating to financial soundness and integrity (see ICP
5 Suitability of Persons).

6.2.9

The supervisor should be able to deny a change of control when, forexample, it would be prejudicial to the interests of policyholders, theresulting structure would not allow for effective supervision, or theultimate beneficial owner cannot be identified.

(De)Mutualisation
6.3

A change of a mutual company to a stock company, or vice versa, is subject
to the supervisor’s approval.
6.3.1

In jurisdictions where mutual ownership of insurers is possible,
legislation should provide a process for mutual insurers to demutualiseat their own discretion or if directed to do so by the supervisor.

6.3.2

The process for (de)mutualisation may vary by jurisdiction. For example,
the ultimate approval may be provided by authorities other than the
supervisor, such as courts or votes of member policyholders.
Regardless, the supervisor should be consulted and should have theright to object to a (de)mutualisation.

6.3.3

In assessing a (de)mutualisation, the supervisor should consider the
impact on the financial condition of the insurer and the ongoing
expectations of policyholders, including those that will continue asparticipating policyholders. The supervisor should also assess whether

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the new governing organisational document of the company adequately
protects current and future policyholders.
Portfolio Transfer
6.4

The supervisor assesses and decides on the transfer of all or a part of an
insurer’s business portfolio taking into account at least the financial
condition of the transferee and the transferor and whether the interests ofthe policyholders of both the transferee and transferor will be protected.
6.4.1

Insurance policies are legal contracts between an insurer and its
policyholders. As such, an insurer should not be able unilaterally to alter
the terms of a contract by merging with another insurer, (de)mutualising,or transferring some of its business to another insurer.

6.4.2

In order to protect the interests of policyholders and to safeguard thefinancial condition of the insurers involved, legislation should address theconditions for a portfolio transfer. Policyholders’ benefit expectations andexisting policy values should not normally be lessened as a result of aportfolio transfer.

6.4.3

The process for a portfolio transfer may vary by jurisdiction. For example,
the ultimate approval may be provided by authorities other than the
supervisor, such as courts. Regardless, the supervisor should be
consulted and should have the right to object to a portfolio transfer.

6.4.4

When assessing a transfer, the supervisor should consider the impact
on the transferring policyholders, as well as on those that are nottransferring, and those that are current policyholders of the company towhich the policyholders are being transferred. This should apply whether
the portfolio transfer is considered a part of normal business, a merger
or part of a resolution where the insurer is no longer viable (see ICP 12
Exit from the Market and Resolution).

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Corporate Governance
The supervisor requires insurers to establish and implement a corporate
governance framework which provides for sound and prudent management andoversight of the insurer’s business and adequately recognises and protects theinterests of policyholders.
7.0
Introductory Guidance
7.0.1

The corporate governance framework of an insurer:• promotes the development, implementation and effective
oversight of policies that clearly define and support theobjectives of the insurer;• defines the roles and responsibilities of persons accountable
for the management and oversight of an insurer by clarifying
who possesses legal duties and powers to act on behalf of theinsurer and under which circumstances;• sets requirements relating to how decisions and actions aretaken including documentation of significant or material
decisions, along with their rationale;• provides sound remuneration practices which promote thealignment of remuneration policies with the long term interestsof insurers to avoid excessive risk taking;• provides for communicating with the supervisor, as
appropriate, matters relating to the management andoversight of the insurer; and• provides for corrective actions to be taken for non-complianceor weak oversight, controls or management.

7.0.2

An effective corporate governance framework enables an insurer to beflexible and transparent; to be responsive to developments affecting its
operations in making timely decisions and to ensure that powers are notunduly concentrated. The corporate governance framework supports
and enhances the ability of the key players responsible for an insurer’s
corporate governance; ie the Board, Senior Management and Key
Persons in Control Functions to manage the insurer’s business soundlyand prudently.

Organisational structures
7.0.3

The insurer should establish a transparent organisational structure which
supports the strategic objectives and operations of the insurer. The
Board and Senior Management should know and understand thestructure and the risks that it poses.
The ways in which an insurer chooses to organise and structure itself
can vary depending on a number of factors such as:

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• jurisdictional corporate law, which may allow or requiredifferent Board structures (such as one-tier or two-tier
Boards);• organisational structure such as stock companies, mutuals or
co-operatives; and• group, branches, or solo legal entity operations.
These considerations can affect how an insurer establishes andimplements its corporate governance framework and are explained in
more detail below. It is important for supervisors to understand thesedifferent considerations in order to be able to adequately assess theeffectiveness of an insurer’s corporate governance framework.
CF 5.3CF 5.4ZGh

CF 7.0.a

The group-wide supervisor requires the Head of the IAIG to document thelegal and management structures of, and inter-relationships within, theIAIG to enable an understanding of its structure to help identify risks andhow they are managed.

CF 7.0.a.1

The documentation should mainly support the IAIG Board and Senior
Management in discharging their responsibilities, but can also be
useful for the group-wide supervisor.

CF 7.0.a.2

The documentation covers legal entities within the IAIG and, where
relevant, the wider group of which the IAIG is part, and includes items
such as:•home jurisdiction of the Head of the IAIG;•

the jurisdictions of legal entities within the IAIG, including branches;•

off-balance sheet entities;•

materiality of legal entities or business lines within the IAIG;•

financial ties (such as commercial contracts) and non-financial ties
(such as common directors);•

details of the shareholding structure and significant shareholdings,
including controlling shareholders;•

governance structure, including Boards and their committee
structure and key responsibilities; and•management structure, including the division of authority anddecision making between business line management, local
management, and Board oversight.

7.0.4

The standards on corporate governance are designed with sufficient
flexibility to apply to supervision of insurers regardless of any differencesin the corporate structures and legal systems.

7.0.5

The term Board includes its management and oversight roles, regardlessof Board structure.

Mutuals and co-operatives
7.0.6

Governance of insurers formed as mutuals or co-operatives is different
from that of insurers formed as joint stock companies (ie, bodies

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corporate). These standards are nevertheless sufficiently flexible to beadapted to mutuals and co-operatives to promote the alignment ofactions and interests of the Board and Senior Management with thebroader interests of policyholders. Where there are references toshareholders or stakeholders, they should be generally treated as
references to policyholders in mutuals, unless otherwise indicated.
Insurance Groups
7.0.7

Insurance groups should ensure that the corporate governanceframework is appropriate to the structure, business and risks of theinsurance group and its legal entities. The corporate governanceframework should include policies, processes and controls which
address risks across the insurance group and legal entities, and clear
reporting lines between the head of the group and the legal entities within
the group.

7.0.8

When setting up or monitoring their corporate governance framework,
insurance groups should evaluate the specific challenges which may
arise from the organisational model adopted by a group (e.g. more
centralised or more decentralised model). The main factors underlying
the challenges are:• the division of authorities and responsibilities between the key
players at the insurance group and legal entity level;• effective group-wide direction and coordination;• proper consideration of the legal obligations, governanceresponsibilities and risks both at the insurance group and legal
entity level; and• effective communication within the group and adequate
information at all levels (see Issues Paper on Approaches toGroup Corporate Governance; Impact on Control Functions).

7.0.9

CF 5.5CF 5.6The supervisor should take the organisational structure of the group into
consideration in evaluating its governance. Particularly when the
management structure differs from the legal entity structure, it is not
sufficient to assess governance only at the legal entity level. In such acase, it is important that appropriate governance exists across the groupand that the supervisor assesses it on a group-wide basis.
V
Df

CF 7.0.b

The group-wide supervisor requires the Head of the IAIG to ensure thatthe group-wide corporate governance framework is appropriate to thestructure, business and risks of the IAIG including its legal entities.

CF 7.0.c

The group-wide supervisor requires the Head of the IAIG to establish
clear reporting lines between the legal entities within the IAIG and theHead of the IAIG.

Branch operations
7.0.10If an insurer is a branch, these standards would generally apply to thelegal entity in its home jurisdiction. However, the host supervisor may
require designated oversight and/or management accountabilities andstructures to be maintained at the branch, including in some cases a

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designated representative responsible for the management of the
branch. In such cases, these standards should also apply, as
appropriate, to the oversight and management roles maintained within
the branch taking due account of the governance structures andarrangements as determined by the host supervisor.
Appropriate allocation of oversight and management responsibilities
7.1

The supervisor requires the insurer’s Board to:• ensure that the roles and responsibilities allocated to the Board,
Senior Management and Key Persons in Control Functions areclearly defined so as to promote an appropriate separation of theoversight function from the management responsibilities; and• provide oversight of the Senior Management.
7.1.1

The Board should ensure that the insurer has a well-defined governancestructure which provides for the effective separation between oversightand management functions. The Board is responsible for providing theoverall strategy and direction for the insurer and overseeing its proper
overall management, while leaving the day-to-day management of theinsurer to Senior Management. The separation of the roles of the Chairof the Board and the Chief Executive Officer (CEO) reinforces a clear
distinction between accountability for oversight and management.

7.1.2

The Board should also ensure that there is a clear allocation of roles andresponsibilities to the Board as a whole, to committees of the Board
where they exist, and to the Senior Management and Key Persons inControl Functions to ensure proper oversight and sound management of
the insurer. The allocation of roles and responsibilities should clearly
identify the individual and collective accountabilities for the discharge ofthe respective roles and responsibilities. The organisational structure of
the insurer and the assignment of responsibilities should enable theBoard and Senior Management to carry out their roles in an adequate
and objective manner and should facilitate effective decision making.

7.1.3

The allocation of responsibilities to individual Board Members (forexample the membership of Board committees such as the audit or
remuneration committee) should take due account of whether the
relevant member has the degree of independence and objectivity
required to carry out the functions of the particular committee. The
effective oversight of the executive functions should be performed by the
non-executive members of the Board, because they are not involved in
the day-to-day management of the insurer. Within a group the allocationand division of the oversight and management responsibilities at different
levels should be transparent, appropriate for, and aligned with, theorganisational model of the group. Where individuals undertake
functions for more than one legal entity within a group, the group shouldhave in place appropriate measures so that conflicts of interest between
the different roles to be performed by such individuals are avoided, or
where such conflicts cannot be avoided, they should be managed.

7.1.4

In order to provide effective oversight of the Senior Management, theBoard should:

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• ensure that there are adequate policies and processes
relating to the appointment, dismissal and succession of the
Senior Management, and be actively involved in suchprocesses;• ensure that Senior Management’s knowledge and expertise
remain appropriate given the nature of the business and theinsurer's risk profile;• monitor whether the Senior Management is managing theaffairs of the insurer in accordance with the strategies andpolicies set by the Board, and the insurer’s risk appetite,
corporate values and corporate culture;• set appropriate performance and remuneration standards for
Senior Management consistent with the long-term strategy
and the financial soundness of the insurer and monitor
whether the Senior Management is meeting the performancegoals set by the Board;• regularly meet with the Senior Management to discuss andreview critically the decisions made, information provided andany explanations given by the Senior Management relating to
the business and operations of the insurer; and• have regular interaction with any committee it establishes aswell as with other key functions, proactively request
information from them and challenge that information whennecessary.
7.1.5

As a part of its regular monitoring and review of the insurer’s operations,
the Board should review whether the relevant policies and processes, as
set by the Board, are being properly implemented by Senior
Management and are operating as intended. Particular attention shouldbe paid as to whether the responsibilities for managing and implementing
the policies of the Board have been effectively discharged by those
responsible. The Board should obtain reports at least annually for thispurpose and such reports may include internal or external independent
reports as appropriate.

CF 5.7CF 7.1.a

The group-wide supervisor requires the IAIG Board to establish a welldefined group-wide governance structure, which promotes effective
oversight of the group-wide operations independent of day-to-day
management.

Corporate culture, business objectives and strategies of the insurer
7.2

The supervisor requires the insurer’s Board to set and oversee theimplementation of the insurer’s corporate culture, business objectives andstrategies for achieving those objectives, in line with the insurer’s long terminterests and viability.
7.2.1

The Board should adopt a rigorous process for setting, approving, andoverseeing the implementation of the insurer’s overall businessobjectives and strategies, taking into account the long term financial
safety and soundness of the insurer as a whole, the interests of its

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policyholders and other stakeholders, and the fair treatment ofcustomers. The Board ensures that the Senior Management has
adequately documented and communicated these objectives andstrategies to the Key Persons in Control Functions and all other relevant
staff.
7.2.2

The effective implementation of objectives and strategies should be
supported by the corporate culture and by clear and objective
performance goals and measures, taking due account of, among otherthings, the insurer’s long term interests and viability and the interests ofpolicyholders and other stakeholders. The Board should review theappropriateness of the goals and measures set.

7.2.3

A corporate culture reflects the fundamental corporate values andincludes norms for responsible and ethical behaviour applicable to all
employees of the insurer. The Board should take the lead in setting theappropriate tone at the top. This includes adherence to the corporate
values by the Board and a strong risk culture avoiding excessive risktaking. The corporate values, norms and supporting policies should becommunicated throughout the insurer. These are also reflected in theinsurer’s business objectives and strategies, and supported byprofessional standards and codes of ethics that set out what the insurer
considers to be acceptable and unacceptable conduct. In this regard, theBoard should take account of the interests of policyholders and otherrelevant stakeholders. In setting the tone at the top the Board should
ensure that employees are aware that appropriate disciplinary or otheractions will follow unacceptable behaviours.

7.2.4

The Board should ensure that the corporate culture promotes timely andfrank discussion and escalation of problems to Senior Management or
itself. The Board should set and oversee the implementation oftransparent policies and processes which promote and facilitate that
employees can communicate concerns or information about illegal orunethical behaviour confidentially and without reprisal directly or
indirectly to the Board (eg whistle blower policy). The Board should
determine how and by whom legitimate concerns shall be investigatedand addressed (Senior Management, Board or an external party).

7.2.5

The Board should define and oversee the implementation of norms forresponsible and ethical behaviour. It should not allow behaviour thatwould be incompatible with the protection of policyholders and that could
lead to reputational risks or improper or illegal activity, such as financial
misreporting, fraud, money laundering, bribery and corruption. The
norms for responsible and ethical behaviour should also make clear that
employees are expected to conduct themselves ethically in addition tocomplying with laws, regulations and the insurer’s policies.

7.2.6

The Board should ensure that the insurer’s corporate governanceframework and overall business objectives and strategies are reviewed
at least annually to ensure that they have been properly implemented
and that they remain appropriate in light of any material changes in theorganisational structure, activities, strategy, and regulatory and otherexternal factors. The Board should ensure more frequent reviews, forinstance when an insurer embarks on a significant new businessinitiative (eg a merger or acquisition, or a material change in the direction

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with respect to the insurer’s product portfolio, risk or marketingstrategies), upon the introduction of a new type or class of risk or productor a decision to market products to a new class or category of clients, orfollowing the occurrence of significant external or internal events which
may potentially have a material impact on the insurer (including its
financial condition, objectives and strategies) or the interests of its
policyholders or other stakeholders.
CF 5.8CF 5.9Vl

CF 7.2.a

The group-wide supervisor requires the IAIG Board to ensure that thegroup-wide business objectives, and strategies for achieving thoseobjectives, take into account at least the following:• applicable laws and regulations of, and the risks which may
arise from doing business in, the jurisdictions in which the
IAIG operates;• long term financial safety and soundness of the IAIG;• the interests of policyholders and other stakeholders;• fair treatment of customers; and• the interests and objectives of the insurance legal entities
within the IAIG.

CF 7.2.a.1

The IAIG Board should establish processes for identifying andaddressing risks to the proper implementation of the IAIG’s objectives
and strategies for achieving those objectives, including any emerging
risks.

CF 7.2.a.2

The group-wide supervisor should cooperate and coordinate with theother involved supervisors to compare the consistency of the interestsand objectives of the IAIG with those of the insurance legal entities
within the IAIG.

CF 7.2.b

The group-wide supervisor requires the Head of the IAIG to provide to thegroup-wide supervisor, at least annually, an explanation of the strategy
that the IAIG Board has set for the IAIG.

CF 7.2.b.1

An explanation of the strategy provides the group-wide supervisor withinformation useful for understanding of the IAIG’s corporate
governance framework. The explanation of the strategy should include
matters such as:• the overall business model and its rationale;• material business lines and how they are likely to develop;• non-insurance business activities the IAIG is likely to pursue;• the geographic emphasis of the IAIG and any likely changes;• anticipated changes in market share(s);• the consequences (financial or otherwise) of achieving, or notachieving, the strategy; and• how the strategy ensures the IAIG will have the ability to fulfil its
obligations to policyholders.

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Structure and governance of the Board
7.3

The supervisor requires the insurer’s Board to have, on an ongoing basis:• an appropriate number and mix of individuals to ensure that
there is an overall adequate level of competence at the Board
level commensurate with the governance structure;• appropriate internal governance practices and procedures tosupport the work of the Board in a manner that promotes theefficient, objective and independent judgment and decision
making by the Board; and• adequate powers and resources to be able to discharge its
duties fully and effectively.
Board composition
7.3.1

CF 5.10CF 5.11

The Board of an insurer should have a sufficient number of members
who have relevant expertise among them as necessary to provide
effective leadership, direction and oversight of the insurer’s business toensure it is conducted in a sound and prudent manner. For this purpose,
the Board should collectively and individually have, and continue tomaintain, including through training, necessary skills, knowledge andunderstanding of the insurer’s business to be able to fulfil their roles. In
particular, the Board should have, or have access to, knowledge andunderstanding of areas such as the lines of insurance underwritten by
the insurer, actuarial and underwriting risks, finance, accounting, the roleof control functions, investment analysis and portfolio management andobligations relating to fair treatment of customers. While certain areas ofexpertise may lie in some, but not all, members, the collective Board
should have an adequate spread and level of relevant competencies andunderstanding as appropriate to the insurer's business.
Gfy

CF 7.3.a

The group-wide supervisor requires that the collective competence of the
IAIG Board includes an understanding of at least:• the group-wide corporate
corporate structure;

governanceframeworkand• the activities of the legal entities within the IAIG, including
associated risks;• the supervisory regimes applicable to the IAIG;• the issues that arise from cross-border business andinternational transactions; and• the risk management, compliance, audit, actuarial and relatedareas.
CF 7.3.a.1

The IAIG Board should be capable of understanding and describing
the purpose, structure, strategy, material operations, and material
risks of the IAIG, including those of legal entities in other financial
sectors and unregulated legal entities that are part of the group.

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7.3.2

Board Members should have the commitment necessary to fulfil theirroles, demonstrated by, for example, a sufficient allocation of time to theaffairs of the insurer and reasonable limits on the number of Board
Memberships held within or outside the insurance group.

Board effectiveness
7.3.3

The Board should review, at least annually, its own performance toascertain whether members collectively and individually remain effectivein discharging the respective roles and responsibilities assigned to themand identify opportunities to improve the performance of the Board as awhole. The Board should implement appropriate measures to address
any identified inadequacies, including any training programmes for
Board Members. The Board may also consider the use of external
expertise from time to time to undertake its performance assessment
where appropriate in order to enhance the objectivity and integrity of thatassessment process.

Internal governance
7.3.4

The Board should have appropriate practices and procedures for its own
internal governance, and ensure that these are followed and periodicallyreviewed to assess their effectiveness and adequacy. These may be
included in organisational rules or by-laws, and should set out how the
Board will carry out its roles and responsibilities. They should also covera formal and documented process for nomination, selection and removalof Board Members, and a specified term of office as appropriate to theroles and responsibilities of the Board member, particularly to ensure theobjectivity of decision making and judgment. Appropriate succession
planning should also form part of the Board’s internal governancepractices.

Chair of the Board
7.3.5

While the Board as a whole remains collectively responsible for the
stewardship of the insurer, the Chair of the Board has the pivotal role ofproviding leadership to the Board for its proper and effective functioning.
The role of the Chair of the Board should generally encompass
responsibilities such as setting the Board’s agenda, ensuring that there
is adequate time allocated for the discussion of agenda items, especially
if they involve strategic or policy decisions of significant importance, andpromoting a culture of openness and debate by facilitating effective
participation of non-executive and executive members andcommunication between them and also with the Senior Management and
Key Persons in Control Functions. To promote checks and balances, it
is good practice for the Chair of the Board to be a non-executive Board
member and not serve as chair of any Board committee. In jurisdictions
where the Chair of the Board is permitted to assume executive duties,
the insurer should have measures in place to mitigate any adverse
impact on the insurer's checks and balances.

Board committees
7.3.6

To support the effective discharge of the responsibilities of the Board,
the Board should assess whether the establishment of committees of theBoard is appropriate. Committees that a Board may commonly establish

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include audit, remuneration, ethics/compliance, nominations and risk
management committees. Where committees are appointed, they shouldhave clearly defined mandates and working procedures (including
reporting to the Board), authority to carry out their respective functions,and a degree of independence and objectivity as appropriate to the roleof the committee. The Board should consider occasional rotation ofmembers and of the chairs of committees, or tenure limits to serve on acommittee, as this can help to avoid undue concentration of power andpromote fresh perspectives. If the functions of any committees are
combined, the Board should ensure such a combination does notcompromise the integrity and/or effectiveness of the functions combined.
In all cases, the Board remains ultimately responsible for mattersdelegated to any such committees.
Independence and objectivity
7.3.7

To promote objectivity in decision making by the Board, the formal andperceived independence of Board Members should be ensured. To that
end, Board Members should avoid personal ties or financial or businessinterests which conflict with that of the insurer. Where it is not reasonably
possible to avoid conflicts of interests, such conflicts should bemanaged. Documented procedures and policies should be in place toidentify and address conflicts of interests which could include disclosureof potential conflicts of interests, requirements for arm’s lengthtransactions, abstention of voting and, where appropriate, prior approvalby the Board or shareholders of professional positions or transactions.

7.3.8

Besides policies on conflicts of interests, the insurer should ensure
objectivity in decision making by establishing clear and objective
independence criteria which should be met by an adequate number ofmembers of the Board (ie non-executive Board Members). For thispurpose, the independence criteria should also take account of groupstructures and other applicable factors. Meeting such criteria isparticularly important for those Board Members undertaking specificroles (such as members of the remuneration and audit committees) inwhich conflicts of interests are more likely to arise.

7.3.9

Objectivity in decision making is also promoted by independence of mindof the individual Board Members. This means that a Board member
should act without favour; provide constructive and robust challenge of
proposals and decisions; ask for information when the member judges it
necessary in the light of the issues; and avoid “group-think”.

7.3.10Board Members should also bear in mind the duties of good faith andloyalty applicable to them at the individual level, as set out in Standard
7.4.

CF 5.12
CF 5.13Go

CF 7.3.b

The group-wide supervisor requires the IAIG Board to ensure that thegroup-wide corporate governance framework includes policies andprocesses to identify and avoid, or manage, conflicts of interest that may
adversely affect the IAIG as a whole or any of its legal entities.

CF 7.3.b.1

Conflicts of interest within an IAIG could arise:

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• at the level of the Board, Senior Management and Key
Persons in Control Functions of the Head of the IAIG andof its legal entities; and• among the interests of the legal entities, or between thegroup-wide interests and those of any legal entity. For
example, when the IAIG may be harmed by actions of
insurance legal entities within the IAIG, or when an
insurance legal entity within the IAIG may be harmed by
the actions of the IAIG.
CF 7.3.b.2

Where conflicts of interest involving individuals or legal entities cannot
be avoided, the relevant individuals or legal entities should inform therelevant Board or the IAIG Board of the conflict and take measures tomitigate its adverse impact.

Board powers
7.3.11

To be able to discharge its role and responsibilities properly, the Board
should have well-defined powers, which are clearly set out either inlegislation and/or as part of the constituent documents of the insurer(such as the constitution, articles of incorporation, by-laws orinternal/organisational rules). These should, at least, include the power
to obtain timely and comprehensive information relating to the
management of the insurer, including direct access to relevant persons
within the organisation for obtaining information, such as Senior
Management and Key Persons in Control Functions.

Access to resources
7.3.12Adequate resources, such as sufficient funding, staff and facilities,
should be allocated to the Board to enable the Board Members to carryout their respective roles and responsibilities efficiently and effectively.
The Board should have access to services of external consultants or
specialists where necessary or appropriate, subject to criteria (such as
independence) and due procedures for appointment and dismissal ofsuch consultants or specialists.

Delegations
7.3.13

The Board may delegate some of the activities or tasks associated with
its own roles and responsibilities. (Delegations in this context are
distinguished from outsourcing of business activities by the insurer,
which is dealt with in ICP 8 Risk Management and Internal Controls.)
Notwithstanding such delegations, the Board as a whole retains theultimate responsibility for the activities or tasks delegated, and thedecisions made in reliance on any advice or recommendations made by
the persons or committees to whom the tasks were delegated.

7.3.14

Where the Board makes any delegations, it should ensure that:• the delegation is appropriate. Any delegation that results in
the Board not being able to discharge its own roles andresponsibilities effectively would be an undue or inappropriatedelegation. For example, the duty to oversee the Senior
Management should not be delegated to a Board committee
comprised mostly or solely of executive members of the Board

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who are involved in the day-to-day management of theinsurer;• the delegation is made under a clear mandate with welldefined terms such as those relating to the powers,
accountabilities and procedures relating to the delegation, andis supported by adequate resources to effectively carry out thedelegated functions;• there is no undue concentration of powers giving any one
person or group of individuals an unfettered and inappropriate
level of powers capable of influencing the insurer’s businessor management decisions;• it has the ability to monitor and require reports on whether thedelegated tasks are properly carried out; and• it retains the ability to withdraw the delegation if it is notdischarged properly and for due purposes by the delegate,
and, for this purpose, have appropriate contingency
arrangements in place.
Duties of individual Board Members
7.4

The supervisor requires that an individual member of the Board:• act in good faith, honestly and reasonably;• exercise due care and diligence;• act in the best interests of the insurer and policyholders, putting
those interests ahead of his/her own interests;• exercise independent judgment and objectivity in his/herdecision making, taking due account of the interests of theinsurer and policyholders; and• not use his/her position to gain undue personal advantage or
cause any detriment to the insurer.
7.4.1

The specific duties identified above are designed to address conflicts ofinterests that arise between the interests of the individual members of
the Board and those of the insurer and policyholders. The insurer should
include these duties as part of the terms of engagement of the individual
Board Members.

7.4.2

The supervisor should be satisfied that individual Board Members
understand the nature and scope of their duties and how they impact on
the way in which the member discharges his/her respective roles andresponsibilities. A Board member should consider his/her ability todischarge the roles and responsibilities in a manner as would be
expected of a reasonably prudent person placed in a similar position.
He/she should act on a fully informed basis, and for this purpose
continually seek and acquire information as necessary.

7.4.3

Where a member of the Board of an insurer has common membershipon the Board of any other entity within or outside the insurer’s group,
there should be clear and well defined procedures regarding themember’s duty of loyalty to the insurer. These may include appropriate

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disclosure and in some instances shareholder approval of suchoverlapping roles. In the event of a material conflict with the interests of
the insurer, the member should disclose such conflicts promptly to theBoard of the insurer and its stakeholders as appropriate, and be required
to decline to vote or take any decisions in any matters in which he/she
has an interest.
Duties related to risk management and internal controls
7.5

The supervisor requires the insurer’s Board to provide oversight in respectof the design and implementation of risk management and internal controls.
7.5.1

It is the Board’s responsibility to ensure that the insurer has appropriate
systems and functions for risk management and internal controls and toprovide oversight to ensure that these systems and the functions thatoversee them are operating effectively and as intended. The
responsibilities of the Board are described further in ICP 8 (RiskManagement and Internal Controls).

Duties related to remuneration
7.6

The supervisor requires the insurer’s Board to:• adopt and oversee the effective implementation of a written
remuneration policy for the insurer, which does not induce
excessive or inappropriate risk taking, is in line with thecorporate culture, objectives, strategies, identified risk appetite,and long term interests of the insurer, and has proper regard to
the interests of its policyholders and other stakeholders; and• ensure that such a remuneration policy, at least, covers thoseindividuals who are members of the Board, Senior Management,
Key Persons in Control Functions and other employees whose
actions may have a material impact on the risk exposure of theinsurer (major risk–taking staff).
7.6.1

Sound remuneration policy and practices are part of the corporate
governance framework of an insurer. This standard and guidance areneither intended to unduly restrict nor reduce an insurer’s ability to attract
and retain skilled talent by prescribing any particular form or level ofindividual remuneration. Rather, they aim to promote the alignment of
remuneration policies with the long term interests of insurers to avoid
excessive risk taking, thereby promoting sound overall governance of
insurers and fair treatment of customers.

Overall remuneration strategy and oversight
7.6.2

As a part of effective risk management, an insurer should adopt andimplement a prudent and effective remuneration policy. Such a policy
should not encourage individuals, particularly members of the Board andSenior Management, Key Persons in Control Functions and major risktaking staff, to take inappropriate or excessive risks, especially where
performance-based variable remuneration is used.

7.6.3

The Board, particularly members of the remuneration committee where
one exists, should collectively have the requisite competencies to makeinformed and independent judgments on the suitability of an insurer’s
remuneration policy. Such competencies include skills, such as a

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sufficient understanding of the relationship between risk andremuneration practices. The remuneration committee, where
established, should have an adequate representation of non-executive
members to promote objectivity in decision-making.
7.6.4

In order to satisfy itself about the effectiveness of the remuneration policy
and practices, the Board should consider at least:• the components of the overall remuneration policy, particularly
the use and balance of fixed and variable components;• the performance criteria and their application for the purposesof determining remuneration payments;• the remuneration of the members of the Board, Senior
Management and major risk-taking staff; and• any reports or disclosures on the insurer’s remuneration
practices provided to the supervisor or the public.

7.6.5

The Board should ensure that in structuring, implementing and reviewing
the insurer’s remuneration policy, the decision-making process identifies
and manages conflicts of interests and is properly documented.
Members of the Board should not be placed in a position of actual or
perceived conflicts of interests in respect of remuneration decisions.

7.6.6

The Board should also ensure that the relevant Key Persons in Control
Functions are involved in the remuneration policy-setting and monitoringprocess to ensure that remuneration practices do not create incentives
for excessive or inappropriate risk taking, are carried out consistently
with established policies and promote alignment of risks and rewards
across the organisation. Similarly, the remuneration and risk
management committees of the Board, if such committees exist, shouldinteract closely with each other and provide input to the Board on the
incentives created by the remuneration system and their effect on risktaking behaviour.

7.6.7

The potential for conflicts of interests that may compromise the integrity
and objectivity of the staff involved in control functions should bemanaged. This can be achieved by a variety of means, such as making
their remuneration:• predominantly based on the effective achievement of theobjectives appropriate to such control functions. Performancemeasures for staff in control functions should represent theright balance between objective assessments of the control
environment (eg the conduct of the relationship between thecontrol functions and executive management) and outputs
delivered by the control functions, including their impact,
quality and efficiency in supporting the oversight of risks. Suchoutput measures may include recommendations made andimplemented to reduce risks, reduction in number ofcompliance breaches and measures adopted to promptly
rectify identified breaches, results of external quality reviews
and losses recovered or avoided through audits of high risk
areas;

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• not linked to the performance of any business units which are
subject to their control or oversight. For example, where risk
and compliance functions are embedded in a business unit, aclear distinction should be drawn between the remuneration
policy applicable to staff undertaking control functions andother staff in the business unit, such as through the separationof the pools from which remuneration is paid to the two groupsof staff; and• adequate as an overall package to attract and retain staff withthe requisite skills, knowledge and expertise to discharge
those control functions effectively and to increase theircompetence and performance.
7.6.8

Where any control function is outsourced, the remuneration terms under
the agreement with the service provider should be consistent with theobjectives and approved parameters of the insurer’s remuneration
policy.

Variable remuneration
7.6.9

Variable remuneration should be performance-based using measures ofindividual, unit or group performance that do not create incentives forinappropriate risk taking.

7.6.10To better align performance-based incentives with the long term value
creation and the time horizon of risks to which the insurer may be
exposed, due consideration should be given to the following:• There should be an appropriate mix of fixed and variable
components, with adequate parameters set for allocating cash
versus other forms of remuneration, such as shares. A
variable component linked to performance that is too highrelative to the fixed component may make it difficult for an
insurer to reduce or eliminate variable remuneration in a poor
financial year;• The reward for performance should include an adjustment forthe material current and future risks associated withperformance. Since the time horizon of performance andassociated risks can vary, the measurement of performance
should, where practicable, be set in a multi-year framework toensure that the measurement process is based on longer term
performance;• If the variable component of remuneration is significant, themajor part of it should be deferred for an appropriate specified
period. The deferral period should take account of the timeframe within which risks associated with the relevant
performance (such as the cost of capital required to support
risks taken and associated uncertainties in the timing and thelikelihood of future revenues and expenses) may materialise.
The deferral period applied may vary depending on the levelof seniority or responsibility of the relevant individuals and thenature of risks to which the insurer is exposed;

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• The award of variable remuneration should contain provisions
that enable the insurer, under certain circumstances, to apply
malus or claw back arrangements in the case of subdued or
negative financial performance of the insurer which is
attributed to the excessive risk taking of the staff concerned
and when risks of such performance have manifested after theaward of variable remuneration; and• Guaranteed variable remuneration should generally not be
offered, as they are not consistent with sound risk
management and performance-based rewards.
7.6.11The variable component should be subject to prudent limits set under the
remuneration policy that are consistent with the insurer’s capitalmanagement strategy and its ability to maintain a sound capital basetaking account of the internal capital targets or regulatory capitalrequirements of the insurer.

7.6.12The performance criteria applicable to the variable components ofremuneration should promote a complete assessment of risk-adjusted
performance. For this purpose, due consideration should be given to theneed for performance criteria to:• be clearly defined and be objectively measurable;• be based not only on financial but also on non-financial criteria
as appropriate (such as compliance with regulation andinternal rules, achievement of risk management goals,
adequate and timely follow up of internal audit
recommendations as well as compliance with market conduct
standards and fair treatment of customers;• take account of not only the individual’s performance, but also
the performance of the business unit concerned where
relevant and the overall results of the insurer and the group;and• not treat growth or volume as a criterion in isolation from otherperformance criteria.

Share-based components
7.6.13

Where share-based components of variable remuneration (such as
shares, share options or similar instruments) are used, appropriate
safeguards should be implemented to align incentives and the longerterm interests of the insurer. Such safeguards may include that:• shares do not vest for a minimum specified period after theiraward (“vesting restrictions”);• share options or other similar rights are not exercisable for aminimum specified period after their award (“holding
restrictions”); and• individuals are required to retain an appropriate proportion of
the shares awarded until the end of their employment or otherspecified period beyond their employment (“retention
restrictions”).

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7.6.14

Subject to any applicable legal restrictions, it is appropriate that future
vesting and holding restrictions for share-based remuneration remain
operative even upon cessation of employment (ie there should be noundue acceleration of the vesting of share-based payments or curtailingof any holding restrictions).

Severance payments
7.6.15

Where an insurer provides discretionary pay-outs on termination of
employment (“severance payments”, sometimes also referred to as“golden parachutes”), such payment should be subject to appropriate
governance controls and limits. In any case, such pay-outs should bealigned with the insurer’s overall financial condition and performanceover an appropriate time horizon. Severance payments should be related
to performance over time; should not reward failure and should not bepayable in the case of failure or threatened failure of the insurer,
particularly to an individual whose actions have contributed to the failure
or potential failure of the insurer.

Reliable and transparent financial reporting
7.7

The supervisor requires the insurer’s Board to ensure there is a reliablefinancial reporting process for both public and supervisory purposes thatis supported by clearly defined roles and responsibilities of the Board,
Senior Management and the external auditor.
7.7.1

The Board is responsible for overseeing the insurer’s systems andcontrols to ensure that the financial reports of the insurer present abalanced and accurate assessment of the insurer’s business and its
general financial condition and viability.
The Board carries out functions including:• overseeing the financial statements, financial reporting anddisclosure processes;• monitoring whether accounting policies and practices of theinsurer are operating as intended;• overseeing the internal audit process (reviews by internal
audit of the insurer’s financial reporting controls) andreviewing the internal auditor’s plans and material findings;
and• reporting to the supervisor on significant issues concerning
the financial reporting process, including actions taken toaddress or mitigate identified financial reporting risks.

7.7.2

The Board should ensure that significant findings and observations
regarding weaknesses in the financial reporting process are promptly
rectified. This should be supported by a formal process for reviewing andmonitoring the implementation of recommendations by the external
auditor.

External Audit
7.8

The supervisor requires the insurer's Board to ensure that there is adequate
governance and oversight of the external audit process.

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7.8.1The Board should ensure that the insurer:• applies robust processes for approving, or recommending for
approval, the appointment, reappointment, removal andremuneration of the external auditor;• applies robust processes for monitoring and assessing theindependence of the external auditor and to ensure that theappointed external auditor has the necessary knowledge,
skills, expertise, integrity and resources to conduct the audit
and meet any additional regulatory requirements;• monitors and assesses the effectiveness of the external audit
process throughout the audit cycle;• investigates circumstances relating to the resignation or
removal of an external auditor, and ensuring prompt actions
are taken to mitigate any identified risks to the integrity of thefinancial reporting process, and• reports to the supervisor on circumstances relating to theresignation or removal of the external auditor.

7.8.2

The Board should oversee the external audit process and safeguard andpromote an effective relationship with the external auditor. For thispurpose the Board should ensure that:• the terms of engagement of the external auditor are clear andappropriate to the scope of the audit and resources required
to conduct the audit and specify the level of audit fees to be
paid;• the auditor undertakes a specific responsibility under theterms of engagement to perform the audit in accordance with
relevant local and international audit standards;• the external auditor complies with internationally accepted
ethical and professional standards and, where applicable, themore stringent requirements applicable to audits of listed
entities and public interest entities;• there are adequate policies and a process to ensure theindependence of the external auditor, including:restrictions and conditions for the provision of non-audit
services which are subject to approval by the Board;
periodic rotation of members of the audit team and/or audit
firm as appropriate; andsafeguards to eliminate or reduce to an acceptable level
identified threats to the independence of the external
auditor.

• there is adequate dialogue with the external auditor on thescope and timing of the audit to understand the issues of risk,
information on the insurer’s operating environment which isrelevant to the audit, and any areas in which the Board may
request for specific procedures to be carried out by the
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external auditor, whether as a part or an extension of the audit
engagement; and• there is unrestricted access by the external auditor to
information and persons within the insurer as necessary to
conduct the audit.
7.8.3

In order to establish the degree of assurance that the Board can draw
from the external auditor’s report, the Board should also understand theexternal auditor’s approach to the audit. This includes the assessment of
the external auditor’s ability to:• identify and assess the risks of material misstatement in theinsurer’s financial statements, taking into consideration thecomplexities of insurance activities and the need for insurers
to have a strong control environment;• respond appropriately to the risks of material misstatement in
the insurer’s financial statements; and• develop appropriate relationships with the internal audit
function and the actuarial function.
The Board should take appropriate actions where doubts arise as to thereliability of the external audit process.

7.8.4

In order to enable the Board to carry out its oversight responsibilities andto enhance the quality of the audit, the Board should have an effective
communication with the external auditor. This should include:• regular meetings between the Board and the external auditor
during the audit cycle, including meetings without
management present; and• prompt communication of any information regarding internal
control weaknesses or deficiencies of which the external
auditor becomes aware.
The Board should require the external auditor to report to it on all relevant
matters.

7.8.5

The supervisor and the external auditor should have an effective
relationship that includes appropriate communication channels for theexchange of information relevant to carrying out their respective statutory
responsibilities.

7.8.6

Reports prepared by the external auditor for the insurer (eg management
letters) should be made available to the supervisor by the insurer or theexternal auditor.

7.8.7

The supervisor should require the external auditor to report matters thatare likely to be of material significance. This would include material fraud,suspicion of material fraud and regulatory breaches or other significant
audit findings identified in the course of the audit. Such information
should be provided to the supervisor without the need for prior consent
of the insurer and the external auditor should be duly protected fromliability for any information disclosed to the supervisor in good faith.

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7.8.8The supervisor should require a further audit by a different external
auditor where necessary.

Communications
7.9

The supervisor requires the insurer’s Board to have systems and controls
to ensure appropriate, timely and effective communications with thesupervisor on the governance of the insurer.
7.9.1

Communications with the supervisor should promote effective
engagement of the supervisor on the governance of the insurer to enable
informed judgments about the effectiveness of the Board and Senior
Management in governing the insurer.

7.9.2

Subject to any reasonable commercial sensitivities and applicableprivacy or confidentiality obligations, the insurer’s communication
policies and strategies should include providing to the insurer’s
stakeholders information such as the following:• the insurer’s overall strategic objectives, covering existing orprospective lines of business and how they are being or will
be achieved;• the insurer’s governance structures, such as allocation ofoversight and management responsibilities between the
Board and the Senior Management, and organisational
structures, including reporting lines;• members of the Board and any Board committees, including
their respective expertise, qualifications, track-record, otherpositions held by such members, and whether such members
are regarded as independent;• processes in place for the Board to evaluate its own
performance and any measures taken to improve the Board’s
performance;• the general design, implementation and operation of the
remuneration policy;• major ownership and group structures, and any significant
affiliations and alliances; and• material related-party transactions.

7.9.3

In addition to information publicly available, the supervisor may require
more detailed and additional information relating to the insurer’s
corporate governance framework for supervisory purposes, which may
include commercially sensitive information, such as assessments by the
Board of the effectiveness of the insurer’s governance system, internal
audit reports and more detailed information on the remuneration
structures adopted by the insurer for the Board, Senior Management,
Key Persons in Control Functions and major risk-taking staff. The
insurer’s communication policies and strategies should enable suchinformation to be provided to the supervisor in a timely and efficientmanner. Supervisors should safeguard such information having due
regard to the confidentiality of commercially sensitive information andapplicable laws.

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CF 5.14
CF 5.15tt

CF 7.9.a

The group-wide supervisor requires the IAIG Board to ensure that the
Head of the IAIG reports to the group-wide supervisor, through regularlyscheduled or ad hoc reporting, material changes related to at least thefollowing:• location of legal entities;• legal structures;• management structures;• governance structure and processes of the IAIG Board;• affiliations with other groups;• strategy;• risk appetite; and• business activities.

CF 7.9.a.1

The group-wide systems and controls for communications should givethe Head of the IAIG the ability to inform the group-wide supervisor ofgovernance issues concerning the IAIG.

7.9.4

Disclosure of information on remuneration should be sufficient to enable
stakeholders to evaluate how the remuneration system relates to risk
and whether it is operating as intended. Relevant information may
include:• the operation of risk adjustments, including examples of how
the policy results in adjustments to remuneration for
employees at different levels;• how remuneration is related to performance (both financial
and personal business conduct) over time; and• valuation principles in respect of remuneration instruments.

7.9.5

Appropriate quantitative information should also be made available toenable supervisors to evaluate the financial impact of the remuneration
policy. Such information may include:• the total cost of remuneration awarded in the period, analysed
according to the main components such as basic salary,variable remuneration and long-term awards;• the total amount set aside in respect of deferred variable
remuneration;• adjustment to net income for the period in respect of variable
remuneration awarded in previous periods;• the total costs of all sign-on payments in the period andnumber of individuals to whom these relate; and• the total costs of all severance payments in the period andnumber of individuals to whom these relate.

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7.9.6

These amounts should be analysed by type of instrument (eg cash,
shares, share options etc.) as applicable, and in a manner consistent
with the key elements of the remuneration policy.

7.9.7

Disclosure of information on governance should be made on a regular(for instance, at least annually) and timely basis.

Duties of Senior Management
7.10

The supervisor requires the insurer to ensure that Senior Management:• carries out the day-to-day operations of the insurer effectively
and in accordance with the insurer’s corporate culture, businessobjectives and strategies for achieving those objectives in linewith the Insurer's long term interests and viability;• promotes sound risk management, compliance and fairtreatment of customers;• provides the Board adequate and timely information to enable
the Board to carry out its duties and functions including themonitoring and review of the performance and risk exposures of
the insurer, and the performance of Senior Management; and• maintains adequate and orderly records of the internalorganisation.
7.10.1

Senior Management should implement appropriate systems andcontrols, in accordance with the established risk appetite and corporate
values and consistent with internal policies and processes.

7.10.2

Such systems and controls should provide for organisation and decisionmaking in a clear and transparent manner that promotes effective
management of the insurer. Senior Management’s systems and controls
should encompass:• processes for engaging persons with appropriatecompetencies and integrity to discharge the functions under
Senior Management, which include succession planning,ongoing training and procedures for termination;• clear lines of accountability and channels of communication
between persons in Senior Management and Key Persons inControl Functions;• proper procedures for the delegation of Senior Management
functions and monitoring whether delegated functions arecarried out effectively and properly, in accordance with thesame principles that apply to delegations by the Board (seeGuidance 7.3.13 and 7.3.14);• standards of conduct and codes of ethics for the Senior
Management and other staff to promote a sound corporate
culture, and the effective implementation on an ongoing basisof standards and codes (see ICP 8 Risk Management andInternal Controls for conflicts of interest provisions);• proper channels of communications, including clear lines ofreporting, as between the individuals performing the functions

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of the Senior Management and the Board, including
provisions dealing with whistleblower protection, and theireffective implementation; and• effective communication strategies with supervisors andstakeholders that include the identification of matters thatshould be disclosed, and to whom such disclosure should be
made.
7.10.3Adequate procedures should be in place for assessing the effectivenessof Senior Management’s performance against the performance
objectives set by the Board. For this purpose, annual assessments of
their performance against set goals should be carried out at least
annually, preferably by an independent party, a control function, or the
Board itself. Any identified inadequacies or gaps should be addressed
promptly and reported to the Board.

7.10.4

Senior Management should also promote strong risk management andinternal controls through personal conduct and transparent policies.
Senior Management should communicate throughout the insurer the
responsibility of all employees in this respect. It should not interfere withthe activities that control functions carry out in the rightful exercise of
their responsibilities, including that of providing an independent view ofgovernance, risk, compliance and control related matters.

Supervisory review
7.11

The supervisor requires the insurer to demonstrate the adequacy andeffectiveness of its corporate governance framework.
7.11.1The supervisor plays an important role by requiring the Board and Senior
Management of the insurer to demonstrate that they are meeting theapplicable corporate governance requirements, consistent with thesestandards, on an ongoing basis. The onus for demonstrating, to thesatisfaction of the supervisor, that the corporate governance framework
is effective and operates as intended rests with the insurer.

7.11.2The Supervisor should assess through its supervisory review andreporting processes whether the insurer’s overall corporate governanceframework is effectively implemented and remains adequate (see ICP 9
Supervisory Review and Reporting).

7.11.3To help facilitate the supervisory review and reporting processes, thesupervisor should establish effective channels of communication with theinsurer, and have access to relevant information concerning thegovernance of the insurer. This may be obtained through periodic reports
to the supervisor and any information obtained on an ad hoc basis (seealso Standard 7.7). Communication may also be facilitated by thesupervisor having regular interaction with the Board, Senior
Management and Key Persons in Control Functions.

7.11.4The supervisor should assess the governance effectiveness of the Board
and Senior Management and determine the extent to which their actions
and behaviours contribute to good governance. This includes the extent
to which the Board and Senior Management contribute to setting andfollowing the “tone at the top”; how the corporate culture of the insurer iscommunicated and put into practice; how information flows to and from

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the Board and Senior Management; and how potential material problems
are identified and addressed throughout the insurer.
7.11.5To ascertain the ongoing effectiveness of the Board and Senior
Management, the supervisor may also consider the use of measures
such as the following, where appropriate:• ongoing mandatory training that is commensurate with theirrespective duties, roles and responsibilities of the Board andSenior Management within the insurer;• a review of the periodic self-evaluation undertaken by the
Board as referred to in Guidance 7.3.3 and 7.11.1;• meetings and/or interviews with the Board and Senior
Management, both collectively and individually as
appropriate, particularly to reinforce expectations relating totheir performance and to get a sense of how informed andproactive they are; and• attending and observing Board proceedings.

7.11.6

Where remuneration policies of an insurer contain more high risk
elements, closer supervisory scrutiny of those policy and practices may
also be warranted, including requests for additional information as
appropriate to assess whether those practices are having an adverse
impact on the ongoing viability of the insurer or commissioning an
independent assessment of the insurer’s remuneration policy andpractices.

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Risk Management and Internal Controls
The supervisor requires an insurer to have, as part of its overall corporate
governance framework, effective systems of risk management and internal
controls, including effective functions for risk management, compliance, actuarial
matters and internal audit.
8.0
Introductory Guidance
8.0.1

As part of the overall corporate governance framework and in
furtherance of the safe and sound operation of the insurer and theprotection of policyholders, the Board is ultimately responsible for
ensuring that the insurer has in place effective systems of risk
management and internal controls and functions to address the key risks
it faces and for the key legal and regulatory obligations that apply to it.
Senior Management effectively implements these systems and provides
the necessary resources and support for these functions.

8.0.2

In some jurisdictions, risk management is considered a subset of internal
controls, while other jurisdictions would see it the other way around. The
two systems are in fact closely related. Where the boundary lies between
risk management and internal controls is less important than achieving,in practice, the objectives of each.

8.0.3

The systems and functions should be adequate for the insurer’s
objectives, strategy, risk profile, and the applicable legal and regulatory
requirements. They should be adapted as the insurer’s business andinternal and external circumstances change.

8.0.4

The nature of the systems that the insurer has is dependent on manyfactors. The systems typically include:• strategies setting out the approach of the insurer for dealing
with specific areas of risk and legal and regulatory obligation;• policies defining the procedures and other requirements thatmembers of the Board and employees need to follow;• processes for the implementation of the insurer’s strategies
and policies; and• controls to ensure that such strategies, policies and processes
are in fact in place, are being observed and are attaining theirintended objectives.

8.0.5

An insurer’s functions (whether in the form of a person, unit or
department) should be properly authorised to carry out specific activities
relating to matters such as risk management, compliance, actuarial
matters and internal audit. These are generally referred to as control
functions.

Special considerations for groups
8.0.6

Group-wide risks may affect insurance legal entities within a group, whilerisks at the insurance legal entity level could also affect the group as a

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whole. To help address this, groups should have strong risk
management and compliance culture across the group and at theinsurance legal entity level. Thus, in addition to meeting group
governance requirements, the group should take into account the
obligations of its insurance legal entities to comply with local laws andregulations.
8.0.7

How a group's systems of risk management and internal controls areorganised and operate will depend on the governance approach thegroup takes, ie, a more centralised or a more decentralised approach(see Issues Paper on Approaches to Group Corporate Governance;
impact on control functions). Regardless of the governance approach, it
is important that effective systems of risk management and internal
controls exist and that risks are properly monitored and managed at theinsurance legal entity level and on a group-wide basis.

8.0.8

Additionally, a group’s governance approach will also affect the way inwhich its control functions are organised and operated. Coordination
between the insurance legal entity and group control functions isimportant to help ensure overall effective systems of risk management
and internal controls. Regardless of how the group control functions areorganised and operated, the result should provide an overall view of thegroup-wide risks and how they should be managed.

8.0.9

Supervisors should require the establishment of comprehensive andconsistent group governance and assess its effectiveness. While thegroup-wide supervisor is responsible for assessing the effectiveness ofthe group’s systems of risk management and internal controls, the other
involved supervisors undertake such assessments on a legal entity
basis. Appropriate supervisory cooperation and coordination isnecessary to have a group-wide view and to enhance the assessment of
the legal entities.

Systems for risk management and internal controls
8.1

The supervisor requires the insurer to establish, and operate within, an
effective and documented risk management system, which includes, atleast:• a risk management strategy that defines the insurer’s risk
appetite;• a risk management policy outlining how all material risks aremanaged within the risk appetite; and• the ability to respond to changes in the insurer’s risk profile in atimely manner.
Basic components of a risk management system
8.1.1

The risk management system is designed and operated at all levels of
the insurer to allow for the identification, assessment, monitoring,
mitigation and reporting of all risks of the insurer in a timely manner. It
takes into account the probability, potential impact and time horizon ofrisks.

8.1.2

An effective risk management system should:

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• take into account the insurer’s overall business strategy andbusiness activities (including any business activities whichhave been outsourced);• provide that the insurer’s risk appetite, expressed in a risk
appetite statement, be aligned with the insurer’s businessstrategy and embedded in its day-to-day activities;• provide relevant objectives, key principles and proper
allocation of responsibilities for dealing with risk across thebusiness areas and business units of the insurer;• provide explanations of the methodologies, key assumptions
and limitations of risk management; for groups this would
include the rationale as to the risk appetite for different
individual insurance legal entities within the group;• provide a documented process defining the Board approvalrequired for any deviations from the risk management strategy
or the risk appetite and for settling any major interpretation
issues that may arise;• define and categorise material risks (by type) to which theinsurer is exposed, at both insurance legal entity and grouplevel where applicable, and the levels of acceptable risk limits
for each type of these risk;• include documented policies that describe how categories ofrisks are managed and the specific obligations of employees
and the insurer in dealing with risk, including risk escalation
and risk mitigation tools;• provide suitable processes and tools (including stress testing
and, where appropriate, models) for identifying, assessing,monitoring and reporting on risks. Such processes should also
cover contingency planning;• provide for regular reviews of the risk management system(and its components) to help ensure that necessary
modifications and improvements are identified and made in atimely manner; and• appropriately address other matters related to risk
management for solvency purposes set out in ICP 16
Enterprise Risk Management for Solvency Purposes.
Scope and embedding of the risk management system
8.1.3

The risk management system should cover at least the following risks:
underwriting and reserving, asset-liability management, investments,
liquidity, concentration, operational and conduct, as well as reinsurance
and other risk mitigation techniques.

8.1.4

The risk management system should be aligned with the insurer’s risk
culture and embedded into the various business areas and units with theaim of having the appropriate risk management practices andprocedures embedded in the key operations and structures.

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CF 8.1.a

The group-wide supervisor requires the Head of the IAIG to ensure thatthe group-wide risk management system encompasses the levels of the
Head of the IAIG and legal entities within the IAIG and covers, at least,the:• diversity and geographical reach of the activities of the IAIG;• nature and degree of risks of individual legal entities andbusiness lines;• aggregation of risks from the legal entities within the IAIG thatarises at the level of the Head of the IAIG, including crossborder risks;• interconnectedness of the legal entities within the IAIG;• level of sophistication and functionality of information andreporting systems in addressing key group-wide risks; and• applicable laws and regulations of the jurisdictions where the
IAIG operates.
CF 8.1.a.1 The group-wide risk management system should:• be integrated with its organisational structure, decisionmaking processes, business operations, and risk culture;• be integrated within its legal entities; and• measure the risk exposure of the IAIG against the risk
limits on an ongoing basis in order to identify potential
concerns as early as possible.

CF 8.1.b

The group-wide supervisor requires the Head of the IAIG to reflect, inthe documentation of its group-wide risk management system, material
differences in risk management that may apply to different legal entities
within the IAIG and their associated risks.

CF 8.1.c

The group-wide supervisor requires the Head of the IAIG to ensure that
the IAIG has in place policies and processes for promoting a sound risk
culture.
CF 8.1.c.1 Policies and processes for promoting a sound risk culture should
include risk management training, address independence, and create
appropriate incentives for staff.
CF 8.1.c.2 The IAIG’s risk culture should support timely evaluation and open
communication of emerging risks that may be significant to the IAIG
and its legal entities.

Identification and Assessment
8.1.5

The risk management system should take into account all reasonably
foreseeable and relevant material risks to which the insurer is exposed,
both at the insurer and the individual business unit levels. This includes
current and emerging risks.

8.1.6

Insurers should assess material risks both qualitatively and, whereappropriate, quantitatively. Appropriate consideration should be given to

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a sufficiently wide range of outcomes, as well as to the appropriate tools
and techniques to be used. The interdependencies of risks should also
be analysed and taken into account in the assessments.
8.1.7

The insurer’s risk assessment should be documented including detailed
descriptions and explanations of the risks covered, the approaches used,
and the key judgements and assumptions made.

8.1.8

Insurers should have in place adequate processes, controls and systems
to assess the risks of new products and carry out a risk assessment
before entering into new business lines and products. Significant new orchanged activities and products that may increase an existing risk orcreate a new type of exposure should be approved by Senior
Management and/or by the Board.

Monitoring
8.1.9

The risk management system should include processes and tools formonitoring risk, such as early warnings or triggers that allow timely
consideration of, and adequate response to, material risks.

Mitigation
8.1.10

The risk management system should include strategies and tools to
mitigate against material risks. In most cases an insurer will control or
reduce the risk to an acceptable level. Another response to risk is totransfer the risk to a third party. If risks are not acceptable within the risk
appetite and it is not possible to control, limit or transfer the risk, theinsurer should cease or change the activity which creates the risk.

Reporting
8.1.11

Risks, the overall assessment of risks and the related action plans should
be reported to the Board and/or to Senior Management, as appropriate,using qualitative and quantitative indicators and effective action plans.
The insurer’s documented risk escalation process should allow forreporting on risk issues within established reporting cycles and outsideof them for matters of particular urgency.

8.1.12The Board should have appropriate ways to carry out its responsibilities
for risk oversight. The risk management policy should therefore cover thecontent, form and frequency of reporting that it expects on risk from
Senior Management and each of the control functions. Any proposed
activity that would go beyond the Board-approved risk appetite should
be subject to appropriate review and require Board approval.

Risk Management Policy
8.1.13The insurer’s risk management policy should be written in a way to help
employees understand their responsibilities regarding risk management.
It should also reflect how the risk management system relates to theinsurer’s overall corporate governance framework and its corporate
culture. Regular internal communications and training within the insurer
on the risk management policy and risk appetite may help in this regard.

8.1.14For insurance groups, a risk management policy addresses the way inwhich the group manages risks that are material at the insurance grouplevel, including risks that arise from the insurance group being part of a

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wider group. For an insurance legal entity that is part of a group, the risk
management policy of that entity should address management of risksmaterial at the entity level as well as additional risk it faces as a result ofits membership in a group, which can encompass the widest group ofwhich the insurance legal entity is a member and not only the entity’s
insurance group. Within an insurance group, the head of the group andthe legal entities should ensure appropriate coordination andconsistency between the head of the group and the legal entities whensetting the risk management policy.
Changes to the risk management system
8.1.15Both the Board and Senior Management should be attentive to the needto modify the risk management system in light of changes in the insurer’s
risk profile as well as other new internal or external events and/or
circumstances. The risk management system should include
mechanisms to incorporate new risks and new information related to risk
already identified on a regular basis. The risk management systemshould also be responsive to the changing interests and reasonable
expectations of policyholders and other stakeholders.

8.1.16

Material changes to an insurer’s risk management system should be
documented and subject to approval by the Board. The reasons for thechanges should be documented. Appropriate documentation should beavailable to internal audit, external audit and the supervisor for theirrespective assessments of the risk management system.

8.1.17

As part of its responsiveness to changes in the insurer’s risk profile, therisk management system should incorporate a feedback loop based on
appropriate information, management processes and objective
assessment. A feedback loop provides a process of assessing the effectof changes in risk leading to changes in risk management policy, risk
limits and risk mitigating actions. This may help ensure that decisions
made by the Board and Senior Management are implemented and theireffects monitored and reported in a timely and sufficiently frequent
manner.

8.1.18Within an insurance group, there should be sufficient coordination andexchange of information between the head of the insurance group andits insurance legal entities as part of their respective feedback loops toensure relevant changes in risk profiles can be taken into account.

CF 5.16
CF 5.17s

CF 8.1.d

The group-wide supervisor requires the Head of the IAIG to:• review, at least annually, the group-wide risk management
system to ensure that existing and emerging risks as well aschanges in the IAIG’s structure and/or business strategy, aretaken into account; and• identify and make the necessary
improvements in a timely manner.

CF 8.1.d.1

modifications

andThe Head of the IAIG should assess whether a change occurring in
one or more legal entities may affect the IAIG’s risk profile overall,

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because the impact on a group-wide basis may not be immediately
apparent.
CF 8.1.d.2

8.2

The group-wide risk management system should take account of allmaterial changes at a legal entity level that may have an impact on
how the IAIG measures and mitigates risk at a group level.

The supervisor requires the insurer to establish, and operate within, an
effective and documented system of internal controls.
Basic components of an internal controls system
8.2.1

The internal controls system should ensure effective and efficient
operations, adequate control of risks, prudent conduct of business,reliability of financial and non-financial information reported (bothinternally and externally), and compliance with laws, regulations,supervisory requirements and the insurer's internal rules and decisions.
It should be designed and operated to assist the Board and Senior
Management in the fulfilment of their respective responsibilities foroversight and management of the insurer. Some insurers have adesignated person or function to support the advancement, coordination
and/or management of the overall internal controls system on a moreregular basis.

8.2.2

The internal controls system should cover all units and activities of theinsurer and should be an integral part of the daily activities of an insurer.
The controls should form a coherent system, which should be regularly
assessed and improved as necessary. Each individual control 1 of an
insurer, as well as all its controls cumulatively, should be designed for
effectiveness and operate effectively.

8.2.3

An effective internal control system requires an appropriate control
structure with control activities defined at every business unit level.
Depending on the organisational structure of the insurer, business orother units should own, manage and report on risks and should be
primarily accountable for establishing and maintaining effective internal
control policies and processes. Control functions should determine andassess the appropriateness of the controls used by the business or otherunits. The internal audit function should provide independent assurance
on the quality and effectiveness of the internal controls system. 2

8.2.4

An effective internal controls system typically includes:
Segregation of duties and prevention of conflicts of interest• appropriate segregation of duties and controls to ensure suchsegregation is observed. This includes, amongst others,
having sufficient distance between those accountable for a

1 Individual controls may be preventive (applied to prevent undesirable outcomes) or detective (to uncover
undesirable activity). Individual controls may be manual (human), automated, or a combination and may be either
general or process or application specific.
2 This division of responsibilities between business, risk management and compliance and internal audit is typicallyreferred to as the three lines of defence. The business is considered as the first line of defence, the control functions(other than internal audit) as the second line of defence, and internal audit as the third line of defence. The businessis deemed to “own” the controls, and the other lines of defence are there to help ensure their application and viability.
Whatever approach is used, it is important that responsibilities be clearly allocated to promote checks and balances
and avoid conflicts of interest.

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process or policy and those who check if for such a process
or policy an appropriate control exists and is being applied. It
also includes appropriate distance between those who designa control or operate a control and those who check if such acontrol is effective in design and operation;• up-to-date policies regarding who can sign for or commit theinsurer, and for what amounts, with corresponding controls,
such as practice that key decisions should be taken at leastby two persons and the practice of double or multiple
signatures. Such policies and controls should be designed,among other things, to prevent any major transaction being
entered into without appropriate governance review or byanyone lacking the necessary authority and to ensure thatborrowing, trading, risk and other such limits are strictly
observed. Such policies should foresee a role for control
functions, for example by requiring for major matters thereview and sign-off by Risk Management or Compliance,
and/or approval by a Board level committee;
Policies and processes• appropriate controls for all key business processes andpolicies, including for major business decisions andtransactions (including intra-group transactions), critical IT
functionalities, access to critical IT infrastructure by
employees and related third parties, and important legal andregulatory obligations;• policies on training in respect of controls, particularly for
employees in positions of high trust or responsibility or
involved in high risk activities;• a centralised documented inventory of insurer-wide key
processes and policies and of the controls in place in respectof such processes and policies, that also may introduce ahierarchy among the policies;
Information and communication• appropriate controls to provide reasonable assurance over theaccuracy and completeness of the insurer’s books, records,
and accounts and over financial consolidation and reporting,including the reporting made to the insurer’s supervisors;• adequate and comprehensive internal financial, operationaland compliance data, as well as external market information
about events and conditions that are relevant to decision
making. Information should be reliable, timely, accessible, andprovided in a consistent format;• information processes that cover all significant activities of theinsurer, including contingency arrangements;• effective channels of communication to ensure that all staff
fully understand and adhere to the internal controls and their
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duties and responsibilities and that other relevant informationis reaching the appropriate personnel;• policies regarding escalation procedures;
Monitoring and review• processes for regularly checking that the totality of all controls
forms a coherent system and that this system works asintended; fits properly within the overall corporate governanceframework of the insurer; and provides an element of risk
control to complement the risk identification, risk assessment,
and risk management activities of the insurer. As part of such
review, individual controls are monitored and analysed
periodically to determine gaps and improvement opportunities
with Senior Management taking such measures as arenecessary to address these; and• periodic testing and assessments (carried out by objective
parties such as an internal or external auditor) to determine
the adequacy, completeness and effectiveness of the internal
controls system and its utility to the Board and Senior
Management for controlling the operations of the insurer.
CF 5.18d

CF 8.2.a

The group-wide supervisor requires the Head of the IAIG to ensure thatthe group-wide internal controls system at the group-wide level covers,at least, the:• diversity and geographical reach of the activities of the IAIG;• intra-group transactions;• interconnectedness of the legal entities within the IAIG; and• applicable laws and regulations of the jurisdictions where the
IAIG operates.

CF 8.2.b

The group-wide supervisor requires the Head of the IAIG to ensure annual
testing and assessments carried out by an independent external orinternal party to assess the coherence, completeness and effectivenessof the internal controls system within the IAIG and its utility to the IAIG
Board and Senior Management.

Responsibilities of the Board
8.2.5

The Board should have an overall understanding of the control
environment across the various entities and businesses, and require
Senior Management to ensure that for each key business process andpolicy, and related risks and obligations, there is an appropriate control.

8.2.6

In addition, the Board should ensure there is clear allocation of
responsibilities within the insurer, with appropriate segregation, including
in respect of the design, documentation, operation, monitoring andtesting of internal controls. Responsibilities should be properly
documented, such as in charters, authority tables, governance manuals
or other similar governance documents.

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8.2.7The Board should determine which function or functions report to it or to
any Board Committees in respect of the internal controls system.

Reporting
8.2.8

Reporting on the internal controls system should cover matters such as:• the strategy in respect of internal controls (such as
responsibilities, target levels of compliance to achieve,
validations and implementation of remediation plans);• the stage of development of the internal controls system,
including its scope, testing activity, and the performanceagainst annual or periodic internal controls system goals
being pursued;• an assessment of how the various business units are
performing against internal control standards and goals;• control deficiencies, weaknesses and failures that have arisenor that have been identified (including any identified by theinternal or external auditors or the supervisor) and the
responses thereto (in each case to the extent not alreadycovered in other reporting made to the Board); and• controls at the appropriate levels so as to be effective,
including at the process or transactional level.

Control functions (general)
8.3

The supervisor requires the insurer to have effective control functions with
the necessary authority, independence and resources.
8.3.1

CF 5.19
CF 5.20

CF 8.3.a

As part of the effective systems of risk management and internal
controls, insurers have control functions, including for risk management,compliance, actuarial matters and internal audit. Control functions add tothe governance checks and balances of the insurer and provide thenecessary assurance to the Board in the fulfilment of its oversight duties.
Fd

The group-wide supervisor requires the Head of the IAIG to ensure that:• the tasks and responsibilities of the group-wide control
functions, whether located at the level of the Head of the IAIG
or within another legal entity of the IAIG, are clearly defined;
and• these group-wide control functions do not duplicate, limit or
restrict the tasks and responsibilities of control functions at
the insurance legal entity level.

CF 8.3.b

The group-wide supervisor requires the Head of the IAIG to ensure thatthe group-wide control functions:• coordinate with the control functions at the insurance legal
entity level; and• ensure effective group-wide management reporting.

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8.3.2The existence of control functions does not relieve the Board or Senior
Management of their respective governance and related responsibilities.

8.3.3

The control functions should be subject to periodic review either by theinternal audit function (for control functions other than internal audit) oran objective external reviewer.

Appointment and dismissal of heads of control functions
8.3.4

The appointment, performance assessment, remuneration, disciplineand dismissal of the head of control functions should be done with theapproval of, or after consultation with, the Board or the relevant Board
committee. For the head of the internal audit function, the appointment,
performance assessment, remuneration, discipline and dismissal should
be done by the Board, its Chair or the Audit Committee.

8.3.5

The insurer should notify the supervisor of the reasons for dismissals ofheads of control functions.

Authority and independence of control functions
8.3.6

The Board should approve the authority and responsibilities of eachcontrol function to allow each control function to have the authority andindependence necessary to be effective.

8.3.7

The authority and responsibilities of each control function should be set
out in writing and made part of, or referred to in, the governancedocumentation of the insurer. The head of each control function should
periodically review such document and submit suggestions for any
changes to Senior Management and the Board for approval, whereappropriate.

8.3.8

A control function should be led by a person of appropriate level ofauthority. The head of the control function should not have operational
business line responsibilities.

8.3.9

Insurers should organise each control function and its associatedreporting lines into the insurer’s organisational structure in a manner thatenables such function to operate and carry out their roles effectively. This
includes direct access to the Board or the relevant Board committee.

8.3.10Notwithstanding the possibility for insurers to combine certain control
functions, a control function should be sufficiently independent from
Senior Management and from other functions to allow its staff to:• serve as a component of the insurer’s checks and balances;• provide an objective perspective on strategies, issues, andpotential violations related to their areas of responsibility; and• implement or oversee the implementation of corrective
measures where necessary.

8.3.11Each control function should avoid conflicts of interest. Where any
conflicts remain and cannot be resolved with Senior Management, theseshould be brought to the attention of the Board for resolution.

8.3.12Each control function should have the authority to communicate on its
own initiative with any employee and to have unrestricted access to
information in any business unit that it needs to carry out its

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responsibilities. The control functions should have the right to conduct
investigations of possible breaches and to request assistance from
specialists within the insurer, eg legal and internal audit, or engage
external
specialists
toperformthetask.
The control functions should be free to report to Senior Management or
the Board on any irregularities or possible breaches disclosed by its
investigations, without fear of retaliation or disfavour from management.
Resources and qualifications of the control functions
8.3.13

Each control function should have the resources necessary to fulfil its
responsibilities and achieve the specific goals in its areas of
responsibility. This includes qualified staff and appropriate
IT/management information processes. The function should beorganised in an appropriate manner to achieve its goals.

8.3.14The head of each control function should review regularly the adequacyof the function's resources and request adjustments from Senior
Management as necessary. Where the head of a control function has amajor difference of opinion with Senior Management on the resources
needed, the head of the control function should bring the issue to theBoard or relevant Board Committee for resolution.

8.3.15

Persons who perform control functions should be suitable for their roleand meet any applicable professional qualifications and standards.
Higher expectations apply to the head of each control function. Persons
who perform control functions should receive regular training relevant totheir role to remain up to date on the developments and techniques
related to their areas of responsibility.

Board access and reporting by the control functions; Board assessment of control
functions8.3.16The Board should grant the head of each control function the authority
and responsibility to report periodically to it or one of its committees. The
Board should determine the frequency and depth of such reporting so as
to permit timely and meaningful communication and discussion ofmaterial matters. The reporting should include, among other things:• information as to the function’s strategy and longer term goals
and the progress in achieving these;• annual or other periodic operational plans describing shorter
term goals and the progress in achieving these; and• resources (such as personnel, budget, etc.), including ananalysis on the adequacy of these resources.

8.3.17

CF 5.21
CF 5.22

In addition to periodic reporting, the head of each control function shouldhave the opportunity to communicate directly and to meet periodically(without the presence of management) with the Chair of any relevant
Board committee (eg Audit or Risk Committee) and/or with the Chair of
the full Board. The Board should periodically assess the performance ofeach control function. This may be done by the full Board, by the Chairof the Board, by the relevant Board committee or by the Chair of therelevant Board committee.
s

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CF 8.3.c

The group-wide supervisor requires the IAIG Board to ensure that thegroup-wide control functions:• are not combined, unless exceptional circumstances apply;• are subject to periodic review either by the group-wide internal
audit function (for control functions other than internal audit)
or an independent external party;• have unrestricted access and periodically report to the IAIG
Board or one of its committees; and• have access to people and information, on a group-wide orlegal entity level, to carry out their responsibilities.

CF 8.3.c.1

The group-wide supervisor should assess on a case-by-case basis
whether the exceptional circumstances justify a combination of groupwide control functions on a time-limited basis.

CF 8.3.c.2

When assessing whether to allow for a combination of group-wide
control functions, the group-wide supervisor should consider at least
whether:• the combination would give rise to potential conflicts ofinterest and how they could be resolved – either for
affected individuals and/or the combined group-wide
control functions (for example, where one group-wide
control function has responsibilities for reviewing another);• the individuals in charge of combined group-wide control
functions would have the necessary availability or
resources to perform efficiently the tasks related to both
functions; and• the combined group-wide control functions would
undermine the ability of either function to fulfil its
responsibilities in assisting the IAIG Board and Senior
Management in maintaining adequate oversight acrossthe IAIG. This risk is likely to be greater where control
functions across different lines of defence are combined.

Risk management function
8.4

The supervisor requires the insurer to have an effective risk management
function capable of assisting the insurer to• identify, assess, monitor, mitigate and report on its key risks ina timely way; and• promote and sustain a sound risk culture.
8.4.1

A robust risk management function that is well positioned, resourced andproperly authorised and staffed is an essential element of an effective
risk management system. Within some insurers, and particularly at larger
or more complex ones, the risk management function is typically led bya Chief Risk Officer.

Access and reporting to the Board by the risk management function
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8.4.2

The risk management function should have access and provide written
reports to the Board as required by the Board, typically on matters suchas:
• an assessment of risk positions and risk exposures and steps
being taken to manage them;• an assessment of changes in the insurer’s risk profile relative
to risk appetite;• where appropriate, an assessment of pre-defined risk limits;• where appropriate, risk management issues resulting fromstrategic affairs such as corporate strategy, mergers andacquisitions and major projects and investments;• an assessment of risk events and the identification of
appropriate remedial actions.

8.4.3

The head of the risk management function should have the authority andobligation to inform the Board promptly of any circumstance that may
have a material effect on the risk management system of the insurer.

Main activities of the risk management function
8.4.4

The risk management function should establish, implement and maintainappropriate mechanisms and activities including to:• assist the Board and Senior Management in carrying out theirrespective responsibilities, including by providing specialist
analyses and performing risk reviews;• identify the individual and aggregated risks (actual, emerging
and potential) the insurer faces;• assess, aggregate, monitor and help manage and otherwise
address identified risks effectively; this includes assessing theinsurer’s capacity to absorb risk with due regard to the nature,probability, duration, correlation and potential severity of risks;• gain and maintain an aggregated view of the risk profile of theinsurer both at a legal entity and/or group-wide level;• establish a forward-looking assessment of the risk profile;• evaluate the internal and external risk environment on an
ongoing basis in order to identify and assess potential risks as
early as possible. This may include looking at risks fromdifferent perspectives, such as by territory or by line ofbusiness;• consider risks arising from remuneration arrangements andincentive structures;• conduct regular stress testing and scenario analyses as
defined in ICP 16 (Enterprise Risk Management for Solvency
Purposes);• regularly provide written reports to Senior Management, Key
Persons in Control Functions and the Board on the insurer's

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risk profile and details on the risk exposures facing the insurer
and related mitigation actions as appropriate;• document and report material changes affecting the insurer’s
risk management system to the Board to help ensure that thesystem is maintained and improved; and• conduct regular self-assessments and implement or monitor
the implementation of any needed improvements.
CF 5.23
CF 5.24

CF 8.4.aJs

The group-wide supervisor requires the Head of the IAIG to ensure thatthe group-wide risk management function, at least:• coordinates and monitors consistent and effective
implementation of risk management mechanisms andactivities at the group-wide level and at the legal entity level;• sets out expectations relating to the group-wide
responsibilities and reporting of the risk management functionof each legal entity within the IAIG, as applicable;• sets policies and processes for effective interaction between
the risk management functions of the Head of the IAIG and of
the legal entities within the IAIG;• assesses the group-wide risk management strategy, which isapproved by the IAIG Board, and ensures that this risk
management strategy, including supporting processes, isimplemented at the group-wide level;• annually plans and conducts an assessment of risks at thegroup-wide level, including those that arise from the legal
entity and material business line level; and• provides at least quarterly risk management reports to the IAIG
Board or one of its committees.

CF 8.4.b

The group-wide supervisor requires the group-wide risk management
function to be independent from risk taking activities.

Compliance function
8.5

The supervisor requires the insurer to have an effective compliancefunction capable of assisting the insurer to i) meet its legal, regulatory andsupervisory obligations and ii) promote and sustain a compliance culture,including through the monitoring of related internal policies.
8.5.1

The compliance function has a broader role than merely monitoring
compliance with laws, regulations and supervisory requirements;
monitoring compliance with internal policies and promoting andsustaining a compliance culture within the insurer are equally important
aspects of this control function.

8.5.2

Compliance starts at the top. The Board is ultimately responsible forestablishing standards for honesty and integrity throughout the insurerand for creating an effective corporate culture that emphasises them.
This should include a code of conduct or other appropriate mechanism
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laws, regulations, supervisory requirements and internal policies, andconduct its business ethically and responsibly.
8.5.3

As part of this commitment, the insurer has in place a robust and well
positioned, resourced and properly authorised and staffed compliancefunction. Within some insurers, particularly larger or more complex ones,
such a function is typically led by a Chief Compliance Officer.

Board access and reporting of the compliance function
8.5.4

The compliance function should have access and provide written reports
to Senior Management, Key Persons in Control Functions and the Boardon matters such as:• an assessment of the key compliance risks the insurer faces
and the steps being taken to address them;• an assessment of how the various parts of the insurer (egdivisions, major business units, product areas) are performing
against compliance standards and goals;• any compliance issues involving management or persons inpositions of major responsibility within the insurer, and thestatus of any associated investigations or other actions being
taken;• material compliance violations or concerns involving any otherperson or unit of the insurer and the status of any associatedinvestigations or other actions being taken; and• material fines or other disciplinary actions taken by any
regulator or supervisor in respect of the insurer or any
employee.

8.5.5

The head of the compliance function should have the authority andobligation to inform promptly the Chair of the Board directly in the eventof any major non-compliance by a member of management or a material
non-compliance by the insurer with an external obligation if in either casehe or she believes that Senior Management or other persons in authority
at the insurer are not taking the necessary corrective actions and a delay
would be detrimental to the insurer or its policyholders.

Main activities of the compliance function
8.5.6

The compliance function should establish, implement and maintainappropriate mechanisms and activities including to:• promote and sustain an ethical corporate culture that values
responsible conduct and compliance with internal andexternal obligations; this includes communicating and holding
training on an appropriate code of conduct or similar thatincorporates the corporate values of the insurer, aims topromote a high level of professional conduct and sets out the
key conduct expectations of employees;• identify, assess, report on and address key legal andregulatory obligations, including obligations to the insurer’s
supervisor, and the risks associated therewith; such analyses
should use risk and other appropriate methodologies;

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• ensure the insurer monitors and has appropriate policies,
processes and controls in respect of key areas of legal,
regulatory and ethical obligation;• hold regular training on key legal and regulatory obligations
particularly for employees in positions of high responsibility or
who are involved in high risk activities;• facilitate the confidential reporting by employees of concerns,
shortcomings or potential or actual violations in respect of
insurer internal policies, legal or regulatory obligations, or
ethical considerations; this includes ensuring there areappropriate means for such reporting;• address compliance shortcomings and violations, including
ensuring that adequate disciplinary actions are taken and anynecessary reporting to the supervisor or other authorities ismade; and• conduct regular self-assessments of the compliance function
and the compliance processes and implement or monitor
needed improvements.
CF 5.25
CF 5.26

CF 8.5.aF
f

The group-wide supervisor requires the Head of the IAIG to ensure thatthe group-wide compliance function at least:• coordinates and monitors consistent and effective
implementation of compliance mechanisms and activities at
the group-wide level and at the legal entity level;• sets appropriate policies and processes regarding the legal
and regulatory obligations of the IAIG and its legal entities;• assesses the material legal and regulatory obligations andcompliance risks of the IAIG, and the steps being taken to fulfil
or address them, at least annually and as required by the
Board;• supports the IAIG Board in fostering an effective corporate
culture throughout the IAIG;• assesses how the IAIG itself is, and the legal entities within the
IAIG are, performing against group-wide compliancestandards and goals; and• provides at least quarterly written reports on its activities tothe IAIG’s Board or one of its committees.

Actuarial function
8.6

The supervisor requires the insurer to have an effective actuarial function
capable of evaluating and providing advice regarding, at least, technicalprovisions, premium and pricing activities, capital adequacy, reinsurance
and compliance with related statutory and regulatory requirements.

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8.6.1A robust actuarial function that is well positioned, resourced and properly
authorised and staffed is essential for the proper operation of the insurer.
It plays a key role as part of the insurer’s overall systems of risk
management and internal controls.

Board access and reporting of the actuarial function
8.6.2

The actuarial function should have access to and periodically report to
the Board on matters such as:• any circumstance that may have a material effect on theinsurer from an actuarial perspective;• the adequacy of the technical provisions and other liabilities;• distribution of profits to participating policyholders;• stress testing and capital adequacy assessment with regard
to the prospective solvency position of the insurer; and• any other matters as determined by the Board.

8.6.3

Written reports on actuarial evaluations should be made to the Board,
Senior Management, or other Key Persons in Control Functions or thesupervisor as necessary or appropriate or as required by legislation.

Main activities of the actuarial function
8.6.4

The actuarial function evaluates and provides advice to the insurer onmatters including:• the insurer’s insurance liabilities, including policy provisions
and aggregate claim liabilities, as well as determination ofreserves for financial risks;• asset liability management with regards to the adequacy andthe sufficiency of assets and future revenues to cover the
insurer’s obligations to policyholders and capitalrequirements, as well as other obligations or activities;• the insurer’s investment policies and the valuation of assets;• an insurer’s solvency position, including a calculation ofminimum capital required for regulatory purposes and liability
and loss provisions;• an insurer’s prospective solvency position by conducting
capital adequacy assessments and stress tests under various
scenarios, and measuring their relative impact on assets,
liabilities, and actual and future capital levels;• risk assessment and management policies and controls
relevant to actuarial matters or the financial condition of theinsurer;• the fair treatment of policyholders with regard to distribution of
profits awarded to participating policyholders;• the adequacy and soundness of underwriting policies;

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• the development, pricing and assessment of the adequacy ofreinsurance arrangements;• product development and design, including the terms andconditions of insurance contracts and pricing, along withestimation of the capital required to underwrite the product;• the sufficiency, accuracy and quality of data, the methods andthe assumptions used in the calculation of technicalprovisions;• the research, development, validation and use of internal
models for internal actuarial or financial projections, or forsolvency purposes as in the ORSA; and• any other actuarial or financial matters determined by the
Board.

CF 5.27
CF 5.28

CF 8.6.a8.6.5

Where required, the actuarial function may also provide to the supervisor
certifications on the adequacy, reasonableness and/or fairness ofpremiums (or the methodology to determine the same) and certifications
or statements of actuarial opinion.

8.6.6

The supervisor should clearly define when such certifications orstatements of actuarial opinion need to be submitted to the supervisor.
When these are required to be submitted, the supervisor should also
clearly define both the qualifications of those permitted to certify or sign
such statements and the minimum contents of such an opinion or
certification.
Xds

The group-wide supervisor requires the Head of the IAIG to ensure thatthe group-wide actuarial function performs an overview of the group-wide
actuarial activities, functions and risks emanating from insurance legal
entities within the IAIG. This overview includes, at least:• risk assessment and management policies and controls
relevant to govern the activities of the group-wide actuarial
function or financial condition;• actuarial concerns related to any insurance legal entity within
the IAIG, or the IAIG as a whole, as applicable;• the IAIG’s solvency position, based on calculations of groupwide regulatory capital requirements and technical provisions;• the IAIG’s prospective solvency position, based on capital
adequacy assessments and stress tests, under various
scenarios, and their relative impact on assets, liabilities, andactual and future capital levels;• the adequacy of the IAIG’s reinsurance arrangements; and• actuarial-related risk modelling in the IAIG’s Own Risk andSolvency Assessment (ORSA) and use of internal models.

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CF 8.6.b

The group-wide supervisor requires the Head of the IAIG to ensure thatthe group-wide actuarial function:• works with the actuarial functions at the insurance legal entity
level to review actuarial information; and• provides independent advice and at least annually reports to
the IAIG Board or one of its committees on the insurance
activities and risks posed to the IAIG.

Appointed actuary
8.6.7

Some jurisdictions may require an “appointed actuary”, “statutory
actuary”, or “responsible actuary” (referred to here as an “Appointed
Actuary”) to perform certain functions, such as determining or providing
advice on an insurer’s compliance with regulatory requirements forcertifications or statements of actuarial opinion. The tasks andresponsibilities of the Appointed Actuary should be clearly defined andshould not limit or restrict the tasks and responsibilities of otherindividuals performing actuarial functions.

8.6.8

The insurer should be required to report the Appointed Actuary’s
appointment to the supervisor.

8.6.9

The Appointed Actuary should not hold positions within or outside of theinsurer that may create conflicts of interest or compromise his or her
independence. If the Appointed Actuary is not an employee of theinsurer, the Board should determine whether the external actuary has
any potential conflicts of interest, such as if his or her firm also provides
auditing or other services to the insurer. If any such conflicts exist, theBoard should subject them to appropriate controls or choose anotherAppointed Actuary.

8.6.10If an Appointed Actuary is replaced, the insurer should notify thesupervisor and give the reasons for the replacement. In somejurisdictions, such a notification includes statements from both theinsurer and the former Appointed Actuary as to whether there were any
disagreements with the former Appointed Actuary over the content of theactuary’s opinion on matters of risk management, required disclosures,
scopes, procedures, or data quality, and whether or not any suchdisagreements were resolved to the former Appointed Actuary’s
satisfaction.

8.6.11

In some jurisdictions, the Appointed Actuary also has the obligation to
notify the supervisor if he or she resigns for reasons connected with hisor her duties as an Appointed Actuary or with the conduct of the insurer’sbusiness and give the reasons for resigning. The Appointed Actuary
should also notify the supervisor and provide an explanation if his or her
appointment is revoked by the insurer.

8.6.12The supervisor should have the authority to require an insurer to replace
an Appointed Actuary when such person fails to adequately perform
required functions or duties, is subject to conflicts of interest or no longer
meets the jurisdiction’s eligibility requirements.

Internal audit function
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8.7

The supervisor requires the insurer to have an effective internal audit
function capable of providing the Board with independent assurance inrespect of the quality and effectiveness of the insurer’s corporate
governance framework.
8.7.1

One of the oversight roles of the Board is to ensure that the information
provided by the internal audit function allows the Board to effectively
validate the effectiveness of the internal control system.

8.7.2

The internal audit function should provide independent assurance to theBoard through general and specific audits, reviews, testing and othertechniques in respect of matters such as:• the overall means by which the insurer preserves its assets
and those of policyholders, and seeks to prevent fraud,misappropriation or misapplication of such assets;• the reliability, integrity and completeness of the accounting,financial and risk reporting information, as well as the capacity
and adaptability of IT architecture to provide that information
in a timely manner to the Board and Senior Management;• the design and operational effectiveness of the insurer’s
individual controls in respect of the above matters, as well asof the totality of such controls (the internal controls system);• other matters as may be requested by the Board, Senior
Management, the supervisor or the external auditor; and• other matters which the internal audit function determinesshould be reviewed to fulfil its mission, in accordance with its
charter, terms of reference or other documents setting out its
authority and responsibilities.

Authority and independence of the internal audit function
8.7.3

To help ensure objectivity, the internal audit function is independent frommanagement and other control functions and is not involved
operationally in the business. The internal audit function’s ultimate
responsibility is to the Board, not management. To help ensure
independence and objectivity, the internal audit function should be freefrom conditions that threaten its ability to carry out its responsibilities inan unbiased manner. In carrying out its tasks, the internal audit function
forms its judgments independently. If necessary, the internal audit
function should consider the need to supplement its own assessmentwith third party expertise in order to make objective and independent
decisions.

8.7.4

The Board should grant suitable authority to the internal audit function,
including the authority to:• access and review any records or information of the insurer
which the internal audit function deems necessary to carry out
an audit or other review;• undertake on the internal audit function’s initiative a review of
any area or any function consistent with its mission;

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• require an appropriate management response to an internal
audit report, including the development of a suitable
remediation, mitigation or other follow-up plan as needed; and• decline doing an audit or review, or taking on any other
responsibilities requested by management, if the internal audit
function believes this is inconsistent with its mission or withthe strategy and audit plan approved by the Board. In any
such case, the internal audit function should inform the Boardor the Audit Committee and seek their guidance.
Board access and reporting of the internal audit function
8.7.5

The head of the internal audit function reports to the Board (or to any
member who is not part of the management) or to the Audit Committee
if one exists (or its Chair). In its reporting, the internal audit function
should cover matters such as:• the function’s annual or other periodic audit plan, detailing the
proposed areas of audit focus, and any significant
modifications to the audit plan;• any factors that may be adversely affecting the internal audit
function’s independence, objectivity or effectiveness;• material findings from audits or reviews conducted; and• the extent of management's compliance with agreed uponcorrective or risk mitigating measures in response to identified
control deficiencies, weaknesses or failures, complianceviolations or other lapses.

8.7.6

In addition to periodic reporting, the head of internal audit should be
authorised to communicate directly, and meet periodically, with the headof the Audit Committee or the Chair of the Board without management
present.

Main activities of the internal audit function
8.7.7

The audit function should carry out such activities as are needed to fulfil
its responsibilities. These activities include:• establishing, implementing and maintaining a risk-based audit
plan to examine and evaluate alignment of the insurer's
processes with their risk culture;• monitoring and evaluating the adequacy and effectiveness of
the insurer’s policies and processes and the documentationand controls in respect of these, on a legal entity and groupwide basis and on an individual subsidiary, business unit,
business area, department or other organisational unit basis;• reviewing levels of compliance by employees, organisational
units and third parties with laws, regulations and supervisory
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• evaluating the reliability, integrity and effectiveness ofmanagement information processes and the means used to
identify, measure, classify and report such information;• monitoring that identified risks are effectively addressed by
the internal control system;• evaluating the means of safeguarding insurer andpolicyholder assets and, as appropriate, verifying theexistence of such assets and the required level of segregationin respect of insurer and policyholder assets;• monitoring and evaluating the effectiveness of the insurer's
control functions, particularly the risk management andcompliance function; and• coordinating with the external auditors and, to the extent
requested by the Board and consistent with applicable law,evaluating the quality of performance of the external auditors.
8.7.8

In carrying out the above tasks, the internal audit function should ensure
all material areas of risk and obligation of the insurer are subject toappropriate audit or review over a reasonable period of time. Amongthese areas are those dealing with:• market, underwriting, credit, liquidity, operational, conduct ofbusiness, as well as reputational issues derived fromexposure to those risks;• accounting and financial policies and whether the associatedrecords are complete and accurate;• extent of compliance by the insurer with applicable laws,
regulations and supervisory requirements from all relevant
jurisdictions;• intra-group transactions, including intra-group risk transfer
and internal pricing;• adherence by the insurer to the insurer’s remuneration policy;• the reliability and timeliness of escalation and reporting
processes, including whether there are confidential means for
employees to report concerns or violations and whether theseare properly communicated, offer the reporting employee
protection from retaliation, and result in appropriate follow up;
and• the extent to which any non-compliance with internal policies
or external legal or regulatory obligations is documented andappropriate corrective or disciplinary measures are taken
including in respect of individual employees involved.

8.7.9

CF 5.29
CF 5.30

Subject to applicable laws on record retention, the internal audit function
should keep records of all areas and issues reviewed so as to provide
evidence of these activities over time.
Hjas

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CF 8.7.a

The group-wide supervisor requires the IAIG Board to ensure that thegroup-wide internal audit function provides independent assessment andassurance to the IAIG Board regarding, at least, the:• group-wide policies, processes, and controls;• overall means by which the IAIG preserves its assets, andthose of policyholders, and seeks to prevent fraud,misappropriation or misapplication of such assets;• reliability, integrity and completeness of the accounting,financial, management, information technology systems andrisk reporting information;• capacity and adaptability of information technology systems
to provide information in an accurate and timely manner to the
IAIG Board and Senior Management; and• design and operational effectiveness of the group-wide risk
management and internal controls systems, both individuallyand overall.

CF 8.7.a.1

The group-wide internal audit function coordinates with the internal
audit functions and external auditors of the legal entities within the
IAIG when providing assessment and assurance to the IAIG Board.

Outsourcing of material activities or functions
8.8

The supervisor requires the insurer to retain at least the same degree ofoversight of, and accountability for, any outsourced material activity orfunction (such as a control function) as applies to non-outsourced activities
or functions.
8.8.1

Outsourcing should not materially increase risk to the insurer ormaterially adversely affect the insurer’s ability to manage its risks andmeet its legal and regulatory obligations.

8.8.2

The Board and Senior Management remain responsible in respect offunctions or activities that are outsourced.

8.8.3

The supervisor should require the Board to have review and approval
processes for outsourcing of any material activity or function and toverify, before approving, that there was an appropriate assessment of
the risks, as well as an assessment of the ability of the insurer’s risk
management and internal controls to manage them effectively in respectof business continuity. The assessment should take into account to what
extent the insurer’s risk profile and business continuity could be affectedby the outsourcing arrangement.

8.8.4

The supervisor should require insurers which outsource any material
activity or function to have in place an appropriate policy for this purpose,setting out the internal review and approvals required and providing
guidance on the contractual and other risk issues to consider. This
includes considering limits on the overall level of outsourced activities at
the insurer and on the number of activities that can be outsourced to thesame service provider. Because of the particularly important role that

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control activities and control functions play in an insurer’s corporate
governance framework, the supervisor should consider issuing
additional requirements for their outsourcing or dedicating more
supervisory attention to any such outsourcing.
8.8.5

Outsourcing relationships should be governed by written contracts thatclearly describe all material aspects of the outsourcing arrangement,
including the rights, responsibilities and expectations of all parties. Whenentering into or varying an outsourcing arrangement, the Board andSenior Management should consider, among other things:• how the insurer’s risk profile and business continuity will beaffected by the outsourcing;• the service provider’s governance, risk management andinternal controls and its ability to comply with applicable laws
and regulations;• the service providers’ service capability and financial viability;and• succession issues to ensure a smooth transition when endingor varying an outsourcing arrangement.

CF 5.31
CF 5.32

CF 8.8.a

8.8.6

In choosing an outsourcing provider, the Board or Senior Management
should be required to satisfy themselves as to the expertise, knowledge
and skills of such provider.

8.8.7

Outsourcing arrangements should be subject to periodic reviews.
Periodic reports should be made to management and the Board.
OSThe group-wide supervisor requires the Head of the IAIG to have:• a policy which takes into account the potential impact on the
IAIG of outsourcing of any material group-wide activity orfunction, sets out the internal review and approvals required,and provides guidance on the contractual and other risk
issues to consider; and• written contracts that describe all material aspects of theoutsourcing
arrangement,
includingtherights,responsibilities and expectations of all parties.

CF 8.8.bWhen choosing a service provider (either internal or external) for amaterial group-wide activity or function that is to be outsourced, thegroup-wide supervisor requires the Head of the IAIG to:• assess the potential service provider’s ability and capacity todeliver the outsourced activities or functions;• perform due diligence on the service provider with respect toexplicit or potential conflicts of interest that would jeopardise
the fulfilment of the needs of the IAIG; and• ensure that the service provider has the necessary resources
to perform the outsourced activities or functions in a properand reliable way, as well as adequate contingency plans in

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place to deal with emergency situations or businessdisruptions.
CF 8.8.b.1

Activities or functions may be outsourced to an internal service
provider (ie a legal entity which is part of the IAIG) or an external
service provider. In the case of an internal service provider, theassessment and due diligence process may be different from the caseof an external service provider. For example, if the internal service
provider has already been assessed recently, some aspects of theassessment may not need to be repeated. Even though theassessment process used may vary between an internal or external
service provider, it should be equally robust.

CF 8.8.c

The group-wide supervisor requires the Head of the IAIG to ensure that
outsourcing (either internal or external) of a group-wide activity orfunction does not impede effective supervision of the Head of the IAIG.

CF 8.8.d

The group-wide supervisor requires the Head of the IAIG to carry out aperiodic review of the cumulative risks of outsourced activities andfunctions and address identified risks.

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Supervisory Review and Reporting
The supervisor uses off-site monitoring and on-site inspections to: examine thebusiness of each insurer; evaluate its financial condition, conduct of business,
corporate governance framework and overall risk profile; and assess its
compliance with relevant legislation and supervisory requirements. The
supervisor obtains the necessary information to conduct effective supervision of
insurers and evaluate the insurance market.
9.0
Introductory Guidance
9.0.1

This ICP focuses on the general processes and procedures supervisors
should have in place with respect to supervisory review and reporting.
For the purpose of this ICP, off-site monitoring and on-site inspections
are collectively referred to as “supervisory review”. Aspects of whatsupervisors may require or assess as part of supervisory review andreporting on specific areas (such as solvency, governance, conduct ofbusiness) are dealt with in other ICPs with respect to those ICPs’ specificareas of focus.

9.0.2

Supervision is a dynamic process that includes:• developing and implementing a framework for supervisory
review and reporting;• developing and executing supervisory plans for insurers;• analysis of reported and other relevant information;• feedback and dialogue between the supervisor and insurers;• intervention, including any preventive/corrective measures orsanctions, where necessary;• follow-up (including updating the supervisory framework
and/or adjusting the frequency and intensity of assessment
under supervisory plans); and• cooperation and coordination with other relevant supervisors
and authorities where necessary.

CF 9
CF 9.0f

CF 9.0.a

F

The group-wide supervisor engages with the Head of the IAIG and, incooperation with other involved supervisors, carries out a supervisory
review to assess the IAIG’s compliance with relevant legislation andsupervisory requirements applicable at the level of the Head of the IAIG.

CF 9.0.a.1

This supervisory review may be conducted within the supervisory
college (see ComFrame material under ICP 25 Supervisory
Cooperation and Coordination).

CF 9.0.a.2

Cooperation with other involved supervisors includes them providing
relevant information concerning the insurance legal entities within the
IAIG that they supervise. It is the responsibility of the group-wide
supervisor to assess the IAIG’s compliance with the relevant

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legislation and supervisory requirements applicable at the level of the
Head of the IAIG.
Framework for supervisory review and reporting
9.1

The supervisor has a documented framework which outlines its approachfor supervisory review and reporting. The supervisor reviews periodicallythat this framework remains effective and adequate.
9.1.1

While the framework should encompass all insurers within a jurisdiction,
it should be sufficiently flexible with varying supervisory review andreporting requirements that allow for taking a risk-based approach. For
example, the supervisory processes and activities which are appropriate
for a complex, internationally active insurer may be different than those
for a small, local insurer.

9.1.2

The supervisor should have documented procedures and/or guidelines
for consistent and regular supervisory review and reporting at an
appropriate level of depth.

9.1.3

The supervisor should be able to process data in a timely and effective
way and have processes and procedures to collect and store reported
data securely in an electronic format. The framework should have thenecessary protections for confidential information in the possession of
the supervisor and for the sharing of information (see ICP 2 Supervisorand ICP 3 Information Sharing and Confidentiality Requirements).

9.1.4

The framework should enable the supervisor to coordinate on-site
inspection and off-site monitoring activities. The supervisor should
document the results of these activities in such a way that they areaccessible and comprehensible to all involved staff.

9.1.5

The supervisor should establish both qualitative and quantitative
methods for assessing insurers, in a consistent manner and on an
ongoing basis. The supervisor should develop monitoring tools to identify
potential risks within or affecting the insurer or its customers in a timely
manner.

9.1.6

The framework should enable the supervisor to evaluate the insurer’sbusiness, financial condition, conduct of business and corporate
governance framework to determine the insurer’s overall risk profile. In
order to achieve this objective, the supervisor should have an
understanding of at least the insurer’s:• current and prospective solvency, including assets andliabilities and off-balance sheet commitments;• capital resources management;• technical operations (eg actuarial methods, underwriting
policy, reinsurance policy);• treatment of customers and whether any activities being
engaged in are not fair, lawful or proper;• corporate culture, business objectives and strategies andbusiness models;• the systems of risk management and internal controls;

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• organisational structure; and• compliance with supervisory requirements.
9.1.7

The supervisor should assess the insurer’s enterprise risk management
framework for the identification and quantification of risks, and evaluate
whether business activities and/or internal practices/processes reflect
the insurer’s risk assessment. The supervisor should compare the risk
profile of the insurer with its risk-carrying capacity and seek to detectissues that may adversely affect its capacity to meet obligations towards
policyholders. The framework should enable the supervisor to analysetrends and compare risk assessments including against any stress test
outcomes.

9.1.8

The framework should include assessments of the risks to which insurers
are exposed and the risks which insurers may pose to policyholders, theinsurance sector and financial stability. These assessments should
include risks which may lead to an insurer’s distress or disorderly failure
or which may be transmitted through collective activities or exposures ofa number of insurers and that may have a serious negative impact onfinancial stability (see ICP 24 Macroprudential Supervision).

9.1.9

The framework should include sufficiently comprehensive and regularcommunication between the supervisor and insurers. This
communication should involve senior level representatives as well as
specialised areas within both the supervisor and insurers, and for
insurance groups, may include contact with non-regulated and parent
entities. Additionally, there should be appropriate communication
channels between the supervisor and the external auditors for theexchange of information relevant to carrying out their respective statutory
responsibilities.

9.1.10The framework should promote pro-active and early intervention by thesupervisor, in order to enable the insurer to take appropriate action to
mitigate risks and/or minimise current or future problems.

Review of the Framework
9.1.11The supervisor’s review of its framework should pay due attention to theevolving risks which may be posed by insurers and to risks to which
insurers may be exposed.

9.1.12

As part of the framework review, the supervisor should confer regularlyinternally as well as externally with other relevant authorities andstakeholders so that all relevant information is being appropriately
assessed and analysed, and to facilitate the identification of potential
new risks or emerging market trends that the framework may need toaddress. While the framework should be updated accordingly, thesupervisor should be mindful that such updates are not done sofrequently or in a manner that causes unnecessary disruption to thesupervisory process and/or excessive costs to the supervisor andinsurers.

9.1.13

The framework should be suitably flexible so that it may adapt easily andin a timely manner to domestic and global developments in, for example,
legislation, the insurance and broader financial markets, or international
standards.

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Group Perspectives

9.2

9.1.14

The framework of the group-wide supervisor should take into account allentities identified within the scope of the insurance group (see ICP 23
Group-wide Supervision). While insurance groups may have different
approaches to governance structures – either more centralised or more
decentralised – the framework should include appropriate tools forsupervisory review and reporting for all relevant entities (see Issues
Paper on Approaches to Group Corporate Governance).

9.1.15

Although the group-wide supervisor may not have the power to conduct
supervisory review and reporting of non-regulated entities, it should
assess, at least, the potential adverse impact of such non-regulated
entities on the group.

9.1.16

Similarly, where the group-wide supervisor does not have the power to
conduct supervisory review and reporting of a group legal entity inanother jurisdiction, it should communicate and coordinate with the other
involved supervisor accordingly. For example, the group-wide supervisor
could approach the other involved supervisor to propose a joint on-site
inspection or recommend that the other involved supervisor undertakesuch an inspection, when deemed necessary.

As part of the supervisory framework, the supervisor develops supervisory
plans which set priorities and determine the appropriate depth and level ofoff-site monitoring and on-site inspection activity.
9.2.1

A supervisory plan is a tool for supervisors to determine the frequency,
scope and depth of supervisory review activities. It could be generic (egaddressing categories or groups of insurers) or specific (addressing
individual insurers).

9.2.2

In establishing a supervisory plan, the supervisor should assess anddetermine the key areas of risk to which insurers are exposed or risks
which insurers may pose, using its judgement and the information,
methodologies and tools at its disposal.

9.2.3

The circular nature of the supervisory framework provides a variety of
inputs to help develop and/or adjust supervisory plans. For example,
market analyses, internal models, insurers' own risk and solvency
assessments (ORSA), horizontal reviews, stress/scenario testing,previous risk and conduct assessments, work of external auditors andinformation gathered as a result of supervisory reporting requirements
provide information the supervisor should use as input in determining thescope and frequency of off-site monitoring and on-site inspections.

CF 9.1SGroup-wide supervisory plan and risk assessment
CF 9.2.a

The group-wide supervisor’s supervisory plan for an IAIG includes agroup-wide risk assessment that is conducted at least annually.

CF 9.2.a.1

The group-wide risk assessment of an IAIG should be conducted with
inputs from the supervisory process.

CF 9.2.a.2

The group-wide supervisor should consider the results of the IAIG’s
enterprise risk management framework including its ORSA
assessment, as part of the group-wide risk assessment.

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CF 9.2.a.3

The group-wide supervisor should use information gathered on legal
entities within the IAIG from other involved supervisors as anotherbasis for the assessment of group-wide risk. Where other involved
supervisors identify risks that may be relevant to the supervision of the
IAIG at the group level, they should share their individual risk
assessment.

CF 9.2.a.4

The group-wide supervisor should consider inputs from other relevantsupervisors not involved in the direct supervision of the IAIG such as
macro-prudential analysis, anti-money laundering or combatting thefinancing of terrorism.

Peer-group analysis
CF 9.2.a.5

To the extent practicable and where useful, the group-wide supervisor
should conduct an analysis of the IAIG’s peers as part of the groupwide risk assessment, in cooperation with group-wide supervisors ofother IAIGs. Information in the public domain should be used for the
purposes of the peer-group analysis. The group-wide supervisor may
also use non-public information provided by other supervisors. If
sharing non-public information for the purpose of the peer-group
analysis, the group-wide supervisor should be conscious of the risk ofsharing information that in certain situations could compromise thecompetitive advantage of the IAIG’s peers. The group-wide supervisor
should consider whether it is appropriate to anonymise information
shared.

CF 9.2.a.6

In conducting peer group analysis, the group-wide supervisor should
consider issues such as:• the similarity of business models and geographical scopeof IAIGs;• the size, type and structure of IAIGs; and• internal IAIG practices and governance, including risk
management.

CF 9.2.a.7

CF 9.2.b

It is the group-wide supervisor’s responsibility to decide to what extent
the outcomes of peer-group analysis are shared with other involved
supervisors. Peer-group analysis is subject to confidentiality
requirements (see ICP 3 Information Exchange and Confidentiality
Requirements).

The group-wide supervisor includes in its group-wide risk assessment of
an IAIG, at least, an evaluation of the following:• the complexity of the IAIG’s group structure and the resulting
risks to effective group-wide supervision;• the capital adequacy and the availability of capital to meetgroup-wide capital requirements taking into account theregulatory capital requirements for each insurance legal entity
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• the impact of the complexity of the IAIG’s group structure on
the effectiveness of its group-wide corporate governanceframework.
CF 9.2.b.1

In conducting the group-wide risk assessment, the group-wide
supervisor should consider:• the alignment between the IAIG's competitive position,business plans and strategy, risk appetite, and riskcarrying capacity;• the IAIG’s approach to its legal and regulatory obligations,its product distribution model and its proposals for dealing
with specific areas of risk;• non-regulated and non-financial legal entities within the
IAIG;• the adequacy and outcomes of the IAIG’s stress testingand scenario analysis (see ICP 16 Enterprise Risk
Management for Solvency Purposes);• the IAIG's ability to meet policyholder obligations in boththe near and long-term within the context of the risks
arising from the macro environment in which the IAIG'soperates; and• the potential impact that the IAIG’s distress or disorderly
failure would have on policyholders, the insurance sector,
and financial stability, as well as the impact from the IAIG’scontribution to collective activities or exposures that may
have a serious negative impact on financial stability.

Complexity
CF 9.2.b.2

In conducting the group-wide risk assessment, the group-wide
supervisor should consider:• aggregated risk exposures that the IAIG has towards
external counterparties, which can arise from direct andindirect exposures, on-balance and off-balance sheet
items, regulated and non-regulated legal entities within the
IAIG, the same or different financial sectors across theIAIG, or a combination or interaction of such exposures.
The group-wide supervisor should evaluate if the Head of
the IAIG has adequate oversight and has implemented anadequate risk management system to assess its
aggregated credit, market, insurance and liquidity risk
concentrations. Such risk concentrations should beviewed in the context of single or closely related drivers ofrisk that may have material impact on the IAIG;• increased operational risk where the IAIG relies on
significant cross-border services or support. Such crossborder activity may also increase the complexity ofrecovery and resolution planning. The group-wide
supervisor should evaluate the effectiveness of the IAIG’s

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policies, processes and systems, and assess whether the
IAIG has adequate business continuity plan arrangements
to mitigate such cross-border operational risk; and• significant intra-group transactions which can give rise tocontagion effects within the IAIG, or result in acircumvention of sectoral regulatory requirements. The
group-wide supervisor should evaluate whether the Headof the IAIG has adequate oversight over all material intragroup transactions.
Capital adequacy
CF 9.2.b.3

In conducting the group-wide risk assessment, the group-wide
supervisor should assess the adequacy of an IAIG’s capital position
against group capital standards applicable at the level of the Head of
the IAIG. The role of the group-wide supervisor in conducting andcoordinating this assessment is particularly important in cases where
the IAIG has a mixture of insurance, banking and securities sector
operations.

CF 9.2.b.4

In conducting the group-wide risk assessment, the group-wide
supervisor should identify situations that may give rise to double ormultiple gearing. Such situations may occur within IAIGs which are notfully consolidated and when one legal entity holds regulatory capitalissued by another entity within the IAIG, where the issuer is permitted
to include the capital in meeting its own regulatory requirements.
These situations can result in an overstatement of group capital. The
group-wide supervisor should require that the capital adequacy
assessments of the IAIG exclude intra-group holdings of regulatory
capital if not performed on a fully consolidated basis.

CF 9.2.b.5

In conducting the group-wide risk assessment, the group-wide
supervisor, in cooperation with other involved supervisors, should
assess the fungibility of capital (its ability to absorb losses arising
anywhere in the IAIG as needed). The group-wide supervisor shouldtake into account regulatory, legal and other requirements that may
affect the IAIG’s ability to transfer capital between entities, sectors andjurisdictions, both in normal circumstances and in a crisis.

Non-regulated and non-financial legal entities
CF 9.2.b.6

In conducting the group-wide risk assessment, the group-wide
supervisor should consider the activities undertaken by non-regulated
legal entities within the IAIG by assessing issues such as:• the potential contagion risks arising from the activities of
non-regulated legal entities due to interdependencies or
exposures between the insurance legal entities and thenon-regulated legal entities within the IAIG;• the competence of the IAIG Board and Senior
Management in understanding and managing the risks
arising from the non-regulated legal entities, particularly ifthese entities are significant to the group;

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• the strength of the group capital adequacy to support theinsurance legal entities. Non-regulated legal entities’contribution to the group capital adequacy could beassessed by calculation of a proxy capital requirement as
if the legal entity were regulated or through deduction of
the group’s interest in the non-regulated legal entity; and• where risk has been transferred from regulated to nonregulated legal entities within the IAIG, the group-wide
supervisor in cooperation with supervisors of the regulated
entities should look through to the overall quantum andquality of assets in the non-regulated entities. The risk
assessment should address third party participations andminority interests.
Stress testingCF 9.2.b.7

In conducting the group-wide risk assessment, the group-wide
supervisor should evaluate the results of group-wide stress tests that
the IAIG performed.

Macroprudential analysis
CF 9.2.b.8

9.3

In conducting the group-wide risk assessment, the group-wide
supervisor, with input from other involved supervisors, should consider
the current and forecasted business and the macroeconomic
environment in the material jurisdictions in which the IAIG operates.
The group-wide supervisor should assess the cumulative potential
impact from this on the operations of the IAIG as well as the impact of
the IAIG’s distress, disorderly failure, or its contribution to collective
activities or exposures, on financial stability. This analysis by thegroup-wide supervisor should also be incorporated into forwardlooking stress testing to identify possible events or changes in market
conditions.

The supervisor reviews outsourced material activities or functions to thesame level as non-outsourced material activities or functions.
9.3.1

The supervisor should review outsourced material activities or functions
through the insurer itself, but should also obtain information from, andconduct on-site inspections of, entities engaged in providing outsourced
activities or functions for the insurer, where necessary.

9.3.2

The supervisory review process for outsourced material activities orfunctions may differ from the process used for non-outsourced activities
or functions, provided that the supervisory outcomes are met.

9.3.3

Agreements between the insurer and entities providing the outsourced
material activities or functions should be drawn up in such a way that thesupervisor’s ability to conduct its review is not restricted.

Supervisory reporting
9.4

The Supervisor:• establishes documented requirements for the regular reportingof qualitative and quantitative information from all insurers
licensed in its jurisdiction;

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• defines the scope, content and frequency of the information to
be reported;• sets out the relevant accounting and auditing standards to beused;• requires that an external audit opinion is provided on annual
financial statements;• requires insurers to report on any material changes or incidents
that could affect their condition or customers;• requires insurers to correct inaccurate reporting as soon as
possible; and• requires more frequent reporting and/or additional informationfrom insurers as needed.
9.4.1

Supervisory reporting requirements should apply to all insurers licensed
in a jurisdiction, and form the general basis for off-site monitoring.
Supervisory reporting requirements are a reflection of the supervisor’s
needs and will thus vary by jurisdiction according to overall market
structure and conditions and by insurer according to its nature, scale andcomplexity.

9.4.2

In setting supervisory reporting requirements, the supervisor may makea distinction for foreign insurers who are allowed to conduct insurance
activities within the jurisdiction by way of a local branch or subsidiary or
on a cross-border provision of services basis.

9.4.3

The supervisor should require insurers to report both quantitative andqualitative information, including at least:• financial reports, which include at least a balance sheet andincome statement as well as a statement of comprehensive
income if appropriate;• an external audit opinion on annual financial statements;• off-balance sheet exposures;• material outsourced functions and activities;• a description of the insurer’s organisational structure,corporate governance framework and risk management andinternal control systems; and• information on complaints, claims, surrenders and lapses.

9.4.4

The supervisor should require insurers to utilise a consistent and clear
set of instructions and definitions for any element in required reports thatis not self-evident, in order to maximise comparability.

9.4.5

The supervisor may require that certain reports and information, such as
solvency ratios or technical provisions, are subject to independent(internal or external) review, including audit and/or actuarial review.

9.4.6

While the supervisor sets out the relevant accounting and auditing
standards to be used for supervisory reporting, the actual standards are
generally established by a party other than the supervisor. To help

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accounting and auditing standards reflect the nature of insurance
business, the supervisor could provide guidance and practices to be
used for areas such as fair value estimations and technical provisions.
9.4.7

The external audit of the annual financial statements should be
conducted in accordance with auditing standards that are generally
accepted internationally.

9.4.8

The supervisor should consider using the work of external auditors inorder to support the supervisory review process. For example, thesupervisor may utilize the external audits to identify: internal control
weaknesses and possible audit material risks; issues resulting from
regulatory and accounting changes; changes in insurance and financial
risks; and issues encountered in applying the audit approach.

9.4.9

The supervisor should require the external auditor to report matters thatare likely to be of material significance without delay. Such matters would
include (indication of) material fraud and regulatory breaches or othersignificant findings identified in the course of the audit. Such information
should be provided to the supervisor without the need for prior consent
of the insurer and the external auditor should be duly protected fromliability for any information disclosed to the supervisor in good faith.

9.4.10Depending on the nature, scale and complexity of the insurer, more
frequent reporting and/or additional information may be requested from
specific insurers on a case-by-case basis.

9.4.11The supervisor should require that information on changes that could
materially impact the insurer’s risk profile, financial position,organisational structure, governance or treatment of its customers isprovided by the insurer in a timely manner.

9.4.12The supervisor periodically reviews its reporting requirements toascertain that they still serve their intended objectives and to identify any
gaps which need to be filled. Assessing the results of off-site monitoringand on-site inspections may help inform such a review.

Group Perspectives
9.4.13The supervisor should require an insurance legal entity which is part ofan insurance group to describe its group reporting structure, and toprovide timely notification of any material changes to that structure andsignificant changes or incidents that could affect the soundness of theinsurance group. The description of the reporting structure should
include information on the relationships between entities within theinsurance group, and on the nature and volume of material intra-grouptransactions. The supervisor may require information on the impact on
the insurance legal entity of being part of an insurance group.

9.4.14The supervisor may request and obtain relevant information about any
entity within an insurance group, subject to applicable legal provisions
and coordination with the supervisors of affected jurisdictions.

9.4.15

The group-wide supervisor should establish its supervisory reporting
requirements on a group-wide basis in coordination with the other
involved supervisors. Such coordination may help the group-wide
supervisor understand what information is being reported and avoid any

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gaps as well as facilitate the submission of information on group entities
in other jurisdictions.
9.4.16

CF 9.2
CF 9.3In order to better understand the group and its risks, the group-wide
supervisor should require the group to submit information on the groupstructure, business operation and financial position of material entities
within the insurance group and relationship among entities within theinsurance group, including participation in other group entities andmaterial intra-group transactions.
Bh

CF 9.4.a

The group-wide supervisor requires the Head of the IAIG to report thereference ICS and, at the option of the group-wide supervisor, any
additional reporting related to the ICS.

CF 9.4.a.1

Reporting to the group-wide supervisor should be on a confidential
basis for the purpose of discussion in the supervisory college.

Off-site monitoring
9.5

The supervisor monitors insurers on an ongoing basis, based oncommunication with the insurer and analysis of information obtained
through supervisory reporting as well as market and other relevant
information.
9.5.1

The supervisor should be proactive and forward-looking in conducting
effective off-site monitoring, and not rely only on historical data. The
supervisor should analyse information obtained in a timely manner.

9.5.2

The results of off-site monitoring should influence the supervisory planand help determine the content, nature, timing and frequency of on-site
inspections. Off-site monitoring may also enable the early detection ofproblems so that prompt and appropriate supervisory responses can betaken before such problems become more serious.

9.5.3

Analysis by the supervisor may provide a deeper understanding ofdeveloping trends affecting an insurer and its customers. Analysis bybusiness lines, customer grouping and/or distribution channels may
provide insights into the insurer’s overall risk profile.

9.5.4

The supervisor should establish and follow documented procedures forthe analysis and monitoring of the supervisory reporting that it receives.
These may be conducted by individual supervisory staff using monitoring
tools and/or specialised resources, as appropriate.

9.5.5

Examples of ways in which this Standard and its corresponding guidance
can be pursued include the following [see text in Annex].

On-site inspection
9.6

The supervisor sets the objective, scope and timing for on-site inspectionsof insurers, develops corresponding work programmes and conducts suchinspections.
9.6.1

On-site inspections help the supervisor to identify strengths andweaknesses within an insurer, and to assess and analyse the risks towhich an insurer and its customers are exposed.

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9.6.2On-site inspections may supplement the analysis from off-site monitoringand provide the supervisor with the opportunity to verify information it
has received. On-site inspection may also help detect problems that may
not be apparent through off-site monitoring. It is important that on-site
inspections are coordinated with off-site monitoring to increase efficiency
and avoid duplication of work.

9.6.3

On-site inspections should be tailored to the particular insurer and its
risks. However, an on-site inspection work programme should remain
flexible since new priorities might arise.

9.6.4

The on-site inspection work programme should take account of theinsurer’s distribution model, the nature, size and profile of its customer
base and its relative importance in the market. On-site inspections
should be more frequent and more in- depth for insurers which are in adifficult financial position or where there is concern that their businesspractices pose a high risk of negative customer outcomes.

9.6.5

The supervisor may use independent experts (see ICP 2 Supervisor) to
conduct part of an on-site inspection, for instance when additional
resources or specific expertise is needed.

9.6.6

The supervisor can conduct on-site inspections on either a broad or
targeted basis. The purpose of a broad on-site inspection is to assess
the overall condition, activities and risk-profile of the insurer. A targeted
on-site inspection is focused on a specific area or areas of an insurer,
such as a particular key activity or process. Targeted on-site inspections
can also be carried out across a number of insurers based on a specifictheme, activity or risk (sometimes called "thematic reviews"). Targeted
on-site inspections can be very effective in focusing supervisory
resources quickly on those areas requiring immediate attention. If atargeted on-site inspection leads to other areas of supervisory concern,
the supervisor may determine that a broad on-site inspection isnecessary.

9.6.7

Advance notice is normally given to the insurer before the supervisor
conducts an on-site inspection so that both parties may plan accordingly.
However, the supervisor may decide not to provide advance notice in
certain circumstances.

9.6.8

Examples of ways in which this Standard and its corresponding guidance
can be pursued include the following [see text in Annex].

CF 9.4CF 9.5Rfv

CF 9.6.aThe group-wide supervisor performs on-site inspections at the level ofthe Head of the IAIG.

CF 9.6.a.1

The group-wide supervisor’s on-site inspections should considergroup-wide activities and major risks that impact legal entities within
the IAIG.

CF 9.6.a.2

During on-site inspections, the group-wide supervisor should haveaccess to the IAIG Board, Senior Management and Key Persons inControl Functions responsible for the group-wide functions whereverthese functions are performed. Where the group-wide functions are
performed by an insurance legal entity within the IAIG, which is outside
the jurisdiction of the group-wide supervisor, the group-wide

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supervisor should inform the relevant other involved supervisor prior
to approaching this insurance legal entity as part of the on-site
inspection carried out at the level of the Head of the IAIG.
CF 9.6.a.3

CF 9.6.bOther involved supervisors should inform the group-wide supervisor ofsignificant planned on-site inspections and communicate the main
findings to the supervisory college where they are material to the IAIG
or to another insurance legal entity within the IAIG.

Where appropriate, the group-wide supervisor, or other involved
supervisors with reasonable supervisory interest, join on-site
inspections of an insurance legal entity in another jurisdiction,
coordinated by the relevant involved supervisor, with prior consent fromthat supervisor.

CF 9.6.b.1

Relevant involved supervisors should consider organising a joint onsite inspection to address issues that are material to the IAIG or toanother insurance legal entity within the IAIG. The relevant involved
supervisor should share the main outcomes of a joint on-site
inspection within the supervisory college.

Supervisory feedback and follow-up
9.7

The supervisor discusses with the insurer as soon as practical any relevant
findings of the supervisory review and the need for any preventive or
corrective measures.

CF 9.6
CF 9.7

CF 9.7.a9.7.1

The supervisor should provide appropriate feedback in a timely mannerto the insurer during the ongoing supervisory review process. The
supervisor should issue in writing the findings of the review and theactions required. In many circumstances, the supervisor’s initial action
will be to discuss the issue with the insurer, which may resolve the issue
and require no further action. However some issues may requirepreventive or corrective measures, and in some cases imposing
sanctions (see ICP 10 Preventive Measures, Corrective Measures andSanctions).

9.7.2

Whether and how the insurer has subsequently addressed issues
identified by the supervisor should be considered in the evaluation of theinsurer and should be factored into the ongoing supervisory plan.
gc

The group-wide supervisor communicates the results of the group-wide
supervisory review of the IAIG, including the group-wide risk assessment,
to the supervisory college and, as appropriate, to the Head of the IAIG.

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Annex: Examples of ways in which Standards 9.5 and 9.6 and their corresponding
guidance can be pursued include the following:A) The evaluation of the effectiveness of the insurer’s corporate governanceframework, including its risk management and internal control systems, can bedone through:
•
•
•

•
•

•

•

•

reviewing and analysing the minutes of the Board and its committees;
examining communications provided by the auditors to the Board and/or the Audit
Committee, such as the auditors’ reports;
analysing information obtained from and/or received through direct engagement withthe external auditor on substantial insights into the insurer’s corporate governanceframework, control environment, and financial reporting;evaluating the suitability of significant owners by analysing the ownership structure andsources of finance/funding;evaluating the independence of the Board Members, the suitability of the Board
Members, Senior Management and Key Persons in Control Functions, theireffectiveness, and their ability to acknowledge improvement needs and correct
mistakes (especially after such needs or mistakes have been identified by the insurer,
its auditors, or the supervisor and after changes of management and in the Board);
testing the insurer's internal policies, processes and controls in order to assess
compliance with regulations and/or adequacy of these in light of the insurer's risk
profile;testing the accounting procedures in order to assess accuracy of the financial andstatistical information periodically sent to the supervisor and its compliance with theregulations; andevaluating the organisational structure and the management of the insurer.

B) Analyses of the nature of the insurer’s activities can be done through:
•
•
•
•
•
•

analysing business lines, the type of products offered, policyholders and location ofbusiness;analysing the distribution model(s) used;meeting with the management to get information and a deeper understanding about
current and future business plans;
analysing material contracts;
analysing the sales and marketing policies of the insurer, in particular, policy conditions
and remuneration paid to the intermediaries; andevaluating the reinsurance cover and its security. In particular, the reinsurance cover
should be appropriate with regards to the financial means of the insurer and the risks
it covers.

C) Analyses of the relationships with external entities can be done through:•••analysing organisational charts, the group structures and the intragroup links;
analysing the relationships with major investors and among branches and subsidiaries;
analysing intragroup transactions, fees and other arrangements, including identifying
instances of cross-subsidisation of businesses within a group or non-arm's length fees
and charges;

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•••analysing agreements with external service providers;
identifying financial problems originating from an entity in the group to which the insurer
belongs; andidentifying of conflicts of interest arising from intra-group relationships or relationships
with external entities.

D) Evaluation of the insurer's financial condition can be done through:
•
•
•
•
•
•
•

analysing audited financial statements and off-balance sheet commitments;
analysing the settlement of claims and the calculation of technical provisions according
to current regulations;analysing the operations and financial results by line of business;
analysing the investment policy (including derivatives policy) and the assets held tocover the technical provisions;valuation of the insurer’s investments;
assessing litigation in which the insurer is a party; andanalysing the forecasted balance sheets and profit and loss accounts in relation to themost recent results and the management plans.

E) Assessment of the insurer's fair treatment of customers can be done through:
•

•
•
•
•
•
•

assessing the culture of the insurer in relation to customer treatment, including theextent to which the insurer’s leadership, governance, performance management andrecruitment, complaints handling policies and remuneration practices demonstrate aculture of fair treatment to customers;
assessing how conflicts of interests with customers are identified, managed andmitigated;
reviewing how products are designed and distributed to ensure they fulfil thecustomers’ demands and needs;
checking the adequacy, appropriateness and timeliness of the information and advice
given to customers;
reviewing the handling and timing of claims and other payments;
reviewing the handling, frequency and nature of customer complaints, disputes andlitigation; andreviewing any customer experience reports used by the insurer or from other sources,
such as an ombudsman.

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Preventive Measures, Corrective Measures and Sanctions
The supervisor:•requires and enforces preventive and corrective measures; and•imposes sanctions

which are timely, necessary to achieve the objectives of insurance supervision,and based on clear, objective, consistent, and publicly disclosed general criteria.
10.0
Introductory Guidance
10.0.1The supervisor should initiate escalating measures to prevent a breachof regulatory requirements by an insurer, respond to a breach of
regulatory requirements by an insurer, and enforce those measures toensure that the insurer responds to the supervisor’s concerns.
Preventive measures should be used to prevent a breach of regulatory
requirements and corrective measures should be used to respond to abreach of regulatory requirements. Functionally, supervisors may takesimilar or identical actions as preventive or corrective measures. In
addition, where a regulatory requirement has been violated, supervisors
may use sanctions.

10.0.2The supervisor should promptly and effectively deal with insurer noncompliance with regulatory requirements or supervisory measures that
could put policyholders at risk, could pose a threat to financial stability,
or could impinge on any other supervisory objectives. The moresignificant the threat to policyholders’ interests or to financial stability,
then the quicker the supervisor will need to act and to require action fromthe insurer, and the more significant the measures that may be required.
By mitigating certain risks, preventive and corrective measures that areprimarily intended to protect policyholders may also contribute tofinancial stability, by decreasing the probability and magnitude of any
negative systemic impact.

10.0.3Circumstances may arise when preventive or corrective measures are
insufficient to prevent an insurer from being no longer viable, or likely to
become no longer viable, and therefore need to exit the market or be
resolved (see ICP 12 Exit from the Market and Resolution).

10.0.4

As part of the supervisory framework (see ICP 9 Supervisory Review andReporting), the supervisor should consider in advance how to use
preventive and corrective measures, enforcement of those measures,and the imposition of sanctions. A supervisor’s framework should be
documented to assist in the delivery of consistent supervision over time.
It is crucial that the framework leaves room for the exercise of
supervisory judgement and discretion, so flexibility should be allowed in
the use of preventive measures, corrective measures and sanctions. In
addition to general criteria, other parts of the framework on preventive
measures, corrective measures and sanctions can also be released
publicly, particularly where the supervisor feels that this additionaltransparency will lead to the market functioning more effectively. The
decision-making processes that underpin the supervisory framework

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should function in a way that allows the supervisor to take immediate
action when necessary.
10.0.5

In some instances, the supervisor will need to work with other authorities
or bodies in order to take or enforce supervisory measures or sanctions
against an insurer. For example, some measures or sanctions will
require the approval of a judicial body.

10.0.6

There are different methods by which supervisory outcomes can beachieved. The method chosen may vary depending on the jurisdiction’s
legal framework. In some jurisdictions, one method is to accept anenforceable written agreement to do, or not to do, some thing or thingsfrom the insurer in question. The potential advantages of achieving an
outcome by this route are that it can be quicker and less costly. This
option can be used to achieve outcomes related to preventive or
corrective measures or to sanctions.

Group perspectives

CF 9.8CF 9.910.0.7

Measures or sanctions targeted at non-insurance legal entities within an
insurance group may require the supervisor to work with other regulatory
authorities.

10.0.8The supervisor for an insurance legal entity within an insurance groupshould inform other involved supervisors when taking supervisory
measures against or imposing sanctions on that insurance legal entity,
where those sanctions are material or otherwise relevant to those
supervisors.
Kx

CF 10.0.a

The group-wide supervisor applies supervisory measures directly to the
Head of the IAIG. If the Head of the IAIG is not within the group-wide
supervisor’s jurisdiction, other involved supervisors apply supervisory
measures to assist the group-wide supervisor.

CF 10.0.a.1

The group-wide supervisor should have flexibility in how it applies
supervisory measures, which may need to vary according to the legal
structure of the group, the jurisdiction in which the legal entities in thegroup are established, and the supervisory authority over relevant
parts of the group.

CF 10.0.a.2

If the Head of the IAIG is not located in the jurisdiction of the groupwide supervisor, the group-wide supervisor should use indirect powers
to apply supervisory measures.

CF 10.0.a.3

Other involved supervisors should assist the group-wide supervisor toapply supervisory measures to the Head of the IAIG or to insurance
legal entities if they have direct supervisory powers to do so.

CF 10.0.b

An involved supervisor coordinates with other involved supervisors
before requiring a specific preventive or corrective measure if thatmeasure will have a material effect on the supervision of the IAIG as awhole, or on the supervision of an insurance legal entity within the IAIG,
unless exceptional circumstances preclude such coordination.

CF 10.0.b.1

The supervisory college provides a forum for the group-wide
supervisor and other involved supervisors to coordinate preventive
and corrective measures. In addition to supervisory colleges,

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coordination can take place through a crisis management group (seeComFrame material under ICP 25 Supervisory Coordination andCooperation).

10.1

10.2

CF 10.0.b.2

Supervisory measures that should be preceded by coordination
between involved supervisors include: restricting the transfer of assets
between entities within the IAIG; requiring an increase in capital; andsuspending or revoking the licence of an insurance legal entity.

CF 10.0.b.3

There may be exceptional circumstances where an involved
supervisor that wishes to act cannot coordinate in advance with theother involved supervisors. In such circumstances, the involved
supervisor should inform the other involved supervisors of the decision
made, or action taken, and the supporting rationale, as soon as
possible.

CF 10.0.b.4

An involved supervisor does not need to coordinate with the other
involved supervisors if the preventive or corrective measure will notmaterially affect the IAIG as a whole or another insurance legal entity.
For example, an involved supervisor may not need to coordinate withthe other involved supervisors before requiring the insurance legal
entity to enhance its regulatory reporting as a preventive measure tomonitor the legal entity’s specific business.

CF 10.0.b.5

If an involved supervisor requires an insurance legal entity within the
IAIG to take preventive or corrective measures that are long-term andmaterial in nature, that supervisor should provide periodic updates tothe supervisory college.

CF 10.0.b.6

The requirement to coordinate action (other than in exceptional
circumstances) does not imply that the supervisor taking action needs
the consent of other involved supervisors to take action which isnecessary to discharge its duties under the law in its jurisdiction.

The supervisor acts against individuals or entities that conduct insurance
activities without the necessary licence.
10.1.1The supervisor should have in place mechanisms to identify whenunlicensed insurance activity is being carried out. Examples of suchmechanisms include monitoring of media and advertising, review ofconsumer complaints or encouraging industry and other stakeholders to
notify the supervisor of suspicious activity.

10.1.2

Where unlicensed activity is identified, the supervisor should act toaddress the issue. Examples include requiring the unlicensed entity toapply for a licence, seeking court orders to require the unlicensed entity
to stop the activity, informing law enforcement authorities of criminal
and/or civil concerns, imposing sanctions on the individual/entity or
publicising the fact that the individual and/or entity is/are not licensed to
conduct insurance activities.

The supervisor requires preventive measures if the insurer seems likely tooperate in a manner that is inconsistent with regulatory requirements.
10.2.1

Determining when an insurer seems likely to operate in a manner that isinconsistent with regulatory requirements will require a degree of
discretion on the part of the supervisor. Nevertheless, concerns that

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necessitate preventive measures should be well founded based on the
supervisor’s assessment.
10.2.2

If the insurer operates in a manner that is likely to impact its ability toprotect policyholders’ interests or pose a threat to financial stability, thesupervisor should act more urgently in requiring preventive measures.

10.2.3The supervisor should communicate concerns to the insurer with apromptness that reflects the significance of the concern. Some concerns,
such as relating to insurer solvency, policyholder protection, or financial
stability, will be sufficiently significant to require immediate
communication to the insurer. Other concerns, although significant, may
not require such rapid communication, but should still be communicatedappropriately. For example, it is unlikely to be appropriate for a
supervisor to wait for the next on-site visit to an insurer before
communicating a significant concern.

10.2.4The supervisor should promptly bring significant concerns to theattention of the Board because it has ultimate responsibility for the
insurer and that such concerns are resolved. In addition, the supervisor
should also communicate with Senior Management and with Key
Persons in Control Functions to bring significant concerns to theirattention.

10.2.5The supervisor should have available a range of preventive measures
broad enough to address insurers of all sizes and complexities.
Preventive measures should be chosen to address the severity of theinsurer’s problems.

10.2.6The supervisor should have the power to issue, and enforce:• restrictions on business activities, such as:oprohibiting the insurer from issuing new policies or new
types of product;orequiring the insurer to alter its sales practices or otherbusiness practices;owithholding approval for new business activities or
acquisitions;orestricting the transfer of assets;oprohibiting the insurer from continuing a business
relationship with an intermediary or other outsourced
provider, or requiring the terms of such a relationship tobe varied;orestricting the ownership of subsidiaries; andorestricting activities of a subsidiary where, in its opinion,such activities jeopardise the financial situation of theinsurer;• directions to reinforce the insurer’s financial position, such as:oPublicIAIS ICPs and ComFrame – November 2019requiring measures that reduce or mitigate risks (forexample, restricting exposures, through either hard or soft
limits, to individual counterparties, sectors, or asset
classes);
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orequiring an increase in capital;orestricting or suspending dividend or other payments toshareholders; andorestricting purchase of the insurer’s own shares; and• other directions, including:

10.2.7orequiring the reinforcement of governance arrangements,
internal controls or the risk management system;orequiring the insurer to prepare a report describing actions
it intends to undertake to address specific activities thesupervisor has identified, through macroprudential
surveillance, as potentially posing a threat to financial
stability (see ICP 24 Macroprudential Supervision);ofacilitating the transfer of obligations under the policies
from a failing insurer to another insurer that accepts thistransfer;osuspending the licence of an insurer; andobarring individuals acting in key roles from such roles infuture.

The supervisor may also have other powers available, including:• temporarily delaying or suspending, in whole or in part, thepayments of the redemption values on insurance liabilities or
payments of advances on contracts;• lowering the maximum rate of guarantees for new business or
introducing additional reserving requirements; or• incentivising the use of a system-wide lending facility, whenavailable, for market-wide liquidity issues extending toinsurers.

10.2.8The supervisor should take steps to address problems arising from
Board Members, Senior Management, Key Persons in Control
Functions, significant owners, external auditors and any other person
who plays a significant role within the insurer. For example, thesupervisor should require the insurer to replace or restrict the power androle of those involved (listed above) in the governance processes if thesupervisor has material concerns with management or governance.

10.2.9The supervisor should reject, rescind and/or request a court to revoke
the appointment of an external auditor who is deemed to haveinadequate expertise or independence, or is not subject to, or does notadhere to, established professional standards.

10.2.10 Supervisors should take action to address insurer audit quality concerns,
including, where possible, requiring replacement or appointment of a
supplementary auditor and the sanctioning of an external auditor if
necessary. Supervisors should watch for indicators of potential major
audit quality concerns, such as when:• the auditor does not have adequate insurance industry
knowledge and competence;
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• there is an identified issue with auditor objectivity andindependence;• the auditor does not disclose to the supervisor matters that itis required to disclose;• clear audit quality concerns are identified, such as if theauditor fails to test internal control systems sufficiently, theauditor is not appropriately sceptical, or does not appropriately
challenge the insurer’s management regarding the major
accounting figures; or• the auditor’s system of internal quality control appears
ineffective.
CF 9.10CF 9.11Ix

CF 10.2.a

The group-wide supervisor requires the Head of the IAIG to takepreventive measures if:• a legal entity within the IAIG seems likely to operate in amanner that• would have a material adverse effect on the IAIG
as a whole; or• the IAIG as a whole seems likely to operate in a manner that isinconsistent with regulatory requirements.

10.3

10.4

CF 10.2.a.1

The situation described in the first part of the Standard could arise, forexample, where one regulated legal entity in the group seems likely tofail to meet its capital requirement, causing the IAIG as a whole to be
likely to fail to meet a group capital requirement to which it is subject.

CF 10.2.a.2

The group-wide supervisor should not require the Head of the IAIG totake additional preventive measures if the supervisor of an insurance
legal entity within the IAIG has already required that entity to takepreventive measures and the group-wide supervisor has assessedthat the preventive measures adequately mitigate the risk to the IAIG
as a whole.

CF 10.2.a.3

The situation described in the second part of the Standard could arise,for example, where every regulated legal entity in the IAIG meets its
capital requirement, but the group as a whole seems unlikely to meeta group capital requirement to which it is subject.

The supervisor requires corrective measures if the insurer fails to operate
in a manner that is consistent with regulatory requirements.
10.3.1The Guidance under Standard 10.2 is equally applicable when
considering corrective measures.

10.3.2

In addition to the supervisory tools set out in 10.2.6, when consideringcorrective measures the supervisor may find it necessary, in cases ofserious breach of regulatory requirements, to revoke the licence of an
insurer. The supervisor should be able to enforce this decision.

The supervisor:

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• requires the insurer to take actions that address the supervisor’s
identified concerns;• periodically checks that the insurer is taking action; and• assesses the effectiveness of the insurer’s actions.

10.5

10.4.1The supervisor should require the insurer to prepare a plan to resolve
the concerns within an acceptable timeframe. The plan should include
actions proposed by the insurer or preventive or corrective measuresrequired by the supervisor. What is acceptable as a timeframe will
depend on the circumstances of the concerns raised.

10.4.2

If the insurer does not prepare an acceptable plan in a specified
timeframe to respond to the supervisor’s concerns, the supervisor should
impose such a plan on the insurer.

10.4.3The supervisor should review the results of the actions that the insurer
has taken. The supervisor should review both whether the actions havebeen taken and, if so, the effectiveness of the actions.

10.4.4The supervisor may require assurance from an independent reviewer
regarding adequate resolution of significant concerns. In such cases thesupervisor may also require that such an independent reviewer be
appointed at the expense of the insurer.

The supervisor escalates, including enforcing, preventive or corrective
measures if its concerns are not addressed by the insurer’s actions.

CF 9.12
CF 9.1310.5.1The supervisor should require further measures if its concerns with theinsurer become worse, including if the insurer fails to take the actions ina plan.

10.5.2

Supervisory measures should escalate in line with the supervisor’s
concerns about the insurer. If the insurer’s inaction leads to an increased
risk to policyholders, then the supervisor should respond by requiringstronger measures to mitigate this risk.

10.5.3

Enforcement of preventive or corrective measures could involve thesupervisor issuing a formal direction to an insurer to take particularactions or to cease conducting particular activities. It could also involvethe supervisor seeking the assistance of other authorities, or the courts,
to enforce a measure.
Jd

CF 10.5.a

The group-wide supervisor coordinates with other involved supervisors
if the Head of the IAIG, or an insurance legal entity within the IAIG, fails
to take action to address the group-wide supervisor’s, or other involved
supervisor’s, identified concerns.

CF 10.5.b

Where an insurance legal entity within the IAIG fails to take preventive or
corrective measures, as required by the involved supervisor, the groupwide supervisor informs the Head of the IAIG of that lack of complianceand assists the involved supervisor, to the extent possible, in achieving
compliant outcome.

10.6

The supervisor imposes sanctions on insurers and individuals
proportionate to the breach of regulatory requirements or othermisconduct.

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10.6.1

The supervisor should be able to impose a range of sanctions, which
could be administrative, civil or criminal in nature. These can include theability to impose fines, the ability to bar individuals acting in key roles
from holding similar roles in future, and the ability to require remediation(such as requiring compensation of policyholders in cases of misselling). It is recognised that supervisors will not always be able to takea full range of legally binding actions themselves and may need to act inconjunction with, or refer matters to, other authorities, in particular, in thecase of criminal penalties.

10.6.2

In some cases it may be appropriate to apply sanctions against insurers
or individuals when justified by their actions, or inactions.

10.6.3The supervisor should, in particular, be able to impose sanctions against
insurers and individuals who:
• fail to provide information to the supervisor in a timely fashion;• withhold information from the supervisor;• provide information that is intended to mislead the supervisor;• deliberately misreport to the supervisor; or• do not act in accordance with orders or directions imposed on
the insurer.

10.6.4The sanctions imposed by the supervisor should be commensurate with
the nature and severity of the insurer’s non-compliance with regulatory
requirements. Administrative or procedural breaches will generally
attract less severe sanctions than breaches arising from an insurer’s
intentional disregard of regulatory requirements. The sanction imposed
should be sufficiently dissuasive so that the insurer, or other insurers, do
not commit a similar breach in the future.

10.6.5The supervisor should impose more severe sanctions relative to thegravity of the breach where an insurer’s history demonstrates a patternof non-compliance with regulatory requirements.

10.6.6The supervisor may impose sanctions on insurers or individuals in
addition to supervisory measures or in the absence of supervisory
measures.

10.6.7The imposition of sanctions against an insurer or an individual typicallyshould not delay either supervisory measures or insurer action taken in
response to supervisory measures. However, in some instances, thenature of the sanctions may delay supervisory measures. For example,
where a supervisor sanctions an insurer by requiring a number of Senior
Managers to be replaced with new individuals, supervisory measuresintended to improve the governance of the insurer may not be practicaluntil after the new individuals are appointed.

10.6.8The supervisor, or another responsible authority in the jurisdiction,
should take action to enforce sanctions that have been imposed.

10.6.9The supervisor should sanction insurers and individuals within aconsistent framework, so that similar violations and weaknesses attract
similar sanctions. Supervisors should consider how proposed sanctions
relate to previous cases. The supervisor should identify precedents

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where the supervisor has sanctioned an insurer or individual for similaractions/inactions. Where the supervisor has sanctioned an insurer orindividual for similar actions/inactions, then the supervisor should
consider carefully whether a comparable sanction is appropriate. If thesupervisor concludes that a very different sanction is appropriate, thesupervisor should be prepared to explain why it reached this conclusion.
10.6.10 In order for sanctions to have a deterrent effect on other insurers, thefact of the sanction, and sufficient details of the breach, should in generalbe published. However, the supervisor should retain the discretion totake a different course of action (for example, not to publish, or to delay
publication) where this would further the achievement of supervisoryobjectives or it is otherwise in the public interest to do so.
CF 9.14
CF 9.15

df
gb

CF 10.6.a

The group-wide supervisor imposes sanctions directly on the Head of the
IAIG within the group-wide supervisor’s jurisdiction.

CF 10.6.a.1

Available sanctions should include the imposition of fines andpenalties (even if non-compliance by the Head of the IAIG is due tothe actions of a legal entity within the IAIG).

CF 10.6.a.2

The group-wide supervisor should have flexibility in how it imposes
sanctions, which may need to vary according to the legal structure of
the group, the jurisdiction in which the legal entities in the group are
established, and the supervisory authority over relevant parts of thegroup.

CF 10.6.a.3

If the Head of the IAIG is not located in the jurisdiction of the groupwide supervisor, the group-wide supervisor should use indirect powers
to impose sanctions.

CF 10.6.b

An involved supervisor communicates with other involved supervisors
before imposing sanctions on:• an insurance legal entity;• the Head of the IAIG; or• an individual involved with the relevant insurance legal entity
or the Head of the IAIG
• if the sanction will have a material effect on the supervision of the IAIG
as a whole or a material effect on the supervision of another insurance
legal entity within the IAIG, unless exceptional circumstances preclude
such communication.

CF 10.6.b.1

The involved supervisor should communicate the need for sanctions
to other involved supervisors at the earliest opportunity. Where an
involved supervisor must act before communicating the need forsanctions, that supervisor should inform the group-wide supervisor
and other involved supervisors of the sanction, and the supporting
rationale, as soon as possible.

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There is no longer an ICP 11

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Exit from the Market and Resolution
Legislation provides requirements for:•the voluntary exit of insurers from the market; and•the resolution of insurers that are no longer viable or are likely to be nolonger viable, and have no reasonable prospect of returning to viability.

12.0
Introductory Guidance
12.0.1

An orderly process for an insurer’s withdrawal from the business of
insurance helps to protect policyholders, and contributes to the stabilityof the insurance market and the financial system. Jurisdictions shouldhave transparent and effective regimes for an insurer’s exit from themarket and the resolution of an insurer.

12.0.2In this ICP, “resolution” refers to an action taken by a resolution authority
towards an insurer that is no longer viable, or is likely to be no longer
viable, and has no reasonable prospect of returning to viability.
Resolution actions include portfolio transfer, run-off, restructuring, andliquidation.

12.0.3In this ICP, the term “resolution authority” refers to authorities that are
responsible for exercising resolution powers over insurers. Dependingon the jurisdiction, this term may include supervisors, othergovernmental entities or private persons (including administrators,
receivers, trustees, conservators, liquidators, or other officers), or courts
authorised by law to exercise resolution powers. Thus in this ICP:
• “supervisor” is used when the standard and/or guidance
involves responsibilities and/or roles of the day-to-day
supervisor of the insurer;• “resolution authority” is used when the standard and/or
guidance involves resolution powers and/or processes after
resolution has been instituted: this includes supervisors acting
under their resolution powers; and• “supervisor and/or resolution authority” is used when thestandard and/or guidance involves responsibilities forplanning and/or initiation of resolution and encompasses
supervisors acting in their pre-resolution roles (eg before asupervisor or resolution authority institutes resolution and/or
obtains any necessary administrative and/or judicial approvals
to do so).

12.0.4The structure and roles of resolution authorities vary across jurisdictions.
In some jurisdictions, the resolution authority and the supervisor may be
one single authority; in other jurisdictions, resolution of insurers may be
the responsibility of one or more separate authorities. In somejurisdictions certain resolution powers may be exercised or overseen by
the court. Whatever the allocation of responsibilities, a transparent andeffective resolution regime should clearly delineate the responsibilities

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and powers of each authority involved in the resolution of insurers (seeICP 1 Objectives, Powers and Responsibilities of the Supervisor). Where
there are multiple authorities responsible for the resolution of insurers,
the resolution regime should empower the relevant authorities tocooperate and coordinate with each other.
12.0.5

Exit from the market refers to cessation of the insurer’s business, in partor in whole. Insurers that meet regulatory requirements may decide toexit from the market on a voluntary basis for business and/or strategic
reasons. This is often referred to as ‘voluntary exit from the market’.

12.0.6

Insurers may also be required by the supervisor to exit from the market.
For example, supervisory measures and/or sanctions may result in an
insurer exiting from the market (ie involuntary exit from the market) (seeICP 10 Preventive Measures, Corrective Measures and Sanctions).

12.0.7

Jurisdictions may need to have mechanisms in place to determine
whether the continuity of insurance cover is necessary when insurers exitfrom the market. Any such continuity should preferably be on the same
contract terms, but when necessary, on amended terms. Suchmechanisms need to be proportionate to the unique nature and structureof the insurance market in each jurisdiction. Continuity of insurance
cover may be facilitated by transferring insurance portfolios to a
succeeding insurer, including a bridge institution. Continuity of someinsurance contracts, particularly for some non-life products, may benecessary for only a short period (for example 30 or 60 days) so that thepolicyholder has sufficient time to find another insurer. Facilitating
continuity of insurance cover might not be necessary for certain types of
insurance products, such as those that are offered by many insurers ina market and which are highly substitutable.

12.0.8Where an insurer exits from the market and there is no succeeding
insurer or no similar insurance products available in the market,
mechanisms that facilitate the availability of alternate cover may need to
be explored by the supervisor, such as when the exiting insurer delivers
insurance contracts that cover risks that may be important to a particularjurisdiction’s economy and/or are compulsory insurance in legislation.

12.0.9Insurers that are no longer viable or likely to be no longer viable and haveno reasonable prospect of becoming so through their recovery action or
supervisory measures, should be resolved. Figure 12.1 illustrates in astylised way the relationship between solvency, viability and the natureof actions to be taken. No uniform, single fixed point of non-viability canbe defined that will be appropriate for the application of resolution
measures in all circumstances. Whether to apply resolution measures,and the type of measures implemented, will depend upon the factual
circumstances of the particular resolution scenario.

Figure 12.1. Stylised relationship between solvency, viability and actions to be taken

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Balance sheet of theinsurer

Viability of theinsurerSolvent

ViableBalancesheet
insolventNon-viable
The point at which the insurer is no longer
viab le or likely to b e no longer viab le, andhas no reasonab le prospect of b ecoming so

Actions to be taken

Preventive

RecoveryResolution

12.0.10 A resolution regime should make it possible for any losses to beabsorbed by: i) shareholders; ii) general creditors; and iii) policyholders,in a manner that respects the jurisdiction’s liquidation claims hierarchy.
Policyholders should absorb losses only after all lower ranking creditors
have absorbed losses to the full extent of their claims. Mechanisms, suchas policyholder protection schemes (PPSs), may mitigate the need forthe absorption of losses by policyholders.
12.0.11 Depending on the circumstances, appropriate resolution measures may
be applied to one or more separate entities in an insurance group, such
as: i) the head of the insurance group; ii) an intermediate holding
company below the head of the insurance group; iii) an insurance legal
entity within the group; iv) a branch of an insurance legal entity within thegroup; or v) other regulated (eg banks) or non-regulated entities within
the group. For other regulated entities within the group (eg banks), a
resolution regime relevant to their sector may apply.
12.0.12 Some insurers operate on a cross-border basis through subsidiaries orbranches in another jurisdiction, or through providing insurance services
on a cross-border basis without setting up a physical presence outside
their home jurisdiction. Also, where an insurance legal entity is a memberof a group, there could be intra-group transactions and guarantees
among insurance legal entities and/or other group entities in different
jurisdictions. Cross-border coordination and cooperation, including
exchange of information, is necessary for the orderly and effective
resolution of insurers that operate on a cross-border basis.
Voluntary exit from the market
12.1

Legislation provides a framework for voluntary exit from the market that
protects the interests of policyholders.
12.1.1

Voluntary exit from the market is initiated by the insurer.

12.1.2The supervisor should require the insurer which voluntarily exits from themarket to make appropriate arrangements for the voluntary exit (eg, runoff or portfolio transfer), including ensuring adequate human andfinancial resources to fulfil all its insurance obligations.

12.1.3The supervisor should require the insurer which voluntarily exits from themarket through run-off to submit a run-off programme to the supervisor.
The programme should include at least the following information:

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• expected timeframe;• projected financial statements;• human and material resources that will be available;• governance and risk management of the process;• communication with policyholders about the insurer’s exitfrom the market; and• communication to the public.
12.1.4

Insurers that exit from the market on a voluntary basis should continue
to be subject to supervision until all insurance obligations are either
discharged or transferred to succeeding insurers. Legislation should
provide for appropriate requirements for these exiting insurers.

Objectives of the resolution of insurers
12.2

Legislation provides a framework for resolving insurers which:• protects policyholders; and• provides for the absorption of losses in a manner that respects
the liquidation claims hierarchy.

CF 12
CF 12.2

12.2.1The legislation should support the objective of protecting policyholders.
This however does not mean that policyholders will be fully protectedunder all circumstances and does not exclude the possibility that losses
be absorbed by policyholders, to the extent they are not covered by
PPSs or other mechanisms. A jurisdiction may have additional resolution
objectives in the legislation, such as contributing to financial stability.

12.2.2The legislation should provide a scheme for prioritising the payment ofclaims of policyholders and other creditors in liquidation (liquidation
claims hierarchy). Resolution powers should be exercised in a way that
respects the hierarchy of creditors’ claims in liquidation. In a resolution
action other than a liquidation, creditors should be entitled tocompensation if they receive less than they would have received if theinsurer was liquidated (ie the “no creditor worse off than in liquidation”(NCWOL) principle). The NCWOL principle may require funding toprovide compensation to creditors so that they receive at least as muchas they would have received in a liquidation.

12.2.3

Resolution should seek to minimise reliance on public funding. In
principle, any public funding used for the resolution of the insurer should
be recouped from the insurance sector in a transparent manner. The
phrase “reliance on public funding” does not refer to the use of funds
from policyholder protection schemes to support the implementation ofresolution actions.
Ku

CF 12.2.a.1

In addition to the resolution objectives in Standard 12.2, the framework
for resolving IAIGs should also include as an objective the contribution
to financial stability, where applicable. A jurisdiction may, at its
discretion, choose to rank these resolution objectives with respect to
IAIGs.

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CF 12.2.b

The resolution of an IAIG seeks to minimise reliance on public funding.

Planning
12.3

The supervisor and/or the resolution authority requires, as necessary,
insurers to evaluate prospectively their specific operations and risks inpossible resolution scenarios and to put in place procedures for use during
a resolution.

CF 12
CF 13

12.3.1The supervisor may identify risks, specific to an insurer’s circumstances,that would arise in resolution and which may impact achieving theresolution objectives of the jurisdiction. For example, such risks may
relate to the insurer’s provision of relevant information to the supervisor
or resolution authority, the continuity of certain business operations,
and/or the orderly implementation of a jurisdiction’s PPS.

12.3.2The supervisor should require the insurer to consider such risks andwhere appropriate, prepare contingency plans to mitigate the risk.

12.3.3The supervisor should require that the insurer have procedures in place
to provide necessary information (eg policyholders’ names, types of theircontracts, and the value of each contract) to a relevant organisation(such as a PPS) in a timely manner when the insurer enters into
resolution.
Sr

CF 12.3.a

Resolution plans are in place for IAIGs where the group-wide supervisor
and/or resolution authority, in consultation with the crisis management
group of the IAIG (IAIG CMG), deems necessary.

CF 12.3.a.1

The group-wide supervisor and/or resolution authority should decide,in consultation with members of the IAIG CMG (see ComFrame
material under ICP 25), whether a resolution plan is needed for an
IAIG, considering at least the following:• the IAIG’s activities and its lines of business;• the number of jurisdictions where the IAIG operates;• the complexity of the IAIG’s group structure; and• the potential impact of failure of the IAIG on the financial
system and real economy in the jurisdictions in which the
IAIG operates.
•
Other issues that may also be taken into consideration are, forexample:• the IAIG’s risk management mechanisms; and• expected costs, benefits and outcomes of the resolution
planning requirement.

CF 12.3.a.2

The group-wide supervisor and/or resolution authority should lead thedevelopment of the group-wide resolution plan, in coordination withmembers of the IAIG CMG, and involve the IAIG as appropriate. To
facilitate its implementation, the resolution plan should identify, inparticular:

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• financial and economic functions that need to be continued
to achieve the resolution objectives for the IAIG;• suitable resolution options to preserve such functions orwind them down in an orderly manner;• data requirements for the IAIG’s business operations,structures and financial and economic functions;• potential barriers to effective resolution and actions to
mitigate those barriers; and• actions to protect policyholders.
CF 12.3.a.3

Other involved supervisors and/or resolution authorities may deem it
appropriate to have their own resolution plan for the IAIG’s insurance
legal entity in their jurisdictions when, for instance:• the insurance legal entity’s presence in the jurisdiction islarge in scope and/or scale;• the insurance legal entity provides critical and/or nonsubstitutable insurance coverages; and/or• its resolution may impact that jurisdiction’s financial
system and real economy.
•
Host jurisdiction resolution plans should be established incooperation with the group-wide supervisor and/or resolution authority
to ensure that the plan is as consistent as possible with the group-wide
resolution plan for the IAIG.

CF 12.3.a.4

CF 12.3.b

Resolution plans should be reviewed on a regular basis, or when there
are material changes to the IAIG’s business or structure or any otherchange that could have a material impact on the resolution plan, andbe updated when necessary. These plans should also be subject toregular reviews within the IAIG CMG.

Where a resolution plan is required, the group-wide supervisor and/or
resolution authority, in coordination with the IAIG CMG:
• requires relevant legal entities within the IAIG to submit
necessary information for the development of resolution plan;• regularly undertakes resolvability assessments to evaluate thefeasibility and credibility of resolution strategies, in light of thepossible impact of the IAIG’s failure on policyholders and thefinancial system and real economy in the jurisdictions in which
the IAIG operates;• requires the IAIG to take prospective actions to improve its
resolvability.

CF 12.3.b.1

Resolvability assessments should be conducted at the level of thoseentities where it is expected that resolution actions would be taken, in
accordance with the resolution strategies for the IAIG, as set out in the
resolution plan.

CF 12.3.b.2

Resolvability assessments should consider if it is feasible and credible
for the resolution authority to resolve the IAIG in a way that protects

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policyholders and contributes to financial stability while minimisingreliance on public funds.
CF 12.3.b.3

Resolvability assessments should be undertaken on a regular basis,or when there are material changes to the IAIG’s business or structure,or any other change that could have a material impact on the
resolvability assessment. These assessments should also be subject
to regular reviews within the IAIG CMG.

CF 12.3.b.4

When the resolution plan and/or resolvability assessment identifies
potential barriers to effective resolution, the IAIG may be given theopportunity to propose its own prospective actions to improve its
resolvability by mitigating these barriers.

CF 12.3.c

The group-wide supervisor and/or resolution authority, in coordination
with the IAIG CMG, requires the Head of the IAIG to have and maintaingroup-wide management information systems (MIS) that are able toproduce information on a timely basis, for supervisors and/or resolution
authorities, for the purposes of resolution planning and actions.

CF 12.3.c.1

Information should be available at the Head of the IAIG and the legal
entity level.

CF 12.3.c.2

The IAIG may rely on its existing information system, so long as it fulfils
the objectives of producing information on a timely basis for the
purposes of resolution planning and actions.

CF 12.3.c.3

The IAIG should:• maintain a detailed inventory, including a description andlocation, of the key MIS used in material legal entities of
the IAIG, mapped to core services and critical functions;• identify and take steps to address legal constraints on theexchange of management information among material
entities of the IAIG (for example, as regards theinformation flow from individual entities of the group
to/from the Head of the IAIG);• demonstrate, as part of the resolution planning process,that it is able to produce the essential information needed
to implement plans within an appropriate period of time;and• maintain specific information at a legal entity level,
including, for example, information on intra-groupguarantees booked on a back-to-back basis, orinformation on the assets supporting policyholder
liabilities.

Cooperation and coordination
12.4

The roles and responsibilities of relevant authorities within a jurisdictionthat are involved in exit of insurers from the market or their resolution are
clearly defined.
12.4.1

The jurisdiction should have a designated authority or authorities
empowered to exercise powers for the resolution of an insurer. Where

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there are multiple authorities within a jurisdiction, their respective
mandates, roles and responsibilities are clearly defined and coordinated.

12.5

12.4.2

Where different authorities within a single jurisdiction are in charge of theresolution of an insurer, a lead authority that coordinates the resolutionof the insurer should be identified.

12.4.3

An example where a lead resolution authority should be identified iswhere the insurer has insurance and other financial operations (such as
banking), and the authority responsible for the resolution of the otherfinancial operations is different from the authority responsible for the
resolution of the insurance operations in the jurisdiction.

12.4.4

Coordination agreements may be established where multiple authorities
may be involved in the resolution of an insurer.

The supervisor and/or resolution authority shares information, cooperates
and coordinates with other relevant authorities for the exit of insurers fromthe market or their resolution.
12.5.1

Relevant authorities in this context may include the group-wide
supervisor and/or resolution authority, other involved supervisors and/or
resolution authorities and others that may need to be involved in the
resolution of insurers, such as PPS and supervisors in other financial
sectors.

12.5.2

When an insurer voluntarily exits from the market, the supervisor should
cooperate and coordinate with other relevant supervisors as necessary.

12.5.3Cooperation and coordination should include matters, among others,
such as consulting with or informing other relevant authorities of eg the
anticipated exercise of resolution powers that the resolution authority
considers necessary before taking resolution actions, where this ispracticable.

12.5.4

When consulting, authorities should seek to determine if coordinatedaction on the resolution of an insurance group is necessary to avoid or
minimise adverse impact on other group entities.

12.5.5The supervisor and/or resolution authority should seek to achieve a
cooperative solution with authorities in other jurisdictions who areconcerned with the resolution of the insurance group.

12.5.6

Cooperation and coordination would be crucial when consideringresolution action such as ordering the insurer to cease business (forexample, when the insurer has overseas branches), freezing theinsurer’s assets, and/or removing management of overseas branches,
subsidiaries, or holding companies.

12.5.7

Information sharing, cooperation and coordination should be undertaken
in a manner that do not compromise the prospect of successful exit orresolution.

12.5.8Cross-border coordination agreements may need to be establishedbetween relevant authorities.

Triggers

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12.6

Legislation provides criteria for determining the circumstances in which thesupervisor and/or resolution authority initiates resolution of an insurer.
12.6.1

Resolution should be initiated where an insurer is no longer viable, or is
likely to be no longer viable and has no reasonable prospect of becoming
so, even if the entity is solvent in light of financial reporting standards.
Criteria that determine or help determine when the supervisor and/or
resolution authority initiates resolution should be considered in light of
the insurer and the circumstances of its resolution. Criteria for
determining whether resolution processes should be initiated may
include:• the insurance legal entity is in breach of the minimum capitalrequirement (MCR) and there is no reasonable prospect of
restoring compliance with MCR;
• the consolidated own funds of the insurance group are lower
than the sum of the proportional shares of the MCRs, orminimum capital requirements of the regulated legal entities
belonging to the insurance group (eg due to double-gearing);• the insurer is in breach of other material prudential
requirements (such as a requirement on assets backing
technical provisions) and there is no reasonable prospect ofcompliance being restored;• there is a strong likelihood that policyholders and/or othercreditors will not receive payments as they fall due;
• intra-group transactions impede or are likely to impede theability of the insurer to meet policyholder and/or creditor
obligations as they fall due; or• measures attempting the recovery of the insurer have failed,or there is a strong likelihood that such proposed measures
will: i) not be sufficient to return the insurer to viability; or ii)
cannot be implemented in a reasonable timeframe.

Powers12.7

Legislation provides an appropriate range of powers to resolve insurers
effectively. These powers are exercised proportionately and withappropriate flexibility.
12.7.1

Powers to resolve insurers should be exercised in a proportionate
manner that resolves the insurer most effectively in light of thecircumstances and objectives of resolution. Some powers may not beneeded for all insurers but only for insurers that are, for example, ofsystemic importance in the jurisdiction. Some powers may only affect theinsurer, while others may impact contractual rights of third parties (suchas a suspension of policyholders’ rights or restructuring of policies).

12.7.2

Some resolution powers are exercised with the aim to stabilise or
restructure an insurer and avoid liquidation. Liquidation can be used inconjunction with other resolution powers. Creditors should have a rightto compensation where they do not receive at a minimum what theywould have received in a liquidation of the insurer under the applicable
insolvency regime (NCWOL principle).

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12.7.3

If a court order is required for the resolution authority to exercise
resolution powers, the time required for court proceedings should betaken into consideration for the effective implementation of resolution
actions.

12.7.4

Powers to resolve insurers that may be exercised, subject to adequate
safeguards, should include the following. This list is not exhaustive andthe resolution authority should have discretion to apply other available
powers. The order of presentation of the powers is not an indication of
the sequence in which these powers could be exercised.
• prohibit the payment of dividends to shareholders;• prohibit the payment of variable remuneration to, and allow
the recovery of monies from, Members of the Board, Senior
Management, Key Persons in Control Functions and majorrisk taking staff, including claw-back of variable
remuneration;• prohibit the transfer of the insurer’s assets without
supervisory approval;• retain, remove or replace the Board, Senior Management
and Key Persons in Control Functions;• take control of and manage the insurer, or appoint an
administrator or manager to do so;• withdraw the license to write new business and put all or partof the insurance business contracts into run-off;• sell or transfer the shares of the insurer to a third party;• restructure, limit or write down liabilities (including insurance
liabilities), and allocate losses to creditors and policyholders,
where applicable and in a manner consistent with theliquidation claims hierarchy and jurisdiction’s legal
framework;• override rights of shareholders of the insurer in resolution,
including requirements for approval by shareholders ofparticular transactions, in order to permit a merger,
acquisition, sale of substantial business operations,recapitalisation or other measures to restructure and disposeof the insurer’s business or its liabilities and assets;• terminate, continue or transfer certain types of contracts,
including insurance contracts;• transfer or sell the whole or part of the assets and liabilitiesof the insurer to a solvent insurer or third party;• transfer any reinsurance associated with transferredinsurance policies without the consent of the reinsurer;• temporarily restrict or suspend the policyholders’ rights ofwithdrawing their insurance contracts;

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• stay rights of the reinsurers of the ceding insurer in resolution
to terminate or not reinstate coverage relating to periods after
the commencement of resolution;• impose a temporary suspension of payments to unsecured
creditors and a stay on creditor actions to attach assets orotherwise collect money or property from the insurer; and• initiate the liquidation of the whole or part of the insurer.
12.7.5The choice and application of the powers set out above should take into
account whether an insurer’s disorderly failure would potentially causesignificant disruption to the financial system and real economy, the typesof business the insurer is engaged in, and the nature of its assets andliabilities.

12.7.6

Where the resolution authority takes action which leads to anotherperson taking control of an insurer with a view to restoring, restructuring
or running off the business, the resolution authority should continue tobe responsible for the orderly resolution of the insurer. In particular, theresolution authority should continue to exercise functions which ensurethat the objectives of resolution are met, notwithstanding any additional
responsibilities which the person appointed may have to the insurer or tothe courts.

12.7.7

Resolution powers should be exercised in a manner that does notdiscriminate between creditors on the basis of their nationality, thelocation of their claim, or the jurisdiction where it is payable.

12.7.8Mechanisms should be in place to (i) enable continuity of cover forpolicyholders where this is needed and (ii) ensure timely payment ofclaims to policyholders of the insurer in resolution, with the aim tominimise disruption to the timely provision of benefits to policyholders. A
PPS can be one of the mechanisms that can help ensure timely
payments to policyholders and minimise disruption.

12.7.9When requiring contracts to be transferred to another insurer, theresolution authority should satisfy itself that the interests of thepolicyholders of the transferor and of the transferee are safeguarded. In
some cases this may be achieved through varying, reducing or
restructuring the transferred liabilities.

12.7.10 Portfolio transfers and transfers of other types of contracts of the insurer
in resolution should not require the consent of each policyholder or party
to the contract.
12.7.11 Consistent with the liquidation claims hierarchy, insurance liabilities
should be written down only after equity and all liabilities that rank lower
than insurance liabilities have absorbed losses, and only if the resolution
authority is satisfied that policyholders are no worse off than in liquidation
after compensation, where necessary.
12.7.12 Information on the period during which policyholders are prohibited fromwithdrawing from their insurance contracts should be available topolicyholders in a transparent manner for the purposes of policyholder
protection.
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12.7.13 The exercise of stay powers, their scope of application and the durationof the stays should be designed to address the specific situation of theinsurer in resolution. For example, the duration of the stay could dependon the type of the insurance or financial contract.
Group and Branch Perspectives
12.7.14 There may be circumstances where resolution powers will need to be
exercised at the level of the head of the insurance group and/or nonregulated entities. Resolution authorities should have the capacity to
exercise resolution powers directly on such entities within theirjurisdiction to the extent necessary and appropriate. Where resolution
powers need to be exercised on entities outside of their jurisdiction orlegal authority, the resolution authority should cooperate and coordinate
with relevant supervisors and resolution authorities in the relevant
jurisdictions, to the extent necessary and appropriate.
12.7.15 Unless otherwise specified by the resolution authority, resolution powers
exercised on an insurance legal entity (for instance to cease writing
business) should also apply to the legal entity’s branches. However, theresolution authority responsible for a branch can also exercise powers
toward the branch. In either case, the resolution authorities responsible
for the branch and the insurance legal entity should consult andcooperate with one another.
12.7.16 The resolution authority may choose which power, or which combinationof powers, is applied to which entity within the group. Different types ofpowers may be applied to different parts of the entity’s business.
CF 14
CF 15

CF 12.7.a

Gg

The powers that the supervisor and/or resolution authority may exercise,subject to adequate safeguards and proportionality, for the resolution of
an IAIG include, at least, the following:• prohibit the payment of dividends to shareholders;• prohibit the payment of variable remuneration to, and allow therecovery of monies from, Members of the Boards, Senior
Management, Key Persons in Control Functions and major risktaking staff, including claw-back of variable remuneration;• prohibit the transfer of the IAIG’s assets without supervisory
approval;• retain, remove or replace the Members of the Boards, Senior
Management and/or Key Persons in Control Functions;• take control of, and manage, the IAIG, or appoint an
administrator or manager to do so;• withdraw the licence to write new business and put all or partof the insurance contracts into run-off;• sell or transfer the shares of the IAIG to a third party;• restructure, limit or write down liabilities (including insurance
liabilities), and allocate losses to creditors and policyholders,
where applicable and in a manner consistent with the

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liquidation claims
framework;hierarchy

andjurisdiction’s

legal• override rights of shareholders of the IAIG in resolution,
including requirements for approval by shareholders ofparticular transactions, in order to permit a merger,
acquisition, sale of substantial business operations,recapitalisation, or other measures to restructure and disposeof the IAIG’s business or its liabilities and assets;• terminate, continue or transfer certain types of contracts,
including insurance contracts;• transfer or sell the whole or part of the assets and liabilities of
the IAIG to a solvent insurer or third party;• transfer any reinsurance associated with transferredinsurance policies without the consent of the reinsurer;• temporarily restrict or suspend the policyholders’ rights ofwithdrawing their insurance contracts;• stay rights of the reinsurers of the ceding insurer in resolution
to terminate, or not reinstate, coverage relating to periods after
the commencement of resolution;• impose a temporary suspension of payments to unsecured
creditors and a stay on creditor actions to attach assets orotherwise collect money or property from the IAIG;• establish a bridge institution;• take steps to provide continuity of essential services andfunctions including:o requiring other legal entities within the IAIG (including
non-regulated entities) to continue to provide theseessential services to the entity in resolution, any
successor, or an acquiring entity;o ensuring that the residual entity in resolution cantemporarily provide such services to a successor oran acquiring entity; oro procuring necessary services from unaffiliated third
parties;• temporarily stay early termination rights associated with
derivatives and securities financing transactions; and• initiate the liquidation of the whole or part of the IAIG.
CF 12.7.a.1

In some jurisdictions, PPSs can be utilised as a bridge institution towhich insurance contracts of the IAIG are transferred.

CF 12.7.a.2

Essential services mentioned under CF12.7a include, in particular, IT.

Liquidation

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12.8

12.9

Legislation provides that the supervisor is involved in the initiation of theliquidation of an insurance legal entity (or a branch of a foreign insurer in
its jurisdiction).
12.8.1Legislation should define the involvement of the supervisor in aliquidation, which promotes the protection of policyholders. The
supervisor should be authorised to initiate, or should be involved in theliquidation of an insurance legal entity, or a branch of a foreign insurer in
its jurisdiction.

12.8.2In many jurisdictions, all resolution actions, including liquidation, may
only be initiated by the supervisor and/or resolution authority. However,in some jurisdictions, the liquidation process can be initiated by anotherperson (such as a creditor of the insurance legal entity, the insurance
legal entity itself, or the court). If legislation permits another person toinitiate liquidation, it should: i) require prior approval of the supervisor, orii) at a minimum, require prior coordination with the supervisor. If
legislation permits another person to initiate liquidation without such priorapproval or coordination, it should provide that the supervisor may
challenge the person’s action.

Legislation provides a high legal priority to policyholders’ claims within theliquidation claims hierarchy.
12.9.1

Policyholders should receive high legal priority in the liquidation of an
insurance legal entity (or of a branch) so that policyholders rank above
ordinary unsecured creditors. However, it is common in many
jurisdictions that a higher priority is given to a limited number of othercategories of claims. These may include claims:• by liquidators, such as claims corresponding to expenses
arising from the liquidation procedure;• by employees;• by tax or fiscal authorities;• by social security systems; and• claims on assets subject to rights in rem (eg throughcollateral, lien, mortgage).

12.9.2

In some jurisdictions, policyholders receive higher priority but only on adetermined part of the insurance legal entity’s assets (eg the assets
covering technical provisions). In such jurisdictions, with respect to thisportion of the insurer’s assets, policyholders’ claims are generally
subordinate only to liquidation expenses.

12.9.3Mechanisms facilitating timely payment and, when needed, continuity ofcontracts should be in place. In some jurisdictions, a PPS or otherprotection mechanisms can contribute to a resolution and ensure timely
payment of claims to policyholders. Where a bridge institution isavailable, this can ensure continuity of insurance products in cases
where no insurer present in the market takes over the insurance portfolioof the insurance legal entity that would otherwise be liquidated. A PPS
or other protection mechanisms could also ensure compliance with
NCWOL principle by providing compensation to policyholders so that

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none are worse off than in liquidation. In some jurisdictions, a PPS can
only pay claims after liquidation has been initiated.
Safeguards
12.10

The resolution authority exercises resolution powers in a way that respects
the liquidation claims hierarchy and adheres to the NCWOL principle. If theresolution authority departs from the general principle of equal treatmentof creditors of the same class (pari passu), the resolution authority
substantiates the reasons for such departure to all affected parties.
12.10.1 While respecting the liquidation claims hierarchy, the resolution authority
could treat certain types of creditors differently from others in the sameclass of creditors’ hierarchy. In such cases, the reasons for such atreatment should be transparent and clearly explained. Concerned
creditors should be protected by the NCWOL principle and where they
do not receive at a minimum what they would have received in aliquidation of the entity they should have a right to compensation.
12.10.2 For instance, different types of creditors could be:• two categories of policyholders ranking pari passu where one
is covered by a PPS while the other is not; or• two categories of creditors ranking pari passu but thecreditors are different in nature (eg direct policyholders
versus cedants).
12.10.3 For instance, different treatment of a creditor could be:• settling contracts ranking pari passu at a different pace; or• reducing (writing down) contracts ranking pari passu at adifferent rate.
12.10.4 These options could be used provided this does not infringe the NCWOL
principle. For instance, Figure 12.2 illustrates the insurance liabilities(ILs) of an insurance legal entity consisting of two portfolios (A and B),
where the total assets amount to 120 but the ILs of each portfolio amountto 100. Assuming that these two portfolios rank pari passu, eachpolicyholder would receive 60% of their credit in liquidation. The
resolution authority could reduce the ILs of A to 80 and the ILs of B to 70(for instance, in the event where a sound insurer or sound insurers
accepted to fund part of but not the whole shortfall). However, if theresolution authority reduces the ILs of B to 40, the resolution authority
will need to provide compensation to policyholders of portfolio B (in theamount of 20) in order to meet the NCWOL principle. This simplified
example does not take account of potential PPSs which could pay someclaims.

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Figure 12.2

12.10.5 The resolution authority could take actions which could worsen theposition of some creditors, provided that said creditors receive
compensation sufficient to meet the NCWOL principle. Figure 12.3
illustrates this approach – it would be beneficial to policyholders in
portfolio B to have their policies transferred, but the portfolio transfer
worsens the position of policyholders in portfolio A. Policyholders in
portfolio A therefore should receive appropriate compensation to ensurethat they are not worse off compared to a liquidation scenario prior to theportfolio transfer. This example does not take account of potential PPSs
which could pay some claims.
Figure 12.3

12.11

Legislation provides whether insurance liabilities may be restructured andwhether policyholders may absorb losses.
12.11.1 In some jurisdictions, insurance liabilities may be restructured.
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• amending terms of insurance contracts;• terminating or
policyholders;

restructuringoptions

providedto• reducing the value of current and future benefits;• early settling of contracts by payment of a proportion of theinsurance liabilities to provide a more rapid and cost-effective
resolution. This can apply to future determined benefits but
also, and in particular in the case of inward (accepted)
reinsurance, to future contingent claims; or• restructuring reinsurance contracts to allow losses to be
imposed on cedants as appropriate.
12.11.2 In most cases, approval from the court is required for the restructuring,
while in some jurisdictions the resolution authority is empowered torestructure all or part of insurance liabilities without court approval.
Restructuring should only occur if it adheres to the NCWOL principle.
12.11.3 Where insurance liabilities may be subject to restructuring in resolution,
the resolution authority should clearly communicate information (forexample, the processes through which such restructuring is undertaken
and the extent that policyholders may be forced to absorb losses) tointerested stakeholders.
Issues specific to groups and branches
12.12

Where the insurance legal entity belongs to a group and the head of theinsurance group is located in the same jurisdiction as the legal entity,mechanisms are in place through which the head of the insurance group isable to be resolved.
12.12.1 When an insurance legal entity is resolved, the resolution of, or theapplication of some resolution powers to, the head of the group may
support or aid the orderly resolution of the insurance legal entity and best
ensure the protection of policyholders.

CF 16
CF 12.12

Lo

CF 12.12.a.1 ICP 12 and the ComFrame material integrated in ICP 12 may be
applicable, where appropriate, to the resolution of:• the Head of the IAIG, and any intermediate holding
company within the IAIG;• non-regulated operational entities within the IAIG that are
significant to the business of the group;• non-insurance financial institutions within the IAIG; and• branches of insurers within the IAIG.
•
This guidance is not intended to override any existing sectoral
requirement (eg for banks).
CF 12.12.a.2 Resolution actions should be taken for legal entities and branches
within the IAIG, that fall within the scope stipulated above, as
necessary and appropriate.
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12.13

The resolution authority has the authority to resolve a branch of a foreign
insurer located in its jurisdiction and, in such circumstance, coordinatesand cooperates with the supervisor and/or resolution authority responsible
for the insurance legal entity.
12.13.1 The resolution authority responsible for a branch should have the ability
to support a resolution carried out by the resolution authority of theinsurance legal entity which owns the branch or by the resolution
authority responsible for the resolution of the insurance group to which
the branch belongs.
12.13.2 The resolution process may differ in the jurisdiction of the branch and inthat of the insurance legal entity, due, among other things, to different
insolvency laws and creditor hierarchies.
12.13.3 Where the resolution authority of the insurance legal entity which owns
the branch or the resolution authority responsible for the resolution of theinsurance group to which the branch belongs are not taking action, or
are acting in a manner that does not take sufficient account of theobjectives of resolution in the branch jurisdiction, the resolution authority
responsible for the branch may need to take actions of its own initiative.
12.13.4 Where the resolution authority for a branch takes resolution action of its
own initiative, it should give prior notification and consult the supervisor
or resolution authority of the insurance legal entity which owns thebranch and/or the supervisor or resolution authority of the insurance.

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Reinsurance and Other Forms of Risk Transfer
The supervisor requires the insurer to manage effectively its use of reinsurance andother forms of risk transfer. The supervisor takes into account the nature of
reinsurance business when supervising reinsurers based in its jurisdiction.
13.0
Introductory Guidance
13.0.1

Reinsurance refers to insurance purchased by an insurer (the ceding
insurer) to provide protection against certain risks, primarily underwriting
risks of the insurance policies issued by the insurer. Reinsurers assume
these risks in exchange for a premium. Other forms of risk transfer
include alternative reinsurance arrangements, such as risk transfer to thecapital markets. For simplicity, this ICP uses “reinsurance” to refer toboth mainstream reinsurance and other forms of risk transfer.

13.0.2

Geographical diversification of risk, which typically involves risk transfer
across jurisdictional borders, is a key element of ceding insurer’s andreinsurer´s capital and risk management. Geographical diversification
can also have an impact in the jurisdiction of the ceding insurer, inparticular jurisdictions exposed to catastrophes. By ceding insurance risk
across borders, ceding insurers in the jurisdiction, and the jurisdiction asa whole, can benefit from a reduced concentration of insurance risk
exposures at the ceding insurer and jurisdiction level respectively. This
may also contribute to the financial stability of the jurisdiction.

13.0.3Ceding insurers and reinsurers may face external limitations togeographical diversification, for example, in the form of constraints tocross-border risk transfer. The supervisor should be aware of and take
into account the potential impacts of such limitations on individual ceding
insurers and reinsurers as well as on the soundness and efficiency of theinsurance market.

13.0.4

A reinsurance contract is one of indemnity between the reinsurer andceding insurer and does not constitute a legal transfer of part of theunderlying risk in the same way as, for example, a novation.
Nonetheless, reinsurance contracts have the effect of transferring part of
the underlying risk in an economic sense. The supervisor should remainaware that while reinsurance transfers insurance risk from the ceding
insurer to the reinsurer, it also creates other risks. In a standardtransaction, the ceding insurer reduces its insurance risk and assumes
other risks such as credit, operational and basis risk; the reinsurer
assumes risks such as insurance, timing, operational and credit risk.

13.0.5A reinsurance contract is by nature a business-to-business transaction,
made between professional counterparties as part of a wider risk andcapital management approach. For this reason, the sort of asymmetry ofexpertise and knowledge associated with insurance contracts involving
general consumers is usually not an issue in the reinsurance sector,
although some asymmetry of bargaining power can exist, depending on
the precise dynamics of the market. Thus, typically, it is not necessary
for the supervisor to seek the same level of protection for ceding insurers
as it does for general consumers (see ICP 19 Conduct of Business).

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13.0.6

The supervisor should be able to assess whether ceding insurers makeeffective use of reinsurance. This involves gaining an understanding of,and comfort with, at least:• the ceding insurer’s reinsurance strategy and reinsurance
programme;• the systems of risk management and internal controls put inplace in order to implement the reinsurance strategy andexecute the reinsurance programme;• the economic impact of the risk transfer originating from theceding insurer’s reinsurance programme; and• the impact of reinsurance on the ceding insurer’s liquidity
management.

13.0.7The standards and guidance under this ICP are applicable to insurers
and reinsurers, thus throughout this ICP:
• references to ceded reinsurance should be taken to include
ceded retrocession (ie the reinsurance ceded by reinsurers);• references to ceding insurers should be taken to include
ceding reinsurers (ie retrocedents); and• references to reinsurers should be taken to include
retrocessionaires (ie reinsurers that assume reinsurance fromceding reinsurers).

13.1

The supervisor requires ceding insurers to have a reinsurance programmethat is appropriate to their business and part of their overall risk and capitalmanagement strategies.
13.1.1

A ceding insurer’s risk and capital management strategies should clearly
articulate the part played by reinsurance, in particular:• the objectives that are pursued by using reinsurance;• the risk concentration levels and ceding limits as defined by
the ceding insurer’s risk appetite; and• the mechanisms to manage and control reinsurance risks.

13.1.2

When articulating the part played by reinsurance in the overall risk andcapital management strategies, the ceding insurer should take into
account its business objectives, levels of capital and business mix, withparticular reference to:• risk appetite (both gross limit and net retention);• peak exposures and seasonality in the insurance book;• levels of diversification in the insurance book; and• appetite for credit risk posed by reinsurers.

13.1.3

The reinsurance programme comprises the detailed implementation of
the reinsurance related elements of the risk and capital management
strategies in terms of coverage, limits, deductibles, layers, signed lines
and markets used. It should reflect the ceding insurer’s overall risk

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appetite, comparative costs of capital and liquidity positions determinedin the reinsurance strategy. Therefore, reinsurance programmes canvary significantly in complexity, levels of exposure and number ofparticipants.
13.1.4

In some instances, an insurer may have a business strategy and risk
appetite to retain all risk and therefore a reinsurance programme would
not be necessary.

13.1.5

Senior Management develops the reinsurance related elements of therisk management strategy as well as the reinsurance programme. Senior
Management is also responsible for establishing appropriate systems
and controls to ensure that these are complied with. The Board is
responsible for approving the strategy and ensuring an appropriate
oversight and consistent implementation of the reinsurance programme.

13.1.6

Senior Management of the ceding insurer should regularly review theperformance of its reinsurance programme, to ensure that it functions as
intended and continues to meet its strategic objectives. It is likely thatsuch a review would take place as part of the feedback loop that is partof the risk management framework.

13.1.7The supervisor should understand the ceding insurer’s businessobjectives and strategies, how reinsurance fits into these, and assess
the extent to which objectives and strategies are adequately reflected in
the reinsurance programme. The supervisor should challenge the ceding
insurer where it identifies inconsistencies between the objectives andstrategies and the reinsurance programme.

13.1.8The supervisor’s assessment of a ceding insurer’s reinsurance
programme should be based on a number of factors, such as the:• structure of the programme, including any alternative risk
transfer mechanisms;• proportion of business ceded so that the net risks retained arecommensurate with the ceding insurer’s financial resources
and risk appetite;• financial condition and claims payment record of thereinsurers in question (both in normal and stressed
conditions);• levels of exposure to a single reinsurer or different reinsurers
being part of the same group;• extent of any credit risk mitigation in place;• expected resilience of the reinsurance programme in stressedclaims situations, including stress related to the occurrence ofmultiple and/or catastrophic events;• cession limits, if any, applicable in the jurisdiction;• the supervisory regime in place in the jurisdiction of thereinsurer;• level of effective risk transfer; andPublicIAIS ICPs and ComFrame – November 2019

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• extent to which relevant functions are outsourced by theceding insurer, including the criteria for the selection ofreinsurance brokers.
Group perspectives
13.1.9The group-wide supervisor should require a reinsurance strategy for the
insurance group that includes the following issues:• its interaction with the
management strategies;group-wide

risk

and

capital• how the risk appetite is achieved, on both a gross limit and net
retention basis;• the appetite for reinsurer credit risk, including approved
security criteria for reinsurance transactions and aggregate
exposure criteria to individual or related reinsurers;• the autonomy afforded to individual insurance legal entities toenter into “entity specific” reinsurance arrangements, and the
management and the aggregation of these exposures in thegroup-wide context;• procedures for managing reinsurance recoverables, including
required reporting from insurers;• intra-group reinsurance strategy and practice; and• use of alternative risk transfer, including capital markets risk
transfer products.
13.2

The supervisor requires ceding insurers to establish effective internal
controls over the implementation of their reinsurance programme.
13.2.1

Control of the reinsurance programme should be part of the ceding
insurer’s overall system of risk management and internal controls (seeICP 8 Risk Management and Internal Controls). The supervisor should
require that the controls and oversight in place are suitable in the context
of the ceding insurer’s business.

13.2.2The ceding insurer should ensure that the characteristics of its
reinsurance programme, including the credit risk posed by the reinsurer,
are reflected in its capital adequacy assessment as well as its ORSA
(see ICP 16 Enterprise Risk Management for Solvency Purposes).

Credit risk posed by the reinsurer
13.2.3

When developing the reinsurance programme the ceding insurer should
consider its appetite for reinsurer credit risk. Reinsurers may facesolvency issues, leading to delayed payment or default, and this canhave significant consequences for the solvency and liquidity of theceding insurer.

13.2.4

In practice, ceding insurers have various options to mitigate reinsurer
credit risk, for example:• establishing criteria on the financial condition and claims
payment record of eligible reinsurers;

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• setting limits on risks ceded to a single reinsurer;• ensuring a spread of risk amongst a number of reinsurers;• incorporating rating downgrade or other special termination
clauses into the reinsurance contract;• requiring the reinsurer to post collateral (the ability to require
this may depend upon the relative commercial strengths of theceding insurer and reinsurer);• proactively monitoring reinsurance claims recoveries; and• withholding reinsurer’s funds.
Approved security criteria
13.2.5The ceding insurer should have in place procedures for identifying
reinsurers that meet its security requirements. If a ceding insurer
develops a pre-approved list of reinsurers, there should also beprocesses for dealing with situations where there is a need to assess
reinsurers outside any pre-approved list. Ceding insurers may have theirown credit committees to make their own assessment of the risk.

13.2.6

In line with other approaches to identifying appropriate reinsurers, any
approved security criteria should be derived from a high level statementof what reinsurance security will be acceptable to the ceding insurer,
which may be based on:• external opinions;• the ceding insurer’s own view of the reinsurer;• minimum levels of capital;• duration and quality of relationship;• expertise of the reinsurer;• levels of retrocession;• reinsurance brokers’ security criteria; or• a mixture of these and other factors.

Aggregate exposure limits or guidelines
13.2.7A ceding insurer should set prudent limits or guidelines reflecting security
and size of the reinsurer, in relation to its maximum aggregate exposure
to any one reinsurer or to a group of related reinsurers, which would becomplementary to any supervisory limits or guidelines.

13.2.8The ceding insurer should have in place procedures for monitoring thisaggregate exposure to ensure that these limits or guidelines are notbreached. The ceding insurer should also have procedures to manage
excess concentrations going forward, such as bringing them back within
limits or guidelines.

Matching of underlying underwriting criteria
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the underlying policies. The ceding insurer may bear a greater net
exposure than it initially intended because of this gap.
Criteria and procedures for purchasing facultative cover
13.2.10 The ceding insurer should have appropriate criteria in place for thepurchase of facultative coverage. Any facultative reinsurance coveragebought should be linked to the procedures for aggregations and recovery
management.
13.2.11 The ceding insurer should have a specific process in place to approve,monitor and confirm the placement of each facultative risk. If facultativereinsurance is necessary to ensure that acceptance of a risk would notexceed maximum net capacity and/or risk limits, such reinsurance
should be secured before the ceding insurer accepts the risk.
Operational risk related to contract documentation
13.2.12 In order to reduce the risk and scope of future disputes, the ceding
insurer and the reinsurer should have in place processes and adequate
controls to document the principal economic and coverage terms andconditions of reinsurance contracts clearly and promptly.
13.2.13 Ceding insurers and reinsurers should finalise the formal reinsurance
contract without undue delay, ideally prior to the inception date of thereinsurance contract.
13.2.14 All material reporting due to and from reinsurers should be timely andcomplete, and settlements should be made as required by thereinsurance contract.
13.2.15 The ceding insurer should consider how its reinsurance contracts will
operate in the event of an insolvency of itself or its reinsurer.
13.2.16 The supervisor should have access, on request, to material reinsurance
documentation. In case of indications of significant uncertainties in termsof reinsurance documentation, the supervisor should take into accountthe resulting underwriting, operational and legal risks when considering
the effects of reinsurance on the ceding insurer’s solvency.
13.3

The supervisor requires ceding insurers to demonstrate the economic
impact of the risk transfer originating from their reinsurance contracts.
13.3.1The supervisor should regard as a reinsurance contract an agreementthat transfers sufficient insurance risk to be considered insurance underjurisdictional rules.

13.3.2

In general, a contract should be considered as a loan or deposit if, during
its development, the ceding insurer has the unconditional obligation toindemnify the reinsurer for any negative balances that may arise out of
the contractual relationship. This characteristic does not result in risk
transfer. All liabilities of the ceding insurer should be contingent on theproceeds of the underlying insurance business.

13.3.3

Upon request from the supervisor, the ceding insurer should provide
sufficient information about its reinsurance contracts to allow the

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supervisor to make informed judgments about the substance of the risk
transfer (ie, the degree of risk transfer in an economic sense).
13.3.4

Where there are concerns of inappropriate reporting with respect to thedegree of risk transfer, the supervisor should assess the substance ofthe reinsurance contract entered into by the ceding insurer and how it
has been reported by the ceding insurer. Further, the supervisor shouldbe able to assess the impact that the ceding insurer’s reinsurance
contracts have on the ceding insurer’s capital requirements. The
supervisor should challenge Senior Management of the ceding insurer
on the purpose of individual contracts where appropriate.

Finite reinsurance

13.4

13.3.5

Finite reinsurance is a generic term that, for the purposes of this ICP, isused to describe a spectrum of reinsurance arrangements that transfer
limited risk relative to aggregate premiums that could be charged under
the contract.

13.3.6

Finite reinsurance transactions are legitimate forms of reinsurance
arrangements; however, it is essential that they are accounted forappropriately. In particular, only contracts that transfer sufficient
insurance risk in order to meet the requirements of the relevant
accounting standards in force in each jurisdiction can be accounted foras reinsurance.

13.3.7The supervisor should pay particular attention to reinsurance contracts
that have, or appear to have, limited levels of risk transfer which may
change over the duration of the contract. Only the amount of risk
transferred under finite reinsurance contracts should be included in theregulatory capital calculations of the ceding insurer.

When supervising ceding insurers purchasing reinsurance across borders,
the supervisor takes into account the supervision performed in thejurisdiction of the reinsurer.
13.4.1

The cross-border nature of reinsurance transactions, together with therelative sophistication of the market participants involved in reinsurance,
are key elements that the supervisor should consider when supervisingceding insurers.

13.4.2

Taking into account the supervision performed in the jurisdiction of thereinsurer may help the supervisor to assess the overall risk profile of theceding insurer. This can be done, for example, by reviewing thesupervisory framework and practices in the jurisdiction of the reinsurer,
or by engaging in supervisor-to-supervisor dialogue.

Supervisory recognition
13.4.3The supervisor can benefit from relying on supervision performed in thejurisdiction of the reinsurer. Benefits may include, for example,
strengthened supervision as well as a more efficient use of resources by
the supervisor of the ceding insurer.

13.4.4

Where supervisors choose to recognise aspects of the work of othersupervisory authorities, they should consider putting a formal
supervisory recognition arrangement in place (see ICP 3 Information
Exchange and Confidentiality Requirements).

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13.4.5

13.5

13.6

Supervisory recognition can be conducted through unilateral, bilateraland multilateral approaches to recognition. All three approaches
recognise the extent of equivalence, compatibility or, at least,
acceptability of a counterparty’s supervisory system. Bilateral andmultilateral approaches typically incorporate a mutuality component to
the recognition element, indicating that this is reciprocal.

The supervisor requires the ceding insurer to consider the impact of its
reinsurance programme in its liquidity management.
13.5.1Given the nature and direction of cash flows within a ceding insurer,
liquidity risk historically has not been considered to be a major issue inthe insurance sector. However, there can be liquidity issues within an
individual ceding insurer which could arise specifically from the ceding
insurer’s reinsurance programme.

13.5.2

Reinsurance contracts do not remove the ceding insurer’s underlying
legal liability to its policyholders. The ceding insurer remains liable tofund all valid claims under contracts of insurance it has written,
regardless of whether they are reinsured or not. For this reason, a large
claim or series of claims could give rise to cash flow difficulties if there
are delays in collecting from reinsurers or in the ceding insurer providing
proof of loss to reinsurers.

13.5.3The supervisor should require ceding insurers to take appropriate
measures to manage their liquidity risk, including funding requirements
in adverse circumstances. As with all risks, the insurer should develop
its own response to the level of risk it faces and the supervisor should
assess these responses. There are a number of ways in which liquidity
risk may be mitigated. For example, some insurers choose to arrange aline of credit from a bank in order to deal with short-term liquidity issues.

13.5.4

Ceding insurers may make arrangements with their reinsurers in orderto mitigate their liquidity risk. These arrangements, if used, may include
clauses that trigger accelerated payment of amounts due from reinsurers
in the event of a large claim and/or the use of collateral or deposit
accounts, giving ceding insurers access to funds as needed. Use of sucharrangements is a commercial matter between the ceding insurer andreinsurer.

13.5.5External triggers can give rise to liquidity issues, especially wherereinsurers have retroceded significant amounts of business. If a
reinsurance contract contains a downgrade clause that gives the ceding
insurer the right to alter the contract provisions, or obliges the reinsurer
to post collateral with a ceding insurer to cover some or all of its
obligations to that ceding insurer, such action may cause liquidity issues
among reinsurers and may be pro-cyclical. Therefore, the supervisor
should be aware of the potential consequences of such triggers for theoverall efficiency and stability of the market.

In jurisdictions that permit risk transfer to the capital markets, thesupervisor understands and assesses the structure and operation of suchrisk transfer arrangements, and addresses any issues that may arise.

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13.6.1

A wide range of techniques has been developed to allow the transfer of
insurance risk to the capital markets, resulting in a diversity andcomplexity of risk transfer arrangements.

13.6.2

In general, arrangements used to enable risk transfer to the capital
markets operate like mainstream reinsurance. For example, risk istransferred via a reinsurance contract with similar terms and conditions
to any other reinsurance contract. Further, the risk assuming entity is areinsurer subjected to licensing conditions like any other reinsurer. The
defining feature of these risk transfer arrangements is the direct fundingof the reinsurance risk exposure with funds raised, often exclusively, inthe capital markets.

13.6.3

Insurance risk transfer to the capital markets can occur by making useof a wide variety of arrangements. Arrangements in the non-life sector
are often broadly classified into four groups: 1) catastrophe bonds (catbonds); 2) collateralised reinsurance; 3) industry loss warranties (ILWs);
and 4) sidecars. These four groups, which are not mutually exclusive,
focus on different elements of the risk transfer arrangements:• cat bonds take the name from the financial instrument (ie adebt security) issued to fund an insurance exposure, usuallya catastrophe;• collateralised reinsurance is generally used to highlight acredit risk mitigation feature of certain insurance transactions(ie the collateralisation of the insurance exposure);• ILWs refer to a range of financial instruments used bycounterparties, who may or may not be insurers, to buy or sell
protection related to insurance risks; and• sidecars refer to a legal entity created ‘on the side’ of an
insurer that is used to transfer insurance risk, usually to thecapital markets.
To illustrate that these are not mutually exclusive, there could be asidecar that underwrites insurance risk via an ILW and funds the
exposure through an issuance of cat bonds, the proceeds of which areused to collateralise the reinsurance risk assumed.

13.6.4In the life sector, some arrangements are similar to the non-life sector(for example, mortality bonds, which operate like cat bonds). Other life
insurance arrangements have specific features that are not used in nonlife insurance, such as the funding of certain portions of the ceding
insurer’s reserves.

13.6.5

Despite the many similarities with mainstream insurance, transactionstransferring insurance risk to the capital markets have special featuresthat the supervisor should bear in mind in order to assess theappropriateness and effectiveness of their use by ceding insurers andreinsurers.

Initial assessment
13.6.6

Insurance risk transfer to the capital markets usually entails the creationof a dedicated entity or a legally ring-fenced arrangement, specificallyconstituted to carry out the transfer of risk. These are referred to by a

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variety of names, such as special purpose vehicles, special purpose
reinsurance vehicles, or special purpose insurers; for the purpose of the
ICPs, they are collectively referred to as special purpose entities (SPEs).
13.6.7The main purpose of an SPE is to assume insurance risk, funding theexposure by raising funds in the capital markets, and to be dismantled
once its purpose has been fulfilled. Importantly, as SPEs conduct
insurance business, the supervisor should consider licensing them as
insurers (see ICP 4 Licensing). Licensing of SPEs should beappropriately tailored to take into consideration the uniquecharacteristics of SPEs. In this respect, close collaboration among those
supervising ceding insurers and those supervising SPEs before
authorisation of the SPE and on an ongoing basis can be particularly
helpful.

13.6.8Key elements of any SPE structure include:• the insurance risk that it assumes is “fully funded” (ie, that the
exposure taken by the SPE is funded across a range offoreseeable scenarios from the time the SPE goes on risk to
the time it comes off risk);• the claims of any investors in the SPE are subordinate tothose of the ceding insurer; and• the investors in the SPE have no recourse to the ceding
insurer in the event of an economic loss.

13.6.9In order to be able to understand and assess whether an SPE structure
meets the criteria above, the supervisor should take the following into
account:• ownership structure of the SPE;• suitability of the Board and Senior Management of the SPE;• the SPE's management of credit, market, underwriting andoperational risks;• investment and liquidity strategy of the SPE;• ranking and priority of payments;• extent to which the cash flows in the SPE structure have beenstress tested;• arrangements for holding the SPE’s assets (eg trust accounts)
and the legal ownership of the assets;• extent to which the SPE’s assets are diversified; and• use of derivatives, especially for purposes other than risk
reduction and efficient portfolio management.

13.6.10 Understanding the role of all the parties to the SPE arrangement is
critical to understanding the underlying risks, particularly as these may
be fundamentally different from those involved in a traditional
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• extent to which key parties have been fully disclosed (egsponsor, (re)insured, investors, advisors, counterparties) andare known to the supervisor;• extent to which potential conflicts of interest between allparties to the SPE have been adequately disclosed andaddressed (such as situations where sponsors also take amanaging role);• credit risk associated with key service providers, including
financial guarantors used to protect the position of investors;• degree of basis risk that is assumed by the ceding insurer andto what extent this could have immediate ramifications for theceding insurer’s financial position in case of a loss;• details of the SPE’s management arrangements and key
personnel;• third party assessments of the SPE structure (eg by credit
rating agencies);• expertise of the legal advisors involved;• robustness of any financial or actuarial projections, if
applicable (eg if triggers are indemnity based); and• disclosure of outsourcing agreements.
13.6.11 As many SPEs are designed to operate with a minimum of day-to-day
management, the supervisor should understand and assess the extent
to which the systems of risk management and internal controls areadequate and proportionate to the nature of the underlying risks and tothe complexity and expected lifespan of the SPE structure.
13.6.12 The systems of risk management and internal controls of the SPE should
ensure that, at least:• investment restrictions are not breached;• interest payments, dividends, expenses and taxes areproperly accounted for;• movements above established thresholds in assets andcollateral accounts are reported;• assets are legally existent and technically identifiable; and• liabilities can be determined on a timely and accurate basis
and obligations satisfied in accordance with the underlying
contracts.
13.6.13 The supervisor should understand and assess:• the systems of risk management and internal controls of theSPE, particularly the extent to which these are sufficient toensure effective operation in compliance with the SPE’s legal
and supervisory obligations; and• operational risks within the SPE structure and any mitigation
arrangements.
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Basis risk
13.6.14 The supervisor should understand and assess the extent to which SPE
arrangements give rise to basis risk. This arises where the trigger forindemnity under the SPE arrangement is different from the basis onwhich underlying protected liabilities can arise.
13.6.15 Where SPEs contain indemnity triggers (ie, recovery from the SPE isbased on the actual loss experience of the ceding insurer) basis risk isunlikely to be an issue. However, many SPEs contain non-indemnity
triggers, such as parametric triggers (driven by objectively measurable
events) or modelled triggers (driven by the outcome of modelled,industry-wide losses). In such cases, there may be events where theceding insurer will remain exposed to its underlying policyholders without
having recourse to the SPE.
13.6.16 Basis risk should be considered with reference either to the amount ofcredit given by the supervisor of the ceding insurer for the SPE
arrangement or in the capital requirement of the ceding insurer, wheresuch mechanisms are used.
13.6.17 Additionally, in some jurisdictions the accounting and regulatory
treatment of insurance risk transfer that uses non-indemnity triggers may
be different from the accounting treatment of indemnity-based insurance.
The supervisor should understand these accounting differences and theimpact these may have on the financial statements of the ceding insurer
and the reinsurer.
Ongoing Supervision
13.6.18 The supervisor should understand the various issues that emerge in theongoing supervision of SPEs and their use. Consideration should begiven to the following areas:• measures to be taken by the supervisor if any of the licensing
or authorisation conditions are breached;• level of capital and ability of the SPE to continue to respondadequately should covered events occur;• level of reporting required by the supervisor in order tounderstand and assess whether the SPE is complying with its
obligations;• the SPE’s response in the event of fluctuations in the valuesof invested assets (eg match/mismatch between collateralaccount and exposure, flow of premiums, fees, commissions);• arrangements put in place in the SPE to ensure that the “fully
funded” condition is maintained in the case that the insurance
risks assumed are rolled over from one risk period to another;and• where the SPE undertakes multiple transactions,arrangements put in place in the SPE to ensure that the funds
corresponding to each transaction are appropriately
segregated and legally insulated.
Unwinding of SPE arrangements
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13.6.19 The unwinding of SPEs is often influenced by the dynamics of insurance
losses. The supervisor should understand and gain comfort with theprovisions in place to require orderly unwinding of SPEs. In particular,
the supervisor should understand the process related to the generation,
mitigation and management of any residual risk emerging from theunwinding of the SPE.
13.6.20 In addition, the supervisor should understand the process and stages
that the SPE goes through when it comes to a natural end and its
obligations have been fulfilled and the SPE is liquidated. There is adistinction between unwinding in the event of a loss and unwinding atransaction reaching legal maturity (without a loss having occurred).
While the latter case is usually simple and straightforward, unwinding ina full or partial loss situation deserves close attention. Consideration
should be given to the following areas:• issues relating to share buy-back and conditions to its
materialisation;• issues relating to disposal of the investment portfolio;• “dismantling” of the SPE and residual risks;• where the SPE undertakes multiple transactions, issues
relating to the segregation and legal insulation of assets pertransaction; and• supervisory issues relating to risks which revert to the ceding
insurer on termination of the arrangement.
Considerations for supervisors of insurers ceding risks to SPEs
13.6.21 Although in many jurisdictions insurance risk transfer to the capital
markets is not permitted, the supervisor should consider that some of theinsurers in its jurisdiction may be transferring insurance risk to SPEs
located in another jurisdiction that permits insurance risk transfer to thecapital markets. In this case, the supervisor of the ceding insurer should
consider, among other things:• whether the risk transfer taking place involves an SPE that islicensed in the jurisdiction where the insurance risk isassumed;• the supervisory regime to which the SPE is subject in its
jurisdiction; and• the extent to which the ceding insurer has adequately
provided for the identification, assessment and managementof the risks associated with transferring insurance risk to an
SPE (eg credit risk, basis risk).

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Valuation
The supervisor establishes requirements for the valuation of assets and liabilities
for solvency purposes.
14.0
Introductory GuidanceApplication
14.0.1The IAIS considers it is most desirable that the methodologies forcalculating items in general purpose financial reports can be used for, or
are substantially consistent with, the methodologies used for regulatory
reporting purposes, with as few changes as possible to satisfy regulatory
requirements. However, the IAIS also recognises that this may not be
possible or appropriate in all respects, considering the differing
purposes. The IAIS believes it is essential that differences between
general purpose financial reports and published regulatory reports are
publicly explained and reconciled.

14.0.2The IAIS considers that differences between technical provisions forgeneral purpose financial reports and published regulatory reports
should be publicly explained and reconciled in terms of differences indata, discount rate, methodology and assumptions used together withthe rationale for why any different approach is appropriate for solvency
purposes.

14.0.3To the extent that financial reporting standards, including IFRS, areconsistent with the standards in this ICP, valuations that are inaccordance with those financial reporting standards may be regarded ascompliant with this ICP.

14.0.4The context and purpose of the valuation of assets or liabilities of an
insurer are key factors in determining the values that should be placedon them. This ICP considers the valuation requirements that should be
met for the purpose of the solvency assessment of insurers within thecontext of IAIS risk-based solvency requirements that reflect a totalbalance sheet approach on an economic basis 3 and address all
reasonably foreseeable and relevant risks.

14.0.5

Standard 17.1 states that the supervisor requires a total balance sheet
approach to be used in the assessment of solvency to recognise theinterdependence between assets, liabilities, regulatory capitalrequirements and capital resources and to require that risks areappropriately recognised. 4 Such an approach ensures that thedetermination of available and required capital is based on consistentassumptions for the recognition and valuation of assets and liabilities forsolvency purposes.

14.0.6

To achieve consistency with this approach to setting capitalrequirements in the context of a total balance sheet approach, capital

3 An economic basis may include amortised cost valuations and market-consistent valuations thatcomply with this ICP.
4 The total balance sheet approach is an overall concept rather than one which implies the use of aparticular methodology such as a cost of capital method or a percentile method.

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resources should broadly be regarded as the difference between assets
and liabilities, but on the basis of their recognition and valuation forsolvency purposes.
Solvency purposes
14.0.7The valuation "for solvency purposes" referred to in this ICP is thevaluation of the assets and liabilities used within the broad concept of arisk-based solvency assessment of insurers.

14.0.8

Solvency assessment results from the application of supervisoryjudgment to various measures and estimates of an insurer’s current
financial position and future financial condition which serve todemonstrate the insurer’s ability to meet its policyholder obligations
when they fall due. Useful in this regard is a set of financial statements
which may differ from those used for general purpose financial reporting.
To distinguish them, this ICP refers to the financial statements used forsolvency assessment as “regulatory financial statements”. Suchstatements include a regulatory balance sheet and regulatory capitalrequirements. For the purposes of this ICP, “valuation for solvency
purposes” refers to valuation of assets and liabilities in the regulatory
financial statements. The overall solvency assessment may use
information additional to the regulatory financial statements such as:• stress and scenario testing;• the insurer’s own risk and solvency assessment; and• relevant disclosure.

14.0.9Technical provisions are a significant component of valuation forsolvency purposes. They include a margin for risk appropriate forsolvency purposes. Regulatory capital requirements are anothercomponent of the solvency assessment, and they include further
allowance for risk so that when taken together, they are sufficient toensure that policy obligations are satisfied with the probability ofsufficiency required by the supervisor.

14.0.10 In adverse circumstances, certain assets may be considered to have
reduced or nil value. Consequently, in the capital adequacy assessment
such assets may be excluded from or have reduced value in capital
resources. Alternatively, a capital requirement may be set to cover the
potential shortfall in value. Such adjustments are part of the process ofdetermining capital requirements and/or capital resources and arecovered by ICP 17 Capital Adequacy. These adjustments are shown
separately from asset values in the regulatory financial statements. This
enables improved transparency, consistency and comparability.
14.1

The valuation addresses recognition, derecognition and measurement ofassets and liabilities.
14.1.1

Assets and liabilities should be recognised and derecognised to theextent necessary for risks to be appropriately recognised. Such
recognition/derecognition principles may differ from those used forgeneral purpose financial reporting in a jurisdiction.

14.1.2

Recognition of insurance contracts as part of the valuation of technicalprovisions is a significant issue for insurers and supervisors. There are

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two key possible points of recognition – on entering into a binding
contract (the bound date) and the inception date of the contract. In
principle, the bound date is the date at which an economic obligationarises. However, in practice, these dates are only likely to be significantly
different for certain classes of non-life insurance.

14.2

14.1.3Contracts for ceded reinsurance should be recognised and valued so as
to correspond to the recognition of the risks which they are mitigating.
Where a current reinsurance policy is contracted to cover future direct
policies, the value of the reinsurance policy should not include any
amount in respect of future direct policies that have not been recognised.

14.1.4

An insurance contract liability (or a part of an insurance contract liability)
within technical provisions should be derecognised when, and only
when, it is extinguished – ie when the obligation specified in theinsurance contract is discharged or cancelled or expires.

14.1.5The purchase of reinsurance should not result in the derecognition oftechnical provisions unless the purchase of that reinsurance results
effectively in the extinguishment or novation of the insurance contracts.

The valuation of assets and liabilities is undertaken on consistent bases.
14.2.1

Solvency assessment based on consistent valuation of assets andliabilities is a prerequisite for obtaining a meaningful insight into theasset-liability positions of an insurer and an understanding of thefinancial position of an insurer relative to other insurers. It provides
reliable information on which to base the actions that are taken by
insurers and their supervisors in respect of those positions.

14.2.2The overall financial position of an insurer should be based on theconsistent measurement of assets and liabilities, the explicit
identification and consistent measurement of risks and their potential
impact on all components of the balance sheet. This consistency should
apply to all assets and liabilities, including assets in excess of theliabilities, and extend across insurers and time periods so as to achieve
comparability.

14.2.3

Undertaking valuation on consistent bases means that differences invalues of assets and liabilities can be explained in terms of thedifferences in the nature of the cash flows including their timing, amountand inherent uncertainty, rather than differences in methodology orassumptions. Such consistency may be applied at different levels suchas segment within a company, a company or a group.

14.2.4

Observed market valuations or amortised cost valuations may be used
for some assets and liabilities, while valuation models, such as
discounted cash flow models, may be used for other assets andliabilities. Calibration of such discounted cash flow models to market
valuations or amortised cost of other assets and liabilities can be ofassistance in achieving consistency.

14.2.5The specific characteristics of insurance contracts, financial instruments
and data available may vary within and across jurisdictions. Consistency
in the valuation of assets and liabilities means that such variations canbe explained in terms of the differences in the nature of the cash flows
valued in each jurisdiction.

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14.2.6

14.3

Regulatory capital requirements are determined using a consistenttreatment of the valuation of assets and liabilities. Consistency in thevaluation of assets and liabilities for solvency purposes does notnecessarily mean that a single valuation basis is used for all assets andliabilities. The balance sheet, when taken together with capitalrequirements, should result in an appropriate recognition of risks.

The valuation of assets and liabilities is undertaken in a reliable, decisionuseful and transparent manner.
Reliability
14.3.1The values placed on the assets and liabilities of an insurer for solvency
purposes should be a reliable measure of their value at the date ofsolvency assessment.

14.3.2

Objectivity is an important aspect of valuing assets and liabilities in a
reliable manner, so that a valuation is not influenced inappropriately byan insurer’s management. The valuation of assets and liabilities typicallyinvolves judgment, eg expert judgment in assessing the relevance ofdata and deriving assumptions. Consistent with reliability of outcome,subjectivity in valuation should be reduced as far as practicable. Thismay be achieved by using information available from effective internal
control processes, market valuations and other relevant current orfactual information, by applying professional standards and subjecting
valuations to independent review. The supervisor should require avaluation methodology which uses information provided by the financial
markets and generally available data on insurance technical risks.
Company-specific information may be appropriate, for example, where
the insurer’s business model and practices are sufficiently substantiatedas representative of the portfolio and similar information is used in market
valuations.

Decision usefulness
14.3.3In the context of this standard, ‘decision useful’ means useful in making
judgments for solvency purposes. It should be recognised that, in valuing
assets and liabilities in a reliable manner, and in reducing the subjectivity
in the valuation, it may not be appropriate to eliminate subjectivity
completely. A method that provides a single value without the need forjudgment may be less decision useful than one that produces a range ofreasonable values from which a value is selected by applying judgment.
A method that produces a decision useful outcome should takeprecedence over one that does not.

14.3.4

In some jurisdictions, enforcement actions can only be based on
objective calculations. In those jurisdictions, an objective calculation
should take precedence over one based on subjective assumptions andmethods. Supervisors may need to provide greater specificity on
assumptions (eg mortality and interest) and methods for regulatory
purposes. Specified methodology should include a margin for risk that is
appropriate for a valuation done for solvency purposes.

14.3.5

Decision useful values may be derived from a range of sources, including
market-consistent valuations, amortised cost valuations and othervaluation models, such as discounted cash flow projection models.

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14.3.6

Where there is a market for an asset or liability in which prices are quoted
publicly and trades are readily available, the quoted prices could provide
a decision useful value of the asset or liability in the large majority ofsituations. Typically, there will be a range of market prices for the same
item, and judgment will be needed in determining the final value.

14.3.7

In some circumstances, a market price may not necessarily provide a
decision useful basis for a valuation. If the reference market isdysfunctional or anomalous in its operation, a more reliable method ofdetermining value based on more normal conditions may be appropriate.
Such circumstances may occur, for example, if there is a high cost in
making actual trades, trading is thin, independent pricing sources are notavailable or are limited, or the market is subject to distorting influences.
The supervisor should evaluate such circumstances and as a result may
conclude that the use of an alternative economic valuation is appropriate.

14.3.8

Amortised cost could be a decision useful value for assets and liabilities
where it is a reflection of the amount the insurer will pay and receive overtime, and fluctuations in market values are not indicative of the insurer’s
ability to meet its obligations. Amortised cost may provide a pragmaticand decision useful value when other valuation approaches are no more
useful or reliable. It is useful to complement such valuations withsensitivity and adequacy testing.

14.3.9An insurer’s modelling of its assets and liabilities may also provide a
decision useful value. The reliability of model results is enhanced
through the use of insurers’ and supervisors’ best practices surrounding
model governance, controls and independent review. Supervisory
comparisons or benchmarking of modelling practices can further
enhance the reliability of modelled results. Models can be used to applycommon measurement criteria across all risks (eg same methodology,
time horizon, risk measure, level of confidence, etc.)

14.3.10 The supervisor should evaluate the extent to which the time value andrisk adjustments add decision useful information. Where this is not thecase, the disclosure requirements may be relied upon. For liabilities
subject to significant litigation uncertainty, it may not be appropriate toinclude estimates of time value and risk in the reported liability, due tothe unreliability of such adjustments.
Transparency
14.3.11 The solvency regime should be supported by appropriate public
disclosure and additional confidential reporting to the supervisor. For
example, explicit determination of the components of the technicalprovisions supports the objectives of transparency and comparability andfacilitates convergence. Standards for public disclosure including thevaluation of assets and liabilities for solvency purposes can be found in
ICP 20 Public Disclosure.
14.3.12 Insurers should provide sufficient information about the approaches they
have taken to the valuation of assets and liabilities, describing how the
principles of reliability, decision usefulness and consistency have beenaddressed. Transparency facilitates understanding and comparability
within and across jurisdictions.
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14.4

The valuation of assets and liabilities is an economic valuation.
14.4.1

14.5

An economic valuation is a valuation such that the resulting assessmentof an insurer’s financial position is not obscured by hidden or inherent
conservatism or optimism in the valuation. Such an approach isappropriate in the context of risk-based solvency requirements which
satisfy these ICPs and standards and shares their objectives oftransparency and comparability.

An economic valuation of assets and liabilities reflects the risk-adjusted
present values of their cash flows.
14.5.1

An economic value should reflect the prospective valuation of the future
cash flows of the asset or liability allowing for the riskiness of those cash
flows and the time value of money. An asset or a liability may have both
cash inflows and cash outflows the net effect of which is a positive or
negative value. Such a valuation is not necessarily determined directly
using a discounted cash flow calculation. A current quoted market value
or a current sale or purchase value may also reflect the prospective
valuation of cash flows.

14.5.2

Supervisors should take into account all relevant information available
about current market assessments of value and risk and the principles,
methodologies and parameters used in the relevant markets forassessing the value of an asset or liability.

14.5.3The historic cost of an asset or liability may not reflect a current
prospective valuation of the future cash flows and may therefore not be
consistent with the current economic valuation of other assets or
liabilities. Historic cost generally does not reflect changes in value overtime. However, amortised cost, which adjusts the historic cost of an asset
or liability over time, may reliably reflect the value of future cash flows,when used in conjunction with an adequacy or impairment test.

14.5.4

Some jurisdictions utilise a subset of economic valuation known asmarket-consistent valuation which is described further in Guidance
14.5.5 to 14.5.11. Some jurisdictions use a subset of economic valuation
known as amortised cost valuation which is described further in
Guidance 14.5.12 to 14.5.15.

Market-consistent valuation
14.5.5It may be appropriate to use market-consistent values for the economic
valuation of assets and liabilities. A valuation that is based uponprinciples, methodologies and parameters that the financial markets
would expect to be used is termed a market-consistent valuation. Wherea range of assessments and approaches is evident from a market, amarket-consistent valuation is one that falls within this range.

14.5.6It may be well known to financial markets that the approach taken tomarket assessments for some assets and some insurance liabilities ortheir components uses modelling based on certain assumptions andtechniques and portfolio specific information as well as generally
available data on insurance technical risks. A calculation consistent withthis approach would be market-consistent.

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14.5.7

However, in exceptional circumstances there may be information
additional to that on market assessments from the wider economy thatshould be taken into account eg where a market is anomalous, notoperating effectively or is subject to intervention from the relevant
authorities. For example, where a government/regulator intervenes in a
major way eg by injecting money or taking control. Such action may bein response to or the cause of distortions of supply and demand in
relevant markets so that values determined in a market consistent way
may also be distorted temporarily.

14.5.8A market-consistent value may not then be appropriate and a different
value, which may, for example, be expected to be market-consistentunder more normal market conditions, may need to be determined toarrive at an economic valuation for solvency purposes. The extent towhich this is appropriate is likely to vary according to market conditions
in different jurisdictions. If such circumstances arise, supervisors should
provide guidance as to the appropriate values or adjustments insurers
should use for solvency purposes to reflect the risk-adjusted present
value of their cash flows and maintain consistency, decision usefulness,relevance and transparency.

14.5.9A sufficiently active market may exist for an asset or liability that in itself
provides a measure of value that is market consistent. For other assets
and liabilities or when the market becomes illiquid, there may be no direct
measure of value. However, relevant market information may beavailable regarding the assessment of components of the rights,
obligations or risks of the asset or liability. If, for example, a componentof the obligations of an insurance liability can be replicated using
financial instruments for which there is a reliable market value, that value
provides a reliable indication of the value for this component.

14.5.10 The market-consistent value of an asset or liability may be determinedusing different techniques, or a combination thereof. For example, invaluing technical provisions:• if the insurance obligations are traded in a sufficiently deepand liquid market the observed prices may be used to arrive
at a market consistent value. The availability, decisionusefulness and reliability of the prices should be taken into
account when deriving the market consistent value;• if some or all of the cash flows associated with the insurance
obligations can be replicated using financial instruments, themarket value of the replicating financial instruments may be
used as the value of those cash flows;• if the cash flows associated with the insurance obligations
cannot be replicated perfectly, then the remaining cash flows
may be valued using a discounted cash flow model. To bemarket consistent, the methodology used needs to deliver a
proxy for market value based on market consistent valuation
principles and to reflect the uncertainty or unavailability ofmarket information.
14.5.11 This approach to valuation is sometimes termed the “components
approach”, under which risk components are valued at market value
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where such a value is ascertainable, decision useful and reliable; othercomponents may need to be valued using marked-to-model methods.
Separate components may, for example, be identifiable for insurance
contracts which have an investment or deposit component and an
insurance risk component. The components approach helps to improve
market consistency and reduce modelling error. It should be noted that
where there is no sufficiently deep liquid market from which to determine
a market consistent value for a risk component, the additional liquidity
risk needs to be considered.
Amortised cost valuation
14.5.12 It may be appropriate to use an amortised cost method for economic
valuation of assets and liabilities. Amortised cost methods determine thevalue of an asset or liability at any point in time as the present value of
future cash flows discounted at an appropriate interest rate, with anappropriate adjustment for risk.
14.5.13 The discount rate used in valuing assets under an amortised cost method
equates the present value of expected contractual cash flows with theamount paid to acquire the asset. The price paid for an asset usuallyequals the market value at time of purchase. Since the price paid reflects
the risk of the instrument at the time of purchase, an adjustment for therisk assessed at that time is automatically included in the discount rate.
14.5.14 When valuing both assets and liabilities under an amortised cost method,
there is a close relationship between the discount rate and the provision
for risk. The discount rate used may be based on the expected yield,
after making allowance for default, of the supporting asset portfolio.
Other combinations of discount rate and risk adjustment are possible.
14.5.15 When an amortised cost method is used, the values produced should be
evaluated for adequacy at least annually. For assets, when the asset has
been impaired to a significant degree, the carrying value of that asset
should be adjusted to reflect that impairment. For liabilities, the value
should be tested at least annually. When the liability value is found to beinadequate, it should be strengthened. Adjustments should also be madeto reduce any significant, undue conservatism identified by the adequacy
test.
14.6

The value of technical provisions and other liabilities does not reflect theinsurer’s own credit standing
14.6.1

To achieve consistent and reliable economic values of insurance
portfolios for solvency purposes, the value of technical provisions should
not reflect an insurer’s own credit standing. Insurance obligations are
required to be met to the same level of confidence by all insurers in ajurisdiction and the value of an identical portfolio held by different
insurers should not depend on the insurer’s credit standing. This also
applies to the technical provisions of a reinsurer.

14.6.2

However, the credit standing of a reinsurer should be taken into accountwhen considering the solvency of a ceding (re)insurer even if thecontractual cash flows are the same. The risk of reinsurer default could
be covered either by the regulatory capital requirements or adjustments
made to the value of assets in determining available capital.

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Alternatively, some allowance for the credit default risk could be made in
valuing the reinsurance asset directly.

14.7

14.6.3The valuation of liabilities, other than technical provisions, should also
not reflect the insurer’s own credit standing.

14.6.4

Where the terms of the debt make it subordinate to the insurer’s
obligations in respect of insurance contracts, the value of the debt may
reflect the lower probability of repayment under subordinated debt andthe lower capital needed to cover the risk of non-payment.

The valuation of technical provisions exceeds the Current Estimate by amargin (Margin over the Current Estimate or MOCE).
14.7.1

Technical provisions are assets or liabilities that represent the economic
value of the insurer fulfilling its insurance obligations to policyholders andother beneficiaries arising over the lifetime of the insurer’s portfolio of
insurance policies. This includes a margin (Margin Over the Current
Estimate or MOCE) to cover the inherent uncertainty of thoseobligations.

14.7.2The cash flows associated with fulfilling an insurer’s insurance
obligations include the premiums receivable, the claims payable under
the insurance policies, any other policy cash flows (eg future distributions
under participating contracts) and the future expenses of administering
the policies.

14.7.3Acquisition costs are usually a significant component of an insurer’s cash
flows. After acquisition costs have been paid future cash inflows may
exceed future cash outflows.

14.7.4

Because an insurer’s obligations under an insurance policy are
inherently uncertain as to amount and/or timing, the present value of the
cash flows associated with fulfilling them has a range of possible values
with varying probabilities. The probability-weighted average of thesepresent values is their expected present value (also called the statisticalmean) and is termed the “current estimate of the cost of meeting theinsurance obligations” (“Current Estimate”). Actuarial and statisticaltechniques may be used in determining the current estimate, including
deterministic, analytical and simulation techniques.

14.7.5In addition to covering the cash flows associated with fulfilling insurance
obligations, an insurer incurs the cost of covering the uncertainty
inherent in those cash flows (eg through holding capital, or throughhedging, reinsurance or other forms of risk mitigation). Insurers are
required to maintain an amount such that the obligations under insurance
policies will be fulfilled with the claimant or beneficiary when they fall due.
In principle, therefore, an economic value of the technical provisions
exceeds the current estimate of the cost of meeting the insurance
obligations by an amount covering this uncertainty. This excess is theMOCE.

14.7.6

Where, for example, capital is required to give the level of confidence
required by the solvency regime, the technical provisions should at leastalso cover the cost of holding that capital. In these circumstances, the
MOCE might be seen as a provision for rewarding the capital committed
to the business over the outstanding lifetime of the policy. As the

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uncertainty reduces over time, so the MOCE will also reduce, gradually
releasing it from the technical provisions. Equally, as uncertainty
reduces, the required capital would also reduce in line with the revised
risk profile.

14.8

14.7.7It may not be necessary, in practice, to determine the current estimate
and the MOCE separately. The solvency regime should require any
method by which technical provisions are valued to be such that thevalue includes an explicit or implicit margin over the current estimate. For
example, a reliable market valuation by reference to a sufficiently deepand liquid market may be expected automatically to include a MOCE.

14.7.8A model which includes in its calculations an allowance for uncertainty
up to the level of confidence required by the solvency regime is also
capable of calculating the technical provisions directly. However, in thiscase, supervisors should consider whether the current estimate and
MOCE should be separately reported to help ensure that technicalprovisions are consistent and reliable.

14.7.9A change in underlying data or assumptions generating a change incurrent estimate and MOCE should be disclosed and justified so thatconsistency, reliability and relevance may be maintained and arbitrary
changes over time are avoided.

The Current Estimate reflects the expected present value of all relevant
future cash flows that arise in fulfilling insurance obligations, using
unbiased, current assumptions.
14.8.1

The current estimate should reflect all future cash flows under an existing
insurance contract to the extent that they are integral to the fulfilment of
the obligations under that contract. This encompasses all cash flows,
including non-guaranteed optional or discretionary cash flows, where
they are established as stemming from the contractual relationshipbetween the insurer and the policyholder. This reflects the commercial
substance of the contract and therefore reflects economic reality.

14.8.2

An insurance contract should be considered as a whole. In particular,
where the contract provides for the payment of future premiums, suchpremiums are integral to the fulfilment of the obligations under that
contract. Neither the company nor the policyholder is able to deal with
one without simultaneously dealing with the other. To recognise one, theother must also be recognised. Valuation of the insurance liability
requires consideration of all of the associated cash flows, including thecontractual, premium inflows. The uncertainty associated with thosecash flows along with that of the other relevant cash flows are reflectedin the probability weightings applied in calculating the current estimate.

14.8.3To give clarity as to what constitutes an insurance contract for solvency
purposes, the supervisory regime should specify the boundaries for
insurance contracts which define the relevant cash flows to be included
in determining the current estimate. The insurance contracts are subject
to the following boundary constraints, if they exist: 5

5 For certain types of long-duration life policy with an indefinite term, these would be evaluated throughthe potential life of the policyholder, allowing for lapse or surrender in the probabilities attached to eachcash flow.

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• contractual termination as extended by any unilateral option
available to the policyholder, or• the insurer having a unilateral right to cancel or freely reunderwrite the policy, or• both the insurer and policyholder being jointly involved in
making a bilateral decision regarding continuation of thepolicy.
14.8.4

The first boundary constraint excludes new business arising from the“rolling-over” of the existing contract, except where such “roll-over” is dueto the exercising of an explicit option available to the policyholder under
the current contract. Contractual cash flows arising from policyholders’unilateral in-the-money options to extend the contractual termination
date should be included. The current estimate should allow for the
expected rate of exercising such options. This boundary constraint also
excludes additional voluntary contributions premiums, except where
provided for as a unilateral option under the contract. For insurance
contracts with variable premiums (such as universal life contracts), thecash-flows should include voluntary contributions above the minimum
required to the extent that there are guarantees, under the current
contract eg no-lapse and premium rate guarantees. The current estimate
should reflect the expected rate of payment of additional contributions
and the expected level of such contributions.

14.8.5The second boundary constraint clarifies that future cash flows arisingfrom events beyond the point where the insurer can unilaterally cancel
the contract – for example, by re-underwriting are not included in thevaluation. This is the case with most non-life insurance contracts which
are typically written for only one year. Although there might be a highexpectation that they would be renewed, the insurer is not bound to doso, and accordingly only cash flows arising in respect of the currently inforce or in run-off contracts, are included for valuation purposes,
whereas the impact of new business might be considered in capitalrequirements or capital resources by the solvency regime. By contrast,
future cash flows under a life or disability contract which the insurer
cannot unilaterally cancel should be included, even if the futurepremiums under such a contract are planned to increase, or able to bevaried by the insurer in respect of the entire class of contracts without
individual underwriting.

14.8.6

The third boundary constraint clarifies that even if the policyholder has
an option to continue or increase the contract, if it requires the insurer’s
consent then cash flows arising from events beyond that point should not
be included for valuation purposes, whereas the impact of new businessmight be considered in capital requirements or capital resources by thesolvency regime

Discretionary payments
14.8.7

Some insurance contracts give the policyholder both guaranteed
benefits (eg a minimum amount payable on death and/or maturity or any
insured event) and for example, a right to participate in the performanceof the relevant class of contracts, related assets or both. The insurer has

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some discretion over the amount or timing of the resulting distributions
to policyholders, but there are often constraints over that discretion.
14.8.8When establishing the future cash flows to include in the determinationof technical provisions for solvency purposes, consideration should
therefore be given to all payments whether or not these payments arecontractually guaranteed under an insurance contract. For example,
future discretionary bonuses which the insurer expects to make should
be included.

14.8.9In view of the wide variety of participating contracts and legal frameworks
in different jurisdictions, supervisors should establish criteria appropriate
to their jurisdictions for the allowance of discretionary elements
associated with participating contracts in the valuation of technicalprovisions. These should nonetheless reflect the principles of aconsistent, reliable and economic valuation and those that apply more
specifically to technical provisions, as discussed in this ICP.

14.8.10 In many jurisdictions, accumulated profits attributable to a class ofpolicyholders are accounted for separately by the insurer. Where suchaccumulated profits can be used to absorb losses to protect policyholderinterests in a period of stress, they may possess all the characteristics ofcapital and may hence be recognised in the determination of capital
resources for solvency purposes. In such a case, it is important to ensurethat the criteria established by the solvency regime for the allowance of
future discretionary benefits in the valuation of technical provisions arecompatible with the criteria for determining capital resources in order toachieve a consistent overall assessment of the solvency position of theinsurer.
Unbiased current assumptions
14.8.11 Unbiased current assumptions are derived from a combination of
relevant, credible experience as well as judgment about its expected
future development, eg improving mortality rates, inflation of expenses
that neither deliberately overstates nor understates the expected
outcome. Reconsideration of data and assumptions should occur every
time the technical provisions are valued, with revisions made as
appropriate to ensure data and assumptions remain appropriate tocurrent conditions.
14.8.12 Observable data, such as interest rates, financial market prices andinflation rates may be expected to be different each time the current
estimate is determined. In particular, cash flows are sensitive to inflation
rates. Where assumptions are derived from observed values in themarket, these should be the observed values current at the date of thevaluation.
14.8.13 Regular experience analysis, considering the individual entity andrelevant industry experience where appropriate, should be undertaken
to support the assumptions used for insurance technical risks. Where
assumptions depend on the results of such experience analyses, themost recent experience for the portfolio need not necessarily represent
the most credible current assumption for that portfolio. Greater credibility
may be achieved by the analysis of several years' experience, smoothingout fluctuations in experience and allowing appropriately for any trends
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in experience that may be evident. However, care should also be takenthat historical experience remains relevant to current conditions.
14.8.14 Where the credibility of an insurer’s own experience is low, for example
for a small or new portfolio of insurance contracts, assumptions basedon the relevant industry experience are likely to be more decision usefulas a basis for projecting its cash flows.
14.8.15 The assumptions used should, in principle, reflect the characteristics ofthe portfolio rather than those of the particular insurer holding that
portfolio. However, it is important to note that, in practice, thecharacteristics of the portfolio underwritten by an insurer may reflect
aspects of an insurer’s specific business practices, particularly withregard its underwriting, claims handling and expenses. Companyspecific information may be appropriate, for example, where the insurer’sbusiness model and practices are sufficiently substantiated as
representative of the portfolio and similar information is used in market
valuations.
14.8.16 With respect to expenses, the insurer’s own expense experience inmanaging a portfolio is likely to be relevant in determining an economic
value.
14.8.17 Acquisition costs are typically a major component of an insurer’s
expenses. For most insurance contracts, acquisition costs will alreadyhave been incurred so that future cash flows include only maintenanceand claims costs. An appropriate analysis of the insurer’s expense
experience is needed to separate out acquisition costs in order to model
future expenses. Care is needed to allow for expenses that do not vary
directly with the level of new business so that expenses that will continue
to be incurred for a period if new business ceases are taken into account.
14.9

The MOCE reflects the inherent uncertainty related to all relevant future
cash flows that arise in fulfilling insurance obligations over the full time
horizon thereof.
14.9.1

Different methods may be used in practice to measure risk. For somerisks, observable market prices for risk may be available. In choosing amethodology, due consideration should be given to the nature of therisks being measured. Other approaches being considered around theworld include quantile, conditional tail expectation, cost of capital andexplicit assumption methods. Where a mixture of appropriate methods isused, a consistency check should be considered. Calibration of themethods used should reduce the effect of methodological differences toa level sufficient to enable reliable solvency assessment to beundertaken. At present, there is no one common methodology. In
practice, the results from different methods will not be identical andcalibration and consistency checks should be applied so thatmethodological differences are reduced to an acceptable level forsolvency assessment purposes. Once established, the methodology
should not be changed from one valuation to the next unless there is areasonable rationale for change.

14.9.2The margin over current estimate (MOCE) represents an estimatedmeasure of the uncertainty inherent in the cash flows associated withfulfilling an insurer’s insurance obligations. To achieve a consistent,

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reliable and decision useful valuation, the margin over current estimate
should consider all of the inherent uncertainty attached to the policy
obligations over the full period of those obligations ie the variability of all
relevant future cash flows to the extent to which this uncertainty is borneby the insurer and not the policyholder.
14.9.3Only risk inherent to the policy obligations should be reflected in the
MOCE. Other risks should be reflected in regulatory capitalrequirements. Where risks are reflected in both the MOCE andregulatory capital requirements to provide an overall level of safety,
double counting should be avoided as far as practical.

14.9.4

In some jurisdictions it may be considered appropriate, due to inherent
uncertainty in policy obligations and profit, that no component ofpremium related to such considerations should be recognised in profit at
the inception of a contract. In those jurisdictions, the inherent uncertainty
is effectively represented by the difference between premium received
and the Current Estimate. Other jurisdictions may take the view that oneof the other methodologies described in this document provides a
decision useful separate estimate of the level of uncertainty indetermining the MOCE and may therefore allow potential gain at issue
to be recognised.

14.9.5

It is important to be clear about the extent to which risk factors should bereflected when valuing the MOCE and to what extent. It is appropriate todifferentiate between the risks specific to the portfolio of insurance
obligations and the risks associated with the operations of the particularinsurer. Risks that are portfolio specific are inherent to the policy
obligations and should be taken into account in the MOCE.

14.9.6

In determining the appropriate methodology for determining the MOCE
in a solvency regime, the supervisor should consider the extent to which
possible methodologies promote transparency and comparability
between insurers and insurance markets.

14.9.7

An appropriate method for the determination of the MOCE would be
expected to exhibit the following characteristics:• Insurance obligations with similar risk profiles have similar
MOCEs;• The less that is known about the cash flows; the higher the
MOCE;• For the same level of probability, risks with higher impact havehigher MOCEs than those with lower impact;• Risks with low frequency and high severity will generally havehigher MOCEs than risks with high frequency and low
severity;• For risks of the same or a similar nature, contracts that persist
over a longer timeframe will have higher MOCEs than thoseof shorter duration;• Risks with a wide probability distribution have higher MOCEs
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• To the extent that emerging experience reduces uncertainty,
MOCEs should decrease, and vice versa.
14.9.8In establishing appropriate criteria or methods for determining the
MOCE, the supervisor should consider the diversification of the inherent
risk factors reflected in the MOCE.

14.9.9Consideration should be given to the segmentation of the insurance
policies of the insurer into separate portfolios and the impact this has on
the diversification of inherent risk factors that is taken into account.
Segmentation, eg by line of business, may be undertaken for calculation
purposes and may mean that diversification within portfolios is taken into
account in the MOCE but diversification across portfolios is left out ofaccount. The calculation method may also mean that diversification
within portfolios is only partially taken into account. Any residual
diversification within portfolios and all diversification across portfolios
could for example be addressed as an offset to regulatory capitalrequirements, if appropriate. The MOCEs for the total business of theinsurer would simply be the sum of the MOCEs of its portfolios.

14.9.10 Where an element of an insurance liability, ie an insurance obligation orrisk in whole or in part, can be replicated or hedged by a financial
instrument which has a reliable value, the value of that instrument
provides a reliable value for that element of the liability including animplicit MOCE. In practice, such hedging is rarely perfect in all scenarios
and there are some differences between the insurance cash flows andthose of the replicating instrument which need to be valued separately.
Where a model is used for this valuation, calibration of the model to thevalue of hedging instrument used is likely to assist in achieving overall
consistency and reliability. Such practice should be encouraged bysupervisors.
14.10

The valuation of technical provisions allows for the time value of money.
The supervisor establishes criteria for the determination of appropriate
rates to be used in the discounting of technical provisions.
14.10.1 The solvency regime allows for the time value of money to be recognisedin the determination of technical provisions and should establish criteria
for the determination of appropriate interest rates to be used in the
discounting of technical provisions (discount rates). In developing thesecriteria, the supervisor should consider the following:• the economics of the insurance obligations in its jurisdiction
including their nature, structure and term; and• the extent (if any) to which benefits are dependent onunderlying assets.
14.10.2 The criteria for determining appropriate interest rates to be used in the
discounting of technical provisions should recognise that the appropriate
interest rates may not be directly observable and apply adjustments
based on observable economic and market data of a general nature as
appropriate.
14.10.3 To the extent that a risk is provided for elsewhere in the balance sheet
by alternative means, there should be no allowance for that risk in thechosen discount rates.

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14.10.4 As the discount rates should reflect the economics of the insurance
obligations, any observed yield curve should be adjusted to account fordifferences between the economics of the observed instrument withthose of the insurance obligations.
14.10.5 The criteria should also allow appropriate interpolation and extrapolation
for non-observable market data and maturities. To provide for consistent,
reliable, economic values, the criteria for discount rates should utilise theentire interest rate term structure.
14.10.6 In principle, if an investment has a reliable market value and fully
replicates or hedges an element of the insurance obligations or risks,such a value is presumed to reflect the time value of money.
14.11

The supervisor requires the valuation of technical provisions to makeappropriate allowance for embedded options and guarantees.
14.11.1 The determination of the current estimate and MOCE should makeexplicit allowance for any options of the policyholder or insurer and forguarantees embedded in the insurance contract, such as guaranteed
minimum benefits and interest rate guarantees. The method used tovalue embedded options and guarantees should be appropriate to thenature, scale and complexity of risk and may include stochastic
simulation or simplified methods as appropriate.
14.11.2 An important policyholder option is the option to lapse and, for some life
products, to receive payment of a surrender value. Explicit allowance forlapses and surrenders should be incorporated in the projections of future
cash flows that are used to determine technical provisions. The risks oflapse and surrender need to be considered over the full time horizon of
the insurance contract. Historical experience of lapses and surrenders is
decision useful in considering the setting of assumptions about future
experience used for calculating a current estimate and MOCE. The
uncertainty associated with lapses and surrender may not be fully
diversifiable across insurance contracts as the level of lapses andsurrenders may depend on economic conditions or perceptions about
the performance of the insurer which apply generally to policyholders.
This is offset by variations in policyholders’ responses to such conditions
or perceptions and their personal motivation for lapse and surrender.
Such factors should be taken into account when assessing the risk oflapse and surrender.
14.11.3 Technical provisions are not required to be subject to a surrender value
floor equal to the total surrender values payable if all policies were to
surrender immediately. Such an approach would not be an economic
valuation as the effect of surrenders is already allowed for in the technicalprovisions by incorporating assumptions about the future rate ofsurrender and associated risks. However, in the determination of theoverall financial requirements for solvency assessment purposes, a formof surrender value minimum may be considered appropriate, to provide
additional protection in the event of a high level of surrenders. Thisshould be reflected in regulatory capital requirements, as appropriate.

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Investments
The supervisor establishes regulatory investment requirements for solvency
purposes in order for insurers to make appropriate investments taking account of
the risks they face.
Basis for establishing regulatory investment requirements
15.1

The supervisor establishes regulatory investment requirements on theinvestment activities of the insurer.
15.1.1

The nature of insurance business necessitates the investment in andholding of assets sufficient to cover technical provisions and capitalrequirements. The quality and characteristics of an insurer’s asset
portfolio and the interdependence between the insurer’s assets and its
liabilities are central to an assessment of an insurer’s solvency position,and therefore, are important aspects to be addressed by the supervisorand for an insurer to manage.

15.1.2

Quantitative requirements alone are not sufficient to ensure solvency,
but should also be complemented with appropriate qualitativerequirements on investment risk. Having both kinds of requirements
helps to guard against the possibility that the regulatory capitalrequirements do not fully cover the risks inherent in those investment
activities.

15.1.3

Factors to consider in establishing regulatory investment requirements
may include:

15.1.4•the overall quality of risk management practices andcorporate governance frameworks of insurers;•

the comprehensiveness and transparency of disclosure
frameworks in the jurisdiction and the ability for third parties
to exercise sufficient scrutiny and market discipline;•

the development of relevant investment and capital markets
locally and internationally and the range of available
financial instruments;•

the cost of compliance, the impact on innovation and theeffect on the efficiency of industry practices; and•the level of prudence and risk-sensitivity of the regulatory
solvency requirements and the risks that they cover.

Additionally, the supervisor should consider requirements applied inother, non-insurance, financial sectors when establishing regulatory
investment requirements for insurers. It is important that requirements
across financial sectors are as consistent as possible in order todiscourage groups from taking advantage of regulatory arbitrage.
Consistency of regulation between sectors may assist in maintaining alevel playing field and enhancing fairness. However, such requirements
should take into account the differences in risk profiles and risk
management between sectors.

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15.1.5

Openness and transparency of the regulatory investment requirements
may help facilitate their effectiveness. The supervisor should be explicit
as to the objectives of setting regulatory investment requirements. Thisis particularly important in order to ensure the consistency of suchrequirements with other building blocks of the regulatory solvency
assessment of the insurer, such as the valuation of assets and liabilities,
the calculation of regulatory capital requirements and the determinationof available capital resources.

Rules-based and principles-based approaches
15.1.6

Regulatory investment requirements may take many forms and may
influence the investment strategies of the insurer. Requirements may berules-based, setting out specific rules or restrictions on the investment
activities of the insurer, or principles-based, where there is no specificrestriction on the asset strategy taken by the insurer, as long as definedprinciples are met.

15.1.7

Regulatory investment requirements may also be a combination of rulesbased and principles-based, setting out some specific rules or
restrictions and some principles with which the insurer’s investment
strategy should comply.

15.1.8Rules-based requirements may be used to prohibit or limit specificclasses of investment. Such rules or restrictions may either be applied
directly to the investments or lead to capital charges or deductions fromavailable capital which act as a disincentive to investment in risky assets
or high concentrations in particular assets, rather than as a prohibition.

15.1.9Rules-based requirements may be relatively easy to enforce bysupervisors, as there is limited scope for different interpretations of therules. However, rules-based requirements may inhibit innovation in
investment strategies and may restrain insurers from holding assets
most appropriate for meeting their financial objectives. Rules-based
requirements may also discourage insurers from fully developing theirown risk management.

15.1.10 Principles-based requirements may provide more flexibility for the
insurer to choose particular investments to best manage its investment
risks. It may allow the insurer to follow an investment strategy that it
believes is the most appropriate to its risk appetite and overall financial
objectives. However, it may also be more difficult for the supervisor todetermine the need to take supervisory measures as principles-based
investment requirements allow some scope for differences ininterpretation.
Group perspectives
15.1.11 In addition to meeting the qualitative and quantitative investment
requirements at an insurance legal entity level, the insurance groupshould monitor investment risk exposures on an aggregate basis for thegroup as a whole.
15.1.12 For insurance groups, regulatory investment requirements may specify
how investment exposures should be aggregated for the purposes ofdetermining investment risk at a group level. Such requirements should
provide for appropriate mitigation of risks associated with intra-group
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transactions, for example, to limit contagion or reputational risk. Issues
to be considered may include exposures to related counterparties andother interests over which the insurer has some influence (for example,
through a minority interest). In stress situations there will tend to begreater restrictions on movements and realisation of investments acrossthe group. The regulatory investment regime may require contractual
evidence of the ability to access assets for solvency purposes before
allowing their inclusion for aggregation at the group level.
15.1.13 The regulatory investment requirements that apply at the insurance legal
entity and group levels, as well as the objectives of such requirements
should be explicit. Such requirements should include issues specific togroups, such as requirements for liquidity, transferability of assets andfungibility of capital within the group.
15.1.14 Regulatory investment requirements should be set having regard to thepossibility of losses from investments made by entities of an insurancegroup weakening another entity or the group as a whole (for example, if
there is explicit or implicit support from another entity).
Regulatory investment requirements regarding the asset portfolio
15.2

The supervisor requires the insurer to invest assets so that, for its portfolio
as a whole:• assets are sufficiently secure and are held in the appropriate
location for their availability;• payments to policyholders or creditors can be made as they falldue; and• assets are adequately diversified.
Security
15.2.1

The insurer’s investments should be sufficiently secure for the portfolio
as a whole, which is essential in ensuring obligations to policyholders
can be met. Regulatory investment requirements may restrict theinsurer’s selection of, or exposure to, investments that have low security
or whose security is difficult to assess reliably. There should beappropriate measures in place to recognise and mitigate aggregations of
exposure across the insurer’s portfolio, having particular regard toconcentrations of low security assets or those whose security is difficult
to assess reliably.

15.2.2The security of an investment is related to the protection of its value andcan be affected by credit risk and market risks (including currency risk).
The security of an investment is also affected by safekeeping,custodianship or trusteeship. Assets should be held in an appropriate
location so they are available to meet policyholder claims where
policyholder payments are made.

15.2.3External credit ratings can assist the insurer in determining the credit riskof an investment. However, the insurer should be aware of the limits ofusing external credit ratings and conduct its own due diligence to assess
credit risk. The supervisor may establish requirements for theappropriate use of external credit ratings. The supervisor may also
require the insurer to conduct a credit analysis independent of the

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external credit rating, which may help in assessing the security of aninvestment.
15.2.4To assess the security of its investments, it is important that the insurer
is capable of assessing the nature, scale and complexity of theassociated risks. This may be difficult in cases where there is a lack oftransparency as to the underlying risk profile of an investment, such as
indirect investments through a collective investment fund or forinvestments in complex financial instruments such as structured assets.
Some markets may also suffer from a lack of transparency or clarity interms of the applicable regulatory and legal systems and the degree ofprotection that they provide.

15.2.5For assets lacking in transparency, the risk profile should be carefully
analysed by the insurer. The insurer should look through to theunderlying exposure of the investment as far as possible, considering
the additional risks that are due to the investment structure. For example,
additional legal risks may arise if investments are located outside of theinsurer’s operating jurisdiction(s).

15.2.6The insurer should evaluate the security of derivative products by taking
into account the underlying exposures, as well as the security of thederivative counterparty, the purpose for which the derivative is held, andthe cover (such as collateral) the insurer has for derivative exposures. In
some cases, derivative counterparties may improve the security bygiving the insurer the right to collateral if the counterparty fails. Similarly,
the security of investments may be improved by guarantees from third
parties.

15.2.7

When engaging in securities lending or repurchase agreements, aninsurer should consider counterparty risk and reinvestment risk. The
insurer should ensure the transactions are appropriately collateralised(with suitably frequent updating) and should recognise that thesetransactions do not mitigate the market or credit risk in the security, since
the security is returned to the insurer at the end of the transaction. Careshould be taken by the insurer when investing the collateral it holds toensure that the transactions are covered even under adverse market
conditions.

Security – group perspectives
15.2.8

CF 15

CF 15.2.a

The supervisor should consider the possibility that aggregation of
exposures in an insurance group may result in heightened security
issues which may be less important at the insurance legal entity level.
The supervisor should closely monitor a group investing in assets thatare not secure, and which could be distributed around the group to avoid
investment restrictions.

The group-wide supervisor requires the Head of the IAIG to ensure that
the IAIG conducts its own due diligence to avoid placing undue relianceon assessments by credit rating agencies with regard to investment
selection and risk management process.

CF 15.2.a.1

The IAIG should conduct due diligence to check the appropriatenessof credit rating assessments, using various sources of information,

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and should conduct its own credit assessments on its larger or more
complex exposures.
CF 15.2.a.2

Undue reliance generally refers to unchallenged acceptance of theratings provided by credit rating agencies.

Liquidity
15.2.9The insurer should have assets that generate sufficient cash flows to pay
policyholder claims when due, as well as all other obligations. The cash
generated from investments includes disposals, maturity, and coupon or
dividend payments.

15.2.10 The ability of the insurer to remain liquid may be adversely impacted fora variety of reasons. For example, the insurer:• pledges or hypothecates its assets;• experiences an unexpectedly large claim;• experiences an event resulting in many claims;• experiences significant shifts in market conditions; or• has a derivative that needs to be serviced (for example, due
to collateralisation or posting of margins).
15.2.11 The ability to realise or liquidate a sufficient amount of investments tomeet policyholder claims, as well as all other obligations, at any point intime is important. For example, where an investment is made in a closed
fund, a resale is usually not possible. This would impede the security of
the investment in terms of its ability to settle obligations towards
policyholders. Similar considerations would need to be given for property
used by the insurer which might be hard to liquidate without an
operational disruption.
Liquidity – group perspectives
15.2.12 The insurer and group-wide and other involved supervisors should
consider the nature of the potential legal and practical impediments tocross-border transfer of assets as well as any potential effect those
impediments might have, particularly in a resolution.
15.2.13 Group issues are relevant when managing liquidity risk, both in terms of
the availability of additional liquidity and the possible need to provide
liquidity support to other parts of the group.
15.2.14 Entities within a group frequently engage in intra-group transactions (egswaps, inter-company loans) in order to manage risks that exist indifferent parts of the group or to have more mature businesses support
growing businesses within the group. Such transactions should be doneusing appropriate transfer pricing based on current market conditions sothat there is appropriate recognition of the impact of these transactions
for each of the entities involved and the group as a whole.
15.2.15 Liquidity of assets and fungibility of capital are especially important if thegroup relies on diversification between entities without each entity being
fully capitalised on a stand-alone basis (where allowed by thesupervisor). The insurers should consider their liquidity needs,
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transferability of assets and fungibility of their capital in a stressed
environment when determining the minimum criteria for liquidity of theirinvestment portfolio.
CF 15
CF 16

CF 15.2.b

The group-wide supervisor requires the Head of the IAIG to consider
the effect of potential legal and operational impediments to the IAIG’s
ability to transfer capital and assets on a cross-border basis.

CF 15.2.b.1

The Head of the IAIG should document specific restrictions that
apply to the transfer of capital and assets from one jurisdiction toanother, and what, if any, additional restrictions apply in the case of
the resolution of a legal entity (see ICP 12 Exit from the Market and
Resolution). The IAIG should have documented procedures on
actions required for cross-border transfer of capital and assets innormal and stressed times.

Diversification
15.2.16 Diversification and pooling of risks is central to the functioning of
insurance business. To mitigate the risk of adverse financial events, it isimportant that the insurer’s overall investment portfolio is adequately
diversified and that its asset and counterparty exposures are kept toprudent levels.
15.2.17 There is a distinction between diversification within a risk category anddiversification between risk categories. Diversification within a risk
category occurs where risks of the same type are pooled (eg shares
relating to different companies). Diversification between risk categories
is achieved through pooling different types of risk. For example, where
the insurer combines two asset portfolios whose performances are notfully correlated, the exposure to the aggregated risks will generally belower than the sum of the exposures to the risks in the individual
portfolios.
15.2.18 With respect to its investment portfolio, the insurer should ensure that itis diversified within and between risk categories, taking into account thenature of the liabilities. Diversification between investment risk
categories could, for example, be achieved through spreading theinvestments across different classes of assets and different markets. For
diversification within a risk category, the investments are sufficiently
uncorrelated so that – through pooling of individual assets – there is asufficient degree of diversification of the portfolio as a whole.
15.2.19 To ensure that its investment portfolio is adequately diversified, theinsurer should avoid overreliance on, for example, any specific asset
type, issuer, counterparty, group, or market and any excessive
concentration or accumulation of risk in the portfolio as a whole. The
insurer may also consider its asset concentration by type of investment
product, by geographical dispersion or by credit rating. Additionally the
insurer may consider its aggregate exposure to related entities (such as
joint ventures) and different types of exposure to the same entity or group(such as equity investment in a reinsurer which is also providing its
reinsurance cover).
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Diversification – group perspectives
15.2.20 Having risk management processes to monitor investments on a groupwide basis is more likely to make Senior Management aware of issues(eg asset concentrations) that could be overlooked if only the individual
legal entities are monitored. Groups that are unaware of their global
exposures could face an inappropriate level of exposure to certain
investments, which may create financial difficulties within the group if thevalue or liquidity of these investments decreases.
Group perspectives
15.2.21 The assets of an entity within an insurance group may include
participations or investments in another entity within the same group.
Appropriate investment requirements should apply to such investmentsor participations, particularly due to liquidity concerns. Relatively small
holdings in another legal entity, within the same insurance group that
does not give the investor control over the issuer may, for example, be
subject to the same requirements that apply to investments in entities
external to the group. On the other hand, for larger holdings which givethe investor control or significant influence over the issuer, consideration
should be given to aggregating the assets of the issuer with those of theinvestor for the purposes of applying investment requirements. This isdone so that adequate security, liquidity and diversification are
maintained and that the investor, using its control over the issuer,
ensures the issuer’s investment activities are consistent with its own
investment policy.
Regulatory investment requirements relating to the nature of the liabilities
15.3

The supervisor requires the insurer to invest in a manner that is appropriate
to the nature and duration of its liabilities.
15.3.1

Assets that are held to cover policyholder liabilities and those covering
regulatory capital requirements should be invested in a manner which isappropriate to the nature of the liabilities, as the insurer needs to use theproceeds of its investments to make payments to policyholders and othercreditors when due. The insurer’s investment strategies should take into
account the extent to which the cash flows from investments match theliability cash flows in terms of timing, amount and currency, and how thischanges in varying conditions. In this context, the insurer should
specifically consider investment guarantees and embedded options thatare contained in its insurance policies.

15.3.2

Insurers are not necessarily required to employ an investment strategy
which matches the assets and the liabilities as closely as possible.
However, to the extent that assets and liabilities are not well matched,
movements in financial variables (eg interest rates, market values andexchange rates) may affect the value of the assets and the liabilities
differently and result in an adverse economic impact for the insurer.

15.3.3As liability cash flows are often uncertain, or there are not always assets
with appropriate cash flow characteristics, the insurer is usually not able
to adopt a completely matched position. Additionally, the insurer may
wish to adopt a mismatched position deliberately in an attempt to
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supervisor may require the insurer to hold additional technical provisions
and/or capital to cover the mismatching risk. The regulatory investment
requirements may also constrain an insurer’s ability to mismatch its
assets and liabilities as the extent of mismatching should not expose
policyholders to risks that cannot be effectively managed by the insurer.
15.3.4

Nevertheless, close matching of assets and liabilities is often possible
and should be considered as a potential requirement in the case of unitlinked or universal life policies where there is a direct link between
policyholder benefits and investment funds or indices. It may not be
possible for the mismatching risk to be covered effectively by capital.
Where the supervisor requires assets to be closely matched to suchliabilities, other restrictions on investments may be appropriate to containthe investment fund risk being borne directly by policyholders.

15.3.5The insurer should manage conflicts of interest (eg between the insurer’s
corporate objectives and disclosed insurance policy objectives) toensure assets are invested appropriately. For example, for with-profits
liabilities, an insurer should invest appropriately to meet policyholders’reasonable expectations.

Group Perspectives
15.3.6

Investments that back liabilities including those covering regulatory
capital requirements within one of a group’s insurance legal entities
should be tailored to the characteristics of the liabilities and the needs ofthe insurance legal entity and not be subject to undue influence from thewider objectives of the group.

Regulatory investment requirements regarding risk assessability
15.4

The supervisor requires the insurer to invest only in assets where it canproperly assess and manage the risks.
15.4.1

The insurer should have sufficient information about its investments,
including those in collective investment funds, to ensure that its asset
risks can be properly managed.

15.4.2The insurer should understand the risks involved, and determine howmaterial the risk from a proposed investment is, before undertaking any
investments. Assessment of risks should take into account the maximum
possible loss, including losses that may occur in situations where assets,such as derivatives, become liabilities for the insurer.

15.4.3

Where the insurer is able to look through the structure of the investments
to the underlying assets, the insurer should consider the risk
characteristics of the underlying assets and how this affects the risk
characteristics of the investments itself. However, where such a lookthrough is not possible, appropriate techniques should be developed toassess the risks associated with the investment including assessing theinvestment manager of an investment fund.

15.4.4

Investments that are not traded on a regulated financial market should
be kept to prudent levels, as an objective assessment of the risks is likely
to be difficult and costly. This is particularly relevant in jurisdictions where
standardised approaches to determining regulatory capital requirements
are used, since such approaches will often be designed to be not unduly

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complex and thus feasible in practice for all insurers. Moreover, by itsvery nature a standardised approach may not be able to fully andappropriately reflect the risk profile of the investment portfolio of eachindividual insurer.
15.4.5The insurer should have access to the requisite knowledge and skills toassess and manage the risks of its investments. When an external
investment advisor or manager is used, the insurer should retain
adequate investment expertise in-house, as it has the ultimate
responsibility for its investments.

Group Perspectives
15.4.6

Investments held by entities within a group are sometimes managed
centrally by an investment management function, with the entities relying
on its expertise. In such arrangements, the investment management
function should have the requisite knowledge and skills to assess andmanage the risks of these investments and manage the investments with
due regard to the needs of individual entities in addition to the group asa whole.

Regulatory investment requirements relating to specific financial instruments
15.5

The supervisor establishes quantitative and qualitative requirements,
where appropriate, on:• the use of more complex and less transparent classes of assets;and• investments in markets or instruments that are subject to lessgovernance or regulation.
15.5.1

Complex investments may have a higher risk of large, sudden or
unexpected losses due to the nature of the underlying risks andvolatilities. Similarly, there are some assets in which investment ispermitted by the regulatory investment regime (because the risk isgenerally sufficiently assessable), but are less transparent compared toother investments. Other assets could be less well governed in terms of
the systems and controls in place for managing them or the market
regulation that applies to them. Such assets may present operationalrisks, particularly in adverse conditions that are difficult to assess
reliably. In terms of market regulation, investments in an unregulated
market or a market that is subject to less regulation (such as theProfessional Securities Market of the London Stock Exchange) need to
be given special consideration.

15.5.2The supervisor should therefore establish quantitative or qualitativerequirements or restrictions on such investments, as necessary. For
example, regulatory investment requirements may include the preapproval of an insurer’s derivative use plan, whereby the insurer has todescribe its controls over and testing of the derivative investment
process before it is used in a live environment.

15.5.3The investments described below are examples of investments that may
necessitate quantitative and qualitative requirements; however, this is
not an exhaustive list and regulatory investment requirements should beflexible and/or sufficiently broad to take account of the changing

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environment. The solvency position and the sophistication of an insurer
should also be considered. The amount of available capital an insurer
has could provide additional flexibility to the supervisor in particularcases.
Off-balance sheet structures
15.5.4

When deciding whether to invest in off-balance sheet structures, theinsurer should take into account their unique characteristics and risk
exposures. For example, special purpose entities (SPEs) (see ICP 13
Reinsurance and Other Forms of Risk Transfer) are generally more
complex than other forms of investments.

15.5.5An investment strategy that uses an off-balance sheet structure may
have an impact on the ability of the insurer to pay policyholder claims
and all other obligations, especially under stressed circumstances.

Investments in structured credit products
15.5.6

An insurer may invest in securities or other financial instruments whichhave been packaged by an SPE and which may originate from otherfinancial institutions (including banks or other insurers). Examples ofsuch instruments are asset backed securities (ABS), credit linked notes(CLN) or insurance linked securities (ILS). In these cases, it may be very
difficult for the insurer to assess the risk inherent in the investment, andin particular the risk profile of the underlying reference instruments,
which in some cases may be of particularly poor quality (eg sub-prime
mortgages). Where the originator is another insurer, the investment may
also carry insurance related risks (such as non-life catastrophe risks inthe case of a non-life catastrophe bond securitisation) which may not betransparent to the insurer or else difficult to assess.

15.5.7

If the supervisor is concerned that the insurer is exposed to an unduelevel of risk in such cases, it may consider establishing qualitative or
quantitative requirements which may relate directly to the insurer
investing in such assets, or which may relate to the originator of the
packaged instrument.

15.5.8In establishing such requirements, the supervisor may recognise thatsome structured credit products are higher risk than others and consider,for example:• the treatment of such investment in other financial sectors;• the extent to which the originator has retained an interest in a
proportion of the risk being distributed to the market;• the definition and soundness of criteria applied by theoriginator in extending the original credit and in diversifying its
credit portfolio;• the transparency of the underlying instruments; and• the procedures the insurer has in place to monitor exposures
to securitisations, including consideration of securitisation
tranches, and reporting them to the insurer’s Board and Senior
Management and supervisor.

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15.5.9

Restrictions or prohibitions may be applied to investments in structured
products where appropriate conditions are not satisfied.

Use of derivatives and similar commitments
15.5.10 An insurer choosing to engage in derivative activities should clearly
define its objectives, ensuring that these are consistent with any
supervisory requirements.
15.5.11 When used appropriately, derivatives may be useful tools in the
management of portfolio risk of insurers and in efficient portfolio
management. In monitoring the activities of insurers involved inderivatives, the supervisor should satisfy itself that the insurer has theability to recognise, measure and prudently manage the risks associatedwith their use. The supervisor should obtain sufficient information on theinsurer’s policies and processes on the use of derivatives and may
request information on the purpose for which particular derivatives are to
be used and the rationale for undertaking particular transactions.
15.5.12 Given the nature of insurance operations, derivatives should preferably
be used as a risk management mechanism rather than for speculation.
The supervisor may restrict the use of derivatives (particularly derivatives
that involve the possibility of unlimited loss) to the reduction of
investment risk or efficient portfolio management. This means that where
derivatives are used, it is for the purpose of reducing risk and costs orgenerating additional capital or income with an acceptable level of risk.
Restrictions may also be applied to require the suitability of derivative
counterparties, the derivative collateral, the tradability of the derivative
and, in the case of over-the-counter derivatives, the ability to value andto close out the position when needed. Derivatives should be consideredin the context of a prudent overall asset-liability management strategy.

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Enterprise Risk Management for Solvency Purposes
The supervisor requires the insurer to establish within its risk management
system an enterprise risk management (ERM) framework for solvency purposes to
identify, measure, report and manage the insurer’s risks in an ongoing andintegrated manner.
16.0
Introductory Guidance
16.0.1

ERM for solvency purposes is the coordination of risk management,
strategic planning, capital adequacy, and financial efficiency in order toenhance sound operation of the insurer and ensure the adequate
protection of policyholders. Capital adequacy measures the insurer’s
assessment of residual risk of its business, after overlaying the
mitigating financial effect of the insurer’s established risk management
system. Any decision affecting risk management, strategic planning or
capital would likely necessitate a compensating change in one or bothof the other two. Successful implementation of ERM for solvency
purposes results in enhanced insight into an insurer’s risk profile andsolvency position that promotes an insurer’s risk culture, earnings
stability, sustained profitability, and long-term viability, as well as theinsurer’s ability to meet obligations to policyholders. Collectively
practiced in the industry, ERM for solvency purposes supports theoperation and financial condition of the insurance sector. These aspects
of ERM should therefore be encouraged from a prudential standpoint.

16.0.2The ERM framework for solvency purposes (ERM framework) is an
integrated set of strategies, policies and processes, established by the
insurer for an effective implementation of ERM for solvency purposes.

16.0.3Components of the ERM framework that are covered in this ICP:
• Risk identification (including group risk and relationshipbetween risks);• Quantitative techniques to measure risk;• Inter-relationship of risk appetite, risk limits and capital
adequacy;• Risk appetite statement;• Asset-liability management, investment, underwriting andliquidity risk management policies;• Own risk and solvency assessment (ORSA); and• Recovery planning.

16.0.4The ERM framework should be integrated within the insurer’s risk
management system (see ICP 8 Risk Management and Internal
Controls).

16.0.5The ERM framework should enhance an insurer’s understanding ofmaterial risk types, their characteristics, interdependencies, and the

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sources of the risks, as well as their potential aggregated financial
impact on the business for a holistic view of risk at enterprise level.
Senior Management should exhibit an understanding of the insurer’s
enterprise risk issues and show a willingness and ability to address
those issues. A fundamental aspect of ERM is the development andexecution of a consistent, transparent, deliberate, and systematic
approach to manage risks, both individually and in aggregate, on an
ongoing basis to maintain solvency and operation within the risk appetite
and risk limits. ERM should be embedded in an insurer’s corporate
culture to ensure that the whole organisation contributes to risk
awareness, feedback loops and coordinated responses to risk
management needs.
16.0.6The objective of ERM is not to eliminate risk. Rather, it is to manage
risks within a framework that includes self-imposed limits. In setting limits
for risk, the insurer should consider its solvency position and its risk
appetite. Risk limits should be set after careful consideration of strategic
objectives, business plans and circumstances and should take into
account the projected outcomes of scenarios run using a range ofplausible future business assumptions which reflect sufficiently adverse
scenarios. A risk limits structure is used to establish guardrails on an
insurer’s risk profile to optimise its returns without endangering the abilityof the insurer to meet its commitments to policyholders.

16.0.7

Some insurers may utilise internal models as part of their ERM process
in order to generate sophisticated risk metrics to inform management
actions and capital needs. Internal models may enhance risk
management and embed risk culture in the insurer. They may provide acommon measurement basis across all risks (eg same methodology,
time horizon, risk measure, level of confidence) and strengthened riskbased strategic decision-making across the organisation. Such an
approach typically adopts a total balance sheet approach whereby the
impact of the totality of material risks is fully recognised on an economic
basis. A total balance sheet approach reflects the interdependence
between assets, liabilities, capital requirements and capital resources,
and identifies the capital allocation sufficient to protect the insurer andits policyholders, as well as to improve capital efficiency.

16.0.8The insurer should have adequate governance and internal controls inplace for models used in the ERM framework. The calculation of risk
metrics should be transparent, supportable, and repeatable.

16.0.9An insurer should have contingency plans that describe in advance thenecessary actions and resources to limit business disruption and losses
resulting from an adverse financial event (such as risk exposuresexceeding risk limits), or an operational event (such as a natural
disaster). Contingency planning may include a recovery plan, when
deemed necessary.

Enterprise risk management framework - risk identification
16.1

The supervisor requires the insurer’s ERM framework to provide for theidentification of all reasonably foreseeable and relevant material risks andrisk interdependencies for risk and capital management.
Risk identification

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16.1.1

The scope of risk identification and analysis of risk interdependencies
should cover, at least: insurance risk, market risk, credit risk,
concentration risk, operational risk and liquidity risk. Other risks may be
included, such as conduct risk, legal risk, political risk, reputational risk,
strategic risk and group risk.

Sources of risk and the relationship between risks
16.1.2

An insurer should consider the sources of different risks and theirimpacts and assess the relationship between risk exposures. By doing
so, an insurer can better identify both strengths and weaknesses ingovernance, control functions and business units. The insurer should
use and improve risk management policies, techniques and practices
and change its organisational structure to make these improvements
where necessary. The insurer should also assess external risk factors
which, if they were to crystallise, could pose a significant threat to its
business.

16.1.3In assessing the relationship between risk exposures, consideration
should be given to correlations between the tails of risk profiles. For
example, risks that show no strong dependence under normal economic
conditions (such as catastrophe risks and market risks) could be morecorrelated in a stress situation.

16.1.4

Assessments of risk exposures should consider macroeconomic
exposures. For example, an insurer should consider interdependencies
between guarantees and options embedded in its products, the assetsbacking those products, financial markets and the real economy.

16.1.5

Sources of risks may include catastrophes, downgrades from rating
agencies or other events that may have an adverse impact on theinsurer’s financial condition and reputation. These events can result, forexample, in an unexpected level of claims, collateral calls or policyholder
terminations and may lead to serious liquidity issues. The ERM
framework should adequately address the insurer’s options forresponding to such events.

Group risk
16.1.6

Group risk is the risk that the financial condition of a group or a legal
entity within the group may be adversely affected by a group-wide event,an event in a legal entity, or an event external to the group. Such an
event may either be financial or non-financial (such as a restructuring).

16.1.7

Group risk may arise, for example, through contagion, leveraging,double or multiple gearing, concentrations, large exposures andcomplexity. Participations, loans, guarantees, risk transfers, liquidity,
outsourcing arrangements and off-balance sheet exposures may all giverise to group risk. Many of these risks may be borne by stand-alone
insurance legal entities and are not specific to being a legal entity that ispart of a group. However, the inter-relationships among legal entities
within a group including aspects of control, influence andinterdependence alter the impact of risks on the legal entities and should
therefore be taken into account in managing the risks of an insurance
legal entity within the insurance group and in managing the risks of that
insurance group as a whole.

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Group perspectives

CF 16
CF 16.1

16.1.8The ERM framework of an insurance group should address the direct
and indirect interrelationships between legal entities within the insurancegroup. The more clearly-defined and understood such relationships are,the more accurately they can be allowed for in the group-wide solvency
assessment. For example, legally enforceable capital and risk transfer
instruments between legal entities within a group may help with theeffectiveness of its ERM framework for group-wide solvency assessment
purposes. To be effective, the management of insurance group risk
should take into account risks arising from all parts of an insurancegroup, including non-insurance legal entities (regulated or unregulated)and partly-owned entities.

16.1.9Assumptions that are implicit in the solvency assessment of an
insurance legal entity may not apply at an insurance group level because
of separation of legal entities within the insurance group. For example,
there may be few, if any, constraints on the fungibility of capital and thetransferability of assets within an individual insurance legal entity.
However, such constraints may feature much more prominently for an
insurance group and may restrict the degree to which benefits ofdiversification of risks across the group can be shared among legal
entities within the insurance group. Such constraints should be taken
into account in both the insurance group’s and the insurance legal
entity’s ERM frameworks.
fthk

CF 16.1.a

The group-wide supervisor requires:• the group-wide ERM framework to be as consistent as
possible across its legal entities;• material differences in the group-wide ERM framework to betransparent and explicitly linked to legal and supervisory
requirements in the jurisdictions where the IAIG operates, andthe risks associated with business conducted in thosejurisdictions.

CF 16.1.b

The group-wide supervisor requires the group-wide ERM framework to
include strategies, policies, and processes to manage effectively at least
the following risks and to address these risks in a cross-border context:• insurance risk;• market risk;• credit risk;• liquidity risk;• concentration risk;• operational risk;• group risk; and• strategic risk.

CF 16.1.b.1

While these risks should be recognised and managed in the groupwide ERM framework, each risk category does not have to be

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managed separately.
Some risk types, such as strategic orconcentration risk, may be included in other risk categories.
CF 16.1.c

The group-wide supervisor requires the group-wide ERM framework totake into account intra-group transactions (IGT) including:• the mechanisms to keep track of intra-group transactions thatare of substantial importance to, and have a significant
consequence for, the IAIG;• the risks arising from intra-group transactions; and• the qualitative and quantitative restrictions on such risks.

CF 16.1.c.1

Intra-group transactions may include:• loans;• guarantees;• issuance of contingent capital;• payment of dividends;• cost sharing structures;• service contracts;• management arrangements and outsourcing;• reinsurance;• transactions across different financial services entities
within the IAIG; and• equity holdings.

CF 16.1.c.2

On a consolidated basis, or other aggregated basis, the risks to the
IAIG arising from IGT may not be evident. The IAIG’s risk assessmentof its IGT should consider, among other factors:• fungibility of capital and transferability of assets (such as
capital or equity injections from one legal entity intoanother);• currency effects such as if there are cost sharing or service
contracts between legal entities located in different
jurisdictions;• correlation or concentration of risk;• practical issues, including the time needed to reallocate
risk and risk mitigants among legal entities; and• contagion risk within the group.

CF 16.1.c.3

The IAIG should take account of, the risk of support being withdrawn
from one part of the IAIG to another due to adverse publicity, poor
results, operational inefficiencies, or supervisory measures.

CF 16.1.c.4

The group-wide ERM framework should address any financial or otheractivities (eg maturity transformation, securities lending) being
undertaken by individual legal entities that may change the risk profile

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of the group. For example, in securities lending transactions, thegroup-wide ERM framework may provide that high quality assets not
be swapped with low quality assets, that appropriate arrangements forthe provisioning of collateral are in place, or that the maturity of theswapped assets does not significantly alter the risk profile of the IAIG.
Enterprise risk management framework – quantitative techniques to measure risk
16.2

The supervisor requires the insurer’s ERM framework to:• provide for the quantification of risk and risk interdependencies
under a sufficiently wide range of techniques for risk and capitalmanagement; and• as necessary, include the performance of stress testing toassess the resilience of its total balance sheet against
macroeconomic stresses.
Measuring, analysing and modelling the level of risk
16.2.1The level of risk is a combination of the impact that the risk will have on
the insurer and the probability of that risk materialising. The insurer
should assess regularly the level of risk it bears by using appropriate
forward-looking quantitative techniques (such as risk modelling, stresstesting, including reverse stress testing, and scenario analysis). An
appropriate range of adverse circumstances and events should beconsidered, including those that pose a significant threat to the financial
condition of the insurer, and management actions should be identified
together with the appropriate timing of those actions. Risk measurement
techniques may also be used in developing long-term business andcontingency plans.

16.2.2Different approaches to measuring risk may be appropriate dependingon the nature, scale and complexity of a risk and the availability of
reliable data on the behaviour of that risk. For example, a low frequency
but high impact risk where there is limited data (such as catastrophe risk)
may require a different approach from a high frequency, low impact risk
for which there is substantial amounts of experience data available.
Stochastic risk modelling may be appropriate to measure some risks(such as non-life catastrophe), whereas relatively simple calculations
may be appropriate in other circumstances.

16.2.3The measurement of risks should be based on a consistent economic
assessment of the total balance sheet as appropriate to ensure thatappropriate risk management actions are taken. In principle, an insurer’s
ERM framework should take into consideration the distribution of future
cash flows to measure the level of risks. The insurer should be careful
not to base decisions purely on accounting or regulatory measures thatinvolve non-economic considerations and conventions although theconstraints on cash flows that they represent should be taken into
account.

Group perspectives
16.2.4

An insurance group should clarify whether data used in risk
assessments is based on a consolidated, aggregated or other method.
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inherent risks of the selected methodology when developing its ERM
framework. For example, intra-group transactions may be eliminated inconsolidation and thus may not be reflected in the consolidated financial
statement of the insurance group at the top level. In using theconsolidation basis for the ERM framework, the insurance group may beable to account, and take credit, for diversification of risk. Conversely,
using another aggregation method may facilitate a more granular
recognition of risk.
Use of models for ERM
16.2.5

Measurement of risks undertaken at different valuation dates should be
produced on a broadly consistent basis overall, which may makevariations in results easier to explain. Such analysis also aids the insurer
in prioritising its risk management.

16.2.6Regardless of how sophisticated they are, models cannot exactly
replicate the real world. Risks associated with the use of models(modelling and parameter risk), if not explicitly quantified, should be
acknowledged and understood as the insurer implements its ERM
framework, including by the insurer’s Board and Senior Management.

16.2.7

Models may be external or internal. External models may be used toassess catastrophes or market risks. Internal models may be developedby an insurer to assess specific material risks or to assess its risks
overall.

16.2.8Internal models can play an important role in facilitating the risk
management process and the supervisor should encourage insurers tomake use of such models for parts or all of their business, where it isappropriate.

16.2.9An insurer may consider that the assessment of current financial
resources and the calculation of regulatory capital requirements would
be better achieved through the use of internal models, where permitted.

16.2.10 If used, an internal model may provide an important strategic andoperational decision-making tool and should be used to enable theinsurer to integrate its risk and capital management processes. In
particular, the internal model used for ORSA should be consistent withmodels for other processes within the ERM framework. These include:
assessment of the risks faced within the insurer’s business; constructionof risk limits structure; and the determination of the economic capitalneeded, where appropriate, to meet those risks.
16.2.11 To be effective, an internal model should address all the identified risks
within its scope, and their interdependencies, and assess their potential
impact on the insurer’s business given the possible situations that could
occur. The methods by which this analysis could be conducted range
from simple stress testing of events to more complex stochastic
modelling, as appropriate.
16.2.12 The insurer’s internal model should be calibrated on the basis of definedmodelling criteria that the insurer believes will determine the level ofcapital appropriate and sufficient to meet its business plan and strategic
objectives. These modelling criteria may include the basis for valuationof the assets and liabilities, the confidence level, risk measure and time
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horizon, as well as other business objectives (for example, aiming toachieve a certain minimum investment rating).
16.2.13 In constructing its internal model, an insurer should adopt risk modelling
techniques and approaches that are appropriate to its risk strategy andbusiness plans. An insurer may consider various inputs to the modelling
process, such as economic scenarios, asset portfolios and liabilities fromin-force or past business, and regulatory constraints on the transfer ofassets.
16.2.14 An internal model used to determine economic capital may enable theinsurer to allocate sufficient financial resources to ensure it continues tomeet its policyholder liabilities as they fall due, at a confidence levelappropriate to its business objectives. To fully assess policyholder
liabilities in this way, all liabilities that should be met to avoid putting
policyholder interests at risk need to be considered, including any
liabilities for which a default in payment could trigger the winding up of
the insurer.
16.2.15 If an insurer uses its own internal model as part of its risk and capitalmanagement processes, the insurer should validate it and review it on aregular basis. Validation should be carried out by suitably experienced
individuals in a different department or persons other than those who
created the internal model, in order to facilitate independence. The
insurer may wish to consider an external review of its internal model byappropriate specialists; for example, if the internal review cannot be
performed with sufficient independence, an external review may be
warranted.
16.2.16 Where a risk is not readily quantifiable (for instance some operationalrisks or where there is an impact on the insurer’s reputation), the insurer
should make a qualitative assessment that is appropriate to that risk andsufficiently detailed to be useful for risk management. The insurer should
analyse the controls needed to manage such risks to ensure that its risk
assessments are reliable and consider events that may result in highoperational costs or operational failure. Such analysis should inform theinsurer’s judgments in assessing the size of the risks and enhancing
overall risk management.
16.2.17

CF 16.2
CF 16.3

It may be appropriate for internal models to be used for a group even
where the use of an internal model is not an approach appropriate at theinsurance legal entity level due to, for example, lack of sufficient data.

Bf

CF 16.2.a

The group-wide supervisor requires the Head of the IAIG to ensure that
the IAIG measures all reasonably foreseeable, quantifiable, and relevantmaterial risks using an economic capital model taking into account therisks that the IAIG faces in different sectors, jurisdictions and economic
environments.

CF 16.2.a.1

The IAIG should prioritise its risks in a consistent and reliable mannerusing appropriate means, including the use of an economic capitalmodel.

CF 16.2.a.2

The economic capital model should be based on techniques that
estimate the amount of capital needed in reasonably foreseeable
adverse situations to which the IAIG is or may be exposed. The

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economic capital model, in conjunction with other relevant capital
measures (for example, regulatory capital requirements), should
support major management decisions by focusing attention on capital
adequacy.
CF 16.2.a.3

The IAIG should consider the output of its economic capital model andregulatory capital requirements as inputs to its capital planning, which
covers at least the IAIG’s business planning period.

Stress testing, scenario analysis and reverse stress testing
16.2.18 Stress testing measures the financial impact of stressing one or morefactors which could severely affect the insurer. Scenario analysis
considers the impact of a combination of circumstances to reflect
historical or other scenarios which are analysed in the light of current
conditions. Scenario analysis may be conducted deterministically usinga range of specified scenarios or stochastically, using models to simulate
many possible scenarios, to derive statistical distributions of the results.
16.2.19 Stress testing and scenario analysis should be carried out by the insurer
to validate and understand the limitations of its models. They may also
be used to complement the use of models for risks that are difficult tomodel or where the use of a model may not be appropriate from a costbenefit perspective. For example, these techniques can be used toinvestigate the effect of proposed management actions.
16.2.20 Scenario analysis may be particularly useful as an aid to communicate
risk management issues to the Board, Senior Management, business
units and control functions. As such, scenario analysis can facilitate theintegration of the insurer’s ERM framework within its business
operations and establish a sound risk culture.
16.2.21 Reverse stress testing may help identify scenarios that could result in
failure or cause the financial position of an insurer to fall below apredefined level. While some risk of failure is always present, such an
approach may help to ensure adequate focus on the management
actions that are appropriate to avoid undue risk of business failure. The
focus of such reverse stress testing is on appropriate risk management
actions rather than the assessment of its financial condition and so may
be largely qualitative in nature although broad assessment of associatedfinancial impacts may help in deciding the appropriate action to take.
16.2.22 Stress testing is intended to serve the insurer as an aid to sound risk
management, including by identifying residual macroeconomic
exposure.
16.2.23 Macroeconomic exposure in the insurance sector can accumulate
through certain types of insurance liabilities or may be created throughnon-insurance activities. Examples are:• savings-oriented products (or protection-oriented productswith a savings component) that offer unmatched guarantees
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• products embedding features such as automatic asset sales
triggered by asset value decreases or that require dynamic
hedging; and• derivatives contracts such as financial guarantee products
including credit default swaps (CDS) that are not used tohedge risk.
16.2.24 In deciding whether it is necessary to require stress testing, and thefrequency, scope and type of such stress testing, the supervisor shouldtake into account, for example:• the nature, scale and complexity of: the insurer, its activities,business model and products, including the characteristics ofthe guarantees it provides;• the characteristics of any automatic asset reallocation
mechanisms;• the use of dynamic hedging and the extent to which suchguarantees are matched or hedged; and• its activity in derivatives markets.
Group perspectives
16.2.25 The risks identified and the techniques that are appropriate andadequate for measuring them (including stress testing, scenario
analysis, risk modelling and reverse stress testing) may differ atinsurance group and insurance legal entity level. Where an insurance
legal entity’s ERM framework is an integral part of the insurance group’s
ERM framework, the techniques used to measure risks at group levelshould consider those that are appropriate and adequate at theinsurance legal entity level.
CF 16.4
CF 16.5

Fp

CF 16.2.b

The group-wide supervisor requires the IAIG’s risk measurement toinclude:• stress and reverse stress testing and scenario analysis the
IAIG deems relevant to its risk profile; and• the resilience of its
macroeconomic stresses.

totalbalancesheetagainstCF 16.2.b.1

Stresses should include (but may not be limited to) those in the risk
transfer markets that may have an adverse effect on the IAIG’s risk
profile. For example, when developing its scenarios for stress testing,the IAIG should consider reinsurance capacity and related risk transfer
costs in future periods after a catastrophic event.

CF 16.2.b.2

The IAIG’s assessment of macroeconomic stresses should pay
particular attention to the impact of stresses on the value ofguarantees and options embedded in insurance products and on theassets backing them.

CF 16.2.c

The group-wide supervisor requires the group-wide ERM framework to be
independently reviewed at least once every three years, in order toascertain that it remains fit for purpose.

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CF 16.2.c.1

The group-wide ERM framework review may be carried out by aninternal or external body as long as the reviewer is independent andnot responsible for, nor been actively involved in, the part of the groupwide ERM framework that it reviews.

CF 16.2.c.2

It may be necessary for the IAIG to perform an ad hoc review after amajor change has occurred, such as a change in its risk profile,structure or business strategy.

Enterprise risk management framework - Inter-relationship of risk appetite, risk limits
and capital adequacy
16.3

The supervisor requires the insurer’s ERM framework to reflect therelationship between the insurer’s risk appetite, risk limits, regulatory
capital requirements, economic capital and the processes and methods formonitoring risk.
16.3.1An insurer's ERM framework should reflect how its risk management
coordinates with strategic planning and its management of capital(regulatory capital requirement and economic capital).

16.3.2As an integral part of its ERM framework, an insurer should also reflect
how its risk management links with corporate objectives, strategy andcurrent circumstances to maintain capital adequacy and solvency and tooperate within the risk appetite and risk limits described in the risk
appetite statement.

16.3.3

An insurer’s ERM framework should use reasonably long time horizon,
consistent with the nature of the insurer’s risks and the businessplanning horizon, so that it maintains relevance to the insurer's businessgoing forward. This can be done by using methods (such as scenario
models) that produce a range of outcomes based on plausible futurebusiness assumptions which reflect sufficiently adverse scenarios. The
analysis of these outcomes may help the Board and Senior Management
in strategic business planning.

16.3.4

Risks should be monitored and reported to the Board and Senior
Management, in a regular and timely manner, so that they are fully
aware of the insurer's risk profile and how it is evolving and makeeffective decisions on risk appetite and capital management.

16.3.5

Where internal models are used for business forecasting, the insurer
should perform back-testing, to the extent practicable, to validate theaccuracy of the model over time.

16.3.6The insurer’s ERM framework should note the insurer’s reinsurance
arrangements and how they:• reflect the insurer’s risk limits structure;• play a role in mitigating risk; and• impact the insurer’s capital requirements.
The use of any non-traditional forms of reinsurance (eg finite
reinsurance) should also be addressed.

Enterprise risk management framework - risk appetite statement
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16.4

The supervisor requires the insurer to have a risk appetite statement that:• articulates the aggregate level and types of risk the insurer iswilling to assume within its risk capacity to achieve its financial
and strategic objectives, and business plan;• takes into account all relevant and material categories of risk andtheir interdependencies within the insurer’s current and target
risk profiles; and• is operationalised in its business strategy and day-to-day
operations through a more granular risk limits structure.
16.4.1An insurer’s risk appetite statement should include qualitative
statements as well as quantitative measures expressed relative toearnings, capital, risk measures, liquidity and other relevant measures
as appropriate.

16.4.2

Qualitative statements should:• complement quantitative measures;• set the overall tone for the insurer’s approach to risk taking;and• articulate clearly the motivations for taking on or avoiding
certain types of risks, products, jurisdictional/regional
exposures, or other categories.

16.4.3

Risk appetite may not necessarily be expressed in a single document.
However the way it is expressed should provide the insurer’s Board witha coherent and holistic, yet concise and easily understood, view of theinsurer’s risk appetite.

16.4.4The supervisor should require risk capacity of the insurer to include theconsideration of regulatory capital requirements, economic capital,
liquidity and operational environment.

16.4.5

The risk appetite statement should give clear guidance to operational
management on the level of risk to which the insurer is prepared to be
exposed and the limits of risk to which they are able to expose theinsurer. It should also be communicated across and within the insurer tofacilitate entrenching the risk appetite into the insurer’s risk culture.

16.4.6

An insurer should consider how to embed these limits in its ongoing
operations. This may be achieved by expressing limits in a way that canbe measured and monitored as part of ongoing operations. Stresstesting may provide an insurer with a tool to help ascertain whether thelimits are suitable for its business.

Group perspectives

CF 16.6
CF 16.7

16.4.7

An insurance legal entity’s risk appetite statement should define risk
limits taking into account all of the group risks it faces to the extent thatthey are relevant and material to the insurance legal entity.

16.4.8When creating a risk limits structure at the insurance legal entity level,
the entity’s Board and Senior Management should take into account risk
limits at the group level.
Ji

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CF 16.4.a

The group-wide supervisor requires the group-wide ERM framework toestablish and maintain processes to communicate its risk appetiteinternally and externally.

CF 16.4.a.1

The granularity of disclosure may differ between internal and external
communication.

Asset-liability management, investment, underwriting and liquidity risk management
policies
16.5

The supervisor requires the insurer’s ERM framework to include an explicit
asset-liability management (ALM) policy which specifies the nature, roleand extent of ALM activities and their relationship with productdevelopment, pricing functions and investment management.
16.5.1

As appropriate, the ALM policy should set out how:• the investment and liability strategies allow for the interaction
between assets and liabilities;• the liability cash flows will be met by the cash inflows; and• the economic valuation of assets and liabilities will change
under a range of different scenarios.
ALM does not imply that assets should be matched as closely as
possible to liabilities, but rather that mismatches are effectively
managed. Not all ALM needs to use complex techniques. For example,
simple, low risk or short term business may call for less complex ALM
techniques.

16.5.2The insurer’s ALM policy should recognise the interdependence
between all of the insurer’s assets and liabilities and take into accountthe correlation of risk between different asset classes as well as thecorrelations between different products and business lines, recognisingthat correlations may not be linear. The ALM policy should also take into
account any off-balance sheet exposures that the insurer may have andthe contingency that risks transferred may revert to the insurer.

16.5.3Different strategies may be appropriate for different categories of assets
and liabilities. One possible approach to ALM is to identify separatehomogeneous segments of liabilities and obtain investments for eachsegment that would be appropriate if each liability segment was a standalone business. Another possible approach is to manage the insurer’s
assets and liabilities together as a whole. The latter approach may
provide greater opportunities for profit and management of risk than theformer. If ALM is practised for each business segment separately, this is
likely to mean that the insurer may not benefit as much from the benefitsof scale, hedging, diversification and reinsurance.

16.5.4

However, for some types of insurance business it may not beappropriate to manage risks by combining liability segments. It may benecessary for the insurer to devise separate and self-contained ALM
policies for particular portfolios of assets that are ring-fenced orotherwise not freely available to cover obligations in other parts of theinsurer.

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16.5.5

Assets and liabilities may be ring-fenced to protect policyholders. For
example, non-life insurance business is normally ring-fenced from life
insurance business, and likewise, participating business is separated
from non-participating. Supervisory requirements or the insurer’s ERM
framework may require some liabilities to be closely matched with thesupporting assets. For example, equity-linked or indexed-linked benefits
may be closely matched with corresponding assets, and annuities’ cash
outflows may be closely matched with cash inflows from fixed income
instruments.

16.5.6

Some liabilities may have particularly long durations, such as certain
types of liability insurance and whole-life policies and annuities. In thesecases, assets with sufficiently long duration may not be available tomatch the liabilities, introducing a significant reinvestment risk, such thatthe present value of future net liability cash flows is particularly sensitive
to changes in interest rates. There may also be gaps in the asset
durations available. An ALM policy should address the risks arising fromduration or other mismatches (for example, by holding adequate capitalor having appropriate risk mitigation in place). The ERM framework
should reflect the insurer’s capacity to bear ALM risk, according to theinsurer’s risk appetite and risk limits structure.

Group perspectives
16.5.7

16.6

The group-wide ALM policy should take into account any legal
restrictions that may apply to the treatment of assets and liabilities within
the jurisdictions in which the group operates.

The supervisor requires the insurer’s ERM framework to include an explicit
investment policy that:• addresses investment risk according to the insurer’s risk
appetite and risk limits structure;• specifies the nature, role and extent of the insurer’s investment
activities and how the insurer complies with regulatory
investment requirements; and• establishes explicit risk management procedures with regard to
more complex and less transparent classes of asset andinvestments in markets or instruments that are subject to lessgovernance or regulation; and• as necessary, includes a counterparty risk appetite statement.
16.6.1An investment policy may set out the insurer’s strategy for optimising
investment returns and specify asset allocation strategies andauthorities for investment activities and how these are related to the ALM
policy.

16.6.2The investment policy should address the safe-keeping of assets
including custodial arrangements and the conditions under whichinvestments may be pledged or lent.

16.6.3Credit risk should be considered in the investment policy.

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• type of asset;• credit rating;• issuer/counterparty
issuer/counterparty;orrelatedentitiesofan• financial market;• sector; and• geographic area.
16.6.5

It is important for the insurer to understand the source, type and amountof investment risk. For example, it is important to understand who has
the ultimate legal risk or basis risk in a complex chain of transactions.
Similar questions arise where the investment is via external funds,
especially when such funds are not transparent.

16.6.6

A number of factors may shape the insurer’s investment strategy. For
insurers in many jurisdictions concentration risk arising from the limited
availability of suitable domestic investment vehicles may be an issue. By
contrast, international insurers’ investment strategies may be complex
because of a need to manage or match assets and liabilities in a numberof currencies and different markets. In addition, the need for liquidity
resulting from potential large-scale payments may further complicate an
insurer’s investment strategy.

16.6.7

Where appropriate, the investment policy should outline how the insurer
deals with inherently complex financial instruments such as derivatives,
hybrid instruments that embed derivatives, private equity, hedge funds,
insurance linked instruments and commitments transacted throughspecial purpose entities. Complex or less transparent assets may
present operational risks that are difficult to assess reliably, especially inadverse conditions.

16.6.8An effective investment policy and ERM framework should provide forappropriately robust models reflecting relevant risks of complex
investment activities (including underwriting guarantees for suchcomplex securities). There should be explicit procedures to evaluate
non-standard risks associated with complex structured products,
especially new forms of concentration risk that may not be obvious.

16.6.9For complex investment strategies, the insurer’s investment policy and
ERM framework may incorporate the use of stress testing andcontingency planning to handle hard-to-model risks such as liquidity andsudden market movements. Trial operation of procedures may also beappropriate in advance of ‘live’ operation.

16.6.10 The insurer’s investment policy and ERM framework should be clear
about the purpose of using derivatives and address whether it isappropriate for it to prohibit or restrict the use of some types ofderivatives where, for example:• the potential exposure cannot be reliably measured;• closing out of a derivative is difficult considering the illiquidityof the market;
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• the derivative is not readily marketable as may be the casewith over-the-counter instruments;• independent (ie external) verification of pricing is notavailable;• collateral arrangements do not fully cover the exposure to thecounterparty;• the counterparty is not suitably creditworthy; and• the exposure to any one counterparty exceeds a specified
amount.
These factors are particularly important for unregulated over-the-counter
derivatives. The effectiveness of clearing facilities available may be arelevant consideration in assessing the counterparty risk associated withsome types of over-the-counter derivatives, such as credit default swaps.
16.6.11 A counterparty risk appetite statement sets out the level of risk the
insurer is willing to accept that a counterparty will be unable to meet its
obligations as they fall due. This may impact the insurer’s financial
position through, for example, reductions in fair value or impairment ofinvestments, loss of reinsurance cover, open market exposures or theloss of securities that have been loaned.
16.6.12 In deciding whether it is necessary to require a counterparty risk appetitestatement, the supervisor should take into account the size of theinsurer’s counterparty exposures, both in absolute terms and relative tothe insurer’s portfolio, according to the characteristics outlined in
Guidance 16.6.4, as well as the complexity and form of these exposures.
Particular attention should be paid to financial sector counterparties, asthese counterparties may be more likely to contribute to the build-up of
systemic risk. Attention should also be paid to off-balance sheet
exposures or commitments, as these may be more likely to materialise
during stress.
CF 16.8
CF 16.9Gl

CF 16.6.a

The group-wide supervisor requires the Head of the IAIG to establish andmaintain a group-wide investment policy that sets criteria for investment
quality and addresses the selection of, and exposure to, low-quality
investments or investments whose security is difficult to assess.

CF 16.6.a.1

CF 16.6.b

The group-wide investment policy should take into account thedifferent regulatory investment requirements of the jurisdictions inwhich the IAIG operates.

The group-wide supervisor requires the Head of the IAIG to:• set limits, or other requirements, in the group-wide investment
policy so that assets are properly diversified and asset
concentration risk is mitigated; and• have a counterparty risk appetite statement.

CF 16.6.b.1

The IAIG should avoid excessive concentrations in any particular:• type of asset;

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• credit rating;• issuer/counterparty or related entities of an issuer/counterparty;• financial market;• sector; or• geographic area.
CF 16.6.b.2

CF 16.6.c

To support the assessment of concentrations, the IAIG should analyseaggregate exposures to individual counterparties and to groups ofrelated counterparties both at the legal entity level and group-widelevel.

The group-wide supervisor requires the Head of the IAIG to establish
criteria on intra-group investments in the group-wide investment policy.

CF 16.6.c.1

Criteria on intra-group investments should take into account, whenappropriate:• liquidity;• contagion or reputational risk;• valuation uncertainty;• impact on capital resources;• nature of the IAIG’s business; and• financial condition of the individual legal entities.
•
The fact that intragroup investments may be subject tosupervisory approval, in certain jurisdictions, does not remove therequirement for the Head of the IAIG to set its own criteria.

CF 16.6.d

The group-wide supervisor requires the Head of the IAIG to monitor
investments on a group-wide basis to identify levels of investment
exposure that do not comply with the group-wide investment policy.

CF 16.6.d.1

16.7

Group-wide investment exposures that exceed limits, or any othernon-compliance, should be reported to the IAIG Board and Senior
Management upon identification. Reports to the IAIG Board andSenior Management should include material exposures that, even if
within limits, could create financial difficulties within the IAIG if thevalue or liquidity of the investments decreases.

The supervisor requires the insurer’s ERM framework to include anunderwriting policy that addresses the:• insurer’s underwriting risk according to the insurer’s risk
appetite and risk limits structure;• nature of risks to be underwritten, including any material
relationship with macroeconomic conditions; and• interaction of the underwriting strategy with the insurer’s
reinsurance strategy and pricing.

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16.7.1

An underwriting policy should cover the underwriting process, pricing,claims settlement and expense control (where applicable and relevantto the expenses of the underwriting process). Such a policy may include:• the terms on which contracts are written and any exclusions;• the procedures and conditions that need to be satisfied forrisks to be accepted;• additional premiums for substandard risks; and• procedures and conditions that need to be satisfied for
claims to be paid.

16.7.2Control of expenses associated with underwriting and payment of claims
is an important part of managing risk especially in conditions of highgeneral rates of inflation. Inflation of claim amounts also tends to be highin such conditions for some types of risk. Insurers should have systems
in place to control their expenses. These expenses should be monitoredby the insurer on an ongoing basis.

16.7.3The underwriting policy should take into account the effectiveness of risk
transfer. This includes ensuring that:• the insurer’s reinsurance programme provides coverageappropriate to its level of capital, the profile of the risks it
underwrites, its business strategy and risk appetite; and• the risk will not revert to the insurer in adverse circumstances.

16.7.4

In addressing the nature and amount of risks to be underwritten theunderwriting policy should cover, at least:• product classes the insurer is willing to write;• relevant exposure limits (eg geographical, counterparty,
economic sector); and• a process for setting underwriting limits.

16.7.5The underwriting policy should address the potential impact on theinsurer’s financial position from material correlations between
macroeconomic conditions and the insurance portfolio (for example byassessing the potential impact stemming from certain insurance
products with embedded guarantees and options).

16.7.6The underwriting policy should address:• how an insurer analyses emerging risks in the underwritten
portfolio; and• how emerging risks are considered in modifying underwriting
practices.

16.7.7

CF 16.10
CF 16.11

The underwriting policy should describe interactions with thereinsurance strategy and associated credit risk, and should include
details of the reinsurance cover of certain product classes or particularrisks.
Ru

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CF 16.7.a

The group-wide supervisor requires the Head of the IAIG to ensure that
the IAIG implements its group-wide ERM framework by establishingprocedures and monitoring practices for the use of sufficient, reliable andrelevant data for its underwriting, pricing, reserving and reinsurance
processes.

Group-wide claims management policy
CF 16.7.b

The group-wide supervisor requires the Head of the IAIG to establish andmaintain a group-wide claims management policy, as part of the groupwide ERM framework, that includes procedures for:• claims estimation and settlement;• feedback into the group-wide underwriting policy andreinsurance strategy; and• claims data reporting for group analysis.

CF 16.7.b.1

The group-wide claims management policy may establish proceduresfor:• delegations of authority for claims settlement;• criteria for accepting or rejecting claims; and• escalating claims.

CF 16.7.b.2

A group-wide claims management policy should allow insurance legal
entities to establish individual claims management policies andprocesses, adjusted to supervisory requirements and circumstancesin their jurisdictions.

CF 16.7.b.3

Escalating claims may include information about sudden increases inclaim activity, delays in settlements and increased rejections.

Group-wide strategy for reinsurance and other forms of risk transfer
CF 16.7.c

The group-wide supervisor requires the Head of the IAIG to establish andmaintain a group-wide strategy for reinsurance and other forms of risk
transfer as part of the group-wide ERM framework that considers thefollowing issues, as applicable:• the interaction with the
management strategies;group-wide

risk

and

capital• how the risk appetite is achieved, on both a gross limit and net
retention basis;• the appetite for reinsurer credit risk, including approved
security criteria for reinsurance transactions and aggregate
exposure criteria to individual or related reinsurers;• the autonomy afforded to individual insurance legal entities toenter into “entity specific” reinsurance arrangements, and the
management and the aggregation of these exposures in thegroup-wide context;• procedures for managing reinsurance recoverables, including
required reporting from insurers;
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• intra-group reinsurance strategy and practice;• use of alternative risk transfer, including capital markets risk
transfer products; and• effectiveness of risk transfer in adverse circumstances.
CF 16.7.c.1

A strategy for other forms of risk transfer may include the use of capital
markets risk transfer products (for example, insurance linked
securities). Strategic considerations may include factors like thematurity of the capital markets offering such risk transfer products,
regulatory approaches regarding the use of such risk transfer
products, and overall mix of traditional reinsurance with other forms ofrisk transfer.

Group-wide actuarial policy
CF 16.7.d

The group-wide supervisor requires the Head of the IAIG to establish andmaintain a group-wide actuarial policy, as part of the group-wide ERM
framework, that consists of a set of group-wide practice standards,
covering at least:• the process to assess the appropriateness, at the group-widelevel, of the data, methodologies and underlying models used,
as well as the assumptions made in the calculation of technicalprovisions;• the process to calculate reinsurance recoverable assets taking
into account the design of the reinsurance programme under
the reinsurance strategy of the IAIG; and• model risk management of internal models that generate
actuarial and financial projections for solvency purposes.

CF 16.7.d.1

The group-wide practice standards comprising the group-wide
actuarial policy should:• be compliant with applicable laws and regulations,accounting regime, and professional actuarial standards;• formalise materiality thresholds to trigger higher levels ofmanagement actions to ensure well-governed activities;• provide for a data validation process that supports
actuarial
activities
toensuredata
quality,comprehensiveness, granularity and timeliness;• provide a framework for determining assumptions used in
valuations, including a process of incorporating theexperience of the IAIG and its insurance legal entities, aswell as a process of developing assumptions if the IAIG
does not have enough experience in a particular businessline or market;• articulate model validation and maintenance procedure toensure that model usage and model modifications alignwith the risk appetite and risk limits structure; andPublicIAIS ICPs and ComFrame – November 2019

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• create consistent management information requirementsfrom in-depth reviews and monitoring of actuarial
activities.
CF 16.7.d.2

The group-wide actuarial policy should contain practice standards toraise awareness of matters that have, or are likely to have, a materiallyadverse effect on the solvency, reserves or financial condition of oneof the insurance legal entities, or the IAIG as a whole. Such standards
would prompt the group-wide actuarial function to inform the relevant
Board, Senior Management or Key Persons in Control Functions, as
appropriate, for suitable action (see ICP 8 Risk Management andInternal Controls).

CF 16.7.d.3

Differences in reporting may exist at the insurance legal entity level tocomply with jurisdictional requirements. The group-wide actuarial
policy should focus on group-wide reporting requirements, both forinternal management purposes and for reporting and disclosure
purposes. The group-wide reporting should reflect jurisdictional
differences.

CF 16.7.d.4

The group-wide actuarial policy should require an assessment of theconsistency of the base assumptions used to derive technicalprovisions compared to those used to derive capital requirements,
economic capital models, or the forward-looking view in the ORSA.
Such an assessment of consistency may provide insight as to thecoherence of the base assumptions and those applied in stressconditions.

CF 16.7.e

The group-wide supervisor requires the group-wide actuarial function, as
part of the group-wide ERM framework, to report (whether certified or not)to the IAIG Board annually on at least the following:• a prospective actuarial analysis of the financial condition of
the IAIG which goes beyond the current balance sheet of the
IAIG;• the reliability and sufficiency of the technical provisions;• the adequacy of reinsurance credit for technical provisions;and• consideration of non-insurance legal entities and nonregulated legal entities.

CF 16.7.e.1

The group-wide actuarial function should provide the IAIG Board an
actuarial analysis of the current and future financial condition of the
IAIG given recent experience and the group-wide policies forunderwriting, claims management and investment and the group-wide
reinsurance strategy.

CF 16.7.e.2

The group-wide actuarial function may use the underlying actuarial
reports submitted by the individual insurance legal entities as input toits annual reporting to the IAIG Board. Further examples of issues that
could be addressed include:

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• the assumptions used by all of the insurance legal entities
in the group and the consolidation/aggregation method
applied at the group level;• the methodologies used to determine current estimates by
each insurance legal entity and the consolidation/
aggregation method applied at the group level;• the methodologies used to determine the margin overcurrent estimate by each insurance legal entity and theconsolidation/aggregation method applied at the grouplevel;• the availability and appropriateness of data used in
valuations;• back-testing of assumptions and valuations;• uncertainty in current estimates used by both insurance
legal entities and at the consolidated/aggregated grouplevel;• the adequacy of pricing, taking into account theunderwriting policies, at the appropriate unit level, theinsurance legal entity level and the group level;• the performance of the IAIG's insurance portfolios andanalysis of any changes in business volumes, exposures,
claims experience, mix of business and pricing during theyear;• asset-liability management
investment policy;

under

the

group-wide• suitability and adequacy of reinsurance or other forms ofrisk transfer arrangements, taking into account thestrategies for underwriting and claims management, as
well as the overall financial condition and risk appetite of
the IAIG; and• the extent of reliance on the values provided by noninsurance legal entities.
16.8

The supervisor requires the insurer’s ERM framework to address liquidity
risk and to contain strategies, policies and processes to maintain adequate
liquidity to meet its liabilities as they fall due in normal and stressed
conditions.
16.8.1

When analysing its liquidity profile, the insurer should assess the liquidityof both its assets and liabilities. The insurer should consider, whereapplicable, issues such as:• market liquidity in normal and stressed conditions, quality ofassets and its ability to monetise assets in each situation;• characteristics of insurance contracts that may affectpolicyholder behaviour around lapse, withdrawal or renewal;

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• adverse insurance events that may trigger short-term liquidity
needs, including catastrophes;• non-insurance activities such as margining or posting
collateral for derivatives contracts, securities lending or
repurchase agreements; and• contingent sources of liquidity (including committed lines ofcredit or future premium income) and whether these would beavailable in stressed conditions.
16.8.2

An insurer should have well-defined processes and metrics in place,which may be simple or more advanced depending on its activities, toassess its liquidity position at different time horizons on a regular basis.
An insurer’s liquidity analysis should cover both normal and stressedmarket conditions. The insurer should assess the results of such analysis
in light of its risk appetite.

16.8.3

Upon the supervisor’s request, the insurer should report its liquidity risk
management processes and analysis, including key assumptions or
metrics.

Group perspectives

16.9

16.8.4

An insurance group’s assessment should result in a coherent view ofliquidity risk across legal entities within the group. For example, where
an individual legal entity relies on the head of the group for funding, thisshould be accounted for in both the individual legal entity’s and the headof the group’s liquidity analysis.

16.8.5

When analysing its liquidity position, an insurance group may use
different scenarios and analyses on a legal entity level and group-widelevel where appropriate. Such scenarios should take into account thatcircumstances may differ between individual legal entities and the groupas a whole.

The supervisor requires, as necessary, the insurer to establish moredetailed liquidity risk management processes, as part of its ERM framework,that include:• liquidity stress testing;• maintenance of a portfolio of unencumbered highly liquid assets
in appropriate locations;• a contingency funding plan; and• the submission of a liquidity risk management report to thesupervisor.
16.9.1Liquidity risk increases as the imbalance between liquidity sources andneeds grows, for instance due to liquidity transformation. Unexpectedliquidity needs could be generated by, for example:•

derivatives, particularly any collateral or margin that needs to beposted for mark-to-market declines in the value of the contract;•

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•insurance products that contain provisions that allow a
policyholder to withdraw cash from the policy with little notice or
penalty; and•insurance products covering natural catastrophes.

These activities may contribute to systemic risk when not properly
managed, for instance when funds received from short-term securities
lending or repurchase agreements or balances from more liquid
insurance products are invested in illiquid assets.

CF 16.12
CF 16.13

16.9.2

Some insurers are required to establish more detailed liquidity risk
management processes as compared to those processes set out inStandard 16.8. More detailed liquidity risk management processes areintended to help the insurer with its risk management. Additionally, themeasures may provide the supervisor with a view on vulnerabilities that
may cause funding shortfalls in stress.

16.9.3Liquidity stress testing is a forward looking risk management tool toreveal vulnerabilities in the insurer’s liquidity profile and provide
information on its ability to meet liabilities as they fall due. A portfolio of
unencumbered highly liquid assets may provide a source of liquidity forthe insurer to meet its liabilities as they fall due. A contingency fundingplan, describing the strategies for addressing liquidity shortfalls in stresssituations, may assist the insurer in addressing an unforeseen stresssituation, where its liquid assets are insufficient or unexpectedly become
illiquid. A liquidity management report could assist the insurer and thesupervisor to address shortcomings in the insurer’s risk management bylaying out details of its liquidity risk management in an accessible format.

16.9.4

In deciding whether it is necessary to require more detailed liquidity risk
management processes, and the intensity of such processes, thesupervisor should take into account the nature, scale and complexity of
the insurer’s activities that lead to increased liquidity risk exposure aswell as the risk amplification effects related to the size of the insurer.
Increased liquidity risk exposure may depend on, for example, themagnitude of potential collateral or margin calls from derivatives or othertransactions, the use of securities financing transactions or thecharacteristics of insurance contracts that may affect policyholder
behaviour around lapse, withdrawal or renewal.

16.9.5The supervisor may increase or decrease the intensity of theserequirements by, for example, varying the frequency, scope andgranularity of liquidity stress testing, the proportion of various types ofhighly liquid assets allowed in the portfolio or the form and level of detailin the contingency funding plan and liquidity risk management report.

16.9.6

Where an insurer is required to establish more detailed liquidity risk
management processes, the supervisor should assess the effectivenessof their implementation, including the interaction with existing control
mechanisms. Additionally, the supervisor should evaluate the quality andquantity of the assets that the insurer includes in its portfolio of highly
liquid assets in light of the liquidity characteristics of its activities. The
supervisor may develop its own, general, criteria for highly liquid assets.
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CF 16.9.a. The group-wide supervisor requires the Head of the IAIG to assess the
IAIG’s resilience against severe but plausible liquidity stresses todetermine whether current exposures are within the IAIG’s liquidity risk
appetite.
CF 16.9.a.1

Forward-looking risk assessments should be done through scenario
analysis or stress testing to reveal vulnerabilities in an IAIG’s liquidity
profile and should be performed for material legal entities and the IAIG
as a whole.

CF 16.9.a.2

Depending on its business model, an IAIG may be vulnerable todifferent liquidity stresses than other insurers. Certain activities may
contribute to larger or less predictable liquidity needs. The group-wide
supervisor should therefore consider the nature, scale, and complexityof the IAIG’s activities that lead to increased liquidity risk exposure aswell as the risk amplification effects related to the size of the IAIG whensetting its expectations of the IAIG’s stress testing. The group-wide
supervisor may, based on these considerations, vary the frequency,
scope and granularity of liquidity stress testing.

CF 16.9.a.3

The group-wide supervisor may suggest the IAIG include in its
assessment certain stresses that have been informed by the groupwide
supervisor’s
macroprudential
surveillance(ICP
24
Macroprudential Supervision).

CF 16.9.a.4

The IAIG may consider the following when designing severe but
plausible stresses:

CF 16.9.a.5•

exposure to insurable events;•

withdrawals from, and run-offs of, insurance policies;•

contingent off-balance sheet exposures;•the impact of a deterioration in the IAIG’s credit rating;•the ability to transfer liquidity between legal entities andbetween jurisdictions;•currency convertibility and access to foreign exchange
markets;•

reductions in the ability to access secured and unsecured
wholesale funding; and•the correlation and concentration of funding sources.

The IAIG may consider the impact of chosen stresses on theappropriateness of its assumptions relating to:•correlations between funding markets;•the effectiveness of diversification across its chosen sourcesof funding;•

additional margin calls and collateral requirements;•

reliance on committed lines of credit;

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CF 16.9.a.6•

estimates of future balance sheet growth and premiumincome;•the continued availability of market liquidity, including incurrently highly liquid markets;•ability to access secured and unsecured funding; and•currency convertibility.

The IAIG should evaluate its cash inflows (sources) and cash outflows(needs) under stress scenarios and determine its stressed liquidity
position, ie its net stressed cash outflows.

CF 16.9.b. The group-wide supervisor requires the Head of the IAIG to establish andmaintain an adequate level of unencumbered highly liquid assets inappropriate locations.
CF 16.9.b.1

The IAIG should maintain adequate liquidity to meet its liabilities as
they fall due in normal and stressed conditions. Where stressscenarios reveal stressed cash outflows that exceed stressed cash
inflows, the IAIG should hold unencumbered highly liquid assets, withappropriate haircuts, of sufficient value to meet excess stressed cash
outflows.

CF 16.9.b.2

The group-wide supervisor should consider the results of the IAIG’s
stress testing or scenario analysis when assessing the quality andquantity of the assets that the IAIG considers to be highly liquid assets.
Where an IAIG is subject to significant short-term liquidity needs (forexample daily or weekly) the supervisor may require higher quality
assets than an IAIG subject to longer-term needs. The group-wide
supervisor may also require an IAIG with larger or less predictablestressed liquidity needs to hold a larger amount of highly liquid assets
than an IAIG with smaller and more consistent liquidity needs.

CF 16.9.b.3

The IAIG should be able to demonstrate to the group-wide supervisor
the liquidity of any assets it considers highly liquid assets in its liquidity
risk management report.

CF 16.9.b.4

To promote their usability, assets that the IAIG relies on for liquidity
should be free of legal, regulatory, contractual or other restrictions
on the ability of the IAIG to liquidate, sell, transfer, or assign theassets (ie unencumbered).

CF 16.9.b.5

The Head of the IAIG should ensure that its portfolio of highly liquid
assets is sufficiently diversified. This may include looking through tothe underlying assets to determine the extent of concentration risk.
The Head of the IAIG should also consider whether it holds a
substantial share of the market for a particular instrument,
counterparty or asset class to assess if the market would be able tobear the IAIG’s sales and whether market reaction would not adversely
impact the IAIG’s ability to monetise its assets as planned.

CF 16.9.b.6

The Head of the IAIG should consider the marketability andrealisability, including as acceptable collateral, of its highly liquid
assets by taking into account factors such as market depth andaccess, monetisation timelines (for example delays in finding a willingbuyer, time to settlement) and the likelihood and extent of forced-sale

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losses. In stressed market conditions, it may not be feasible to value
properly or sell some types of assets or to do so without a significant
loss in value.
CF 16.9.b.7

Liquidity is not always freely transferable within a group when needed.
The Head of the IAIG should ensure that liquidity is available to legal
entities within the group when needed, subject to any applicable legal,
regulatory or operational constraints, including cross-borderconstraints.

CF 16.9.b.8

The minimum criteria for determining asset liquidity may be addressedin the group-wide investment policy or a separate liquidity policy.

CF 16.9.c. The group-wide supervisor requires the Head of the IAIG to maintain acontingency funding plan to respond to liquidity stress events.
CF 16.9.c.1

The group-wide supervisor should consider the nature, scale, andcomplexity of the IAIG’s activities that lead to increased liquidity risk
exposure, as well as the risk amplification effects related to the size of
the IAIG, when setting its expectations of the IAIG’s contingency
funding plan requirements. This includes the form and level of detailof the contingency funding plan and the frequency for reviewing andupdating the plan. The group-wide supervisor’s expectations may be
informed by the IAIG’s liquidity stress testing or scenario analysis,
which may reveal funding sources most likely to be impacted during
stress and those on which the IAIG is most reliant. The group-wide
supervisor may consider requiring a more detailed or frequently
updated plan from an IAIG with more unpredictable cash inflows andoutflows or where cash inflows and outflows are more significantly
impacted by the IAIG’s liquidity stress tests or scenario analysis.

CF 16.9.c.2

A contingency funding plan describes the strategies for addressing
liquidity shortfalls in stress situations, including the methods that the
IAIG would use to access alternative sources of funding.

CF 16.9.c.3

A contingency funding plan should include quantitative metrics that the
IAIG would use to identify a liquidity stress event, including the leveland nature of the effect it would have on the IAIG’s liquidity positionand on sources of available funding.

CF 16.9.c.4

A contingency funding plan should outline the strategies, policies andprocesses to manage a range of stresses. The plan should establish
a clear allocation of roles and clear lines of management responsibility.
The plan should define procedures for identifying early warning
indicators for potential liquidity stress events that are based on thefeatures of the IAIG’s business.

CF 16.9.c.5

The supervisor may allow the IAIG’s contingency funding plan to be
developed as part of a recovery plan.

CF 16.9.d. The group-wide supervisor requires the Head of the IAIG to report, at least
annually, on its management of liquidity risk. The report includes at least
the following:• a liquidity risk appetite statement;• established liquidity risk limits;
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• a discussion of the current liquidity position of the IAIG in
relation to its liquidity risk appetite and limits;• a summary of strategies, policies and processes that the IAIG
has in place to manage liquidity risk;• a discussion of potential vulnerabilities in the IAIG’s liabilities
as well as the means of enhancing the liquidity position; and• the IAIG’s approach to, and results of, liquidity stress testing.
CF 16.9.d.1

The group-wide supervisor should consider the nature, scale, andcomplexity of the IAIG’s activities that lead to increased liquidity risk
exposure as well as the risk amplification effects related to the size of
the IAIG when setting liquidity reporting requirements, including thelevel of detail of the report and the frequency for reviewing andupdating the report. The supervisor may determine that the reporting
requirement is satisfied by reference to other risk management
policies, risk reporting and/or the ORSA report.

CF 16.9.d.2

The summary of strategies, policies and processes should discuss any
metrics the IAIG uses to identify, measure, monitor, and control
liquidity risk as well as how the results from the liquidity stress testing
are incorporated into day-to-day management of the IAIG. The Headof the IAIG should have a process in place to discuss the results andtake the necessary actions.

Own risk and solvency assessment (ORSA)
16.10

The supervisor requires the insurer to perform regularly its own risk andsolvency assessment (ORSA) to assess the adequacy of its risk
management and current, and likely future, solvency position.
16.10.1 The insurer should document the main outcomes, rationale, calculations
and action plans arising from its ORSA.
16.10.2 ORSAs should be largely driven by how an insurer is structured and how
it manages itself. The performance of an ORSA at the insurance legal
entity level does not exempt the group from conducting a group-wide
ORSA.

16.11

The supervisor requires the insurer’s Board and Senior Management to be
responsible for the ORSA.
16.11.1 The Board should adopt a rigorous process for setting, approving, andoverseeing the effective implementation by Senior Management of theinsurer’s ORSA.
16.11.2 Where appropriate, the effectiveness of the ORSA should be validated
through internal or external independent overall review by a suitably
experienced individual.

16.12

The supervisor requires the insurer’s ORSA to:• encompass all reasonably foreseeable and relevant material
risks including, at least, insurance, credit, market, concentration,
operational and liquidity risks and (if applicable) group risk; andPublicIAIS ICPs and ComFrame – November 2019

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• identify the relationship between risk management and the leveland quality of financial resources needed and available;
and, as necessary:• assess the insurer’s resilience against severe but plausible
macroeconomic stresses through scenario analysis or stresstesting; and• assess aggregate counterparty exposures and analyse the effectof stress events on material counterparty exposures throughscenario analysis or stress testing.
16.12.1 The insurer should consider in its ORSA all material risks that may havean impact on its ability to meet its obligations to policyholders, includingin that assessment a consideration of the impact of future changes in
economic conditions or other external factors. The insurer should
undertake an ORSA on a regular basis so that it continues to provide
relevant information for its management and decision making
processes. The insurer should regularly reassess the sources of risk andthe extent to which particular risks are material. Significant changes in
the risk profile of the insurer should prompt it to undertake a new ORSA.
Risk assessment should be done in conjunction with consideration of theeffectiveness of applicable controls to mitigate the risks.
16.12.2 The ORSA should explicitly state which risks are quantifiable and which
are non-quantifiable.
16.12.3 In deciding whether it is necessary to require scenario analysis or stresstesting as part of the ORSA, and the frequency, scope and type of such
scenario analysis or stress testing, the supervisor should take into
account, for example, the nature, scale and complexity of the insurer, its
business model and products and the size of the insurer’s exposures,
both in absolute terms and relative to the insurer’s portfolio. For
macroeconomic exposure, relevant factors may include thecharacteristics of the guarantees the insurer provides and the extent towhich such guarantees are matched or hedged, the characteristics ofany (automatic) asset reallocation mechanisms, the use of dynamic
hedging, the insurer’s activity in derivatives markets or other drivers ofvolatility in the sources or uses of cash. For counterparty exposure,particular attention should be paid to financial sector counterparties, asthese may be more likely to contribute to the build-up of systemic risk,
and to off-balance sheet exposures or commitments, as these may be
more likely to have an impact during stress.
Group perspectives
16.12.4 An insurance group’s ORSA should:• include all reasonably foreseeable and relevant material
risks arising from every legal entity within the insurancegroup and from the widest group of which the insurancegroup is part;• take into account the fungibility of capital and thetransferability of assets within the group; andPublicIAIS ICPs and ComFrame – November 2019

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• ensure capital is not double counted.
16.12.5 Similarly, an insurance legal entity’s ORSA should include all additionalrisks arising from the widest group to the extent that they impact theinsurance legal entity.
16.12.6 In the insurance legal entity’s ORSA and the insurance group’s ORSA,
it may be appropriate to consider scenarios in which a group splits orchanges its structure in other ways. Assessment of current capital
adequacy and continuity analysis should include consideration of
relevant possible changes in group structure and integrity in adverse
circumstances and the implications this could have for group risks, theexistence of the group and the support or demands from the group to oron its insurance legal entities.
16.12.7 Given the level of complexity at insurance group level compared with thatat an insurance legal entity level, additional analysis and information is
likely to be needed for the group’s ORSA in order to addresscomprehensively the range of insurance group level risks. For example,
it may be appropriate to apply a contagion test by using stress testing toassess the impact of difficulties in each legal entity within the insurancegroup on the other insurance group entities.
16.12.8 In conducting its group-wide ORSA, the group should be able to accountfor diversification in the group. Moreover, the group should be able todemonstrate how much of the diversification benefit would bemaintained in a stress situation.
CF 16.12.a The group-wide supervisor requires the Head of the IAIG to perform agroup-wide ORSA, using both quantitative and qualitative approaches,
which takes into account at least:• the legal and management structures of the group;• group-wide economic capital models;• risk aggregation;• the fungibility of capital and the transferability of assets within
the group; and• the outputs of the economic capital model and the regulatory
capital requirements.
CF 16.12.a.1 In conducting its group-wide ORSA, the IAIG should consider allmaterial risks arising from its legal entities including non-regulated
ones. In particular, political and reputational risks should beconsidered.
CF 16.12.b The group-wide supervisor requires the Head of the IAIG, as part of thegroup-wide ORSA, to:• assess the IAIG’s resilience against severe but plausible
macroeconomic stresses through scenario analysis or stresstesting; andPublicIAIS ICPs and ComFrame – November 2019

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•assess aggregate counterparty exposures and analyse theeffect of stress events on material counterparty exposuresthrough scenario analysis or stress testing.

CF 16.12.b.1 Scenario analysis of material counterparty exposures should assess
the potential impact on the IAIG’s financial position of the deteriorationof the credit-worthiness or of the default of individual legal entities,
sectors or geographic areas.
ORSA - economic and regulatory capital
16.13

The supervisor requires the insurer to:• determine, as part of its ORSA, the overall financial resources it
needs to manage its business given its risk appetite andbusiness plans;• base its risk management actions on consideration of its
economic capital, regulatory capital requirements, financial
resources, and its ORSA; and• assess the quality and adequacy of its capital resources to meet
regulatory capital requirements and any additional capital needs.
16.13.1 It is important that an insurer has regard for how risk management andcapital management relate to and interact with each other. Therefore, aninsurer should determine the overall financial resources it needs, taking
into account its risk appetite, risk limits structure and business plans,
based on an assessment of its risks, the relationship between them andthe risk mitigation in place. Determining economic capital may help an
insurer to assess how best to optimise its capital base, whether to retain
or transfer risk and how to allow for risks in its pricing.
16.13.2 Although the amounts of economic capital and regulatory capitalrequirements and the methods used to determine them may differ, an
insurer should be aware of, and be able to analyse and explain, thesedifferences. Such analysis helps to embed supervisory requirements
into an insurer's ORSA and risk and capital management, so as toensure that obligations to policyholders continue to be met as they falldue.
16.13.3 As part of the ORSA, the insurer should perform its own assessment of
the quality and adequacy of capital resources both in the context ofdetermining its economic capital and in demonstrating that regulatory
capital requirements are met having regard to the quality criteria
established by the supervisor and other factors which the insurer
considers relevant.
Re-capitalisation
16.13.4 If an insurer suffers losses that are absorbed by its available capital
resources, it may need to raise new capital to meet ongoing regulatory
capital requirements and to maintain its business strategies. It cannot beassumed that capital will be readily available at the time it is needed.
Therefore, an insurer’s own assessment of the quality of capital should
also consider the issue of re-capitalisation, especially the ability ofcapital to absorb losses on an ongoing basis and the extent to which

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the capital instruments or structures that the insurer uses may facilitateor hinder future re-capitalisation. For example, if an insurer enters into afunding arrangement where future profits are cashed immediately, thereduced future earnings potential of the insurer may make it moredifficult to raise capital resources in the future.
16.13.5 For an insurer to be able to recapitalise in times of financial stress, it iscritical to maintain market confidence at all times, through its solvency
and capital management, investor relationships, robust governancestructure/practices and fair conduct of business practices. For example,
where an insurer issues preferred stock without voting rights, this may
affect the robustness of the governance structure and practice of that
insurer. The voting rights attached to common stock can provide animportant source of market discipline over an insurer’s management.
Other insurers may issue capital instruments with lower coupons andfees, sacrificing the economic value of the existing shareholders andbondholders.
16.13.6 When market conditions are good, many insurers should be readily able
to issue sufficient volumes of high quality capital instruments at
reasonable levels of cost. However, when market conditions arestressed, it is likely that only well capitalised insurers, in terms of boththe quality and quantity of capital resources held, will be able to issue
high quality capital instruments. Other insurers may only be able to issue
limited amounts of lower quality capital and at higher cost. Therefore,
the supervisor should make sure that insurers have regard for suchvariations in market conditions and manage the quality and quantity of
their capital resources in a forward looking manner. In this regard, it isexpected that high quality capital instruments (such as common shares)
should form the substantial part of capital resources in normal market
conditions as that would enable insurers to issue capital instrumentseven in stressed situations. Such capital management approaches also
help to address the procyclicality issues that may arise, particularly inrisk-based solvency requirements.
Group perspectives
16.13.7 An insurance group should determine, as part of its ORSA, the overall
financial resources it needs to manage its business given its risk appetiteand business plans and demonstrate that its supervisory requirements
are met. The insurance group’s risk management actions should bebased on appropriate risk limits and consideration of its economic
capital, regulatory capital requirements and financial resources.
Economic capital should thus be determined by the insurance group as
well as its insurance legal entities, and appropriate risk limits andmanagement actions should be identified for both the insurance groupand the insurance legal entities.
16.13.8 Key group-wide factors to be addressed in the insurer’s assessment ofgroup-wide capital resources include multiple gearing, intra-group
creation of capital and reciprocal financing, leverage of the quality ofcapital and fungibility of capital and free transferability of assets acrossgroup entities.
ORSA - continuity analysis
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16.14The supervisor requires:• the insurer, as part of its ORSA, to analyse its ability to continue
in business, and the risk management and financial resources
required to do so over a longer time horizon than typically used
to determine regulatory capital requirements; and• the insurer’s continuity analysis to address a combination ofquantitative and qualitative elements in the medium and longerterm business strategy of the insurer and include projections of
its future financial position and analysis of its ability to meet
future regulatory capital requirements.
Capital planning and forward-looking perspectives
16.14.1 An insurer should be able to demonstrate an ability to manage its riskover the longer term under a range of plausible adverse scenarios. An
insurer’s capital management plans and capital projections are therefore
key to its overall risk management strategy. These should allow theinsurer to determine how it could respond to unexpected changes inmarket and economic conditions, innovations in the industry and otherfactors such as demographic, legal and regulatory, medical and social
developments.
16.14.2 Where appropriate, the supervisor should require an insurer toundertake periodic, forward-looking continuity analysis and modelling of
its future financial position including its ability to continue to meet its
regulatory capital requirements in future under various conditions.
Insurers should ensure that the capital and cash flow projections (before
and after stress) and the management actions included in their forecasts
are approved at a sufficiently senior level.
16.14.3 In carrying out its continuity analysis, the insurer should also apply
reverse stress testing to identify scenarios that would be the likely causeof business failure (eg where business would become unviable or themarket would lose confidence in it) and the actions necessary to manage
this risk.
16.14.4 As a result of continuity analysis, the supervisor should encourage
insurers to maintain contingency plans and procedures. Such plans
should identify relevant countervailing measures and off-setting actions
they could realistically take to restore/improve the insurer’s capital
adequacy or cash flow position after some future stress event andassess whether actions should be taken by the insurer in advance asprecautionary measures.
Projections
16.14.5 A clear distinction should be made between the assessment of thecurrent financial position and the projections, stress testing and scenario
analyses used to assess an insurer’s financial condition for the purposesof strategic risk management, including maintaining solvency. The
insurer’s continuity analysis should help to ensure sound, effective andcomplete risk management processes, strategies and systems. It should
also help to assess and maintain on an ongoing basis the amounts,
types and distribution of financial resources needed to cover the natureand level of the risks to which the insurer is or may be exposed to andPublicIAIS ICPs and ComFrame – November 2019

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to enable the insurer to identify and manage all reasonably foreseeable
and relevant material risks. In doing so, the insurer assesses the impact
of possible changes in business or risk strategy on the level of economic
capital needed as well as the level of regulatory capital requirements.
16.14.6 Such continuity analysis should have a time horizon needed for effective
business planning (for example, 3 to 5 years), which is longer thantypically used to determine regulatory capital requirements. It should
also place greater emphasis than may be considered in regulatory
requirements on new business plans and product design and pricing,including embedded guarantees and options, and the assumptions
appropriate given the way in which products are sold. The insurer’s
current premium levels and strategy for future premium levels are a key
element in its continuity analysis. In order for continuity analysis toremain meaningful, the insurer should also consider changes in external
factors such as possible future events including changes in the politicalor economic situation.
Link with business strategy
16.14.7 Through the use of continuity analysis an insurer should be better able
to link its current financial position with future business plan projections
and ensure its ability to maintain its financial condition in the future. Thismay help the insurer to further embed its ERM framework into its
ongoing and future operations.
16.14.8 An internal model may also be used for the continuity analysis, allowing
the insurer to assess the capital consequences of strategic businessdecisions in respect of its risk profile. For example, the insurer may
decide to reduce its capital requirement through diversification by writing
different types of business in order to reduce the capital that is needed
to be held against such risks, potentially freeing up resources for use
elsewhere. This process of capital management may enable the insurer
to change its capital exposure as part of its long-term strategic decision
making.
16.14.9 As a result of such strategic changes, the risk profile of an insurer may
alter, so that different risks should be assessed and quantified within its
internal model. In this way, an internal model may sit within a cycle ofstrategic risk and capital management and provide the link between
these two processes.
Group perspectives
16.14.10 An insurance group should analyse its ability to continue in businessand the risk management and financial resources it requires to do so.
The insurance group’s analysis should consider its ability to continue toexist as an insurance group, potential changes in group structure andthe ability of its legal entities to continue in business.
16.14.11 An insurance legal entity’s continuity analysis should assess theongoing support from the group including the availability of financial
support in adverse circumstances as well as the risks that may flow fromthe group to the insurance legal entity. The insurance legal entity andthe insurance group should both take into account the business risks
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they face including the potential impact of changes in the economic,
political and regulatory environment.
16.14.12 In their continuity analysis, insurance groups should pay particularattention to whether the insurance group will have available cash flows(eg from surpluses released from long-term funds or dividends fromother subsidiaries) and whether they will be transferable among legal
entities within the group to cover any payments of interest or capital onloans, to finance new business and to meet any other anticipatedliabilities as they fall due. Insurance groups should outline whatmanagement actions they would take to manage the potential cash flow
implications in stressed conditions (eg reducing new business or cutting
dividends).
16.14.13 The insurance group’s continuity analysis should also consider the
distribution of capital in the insurance group after stress and thepossibility that subsidiaries within the insurance group may require recapitalisation (either due to breaches of local regulatory requirements, ashortfall in economic capital, or for other business reasons). The
assessment should consider whether sufficient sources of surplus andtransferable capital would exist elsewhere in the insurance group andidentify what management actions may need to be taken (eg intra-group
movements of resources, other intra-group transactions or group
restructuring).
16.14.14 The insurance group should also apply reverse stress testing to identify
scenarios that could result in failure or cause the financial position of theinsurance group to fall below a predefined level and the actions
necessary to manage this risk.
Recovery Planning
16.15

The supervisor requires, as necessary, insurers to evaluate in advance their
specific risks and options in possible recovery scenarios.
16.15.1 The supervisor may require an insurer to produce a recovery plan that
identifies in advance options to restore the financial position and viability
if the insurer comes under severe stress (see Application Paper on
Recovery Planning). In deciding whether it is necessary to require arecovery plan, and the form, content and level of detail of such recovery
planning, the supervisor should take into account, for example, theinsurer’s complexity, systemic importance, risk profile and businessmodel. A recovery plan is intended to serve the insurer as an aid tosound risk management. Additionally, if the insurer comes under severe
stress, a plan may serve the supervisor as valuable input to any
necessary supervisory measures.
16.15.2 The supervisor should require the insurer to provide the necessary
information to enable the supervisor to assess the robustness andcredibility of any recovery plan required. If the supervisor identifies
material deficiencies in the plan, it should provide feedback and require
the insurer to address these deficiencies.
16.15.3 The supervisor should require the insurer to review any recovery planrequired on a regular basis, or when there are material changes to theinsurer’s business, risk profile or structure, or any other change that

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could have a material impact on the recovery plan, and to update it whennecessary.
CF 16.15.a The group-wide supervisor requires the Head of the IAIG to:• develop a recovery plan that identifies in advance options to
restore the financial position and viability;• review and update the recovery plan on a regular basis, orwhen there are material changes; and• take actions for recovery if the IAIG comes under severe
stress.
CF 16.15.a.1 The group-wide supervisor should consider the IAIG’s nature, scale,and complexity when setting recovery plan requirements, including theform, content and detail of the recovery plan and the frequency forreviewing and updating the plan.
CF 16.15.a.2 Recovery planning is the responsibility of the IAIG. The IAIG shouldbe able to take timely actions for recovery, in particular when any predefined criteria are met that trigger the activation of the recovery plan.
CF 16.15.a.3 A recovery plan developed by the IAIG should cover all material legal
entities within the group.
CF 16.15.a.4 A recovery plan should serve as a guide for the IAIG to plan andmanage severe stress scenarios, although the actual nature andtiming of recovery actions will depend on the circumstances.
CF 16.15.a.5 The IAIG should ensure that:• it has a robust governance structure and sufficient
resources to support the recovery planning process, which
includes clear allocation of responsibilities; and• recovery planning is integrated into the IAIG’s overall
governance processes.
CF 16.15.a.6 A recovery plan is an integral part of the risk management process ofan IAIG, aimed at identifying actions to be taken in severe stressscenarios that pose a serious risk to the viability of the IAIG, or any
material part of its insurance business. A recovery plan describes if
and how the IAIG would:• discontinue or divest certain portfolios, business lines,
legal entities, or other services; and/or• continue operating certain lines of insurance businesswhile restructuring or running off its discontinued businesslines in an orderly fashion.
CF 16.15.a.7 A recovery plan should include:• a description of the legal entities covered by the plan,
including their legal structures, interdependencies, corebusiness lines and main risks;• a description of functions and/or services that are
significant for the continuation of the IAIG (for example,
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shared services, such as information technology services
and outsourced functions);• pre-defined criteria with quantitative and qualitative trigger
points, governance, escalation mechanisms andsupporting processes;• a range of severe stress scenarios, including both
idiosyncratic and market-wide stress;• credible options to respond to severe stress scenarios,
including actions to address capital shortfalls and liquidity
pressures, and to restore the financial condition of theIAIG, taking into account intra-group transactions;• assessment of the necessary steps, costs, resources andtime needed to implement the recovery actions, including
the risks associated with the implementation of the actions;and• strategies for communication with stakeholders.
CF 16.15.a.8 Pre-defined criteria should be well-defined and aligned with
contingency plans. They should include qualitative and quantitative
criteria, such as a potential breach of a prescribed capital requirement(PCR). Criteria may also include triggers based on: liquidity, market
conditions, macro-economic conditions, and the insurer's operational
conditions.
CF 16.15.a.9 Possible actions for recovery include:• strengthening the IAIG’s capital position, such asrecapitalisations;• capital conservation, such as cost containment andsuspension of dividends and of payments of variable
remuneration;• reorganisation of corporate structure and divestitures,such as sales of legal entities or portfolios;• voluntary restructuring of liabilities, such as debt-to-equity
conversion; and• securing sufficient diversified funding and adequate
availability of collateral in terms of volume, location andquality.
CF 16.15.a.10 As a recovery plan may not be able to cover every possible scenario,
the IAIG may take, or the group-wide supervisor may require the IAIG
to take, measures for recovery other than those contemplated in the
IAIG’s recovery plan.
CF 16.15.a.11 The group-wide supervisor should regularly review the recovery plan,
including the predefined criteria, the assumptions and severe stressscenarios underlying the plan, to assess its credibility and likely
effectiveness. Where necessary, the group-wide supervisor should

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provide feedback and require the IAIG to address any material
deficiencies.
CF 16.15.b The group-wide supervisor requires the Head of the IAIG to have andmaintain group-wide management information systems that are able toproduce information relevant to the recovery plan on a timely basis.
CF 16.15.b.1 The IAIG may rely on an existing information system, so long as it
fulfils the objectives of producing information relevant to the recovery
plan on a timely basis.
CF 16.15.b.2 It is important that the IAIG has available the information necessary forexecuting recovery actions when needed. Some of this information
may be similar to the information needed for resolution; however,recovery may also require other information (see ComFrame material
under ICP 12 Exit from the Market and Resolution).
Role of supervision in ERM for solvency purposes
16.16

The supervisor undertakes reviews of the insurer's ERM framework,
including the ORSA. Where necessary, the supervisor requires
strengthening of the insurer’s ERM framework, solvency assessment andcapital management processes.
16.16.1 The output of an insurer’s ORSA should serve as an important tool inthe supervisory review process by helping the supervisor to understandthe risk exposure and solvency position of the insurer.
16.16.2 The insurer's ERM framework and risk management processes(including internal controls) are critical to solvency assessment. The
supervisor should therefore assess the adequacy and soundness of an
insurer’s framework and processes by receiving regularly theappropriate information, including the ORSA report.
16.16.3 In assessing the soundness, appropriateness and strengths andweaknesses of the insurer’s ERM framework, the supervisor should
consider questions such as:• What are the roles and responsibilities within the ERM
framework?
• Is the insurer within its stated risk appetite?
• What governance has been established for the oversight ofoutsourced elements of the ERM framework?
• What modelling and stress testing (including reverse stresstesting) is done?
• Has the model risk management been applied in the ERM
framework?
• How does the insurer maintain a robust risk culture that
ensures active support and adjustment of the insurer’s ERM
framework in response to changing conditions?
16.16.4 The supervisor should review an insurer's internal controls and monitor
its capital adequacy, requiring strengthening where necessary. Where
internal models are used to calculate the regulatory capital

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requirements, particularly close interaction between the supervisor andinsurer is important. In these circumstances, the supervisor may
consider the insurer’s internal model, its inputs and outputs and thevalidation processes, as a source of insight into the risk exposure andsolvency position of the insurer.
16.16.5 The supervisor should monitor the techniques employed by the insurer
for risk management and capital adequacy assessment and takesupervisory measures where weaknesses are identified. The supervisor
should not take a one-size-fits-all approach to insurers’ risk management
but rather base their expectations on the nature, scale and complexityof its business and risks. In order to do this, the supervisor should havesufficient and appropriate resources and capabilities. For example, thesupervisor may have a risk assessment model or programme with which
it can assess insurers' overall condition (eg risk management, capital
adequacy and solvency position) and ascertain the likelihood of insurers
breaching supervisory requirements. The supervisor may also prescribe
minimum aspects that an ERM framework should address.
16.16.6 The supervisor should require the insurer to provide appropriate
information on the ERM framework and risk and solvency assessments.
This should provide the supervisor with a long-term assessment of
capital adequacy to aid in the assessment of insurers, as well as
encourage insurers to have an effective ERM framework. This may beachieved also by, the supervisor requiring or encouraging insurers toprovide a solvency and financial condition report. Such a report may
include information such as:• a description of the relevant material categories of risk that theinsurer faces;• the insurer’s risk appetite and risk limits structure;• the insurer’s overall financial resource needs, including its
economic capital and regulatory capital requirements, as wellas the capital available to meet these requirements; and• projections of how such factors will develop in future.
16.16.7 The supervisor should be flexible and apply their skills, experience andknowledge of the insurer in assessing the adequacy of the risk appetitestatement. The supervisor may be able to assess the quality of aparticular risk appetite statement by discussing with the Board andSenior Management how the insurer’s business strategy is related to therisk appetite statement, as well as how the risk appetite had an impact
on the insurer’s decisions. This includes reviewing other material, suchas strategy and planning documents and Board reports in the context of
how the Board determines, implements, and monitors its risk appetite so
as to ensure that risk-taking is aligned with the Board-approved risk
appetite statement.
16.16.8 The supervisor should be provided access to the material results ofstress testing, scenario analysis and risk modelling and their key
underlying assumptions to be reported to them and have access to otherresults, if requested. Where the supervisor considers that thecalculations conducted by an insurer should be supplemented with
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additional calculations, it should be able to require the insurer to carryout those additional calculations. The supervisor should also consider
available reverse stress tests performed by insurers where they wish toassess whether appropriate action is being taken to manage the risk ofbusiness failure.
16.16.9 While insurers should carry out stress testing, scenario analysis and risk
modelling that are appropriate for their businesses, the supervisor may
also develop prescribed or standard tests and require insurers to
perform them when warranted. One purpose of such testing may be to
improve consistency of testing among a group of similar insurers.
Another purpose may be to assess the financial condition of theinsurance sector to economic, market or other stresses that apply to anumber of insurers simultaneously (such as pandemics or major
catastrophes). Such tests may be directed to be performed by selected
insurers or all insurers. The criteria the supervisor uses for scenarios forstandard tests should reflect the jurisdiction’s risk environment.
16.16.10 Forward-looking stress testing, scenario analysis and risk modelling of
future capital positions and cash flows whether provided by the insurer’s
own continuity analysis or in response to supervisory requirements is avaluable tool for the supervisor in assessing the financial condition of
insurers. Such testing informs the discussion between the supervisor
and insurers on appropriate planning, comparing risk assessments
against stress test outcomes, risk management and management
actions. The supervisor should consider the dynamic position of insurers
and form a high-level assessment of whether the insurer is adequately
capitalised to withstand a range of standardised and bespoke stresses.
16.16.11 Where an internal model, including an economic capital model, is usedin an insurer’s ORSA, the supervisor should obtain an understanding of
the underlying assumptions used. The supervisor should review theoutputs of the internal model, at least from the following viewpoints:• scope of risk categories of the internal model;• the insurer’s prioritisation of risks in its risk appetite; and• the insurer’s use of the outputs in making major management
decisions on capital planning for meeting regulatory capitalrequirements.
16.16.12 By reviewing the insurer’s ORSA continuity analysis, the supervisor
may be able to learn about the robustness of an insurer’s future financial
condition and the information on which the insurer bases decisions andits contingency planning. Such information should enable the supervisor
to assess whether an insurer should improve its ERM framework bytaking additional countervailing measures and off-setting actions, either
immediately, as a preventive measure, or including them in future plans.
Objectives of such supervisory measures may be to reduce any
projected financial inadequacies, improve cash flows and/or increase an
insurer’s ability to restore its capital adequacy after stress events.
16.16.13 Publicly disclosing information on risk management may improve thetransparency and comparability of existing solvency requirements.
There should be an appropriate balance regarding the level of
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information to disclose about an insurer's risk management against thelevel of sufficient information for external and internal stakeholders which
is useful and meaningful. Therefore, the requirements for public
disclosure of information on risk management, including possible
disclosure of elements of a solvency and financial condition report,
should be carefully considered by the supervisor taking into account the
proprietary nature of the information.
16.16.14 Where an insurer's risk management and solvency assessment are notconsidered adequate by the supervisor, the supervisor should takeappropriate measures. This could be in the form of further supervisory
reporting or additional qualitative and quantitative requirements arisingfrom the supervisor's assessment. Additional quantitative requirements
should only be applied in appropriate circumstances and be subject to atransparent supervisory framework. Otherwise, if routinely applied, suchmeasures may undermine a consistent application of standardised
approaches to regulatory capital requirements.
Group perspectives
16.16.15 In assessing the soundness, appropriateness and strengths andweaknesses of the group’s ERM framework, the group-wide supervisor
should consider questions such as:• How well is the group’s ERM framework tailored to the group?
• Are decisions influenced appropriately by the group’s ERM
framework outputs?
• How responsive is the group’s ERM framework to changes inindividual businesses and to the group structure?
• How does the framework bring into account intra-grouptransactions; risk mitigation; and constraints on fungibility ofcapital, transferability of assets, and liquidity?
16.16.16 The group-wide supervisor should review the risk management andfinancial condition of the insurance group. Where necessary, the groupwide supervisor should require strengthening of the insurance group’s
risk management, solvency assessment and capital management
processes, as appropriate to the nature, scale and complexity of risks atgroup level. The group-wide supervisor should inform the other involved
supervisors of any action required.
16.16.17 The group-wide supervisory review and assessment of the insurancegroup’s ERM framework should consider the framework’s suitability asa basis for group-wide solvency assessment. The arrangements for
managing conflicts of interest across an insurance group should be aparticular focus in the supervisory review and assessment of an
insurance group’s ERM framework.
16.16.18 The supervisory assessment of the group’s ERM framework may affectthe level of capital that the insurance group is required to hold forregulatory purposes and any regulatory restrictions that are applied. For
example, the group-wide supervisor may require changes to therecognition of diversification across the insurance group, the allowances
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made for operational risk and the allocation of capital within theinsurance group.
16.16.19 Although it is not a requirement in general for an insurance legal entity
or an insurance group to use internal models to carry out its ORSA, thesupervisor may consider it appropriate in particular cases that the ORSA
should use internal models in order to achieve a sound ERM framework.
The quality of an insurance group’s ORSA is dependent on how wellintegrated its internal capital models, the extent to which it takes into
account constraints on fungibility of capital and its ability to modelchanges in its structure, the transfer of risks around the insurance groupand insurance group risk mitigation. These factors should be taken into
account by the group-wide supervisor in its review of the insurancegroup’s ORSA.
16.16.20 The supervisor may wish to specify criteria or analyses as part of thesupervisory risk assessments to achieve effective supervision andconsistency across insurance groups. This may, for example, include
prescribed stress tests that apply to insurance groups.

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Capital Adequacy
The supervisor establishes capital adequacy requirements for solvency purposesso that insurers can absorb significant unforeseen losses and to provide fordegrees of supervisory intervention.
17.0
Introductory Guidance
17.0.1This ICP does not directly apply to non-insurance entities (regulated or
unregulated) within an insurance group, but it does apply to insurance
legal entities and insurance groups with regard to the risks posed to themby non-insurance entities.

Capital adequacy in the context of a total balance sheet approach
17.1

The supervisor requires that a total balance sheet approach is used in theassessment of solvency to recognise the interdependence between assets,
liabilities, regulatory capital requirements and capital resources and torequire that risks are appropriately recognised.
17.1.1The overall financial position of an insurer should be based on consistentmeasurement of assets and liabilities and explicit identification andconsistent measurement of risks and their potential impact on allcomponents of the balance sheet. In this context, the IAIS uses the term
total balance sheet approach to refer to the recognition of theinterdependence between assets, liabilities, regulatory capitalrequirements and capital resources. A total balance sheet approachshould also require that the impacts of relevant material risks on an
insurer’s overall financial position are appropriately and adequately
recognised. 6

17.1.2

The assessment of the financial position of an insurer for supervisionpurposes addresses the insurer’s technical provisions, required capitaland available capital resources. These aspects of solvency assessment(namely technical provisions and capital) are intrinsically inter-related
and cannot be considered in isolation by a supervisor.

17.1.3

Technical provisions and capital have distinct roles, requiring a clear andconsistent definition of both elements. Technical provisions represent theamount that an insurer requires to fulfil its insurance obligations andsettle all commitments to policyholders and other beneficiaries arisingover the lifetime of the portfolio. 7 In this ICP, the term regulatory capitalrequirements refers to financial requirements that are set by thesupervisor and relates to the determination of amounts of capital that aninsurer must have in addition to its technical provisions.

17.1.4

Technical provisions and regulatory capital requirements should becovered by adequate and appropriate assets, having regard to the natureand quality of those assets. To allow for the quality of assets, supervisors

6 It is noted that the total balance sheet approach is an overall concept rather than implying use of aparticular methodology.

7 This includes costs of settling all commitments to policyholders and other beneficiaries arising over the

lifetime of the portfolio of policies, the expenses of administering the policies, the costs of hedging,reinsurance, and of the capital required to cover the remaining risks.

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may consider applying restrictions or adjustments (such as quantitative
limits, asset eligibility criteria or “prudential filters”) where the risks
inherent in certain asset classes are not adequately covered by theregulatory capital requirements.
17.1.5

Capital resources may be regarded very broadly as the amount of theassets in excess of the amount of the liabilities. Liabilities in this context
includes technical provisions and other liabilities (to the extent theseother liabilities are not treated as capital resources - for example,
liabilities such as subordinated debt may under certain circumstances begiven credit for regulatory purposes as capital – see Guidance 17.10.8 17.10.11). Assets and liabilities in this context may include contingent
assets and contingent liabilities.

17.1.6

In considering the quality of capital resources the supervisor should haveregard to their characteristics, including the extent to which the capital isavailable to absorb losses (including considerations of subordination andpriority), the extent of the permanent and/or perpetual nature of thecapital and the existence of any mandatory servicing costs in relation to
the capital. 8

Additional guidance for insurance groups and insurance legal entities that are
members of groups
17.1.7The capital adequacy assessment of an insurance legal entity which is amember of an insurance group needs to consider the value of any
holdings the insurance legal entity has in affiliates. Consideration may
be given, either at the level of the insurance legal entity or the insurancegroup, to the risks attached to this value.

17.1.8Where the value of holdings in affiliates is included in the capital
adequacy assessment and the insurance legal entity is the parent of thegroup, group-wide capital adequacy assessment and legal entity
assessment of the parent may be similar in outcome although the detailof the approach may be different. For example, a group-wide
assessment may consolidate the business of the parent and its
subsidiaries and assess the capital adequacy for the combined businesswhile a legal entity assessment of the parent may consider its own
business and its investments in its subsidiaries.

17.1.9There are various possible approaches for group-wide supervision. Morespecifically, undertaking a capital adequacy assessment of an insurancegroup falls into two broad sets of approaches:• group level focus; and• legal entity focus.
“Hybrid” or intermediate approaches which combine elements ofapproaches with a group and a legal entity focus may also be used.

17.1.10 The choice of approach would depend on the preconditions in ajurisdiction, the legal environment which may specify the level at which
the group-wide capital requirements are set, the structure of the group

8 More detailed guidance on the determination of capital resources is given below.

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and the structure of the supervisory arrangements between the
supervisors.
17.1.11 To further describe and compare the various approaches to group-wide
capital adequacy assessment, a two dimensional continuum may beconsidered; on one axis – the organisational perspective – consideration
is given to the extent to which a group is considered as a set ofinterdependent entities or a single integrated entity; on the other axis –the supervisory perspective – consideration is given to the relative weightof the roles of insurance legal entity supervision and group-wide
supervision, without implying that the latter can replace the former in any
way. It is recognised that supervisors around the world have adopted
approaches corresponding to many points of this continuum. The
continuum may be split into four quadrants as shown in Figure 17.1
below.
Figure 17.1
SUPERVISORY PERSPECTIVE

Legal Entity Focus

Group Level Focus

Large relative weight ofgroup supervision withrespect
tolocal
supervision

Insurance legal entity capital
adequacy assessed for all(relevant) legal entities taking
into account group impact. The
results are binding and valid
for local supervisors as well as
for the group supervisor

Insurance legal entity capital
adequacy assessed under
the assumption that thegroup behaves as a single
integrated entity. Local andgroup
supervisors
additionally define how muchcapital each legal entity has
to hold.

Small relative weight ofgroup supervision withrespect
tolocal
supervision

Insurance legal entity capital
adequacy assessed for all(relevant) legal entities taking
into account group impact.
These results are not binding;
local
supervisors
apply
insurance legal entity capital
adequacy requirements.

Insurance legal entity capital
adequacy assessed under
the assumption that thegroup behaves as a single
integrated entity. These
results are not binding; local
supervisors apply insurance
legal entity capital adequacy
requirements.

O R G A N I S A T I O N A L

P E R S P E C T I V E

Additional guidance for insurance groups and insurance legal entities that are
members of groups - group level focus
17.1.12 Under a group-wide capital adequacy assessment which takes a grouplevel focus, the insurance group is considered primarily as a single
integrated entity for which a separate assessment is made for the groupas a whole on a consistent basis, including adjustments to reflect
constraints on the fungibility of capital and transferability of assets
among group members. Hence under this approach, a total balance
sheet approach to solvency assessment is followed which is (implicitly
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or explicitly) based on the balance sheet of the insurance group as awhole. However, adjustments may be necessary appropriately to take
into account risks from non-insurance members of the insurance group,
including cross-sector regulated entities and non-regulated entities.
17.1.13 Methods used for approaches with a group level focus may vary in theway in which group capital requirements are calculated. Either thegroup’s consolidated accounts may be used as a basis or an aggregation
method may be used. The former is already adjusted for intra-groupholdings and further adjustments may then need to be made to reflect
the fact that the group may not behave or be allowed to behave as one
single entity. 9 This is particularly the case in stressed conditions. The
latter method may sum surpluses or deficits (ie the difference between
capital resources and capital requirements) for each insurance legal
entity in the group with relevant adjustments for intra-group holdings inorder to measure an overall surplus or deficit at group level. Alternatively,
it may sum the insurance legal entity capital requirements and insurance
legal entity capital resources separately in order to measure a group
capital requirement and group capital resources. Where an aggregation
approach is used for a cross-border insurance group, consideration
should be given to consistency of valuation and capital adequacy
requirements and of their treatment of intra-group transactions.
Additional guidance for insurance groups and insurance legal entities that are
members of groups - legal entity focus
17.1.14 Under a group-wide capital adequacy assessment which takes a legal
entity focus, the insurance group is considered primarily as a set ofinterdependent legal entities. The focus is on the capital adequacy ofeach of the parent and the other insurance legal entities in the insurancegroup, taking into account risks arising from relationships within thegroup, including those involving non-insurance members of the group.
The regulatory capital requirements and resources of the insurance legal
entities in the group form a set of connected results but no overall
regulatory group capital requirement is used for regulatory purposes.
This is still consistent with a total balance sheet approach, but considers
the balance sheets of the individual group entities simultaneously rather
than amalgamating them to a single balance sheet for the group as awhole. Methods used for approaches with a legal entity focus may varyin the extent to which there is a common basis for the solvency
assessment for all group members and the associated communicationand coordination needed among supervisors.
17.1.15 For insurance legal entities that are members of groups and for
insurance sub-groups that are part of a wider insurance or other sector
group, the additional reasonably foreseeable and relevant material risks
arising from being a part of the group should be taken into account incapital adequacy assessment.
Establishing regulatory capital requirements

9 Consolidated accounts may be those used for accounting purposes or may differ (eg in terms of theentities included in the consolidation).

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17.2

The supervisor establishes regulatory capital requirements at a sufficientlevel so that, in adversity, an insurer’s obligations to policyholders willcontinue to be met as they fall due and requires that insurers maintaincapital resources to meet the regulatory capital requirements.
Purpose and role of regulatory capital requirements and resources
17.2.1An insurer's Board and Senior Management have the responsibility toensure that the insurer has adequate and appropriate capital to support
the risks it undertakes. Capital serves to reduce the likelihood of failure
due to significantly adverse losses incurred by the insurer over a defined
period, including decreases in the value of the assets and/or increases
in the obligations of the insurer, and to reduce the magnitude of losses
to policyholders in the event that the insurer fails.

17.2.2

From a regulatory perspective, the purpose of capital is to ensure that,in adversity, an insurer’s obligations to policyholders will continue to be
met as they fall due. Regulators should establish regulatory capitalrequirements at the level necessary to support this objective.

17.2.3In the context of its own risk and solvency assessment (ORSA), theinsurer would generally be expected to consider its financial position
from a going concern perspective (that is, assuming that it will carry on
its business as a going concern and continue to take on new business)but may also need to consider a run-off and/or winding-up perspective(eg where the insurer is in financial difficulty). The determination ofregulatory capital requirements may also have aspects of both a going
concern and a run-off 10 or winding-up perspective. In establishingregulatory capital requirements, therefore, supervisors should consider
the financial position of insurers under different scenarios of operation.

17.2.4

From a macro-economic perspective, requiring insurers to maintainadequate and appropriate capital enhances the safety and soundness of
the insurance sector and the financial system as a whole, while notincreasing the cost of insurance to a level that is beyond its economic
value to policyholders or unduly inhibiting an insurer’s ability to compete
in the marketplace. There is a balance to be struck between the level ofrisk that policyholder obligations will not be paid with the cost to
policyholders of increased premiums to cover the costs of servicing
additional capital.

17.2.5The level of capital resources that insurers need to maintain forregulatory purposes is determined by the regulatory capital requirements
specified by the supervisor. A deficit of capital resources relative tocapital requirements determines the additional amount of capital that isrequired for regulatory purposes.

17.2.6

Capital resources protect the interests of policyholders by meeting thefollowing two objectives. They:• reduce the probability of insolvency by absorbing losses on agoing concern basis or in run-off; and/or

10 In this context, “run-off” refers to insurers that are still solvent but have closed to new business andare expected to remain closed to new business.

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• reduce the loss to policyholders in the event of insolvency or
winding-up.
17.2.7The extent to which elements of capital achieve the above outcomes willvary depending on their characteristics or “quality”. For example,
ordinary share capital may be viewed as achieving both of the above,
whereas subordinated debt may be viewed largely as only protecting
policyholders in insolvency. Capital which achieves both of the above issometimes termed “going concern capital” and capital which only
reduces the loss to policyholders in insolvency is sometimes termed“wind-up capital” or “gone concern” capital. It would be expected that theformer (ie going concern capital instruments) should form the substantial
part of capital resources.

17.2.8For an insurer, the management and allocation of capital resources is afundamental part of its business planning and strategies. In this context,
capital resources typically serve a broader range of objectives than thosein Guidance 17.2.6. For example, an insurer may use capital resources
over and above the regulatory capital requirements to support future
growth or to achieve a targeted credit rating.

17.2.9It is noted that an insurer’s capital management (in relation to regulatory
requirements and own capital needs) should be supported andunderpinned by establishing and maintaining a sound enterprise risk
management framework, including appropriate risk and capitalmanagement policies, practices and procedures which are appliedconsistently across its organisation and are embedded in its processes.
Maintaining sufficient capital resources alone is not sufficient protection
for policyholders in the absence of disciplined and effective risk
management policies and processes (see ICP 16 Enterprise Risk
Management for Solvency Purposes).

Additional guidance for insurance groups and insurance legal entities that are
members of groups
17.2.10 The supervisor should require insurance groups to maintain capital
resources to meet regulatory capital requirements. These requirements
should take into account the non-insurance activities of the insurancegroup. For supervisors that undertake group-wide capital adequacy
assessments with a group level focus this means maintaining insurancegroup capital resources to meet insurance group capital requirements forthe group as a whole. For supervisors that undertake group-wide capital
adequacy assessments with a legal entity focus this means maintaining
capital resources in each insurance legal entity based on a set ofconnected regulatory capital requirements for the group’s insurance
legal entities which fully take the relationships and interactions between
these legal entities and other entities in the insurance group into account.
17.2.11 It is not the purpose of group-wide capital adequacy assessment toreplace assessment of the capital adequacy of the individual insurance
legal entities in an insurance group. Its purpose is to require that grouprisks are appropriately allowed for and the capital adequacy of individual
insurers is not overstated, eg as a result of multiple gearing and leverageof the quality of capital or as a result of risks emanating from the wider
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group, and that the overall impact of intra-group transactions isappropriately assessed.
17.2.12 Group-wide capital adequacy assessment considers whether theamount and quality of capital resources relative to required capital isadequate and appropriate in the context of the balance of risks andopportunities that group membership brings to the group as a whole andto insurance legal entities which are members of the group. The
assessment should satisfy requirements relating to the structure ofgroup-wide regulatory capital requirements and eligible capital resources
and should supplement the individual capital adequacy assessments of
insurance legal entities in the group. It should indicate whether there aresufficient capital resources available in the group so that, in adversity,
obligations to policyholders will continue to be met as they fall due. If theassessment concludes that capital resources are inadequate or
inappropriate then corrective action may be triggered either at a group(eg authorised holding or parent company level) or an insurance legal
entity level.
17.2.13 The quantitative assessment of group-wide capital adequacy is one of anumber of tools available to supervisors for group-wide supervision. If
the overall financial position of a group weakens it may create stress for
its members either directly through financial contagion and/ororganisational effects or indirectly through reputational effects. Groupwide capital adequacy assessment should be used together with othersupervisory tools, including in particular the capital adequacy
assessment of insurance legal entities in the group. A distinction should
be drawn between regulated entities (insurance and other sector) andnon-regulated entities. It is necessary to understand the financial
positions of both types of entities and their implications for the capital
adequacy of the insurance group but this does not necessarily imply
setting regulatory capital requirements for non-regulated entities. In
addition, supervisors should have regard to the complexity of intra-grouprelationships (between both regulated and non-regulated entities),
contingent assets and liabilities and the overall quality of risk
management in assessing whether the overall level of safety required by
the supervisor is being achieved.
17.2.14 For insurance legal entities that are members of groups and for
insurance sub-groups that are part of a wider insurance or other sector
group, capital requirements and capital resources should take into
account all additional reasonably foreseeable and relevant material risks
arising from being a part of any of the groups.
Structure of regulatory capital requirements - solvency control levels
17.3

The regulatory capital requirements include solvency control levels which
trigger different degrees of intervention by the supervisor with anappropriate degree of urgency and requires coherence between thesolvency control levels established and the associated corrective actionthat may be at the disposal of the insurer and/or the supervisor.
Establishing solvency control levels
17.3.1The supervisor should establish control levels that trigger intervention by
the supervisor in an insurer’s affairs when capital resources fall below

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these control levels. The control level may be supported by a specificframework or by a more general framework providing the supervisor
latitude of action. A supervisor’s goal in establishing control levels is tosafeguard policyholders from loss due to an insurer’s inability to meet its
obligations when due.
17.3.2The solvency control levels provide triggers for action by the insurer andsupervisor. Hence they should be set at a level that allows intervention
at a sufficiently early stage in an insurer’s difficulties so that there would
be a realistic prospect for the situation to be rectified in a timely mannerwith an appropriate degree of urgency. At the same time, thereasonableness of the control levels should be examined in relation to
the nature of the corrective measures. The risk tolerance of thesupervisor will influence both the level at which the solvency control
levels are set and the intervention actions that are triggered.

17.3.3

When establishing solvency control levels it is recognised that views
about the level that is acceptable may differ from jurisdiction tojurisdiction and by types of business written and will reflect, amongst
other things, the extent to which the pre-conditions for effective
supervision exist within the jurisdiction and the risk tolerance of theparticular supervisor. The IAIS recognises that jurisdictions will
acknowledge that a certain level of insolvencies may be unavoidable andthat establishing an acceptable threshold may facilitate a competitivemarketplace for insurers and avoid inappropriate barriers to market
entry.

17.3.4The criteria used by the supervisor to establish solvency control levels
should be transparent. This is particularly important where legal action
may be taken in response to an insurer violating a control level. In thiscase, control levels should generally be simple and readily explainable
to a court when seeking enforcement of supervisory action.

17.3.5

Supervisors may need to consider different solvency control levels fordifferent modes of operation of the insurer - such as an insurer in run-off
or an insurer operating as a going concern. These different scenariosand considerations are discussed in more detail in Guidance 17.6.3 17.6.5.

17.3.6

In addition, the supervisor should consider the allowance formanagement discretion and future action in response to changing
circumstances or particular events. In allowing for management
discretion, supervisors should only recognise actions which are practicaland realistic in the circumstances being considered. 11

17.3.7

Other considerations in establishing solvency control levels include:• the way in which the quality of capital resources is addressedby the supervisor;• the coverage of risks in the determination of technicalprovisions and regulatory capital requirements and the extent

The supervisor should carefully consider the appropriateness of allowing for such management
discretion in the particular case of the MCR as defined in Standard 17.4.

11

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of the sensitivity or stress analysis underpinning thoserequirements;• the relation between different levels (for example the extent towhich a minimum is set at a conservative level);• the powers of the supervisor to set and adjust solvency control
levels within the regulatory framework;• the accounting and actuarial framework that applies in thejurisdiction (in terms of the valuation basis and assumptions
that may be used and their impact on the values of assets andliabilities that underpin the determination of regulatory capitalrequirements);• the comprehensiveness and transparency of disclosure
frameworks in the jurisdiction and the ability for markets toexercise sufficient scrutiny and impose market discipline;• policyholder priority and status under the legal framework
relative to other creditors in the jurisdiction;• overall level of capitalisation in the insurance sector in thejurisdiction;• overall quality of risk management and governanceframeworks in the insurance sector in the jurisdiction;• the development of capital markets in the jurisdiction and its
impact on the ability of insurers to raise capital; and• the balance to be struck between protecting policyholders andthe impact on the effective operation of the insurance sector
and considerations around unduly onerous levels and costs ofregulatory capital requirements.
Additional guidance for insurance groups and insurance legal entities that are
members of groups
17.3.8

While the general considerations in Guidance 17.3.1 to 17.3.7 above on
the establishment of solvency control levels apply in a group-wide
context as well as a legal entity context, the supervisory actions triggered
at group level will be likely to differ from those at legal entity level. As agroup is not a legal entity the scope for direct supervisory action in
relation to the group as a whole is more limited and action may need tobe taken through co-ordinated action at insurance legal entity level.

17.3.9Nevertheless, group solvency control levels are a useful tool for
identifying a weakening of the financial position of a group as a whole orof particular parts of a group, which may, for example, increase
contagion risk or impact reputation which may not otherwise be readily
identified or assessed by supervisors of individual group entities. The
resulting timely identification and mitigation of a weakening of thefinancial position of a group may thus address a threat to the stability of
the group or its component insurance legal entities.

17.3.10 Group-wide solvency control levels may trigger a process of coordinationand cooperation between different supervisors of group entities which
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will facilitate mitigation and resolution of the impact of group-wide
stresses on insurance legal entities within a group. Group-wide control
levels may also provide a trigger for supervisory dialogue with thegroup’s management.
Structure of regulatory capital requirements - triggers for supervisory intervention in
the context of legal entity capital adequacy assessment
17.4

In the context of insurance legal entity capital adequacy assessment, theregulatory capital requirements establish:• a solvency control level above which the supervisor does notintervene on capital adequacy grounds. This is referred to as the
Prescribed Capital Requirement (PCR). The PCR is defined suchthat assets will exceed technical provisions and other liabilities
with a specified level of safety over a defined time horizon.
• a solvency control level at which, if breached, the supervisor
would invoke its strongest actions, in the absence of appropriate
corrective action by the insurance legal entity. This is referred toas the Minimum Capital Requirement (MCR). The MCR is subject
to a minimum bound below which no insurer is regarded to be
viable to operate effectively.
17.4.1A range of different intervention actions should be taken by a supervisor
depending on the event or concern that triggers the intervention. Someof these triggers will be linked to the level of an insurer’s capital
resources relative to the level at which regulatory capital requirements
are set.

17.4.2

In broad terms, the highest regulatory capital requirement, thePrescribed Capital Requirement (PCR), will be set at the level at which
the supervisor would not require action to increase the capital resources
held or reduce the risks undertaken by the insurer. 12 However if theinsurer’s capital resources were to fall below the level at which the PCR
is set, the supervisor would require some action by the insurer to either
restore capital resources to at least the PCR level or reduce the level ofrisk undertaken (and hence the required capital level).

17.4.3

The regulatory objective to require that, in adversity, an insurer’s
obligations to policyholders will continue to be met as they fall due will
be achieved without intervention if technical provisions and otherliabilities 13 are expected to remain covered by assets over a defined
period, to a specified level of safety. As such, the PCR should bedetermined at a level such that the insurer is able to absorb the losses
from adverse events that may occur over that defined period and thetechnical provisions remain covered at the end of the period.

12 Note that this does not preclude the supervisor from intervention or requiring action by the insurer forother reasons, such as weaknesses in the risk management or governance of the insurer. Nor does it
preclude the supervisor from intervention when the insurer’s capital resources are currently above the
PCR but are expected to fall below that level in the short term. To illustrate, the supervisor may establish
a trend test (a time series analysis). A sufficiently adverse trend would require some supervisory action.
The trend test would support the objective of early regulatory intervention by considering the speed atwhich capital deterioration is developing.
13 To the extent these liabilities are not treated as capital resources.
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17.4.4

The Minimum Capital Requirement (MCR) represents the supervisoryintervention point at which the supervisor would invoke its strongest
actions, if further capital is not made available. 14 Therefore, the main aimof the MCR is to provide the ultimate safety net for the protection of theinterests of policyholders.

17.4.5

These actions could include stopping the activities of the insurer,
withdrawal of the insurer’s licence, requiring the insurer to close to new
business and run-off the portfolio, transfer its portfolio to another insurer,
arrange additional reinsurance, or other specified actions. This position
is different from the accounting concept of insolvency as the MCR would
be set at a level in excess of that at which the assets of the insurer werestill expected to be sufficient to meet the insurer’s obligations to existing
policyholders as they fall due. The PCR cannot be less than the MCR,
and therefore the MCR may also provide the basis of a lower bound for
the PCR, which may be especially appropriate in cases where the PCR
is determined on the basis of an insurer’s internal model 15 approved foruse in determining regulatory capital requirements by the supervisor.

17.4.6

In establishing a minimum bound on the MCR below which no insurer isregarded to be viable to operate effectively, the supervisor may, forexample, apply a market-wide nominal floor 16 to the regulatory capitalrequirements, based on the need for an insurer to operate with a certain
minimal critical mass and consideration of what may be required to meet
minimum standards of governance and risk management. Such anominal floor might vary between lines of business or type of insurer andis particularly relevant in the context of a new insurer or line of business.

17.4.7

Regulatory capital requirements may include additional solvency control
levels between the level at which the supervisor takes no intervention
action from a capital perspective and the strongest intervention point(that is, between the PCR and MCR levels). These control levels may be
set at levels that correspond to a range of different intervention actions
that may be taken by the supervisor itself or actions which the supervisor
would require of the insurer according to the severity or level of concern
regarding adequacy of the capital held by the insurer. These additional
control levels may be formally established by the supervisor with explicit
intervention actions linked to particular control levels. Alternatively, these
additional control levels may be structured less formally, with a range ofpossible intervention actions available to the supervisor depending on
the particular circumstances. In either case the possible triggers and

14 Note that this does not preclude such actions being taken by the supervisor for other reasons, andeven if the MCR is met or exceeded.
15 The term “internal model” refers to “a risk measurement system developed by an insurer to analyse
its overall risk position, to quantify risks and to determine the economic capital required to meet thoserisks”. Internal models may also include partial models which capture a subset of the risks borne by the
insurer using an internally developed measurement system which is used in determining the insurer's
economic capital. The IAIS is aware that insurers use a variety of terms to describe their risk and capitalassessment processes, such as “economic capital model”, “risk-based capital model”, or “businessmodel”. The IAIS considers that such terms could be used interchangeably to describe the processes
adopted by insurers in the management of risk and capital within their business on an economic basis.
For the purposes of consistency, the term “internal model” is used throughout.
16 In this context, a market-wide nominal floor may, for example, be an absolute monetary minimum
amount of capital required to be held by an insurer in a jurisdiction.
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range of intervention actions should be appropriately disclosed by thesupervisor.
17.4.8Possible intervention actions include:• measures that are intended to enable the supervisor to better
assess and/or control the situation, either formally or
informally, such as increased supervision activity or reporting,or requiring auditors or actuaries to undertake an independent
review or extend the scope of their examinations;• measures to address capital levels such as requesting capitaland business plans for restoration of capital resources torequired levels, limitations on redemption or repurchase of
equity or other instruments and/or dividend payments;• measures intended to protect policyholders pending
strengthening of the insurer’s capital position, such as
restrictions on licences, premium volumes, investments, typesof business, acquisitions, reinsurance arrangements;• measures that strengthen or replace the insurer’s
management and/or risk management framework and overall
governance processes;• measures that reduce or mitigate risks (and hence required
capital) such as requesting reinsurance, hedging and othermechanisms; and/or• refusing, or imposing conditions on, applications submitted forregulatory approval such as acquisitions or growth inbusiness.

17.4.9In establishing the respective control levels, consideration should be hadfor these possibilities and the scope for an insurer with capital at this level
to be able to increase its capital resources or to be able to accessappropriate risk mitigation tools from the market.
Figure 17.2 below illustrates the concept of solvency control levels in thecontext of establishing regulatory capital requirements:

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Figure 17.2: Solvency control levels and regulatory capital requirements

CapitalResources(CR)

Prescribed Capital
Requirement (PCR)
Required
CapitalRisk Margin(RM)

Technical
Provisions(TP) andOther
liabilities

Insurer’s
Financial
Position

Minimum Capital
Requirement(MCR)

Current
Estimate
(CE)

Other
liabilities

Regulatory
CapitalRequirements

Structure of regulatory capital requirements - Triggers for supervisory intervention in
the context of group-wide capital adequacy assessment
17.5

In the context of group-wide capital adequacy assessment, the regulatory
capital requirements establish solvency control levels that are appropriate
in the context of the approach to group-wide capital adequacy that is
applied.
17.5.1The supervisor should establish solvency control levels that areappropriate in the context of the approach that is adopted for group-wide
capital adequacy assessment. The supervisor should also define therelationship between these solvency control levels and those at legal
entity level for insurers that are members of the group. The design ofsolvency control levels depends on a number of factors. These include
the supervisory perspective, ie the relative weight placed on group-wide
supervision and legal entity supervision, and the organisational
perspective, ie the extent to which a group is considered as a set ofinterdependent entities or a single integrated entity. The solvency control
levels are likely to vary according to the particular group and thesupervisors involved. (see Figure 17.1). The establishment of groupwide solvency control levels should be such as to enhance the overall
supervision of the insurers in the group.

17.5.2

Having group-wide solvency control levels does not necessarily mean
establishing a single regulatory capital requirement at group level. For
example, under a legal entity approach consideration of the set of capital

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requirements for individual entities (and interrelationships between them)
may enable appropriate decisions to be taken about supervisoryintervention on a group-wide basis. However, this requires the approach
to be sufficiently well developed for group risks to be taken into accounton a complete and consistent basis in the capital adequacy assessmentof insurance legal entities in a group. To achieve consistency forinsurance legal entity assessments, it may be necessary to adjust thecapital requirements used for insurance legal entities so they are suitablefor group-wide assessment.
17.5.3

One approach may be to establish a single group-wide PCR or aconsistent set of PCRs for insurance legal entities that are members of
the group which, if met, would mean that no supervisory intervention atgroup level for capital reasons would be deemed necessary or
appropriate. Such an approach may assist, for example, in achieving
consistency of approach towards similar organisations with a branch
structure and different group structures eg following a change instructure of a group. Where a single group-wide PCR is determined, it
may differ from the sum of insurance legal entity PCRs because of groupfactors including group diversification effects, group risk concentrations
and intra-group transactions. Similarly, where group-wide capital
adequacy assessment involves the determination of a set of PCRs forthe insurance legal entities in an insurance group, these may differ fromthe insurance legal entity PCRs if group factors are reflected differently
in the group capital assessment process. Differences in the level ofsafety established by different jurisdictions in which the group operates
should be considered when establishing group-wide PCR(s).

17.5.4The establishment of a single group-wide MCR might also be considered
and may, for example, trigger supervisory intervention to restructure thecontrol and/or capital of the group. A possible advantage of this approachis that it may encourage a group solution where an individual insurer isin financial difficulty and capital is sufficiently fungible and assets aretransferable around the group. Alternatively, the protection provided by
the supervisory power to intervene at individual entity level on breach of
an insurance legal entity MCR may be regarded as sufficient.

17.5.5The solvency control levels adopted in the context of group-wide capital
adequacy assessment should be designed so that together with thesolvency control levels at insurance legal entity level they represent a
consistent ladder of supervisory intervention. For example, a group-wide
PCR should trigger supervisory intervention before a group-wide MCR
because the latter may invoke the supervisor’s strongest actions. Also, if
a single group-wide PCR is used it may be appropriate for it to have afloor equal to the sum of the legal entity MCRs of the individual entities
in the insurance group. Otherwise, no supervisory intervention into theoperation of the group would be required even though at least one of its
member insurers had breached its MCR.

17.5.6

Supervisory intervention triggered by group-wide solvency control levels
should take the form of coordinated action by relevant group supervisors.
This may, for example, involve increasing capital at holding company
level or strategically reducing the risk profile or increasing capital ininsurance legal entities within the group. Such supervisory action may

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be exercised via the insurance legal entities within a group and, where
insurance holding companies are authorised, via those holding
companies. Supervisory action in response to breaches of group-wide
solvency control levels should not alter the existing division of statutory
responsibilities of the supervisors responsible for authorising andsupervising each individual insurance legal entity.
Structure of regulatory capital requirements - approaches to determining regulatory
capital requirements
17.6

The regulatory capital requirements are established in an open andtransparent process, and the objectives of the regulatory capitalrequirements and the bases on which they are determined are explicit. In
determining regulatory capital requirements, the supervisor allows a set ofstandardised and, if appropriate, other approved more tailored approaches
such as the use of (partial or full) internal models.
17.6.1

Transparency as to the regulatory capital requirements that apply isrequired to facilitate effective solvency assessment and supports its
enhancement, comparability and convergence internationally.

17.6.2The supervisor may develop separate approaches for the determinationof different regulatory capital requirements, in particular for thedetermination of the MCR and the PCR. For example, the PCR and MCR
may be determined by two separate methods, or the same methods andapproaches may be used but with two different levels of safety specified.
In the latter case, for example, the MCR may be defined as a simple
proportion of the PCR, or the MCR may be determined on different
specified target criteria to those specified for the PCR.

17.6.3

The PCR would generally be determined on a going concern basis, ie inthe context of the insurer continuing its operations. On a going concern
basis, an insurer would be expected to continue to take on new risks
during the established time horizon. Therefore, in establishing theregulatory capital level to provide an acceptable level of solvency, thepotential growth in an insurer’s portfolio should be considered.

17.6.4

Capital should also be capable of protecting policyholders if the insurer
were to close to new business. Generally, the determination of capital ona going concern basis would not be expected to be less than would be
required if it is assumed that the insurer were to close to new business.
However, this may not be true in all cases, since some assets may lose
some or all of their value in the event of a winding-up or run-off, forexample, because of a forced sale. Similarly, some liabilities may
actually have an increased value if the business does not continue (egclaims handling expenses).

17.6.5Usually the MCR would be constructed taking into consideration thepossibility of closure to new business. It is, however, relevant to also
consider the going concern scenario in the context of establishing thelevel of the MCR, as an insurer may continue to take on new risks up
until the point at which MCR intervention is ultimately triggered. The
supervisor should consider the appropriate relationship between the
PCR and MCR, establishing a sufficient buffer between these two levels(including consideration of the basis on which the MCR is generated)within an appropriate continuum of solvency control levels, having regard

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for the different situations of business operation and other relevant
considerations.
17.6.6It should be emphasised that meeting the regulatory capital requirements
should not be taken to imply that further financial injections will not benecessary under any circumstances in future.

17.6.7

Regulatory capital requirements may be determined using a range ofapproaches, such as standard formulae, or other approaches, more
tailored to the individual insurer (such as partial or full internal models),
which are subject to approval by the relevant supervisors. 17 Regardlessof the approach used, the principles and concepts that underpin theobjectives for regulatory capital requirements described in this ICP apply
and should be applied consistently by the supervisor to the various
approaches. The approach adopted for determining regulatory capitalrequirements should take account of the nature and materiality of therisks insurers face generally and, to the extent practicable, should also
reflect the nature, scale and complexity of the risks of the particularinsurer.

17.6.8

Standardised approaches, in particular, should be designed to deliver
capital requirements which reasonably reflect the overall risk to which
insurers are exposed, while not being unduly complex. Standardised
approaches may differ in level of complexity depending on the risks
covered and the extent to which they are mitigated or may differ inapplication based on classes of business (eg life and non-life).
Standardised approaches should be appropriate to the nature, scale andcomplexity of the risks that insurers face and should include approaches
that are feasible in practice for insurers of all types including small andmedium sized insurers and captives taking into account the technicalcapacity that insurers need to manage their businesses effectively.

17.6.9By its very nature a standardised approach may not be able to fully andappropriately reflect the risk profile of each individual insurer. Therefore,
where appropriate, a supervisor should allow the use of more tailoredapproaches subject to approval. In particular, where an insurer has aninternal model (or partial internal model) that appropriately reflects its
risks and is integrated into its risk management and reporting, thesupervisor should allow the use of such a model to determine more
tailored regulatory capital requirements, where appropriate. 18 The use of
the internal model for this purpose would be subject to prior approval by
the supervisor based on a transparent set of criteria and would need tobe evaluated at regular intervals. In particular, the supervisor would need
to be satisfied that the insurer’s internal model is, and remains,appropriately calibrated relative to the target criteria established by thesupervisor (see Guidance 17.12.1 to 17.12.18).

17.6.10 The supervisor should also be clear on whether an internal model may
be used for the determination of the MCR. In this regard, the supervisor
A more tailored approach which is not an internal model might include, for example, approved
variations in factors contained in a standard formula or prescribed scenario tests which are appropriate
for a particular insurer or group of insurers.
18 It is noted that the capacity for a supervisor to allow the use of internal models will need to takeaccount of the sufficiency of resources available to the supervisor.
17

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should take into account the main objective of the MCR (ie to provide theultimate safety net for the protection of policyholders) and the ability of
the MCR to be defined in a sufficiently objective and appropriate manner
to be enforceable (refer to Guidance 17.3.4).
17.7

The supervisor addresses all relevant and material categories of risk ininsurers and is explicit as to where risks are addressed, whether solely intechnical provisions, solely in regulatory capital requirements or if
addressed in both, as to the extent to which the risks are addressed in each.
The supervisor is also explicit as to how risks and their aggregation arereflected in regulatory capital requirements.
Types of risks to be addressed
17.7.1The supervisor should address all relevant and material categories ofrisk - including at least underwriting risk, credit risk, market risk,
operational risk and liquidity risk. This should include any significant risk
concentrations, for example, to economic risk factors, market sectors orindividual counterparties, taking into account both direct and indirect
exposures and the potential for exposures in related areas to become
more correlated under stressed circumstances.

Dependencies and interrelations between risks
17.7.2

The assessment of the overall risk that an insurer is exposed to should
address the dependencies and interrelationships between risk
categories (for example, between underwriting risk and market risk) as
well as within a risk category (for example, between equity risk andinterest rate risk). This should include an assessment of potential
reinforcing effects between different risk types as well as potential“second order effects”, ie indirect effects to an insurer’s exposure causedby an adverse event or a change in economic or financial market
conditions. 19 It should also consider that dependencies between different
risks may vary as general market conditions change and may
significantly increase during periods of stress or when extreme eventsoccur. “Wrong way risk”, which is defined as the risk that occurs when
exposure to counterparties, such as financial guarantors, is adversely
correlated to the credit quality of those counterparties, should also be
considered as a potential source of significant loss eg in connection with
derivative transactions. Where the determination of an overall capitalrequirement takes into account diversification effects between different
risk types, the insurer should be able to explain the allowance for theseeffects and ensure that it considers how dependencies may increase
under stressed circumstances.

Allowance for risk mitigation
17.7.3Any allowance for reinsurance in determining regulatory capitalrequirements should consider the possibility of breakdown in theeffectiveness of the risk transfer and the security of the reinsurance
counterparty and any measures used to reduce the reinsurance

19 For example, a change in the market level of interest rates could trigger an increase of lapse rates on
insurance policies.

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counterparty exposure. Similar considerations would also apply for otherrisk mitigants, for example derivatives.
Transparency of recognition of risks in regulatory requirements
17.7.4The supervisor should be explicit as to where risks are addressed,
whether solely in technical provisions, solely in regulatory capitalrequirements or if addressed in both, as to the extent to which the risks
are addressed in each. The solvency requirements should also clearly
articulate how risks are reflected in regulatory capital requirements,
specifying and publishing the level of safety to be applied in determining
regulatory capital requirements, including the established target criteria(refer to Standard 17.8).

Treatment of risks which are difficult to quantify

17.8

17.7.5The IAIS recognises that some risks, such as strategic risk, reputationalrisk, liquidity risk and operational risk, are less readily quantifiable thanthe other main categories of risks. Operational risk, for example, isdiverse in its composition and depends on the quality of systems andcontrols in place. The measurement of operational risk, in particular, may
suffer from a lack of sufficiently uniform and robust data and welldeveloped valuation methods. Jurisdictions may choose to baseregulatory capital requirements for these less readily quantifiable risks
on some simple proxies for risk exposure and/or stress and scenario
testing. For particular risks (such as liquidity risk), holding additional
capital may not be the most appropriate risk mitigant and it may be more
appropriate for the supervisor to require the insurer to control these risks
via exposure limits and/or qualitative requirements such as additional
systems and controls.

17.7.6

However, the IAIS envisages that the ability to quantify some risks (suchas operational risk) will improve over time as more data become
available or improved valuation methods and modelling approaches aredeveloped. Further, although it may be difficult to quantify risks, it isimportant that an insurer nevertheless addresses all material risks in its
own risk and solvency assessment.

The supervisor sets appropriate target criteria for the calculation ofregulatory capital requirements, which underlie the calibration of astandardised approach. Where the supervisor allows the use of approved
more tailored approaches such as internal models for the purpose ofdetermining regulatory capital requirements, the target criteria underlying
the calibration of the standardised approach are also used by those
approaches for that purpose to require broad consistency among all
insurers within the jurisdiction.
17.8.1The level at which regulatory capital requirements are set will reflect therisk tolerance of the supervisor. Reflecting the IAIS’s principles-based
approach, this ICP does not prescribe any specific methods fordetermining regulatory capital requirements. However, the IAIS’s view isthat it is important that individual jurisdictions set appropriate target
criteria (such as risk measures, confidence levels or time horizons) for
their regulatory capital requirements. Further, each jurisdiction should
outline clear principles for the key concepts for determining regulatory
capital requirements, considering the factors that a supervisor should

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take into account in determining the relevant parameters as outlined inthis ICP.
17.8.2

Where a supervisor allows the use of other more tailored approaches todetermine regulatory capital requirements, the target criteria establishedshould be applied consistently to those approaches. In particular, wherea supervisor allows the use of internal models for the determination ofregulatory capital requirements, the supervisor should apply the target
criteria in approving the use of an internal model by an insurer for that
purpose. This should achieve broad consistency among all insurers anda similar level of protection for all policyholders, within the jurisdiction.

17.8.3

With regards to the choice of the risk measure and confidence level towhich regulatory capital requirements are calibrated, the IAIS notes thatsome supervisors have set a confidence level for regulatory purposes
which is comparable with a minimum investment grade level. Some
examples have included a 99.5% VaR calibrated confidence level overa one year timeframe, 20 99% TVaR over one year and 95% TVaR over
the term of the policy obligations.

17.8.4In regards to the choice of an appropriate time horizon, the determinationand calibration of the regulatory capital requirements needs to be basedon a more precise analysis, distinguishing between:• the period over which a shock is applied to a risk – the “shock
period”; and• the period over which the shock that is applied to a risk will
impact the insurer – the “effect horizon”.

17.8.5For example, a one-off shift in the interest rate term structure during a
shock period of one year has consequences for the discounting of the
cash flows over the full term of the policy obligations (the effect horizon).
A judicial opinion (eg on an appropriate level of compensation) in one
year (the shock period) may have permanent consequences for thevalue of claims and hence will change the projected cash flows to beconsidered over the full term of the policy obligations (the effect horizon).

17.8.6The impact on cash flows of each stress that is assumed to occur during
the shock period will need to be calculated over the period for which theshock will affect the relevant cash flows (the effect horizon). In manycases this will be the full term of the insurance obligations. In somecases, realistic allowance for offsetting reductions in discretionary
benefits to policyholders or other offsetting management actions may beconsidered, where they could and would be made and would be effective
in reducing policy obligations or in reducing risks in the circumstances ofthe stress. In essence, at the end of the shock period, capital has to be
sufficient so that assets cover the technical provisions (and otherliabilities) re-determined at the end of the shock period. The redetermination of the technical provisions would allow for the impact of

20 This is the level expected in Australia for those insurers that seek approval to use an internal model
to determine their MCR. It is also the level used for the calculation of the risk-based Solvency Capital
Requirement under the European Solvency II regime.

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the shock on the technical provisions over the full time horizon of thepolicy obligations.
17.8.7

Figure 17.3 summarises key aspects relevant to the determination ofregulatory capital requirements:

Figure 17.3: Illustration of determination of regulatory capital requirements
Valuation date

CapitalCapitalresources

requirement

New
Risk marginrisk margin

Current
estimate

New

Technical
provisions(TP) andotherliabilities

current
Otherliabilities

Financial
position
17.8.8Risk
impact

For the determination of the technical provisions, an insurer is expected
to consider the uncertainty attached to the policy obligations, that is, thelikely (or expected) variation of future experience from what is assumed
in determining the current estimate, over the full period of the policy
obligations. As indicated above, regulatory capital requirements should
be calibrated such that assets exceed the technical provisions (and otherliabilities) over a defined shock period with an appropriately high degreeof safety. That is, the regulatory capital requirements should be set suchthat the insurer’s capital resources can withstand a range of predefined
shocks or stress scenarios that are assumed to occur during that shock
period (and which lead to significant unexpected losses over and above
the expected losses that are captured in the technical provisions).

Calibration and measurement error
17.8.9The risk of measurement error inherent in any approach used todetermine capital requirements should be considered. This is especially
important where there is a lack of sufficient statistical data or market
information to assess the tail of the underlying risk distribution. To
mitigate model error, quantitative risk calculations should be blended
with qualitative assessments, and, where practicable, multiple risk
measurement tools should be used. To help assess the economic
appropriateness of risk-based capital requirements, information should
be sought on the nature, degree and sources of the uncertainty

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surrounding the determination of capital requirements in relation to theestablished target criteria.
17.8.10 The degree of measurement error inherent, in particular, in astandardised approach depends on the degree of sophistication andgranularity of the methodology used. A more sophisticated standardised
approach has the potential to be aligned more closely to the true
distribution of risks across insurers. However, increasing thesophistication of the standardised approach is likely to imply higher
compliance costs for insurers and more intensive use of supervisory
resources (for example, in validating the calculations). The calibration of
the standardised approach therefore needs to balance the trade-off
between risk-sensitivity and implementation costs.
Procyclicality
17.8.11 When applying risk-based regulatory capital requirements, there is a riskthat an economic downturn will trigger supervisory interventions thatexacerbate the economic crises, thus leading to an adverse “procyclical”
effect. For example, a severe downturn in share markets may result in a
depletion of the capital resources of a major proportion of insurers. Thisin turn may force insurers to sell shares and to invest in less risky assets
in order to decrease their regulatory capital requirements. A
simultaneous massive selling of shares by insurers could, however, put
further pressure on the share markets, thus leading to a further drop in
share prices and to a worsening of the economic crises.
17.8.12 However, the system of solvency control levels required enables
supervisors to introduce a more principles-based choice of supervisoryinterventions in cases where there may be a violation of the PCR control
level and this can assist in avoiding exacerbation of procyclicality effects:
supervisory intervention is able to be targeted and more flexible in thecontext of an overall economic downturn so as to avoid measures that
may have adverse macroeconomic effects.
17.8.13 It could be contemplated whether further explicit procyclicalitydampening measures would be needed. This may include allowing alonger period for corrective measures or allowance for the calibration of
the regulatory capital requirements to reflect procyclicality dampening
measures. Overall, when such dampening measures are applied, anappropriate balance needs to be achieved to preserve the risk sensitivityof the regulatory capital requirements.
17.8.14 In considering the impacts of procyclicality, the influence of external
factors (for example, the influence of credit rating agencies) should begiven due regard. The impacts of procyclicality also heighten the needfor supervisory cooperation and communication.
Additional guidance for insurance groups and insurance legal entities that are
members of groups
17.8.15 Approaches to determining group-wide regulatory capital requirements
will depend on the overall approach taken to group-wide capital
adequacy assessment. Where a group level approach is used, either thegroup’s consolidated accounts may be taken as a basis for calculatinggroup-wide capital requirements or the requirements of each insurance
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legal entity may be aggregated or a mixture of these methods may be
used. For example, if a different treatment is required for a particular
entity (for example, an entity located in a different jurisdiction) it might bedisaggregated from the consolidated accounts and then included in an
appropriate way using a deduction and aggregation approach.
17.8.16 Where consolidated accounts are used, the requirements of thejurisdiction in which the ultimate parent of the group is located would
normally be applied, consideration should also be given to the scope ofthe consolidated accounts used for accounting purposes as comparedto the consolidated balance sheet used as a basis for group-wide capital
adequacy assessment to require, for example, identification andappropriate treatment of non-insurance group entities.
17.8.17 Where the aggregation method is used (as described in Guidance
17.1.13), or where a legal entity focus is adopted (as described in
Guidance 17.1.14), consideration should be given as to whether local
capital requirements can be used for insurance legal entities within thegroup which are located in other jurisdictions or whether capitalrequirements should be recalculated according to the requirements of
the jurisdiction in which the ultimate parent of the group is located.
Group-specific risks
17.8.18 There are a number of group-specific factors which should be taken into
account in determining group-wide capital requirements including
diversification of risk across group entities, intra-group transactions, risks
arising from non-insurance group entities, treatment of group entities
located in other jurisdictions and treatment of partially-owned entities andminority interests. Particular concerns may arise from a continuous
sequence of internal financing within the group, or closed loops in thefinancing scheme of the group.
17.8.19 Group specific risks posed by each group entity to insurance membersof the group and to the group as a whole are a key factor in an overall
assessment of group-wide capital adequacy. Such risks are typicallydifficult to measure and mitigate and include notably contagion risk
(financial, reputational, legal), concentration risk, complexity risk andoperational/organisational risks. As groups can differ significantly it may
not be possible to address these risks adequately using a standardised
approach for capital requirements. It may therefore be necessary toaddress group specific risks through the use of more tailored approaches
to capital requirements including the use of (partial or full) internal
models. Alternatively, supervisors may vary the standardised regulatory
capital requirement so that group-specific risks are adequately provided
for in the insurance legal entity and/or group capital adequacy
assessment. 21
17.8.20 Group specific risks should be addressed from both an insurance legal
entity perspective and group-wide perspective ensuring that adequate
allowance is made. Consideration should be given to the potential for
duplication or gaps between insurance legal entity and group-wide
approaches.
21 See Standard 17.9.

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Diversification of risks between group entities
17.8.21 In the context of a group-wide solvency assessment, there should also
be consideration of dependencies and interrelations of risks acrossdifferent members in the group. However, it does not follow that where
diversification effects exist these should be recognised automatically inan assessment of group-wide capital adequacy. It may, for example, be
appropriate to limit the extent to which group diversification effects aretaken into account for the following reasons:• Diversification may be difficult to measure at any time and inparticular in times of stress. Appropriate aggregation of risks
is critical to the proper evaluation of such benefits for solvency
purposes.
• There may be constraints on the transfer of diversification
benefits across group entities and jurisdictions because of alack of fungibility of capital or transferability of assets.
• Diversification may be offset by concentration/aggregation
effects (if this is not separately addressed in the assessmentof group capital).
17.8.22 An assessment of group diversification benefits is necessary underwhichever approach used to assess group-wide capital adequacy. Undera legal entity approach, recognition of diversification benefits will requireconsideration of the diversification between the business of an insurance
legal entity and other entities within the group in which it participates andof intra-group transactions. Under an approach with a consolidation
focus which uses the consolidated accounts method, somediversification benefits will be recognised automatically at the level of theconsolidated group. In this case, supervisors will need to consider
whether it is prudent to recognise such benefits or whether an adjustment
should be made in respect of potential restrictions on the transferability
or sustainability under stress of surplus resources created by groupdiversification benefits.
Intra-group transactions
17.8.23 Intra-group transactions may result in complex and/or opaque intragroup relationships which give rise to increased risks at both insurance
legal entity and group level. In a group-wide context, credit for risk
mitigation should only be recognised in group capital requirements to theextent that risk is transferred outside the group. For example, the transfer
of risk to a captive reinsurer or to an intra-group insurance special
purpose entity should not result in a reduction of overall group capitalrequirements.
Non-insurance group entities
17.8.24 In addition to insurance legal entities, an insurance group may include a
range of different types of non-insurance legal entity, either subject to no
financial regulation (non-regulated entities) or regulated under otherfinancial sector regulation. The impact of all such entities should be taken
into account in the overall assessment of group-wide solvency but theextent to which they can be captured in a group-wide capital adequacymeasure as such will vary according to the type of non-insurance legal
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entity, the degree of control/influence on that entity and the approachtaken to group-wide supervision.
17.8.25 Risks from non-regulated entities are typically difficult to measure andmitigate. Supervisors may not have direct access to information on such
entities but it is important that supervisors are able to assess the risks
they pose in order to apply appropriate mitigation measures. Measurestaken to address risks from non-regulated entities do not imply active
supervision of such entities.
17.8.26 There are different approaches to addressing risks stemming from nonregulated entities such as capital measures, non-capital measures or a
combination thereof.
17.8.27 One approach may be to increase capital requirements in order that thegroup holds sufficient capital. If the activities of the non-regulated entities
have similar risk characteristics to insurance activities (eg certain credit
enhancement mechanisms as compared to traditional bond insurance) it
may be possible to calculate an equivalent capital charge. Anotherapproach might be to deduct the value of holdings in non-regulated
entities from the capital resources of the insurance legal entities in thegroup, but this on its own may not be sufficient to cover the risks involved.
17.8.28 Non-capital measures may include, for example, limits on exposures andrequirements on risk management and governance applied to insurance
legal entities with respect to non-regulated entities within the group.
Cross-jurisdictional entities
17.8.29 Group-wide capital adequacy assessments should, to the extent
possible, be based on consistent application of ICPs across jurisdictions.
In addition, consideration should be given to the capital adequacy andtransferability of assets in entities located in different jurisdictions.
Partial ownership and minority interests
17.8.30 An assessment of group-wide capital adequacy should include anappropriate treatment of partially-owned or controlled group entities andminority interests. Such treatment should take into account the nature of
the relationships of the partially-owned entities within the group and therisks and opportunities they bring to the group. The accounting treatment
may provide a starting point. Consideration should be given to theavailability of any minority interest’s share in the net equity in excess ofregulatory capital requirements of a partially-owned entity.
Variation of regulatory capital requirements
17.9

Any variations to the regulatory capital requirement imposed by thesupervisor are made within a transparent framework, are appropriate to thenature, scale and complexity according to the target criteria and are only
expected to be required in limited circumstances.
17.9.1

As has already been noted, a standardised approach, by its very nature,
may not be able to fully and appropriately reflect the risk profile of eachindividual insurer. In cases where the standardised approach established
for determining regulatory capital requirements is materiallyinappropriate for the risk profile of the insurer, the supervisor should havethe flexibility to increase the regulatory capital requirement calculated by

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the standard approach. For example, some insurers using the standard
formula may warrant a higher PCR and/or group-wide regulatory capitalrequirement if they are undertaking higher risks, such as new products
where credible experience is not available to establish technicalprovisions, or if they are undertaking significant risks that are notspecifically covered by the regulatory capital requirements.
17.9.2

Similarly, in some circumstances when an approved more tailoredapproach is used for regulatory capital purposes, it may be appropriate
for the supervisor to have some flexibility to increase the capitalrequirement calculated using that approach. In particular, where aninternal model or partial internal model is used for regulatory capital
purposes, the supervisor may increase the capital requirement where it
considers the internal model does not adequately capture certain risks,
until the identified weaknesses have been addressed. This may arise,for example, even though the model has been approved where there has
been a change in the business of the insurer and there has been
insufficient time to fully reflect this change in the model and for a newmodel to be approved by the supervisor.

17.9.3

In addition, supervisory requirements may be designed to allow thesupervisor to decrease the regulatory capital requirement for anindividual insurer where the standardised requirement materiallyoverestimates the capital required according to the target criteria.
However, such an approach may require a more intensive use of
supervisory resources due to requests from insurers for consideration ofa decrease in their regulatory capital requirement. Therefore, the IAIS
appreciates that not all jurisdictions may wish to include such an option
for their supervisor. Further, this reinforces the need for such variations
in regulatory capital requirements to only be expected to be made inlimited circumstances.

17.9.4

Any variations made by the supervisor to the regulatory capitalrequirement calculated by the insurer should be made in a transparent
framework and be appropriate to the nature, scale and complexity interms of the target criteria. The supervisor may, for example, develop
criteria to be applied in determining such variations and appropriate
discussions between the supervisor and the insurer may occur.
Variations in regulatory capital requirements following supervisory
review from those calculated using standardised approaches orapproved more tailored approaches should be expected to be made only
in limited circumstances.

17.9.5In undertaking its ORSA, the insurer considers the extent to which theregulatory capital requirements (in particular, any standardised formula)adequately reflect its particular risk profile. In this regard, the ORSA
undertaken by an insurer can be a useful source of information to thesupervisor in reviewing the adequacy of the regulatory capitalrequirements of the insurer and in assessing the need for variation in
those requirements.

Identification of capital resources potentially available for solvency purposes
17.10

The supervisor defines the approach to determining the capital resources
eligible to meet regulatory capital requirements and their value, consistent

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with a total balance sheet approach for solvency assessment and having
regard to the quality and suitability of capital elements.
17.10.1 The following outlines a number of approaches a supervisor could use
for the determination of capital resources in line with this requirement.
The determination of capital resources would generally require thefollowing steps:• the amount of capital resources potentially available forsolvency purposes is identified (see Guidance 17.10.3 17.10.21);• an assessment of the quality and suitability of the capital
instruments comprising the total amount of capital resources
identified is then carried out (see Guidance 17.11.1 17.11.29); and• on the basis of this assessment, the final capital resources
eligible to meet regulatory capital requirements and their value
are determined (see Guidance 17.11.30 - 17.11.44).
17.10.2 In addition, the insurer is required to carry out its own assessment of its
capital resources to meet regulatory capital requirements and any
additional capital needs (see Standard 16.14).
Capital resources under total balance sheet approach
17.10.3 The IAIS supports the use of a total balance sheet approach in theassessment of solvency to recognise the interdependence between
assets, liabilities, regulatory capital requirements and capital resources
so that risks are appropriately recognised.
17.10.4 Such an approach requires that the determination of available andrequired capital is based on consistent assumptions for the recognitionand valuation of assets and liabilities for solvency purposes.
17.10.5 From a regulatory perspective, the purpose of regulatory capitalrequirements is to require that, in adversity, an insurer’s obligations topolicyholders will continue to be met as they fall due. This aim will beachieved if technical provisions and other liabilities are expected toremain covered by assets over a defined period, to a specified level ofsafety. 22
17.10.6 To achieve consistency with this economic approach to setting capitalrequirements in the context of a total balance sheet approach, capital
resources should broadly be regarded as the difference between assets
and liabilities on the basis of their recognition and valuation for solvency
purposes.

22 Refer to Guidance 17.3.1 - 17.9.5.

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Figure 17.4
Total balance sheet approach to solvency assessment

Assessment of financial solvency

Available capital resources•

Broadly given as excess
of assets over liabilities•

Subject to fungibility andtransferability aspects•

Subject to quality criteria

Required regulatory capital• Reflects potential adversechange of excess of assets
over liabilities over time

Valuation of assets and liabilities forsolvency purposes

17.10.7 When regarding available capital resources as the difference between
assets and liabilities, the following issues should be considered:• the extent to which certain liabilities other than technicalprovisions may be treated as capital for solvency purposes(Guidance 17.10.8 - 17.10.10);• whether contingent assets could be included (Guidance
17.10.11);• the treatment of assets which may not be fully realisable in thenormal course of business or under a wind-up scenario(Guidance 17.10.12 - 17.10.19); and• reconciliation of such a “top down” approach to determining
capital resources with a “bottom up” approach which sums up
individual items of capital to derive the overall amount of
capital resources (Guidance 17.10.20).
Treatment of liabilities
17.10.8 Liabilities include technical provisions and other liabilities. Certain items
such as other liabilities in the balance sheet may be treated as capital
resources for solvency purposes.
17.10.9 For example, perpetual subordinated debt, although usually classified as
a liability under the relevant accounting standards, could be classified as
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a capital resource for solvency purposes. 23 This is because of its
availability to act as a buffer to reduce the loss to policyholders andsenior creditors through subordination in the event of insolvency. Moregenerally, subordinated debt instruments (whether perpetual or not) may
be treated as capital resources for solvency purposes if they satisfy thecriteria established by the supervisor. Other liabilities that are notsubordinated would not be considered as part of the capital resources;
examples include liabilities such as deferred tax liabilities and pension
liabilities.
17.10.10 It may, therefore, be appropriate to exclude some elements of funding
from liabilities and so include them in capital to the extent appropriate.
This would be appropriate if these elements have characteristics which
protect policyholders by meeting one or both of the objectives set out inGuidance 17.2.6 above.
Treatment of contingent assets
17.10.11 It may be appropriate to include contingent elements which are notconsidered as assets under the relevant accounting standards, where
the likelihood of payment if needed is sufficiently high according tocriteria specified by the supervisor. Such contingent capital may include,for example, letters of credit, members’ calls by a mutual insurer or theunpaid element of partly paid capital and may be subject to prior approvalby the supervisor.
Treatment of assets which may not be fully realisable on a going concern or wind-up
basis
17.10.12 Supervisors should consider that, for certain assets in the balance
sheet, the realisable value under a wind-up scenario may become
significantly lower than the economic value which is attributable undergoing concern conditions. Similarly, even under normal businessconditions, some assets may not be realisable at full economic value, orat any value, at the time they are needed. This may render such assets
unsuitable for inclusion at their full economic value for the purpose of
meeting required capital. 24
17.10.13 Examples of such assets include:• own shares directly held by the insurer: the insurer has bought
and is holding its own shares thereby reducing the amount of
capital available to absorb losses under going concern or in awind-up scenario;• intangible assets: their realisable value may be uncertain evenduring normal business conditions and may have nosignificant marketable value in run-off or winding-up; Goodwill
is a common example;

23 However, adequate recognition should be given to contractual features of the debt such as embedded
options which may change its loss absorbency.
24 In particular, supervisors should consider the value of contingent assets for solvency purposes taking
into account the criteria set out in Guidance 17.11.21.

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• future income tax credits: such credits may only be realisable
if there are future taxable profits, which is improbable in theevent of insolvency or winding-up;• implicit accounting assets: under some accounting models,certain items regarding future income are included, implicitly
or explicitly, as asset values. In the event of run-off or windingup, such future income may be reduced;• investments 25 in other insurers or financial institutions: suchinvestments may have uncertain realisable value because ofcontagion risk between entities; also there is the risk of“double gearing” where such investments lead to a recognitionof the same amount of available capital resources in several
financial entities; and• company-related assets: certain assets carried in theaccounting statements of the insurer could lose some of theirvalue in the event of run-off or winding-up, for example
physical assets used by the insurer in conducting its business
which may reduce in value if there is a need for the forced saleof such assets. Also, certain assets may not be fully
accessible to the insurer eg surplus in a corporate pension
arrangement.
17.10.14 The treatment of such assets for capital adequacy purposes may needto reflect an adjustment to its economic value. Generally, such an
adjustment may be effected either:• directly, by not admitting a portion of the economic value ofthe asset for solvency purposes (deduction approach); or• indirectly, through an addition to regulatory
requirements (capital charge approach).

capitalDeduction approach
17.10.15 Under the deduction approach, the economic value of the asset is
reduced for solvency purposes. This results in capital resources being
reduced by the same amount. The partial (or full) exclusion of such an
asset may occur for a variety of reasons, for example, to reflect an
expectation that it would have only limited value in the event of
insolvency or winding-up to absorb losses. No further adjustment would
normally be needed in the determination of regulatory capitalrequirements for the risk of holding such assets.
Capital charge approach
17.10.16 Under the capital charge approach, an economic value is placed on
the asset for the purpose of determining available capital resources. The
risk associated with the asset – ie a potential deterioration of theeconomic value of the asset due to an adverse event which may occur
during the defined solvency time horizon - would then need to bereflected in the determination of regulatory capital requirements. This
25 These investments include investment in the equity of, loans granted to, deposits with and bonds
issued by the related parties.

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should take into account the estimation uncertainty 26 inherent in thedetermination of the economic value.
Choice and combination of approaches
17.10.17 As outlined above, an application of the deduction approach would leadto a reduction in the amount of available capital resources, whereas anapplication of the capital charge approach would result in an increase inregulatory capital requirements. Provided the two approaches are basedon a consistent economic assessment of the risk associated with therelevant assets, they would be expected to produce broadly similar
results regarding the overall assessment of the solvency position of theinsurer.
17.10.18 For some asset classes, it may be difficult to determine a sufficiently
reliable economic value or to assess the associated risks. Suchdifficulties may also arise where there is a high concentration of exposure
to a particular asset or type of assets or to a particular counterparty orgroup of counterparties.
17.10.19 A supervisor should choose the approach which is best suited to theorganisation and sophistication of the insurance sector and the nature of
the asset class and asset exposure considered. It may also combine
different approaches for different classes of assets. Whatever approachis chosen, it should be transparent and consistently applied. It is also
important that any material double counting or omission of risks under
the calculations for determining the amounts of required and available
regulatory capital is avoided.
Reconciliation of approaches
17.10.20 The approach to determining available capital resources as broadly theamount of assets over liabilities (with the potential adjustments as
discussed above) may be described as a “top-down” approach - iestarting with the high level capital as reported in the balance sheet andadjusting it in the context of the relevant solvency control level. An
alternative approach which is also applied in practice is to sum up theamounts of particular items of capital which are specified as being
acceptable. Such a “bottom-up” approach should be reconcilable to the“top-down” approach on the basis that the allowable capital items underthe “bottom-up approach” should ordinarily include all items which
contribute to the excess of assets over liabilities in the balance sheet,with the addition or exclusion of items as per the discussion in Guidance
17.10.8 - 17.10.19.
Other considerations
17.10.21 A number of factors may be considered by the supervisor in identifying
what may be regarded as capital resources for solvency purposes,
including the following:

26 This refers to the degree of inaccuracy and imprecision in the determination of the economic value
where observable values are not available, and estimation methodologies need to be applied. Sources
for this estimation uncertainty are for example the possibility that the assumptions and parameters usedin the valuation are incorrect, or that the valuation methodology itself is deficient.

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• the way in which the quality of capital resources is addressedby the supervisor, including whether or not quantitativerequirements are applied to the composition of capital
resources and/or whether or not a categorisation orcontinuum- based approach is used;• the coverage of risks in the determination of technicalprovisions and regulatory capital requirements;• the assumptions in the valuation of assets and liabilities(including technical provisions) and the determination ofregulatory capital requirements, eg going concern basis orwind-up basis, before tax or after tax, etc;
• policyholder priority and status under the legal framework
relative to other creditors in the jurisdiction;• overall quality of risk management and governanceframeworks in the insurance sector in the jurisdiction;• the comprehensiveness and transparency of disclosure
frameworks in the jurisdiction and the ability for markets toexercise sufficient scrutiny and impose market discipline;• the development of the capital market in the jurisdiction andits impact on the ability of insurers to raise capital;• the balance to be struck between protecting policyholders andthe impact on the effective operation of the insurance sector
and considerations around unduly onerous levels and costs ofregulatory capital requirements;• the relationship between risks faced by insurers and those
faced by other financial services entities, including banks.
Additional guidance for insurance groups and insurance legal entities that are
members of groups
17.10.22 The considerations set out in Guidance 17.10.3 - 17.10.21 above apply
equally to insurance legal entity and group-wide supervision. The
practical application of these considerations will differ according towhether a legal entity focus or a group level focus is taken to group-wide
supervision. Whichever approach is taken, key group-wide factors to beaddressed in the determination of group-wide capital resources include
multiple gearing, intra-group creation of capital and reciprocal financing,leverage of the quality of capital and fungibility of capital and freetransferability of assets across group entities. There may be particularconcerns where such factors involve less transparent transactions eg
because they involve both regulated and non-regulated entities or where
there is a continuous sequence of internal financing within the group, orclosed loops in the financing of the group.
Criteria for the assessment of the quality and suitability of capital resources
17.11

The supervisor establishes criteria for assessing the quality and suitabilityof capital resources, having regard to their ability to absorb losses on botha going concern and wind-up basis.

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17.11.1 In view of the two objectives of capital resources set out in Guidance
17.2.6, the following questions need to be considered when establishingcriteria to determine the suitability of capital resources for regulatory
purposes:• To what extent can the capital element be used to absorb
losses on a going concern basis or in run-off?
• To what extent can the capital element be used to reduce theloss to policyholders in the event of insolvency or winding-up?
17.11.2 Some capital elements are available to absorb losses in all
circumstances ie on a going concern basis, in run-off, in winding-up andinsolvency. For example, common shareholders' funds (ordinary sharesand reserves) allow an insurer to absorb losses on an ongoing basis, arepermanently available and rank as the most subordinate instruments ina winding-up. Further, this element of capital best allows insurers toconserve resources when they are under stress because it provides aninsurer with full discretion as to the amount and timing of distributions.
Consequently, common shareholders' funds are a core element of
capital resources for the purpose of solvency assessment.
17.11.3 The extent of loss absorbency of other capital elements can varyconsiderably. Hence, a supervisor should take a holistic approach toevaluating the extent of loss absorbency overall and should establish
criteria that should be applied to evaluate capital elements in this regard,
taking into account empirical evidence that capital elements haveabsorbed losses in practice, where available.
17.11.4 To complement the structure of regulatory capital requirements, thesupervisor may choose to vary the criteria for capital resources suitablefor covering the different solvency control levels established by thesupervisor. Where such an approach is chosen, the criteria relating tocapital resources suitable for covering an individual control level shouldhave regard to the supervisory intervention that may arise if the level isbreached and the objective of policyholder protection.
17.11.5 For example, considering that the main aim of the MCR is to provide theultimate safety net for the protection of the interests of policyholders, thesupervisor may decide to establish more stringent quality criteria for
capital resources suitable to cover the MCR (regarding such resources
as a “last line of defence” for the insurer both during normal times and inwind-up) than for capital resources to cover the PCR.
17.11.6 Alternatively, a common set of regulatory criteria for capital resources
could be applied at all solvency control levels, with regulatory capitalrequirements reflecting the different nature of the various solvency
control levels.
17.11.7 In assessing the ability of elements of capital to absorb losses, thefollowing characteristics are usually considered:• the extent to which and in what circumstances the capitalelement is subordinated to the rights of policyholders in an
insolvency or winding-up (subordination);

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• The extent to which the capital element is fully paid andavailable to absorb losses (availability);• the period for which the capital element is available(permanence); and• the extent to which the capital element is free from mandatory
payments or encumbrances (absence of encumbrances andmandatory servicing costs).
17.11.8 In the first bullet of Guidance 17.11.7 above, this characteristic isinherently linked to the ability of the capital item to absorb losses in theevent of insolvency or winding-up. The characteristics of permanence
and availability are relevant for loss absorbency under both going
concern and winding-up; taken together, they could be described as
being able to absorb losses when needed. The fourth characteristic is
related to the degree to which the capital is conserved until needed, andin the case of absence of mandatory serving costs is primarily relevant
for ensuring loss absorbency on a going concern basis.
17.11.9 The relationship between these characteristics is illustrated below:
Figure 17.5
Quality of capital

Loss absorbency

Loss absorbency undergoing concern

Loss absorbency underwinding-up
Subordination

Availability
Permanence

Absence of
encumbrances/mandatory servicing costs

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17.11.10 In the following Guidance, we examine how the characteristics ofcapital resources described above may be used to establish criteria foran assessment of the quality of capital elements for regulatory purposes.
It is recognised that views about the specific characteristics that are
acceptable may differ from jurisdiction to jurisdiction and will reflect,amongst other things, the extent to which the pre-conditions for effective
supervision exist within the jurisdiction and the risk tolerance of theparticular supervisor.
Subordination
17.11.11 To require that a capital element is available to protect policyholders, it
must be legally subordinated to the rights of policyholders and seniorcreditors of the insurer in an insolvency or winding-up. This means thatthe holder of a capital instrument is not entitled to repayment, dividends
or interest once insolvency or winding-up proceedings have been started
until all obligations to the insurer’s policyholders have been satisfied.
17.11.12 In addition, there should be no encumbrances that undermine thesubordination or render it ineffective. One example of this would beapplying rights of offset where creditors are able to set off amounts they
owe the insurer against the subordinated capital instrument. 27 Further,
the instrument should not be guaranteed by either the insurer or anotherrelated entity unless it is clear that the guarantee is available subject tothe policyholder priority. In some jurisdictions subordination to othercreditors may also need to be taken into account.
17.11.13 Each jurisdiction is governed by its own laws regarding insolvency andwinding-up. Common equity shareholders normally have the lowest
priority in any liquidating distribution of assets, immediately following
preferred shareholders. In some jurisdictions, insurers can issue
subordinated debt that provides protection to policyholders and creditors
in insolvency. While policyholders are often given a legal priority above
other creditors such as bondholders, this is not always the case; somejurisdictions treat policyholders and other creditors equally. Somejurisdictions rank obligations to the government (eg taxes) andobligations to employees, ahead of policyholders and other creditors.
Where creditors have secured claims, they may rank before
policyholders. The determination of suitable capital elements forsolvency purposes is critically dependent upon the legal environment of
the relevant jurisdiction.
17.11.14 The supervisor should evaluate each potential capital element in thecontext that its value and suitability, and hence an insurer’s solvency
position may change significantly in a wind-up or insolvency scenario. In
most jurisdictions the payment priority in a wind-up situation is clearlystated in law.
Availability
17.11.15 In order to satisfy the primary requirement that capital resources areavailable to absorb unforeseen losses, it is important that capitalelements are fully paid.

27 Rights of offset will vary according to the legal environment in a jurisdiction.

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17.11.16 However, in some circumstances, a capital element may be paid for “inkind” ie issued for non-cash. The supervisor should define the extent towhich payment other than cash is acceptable for a capital element to betreated as fully paid without prior approval by the supervisor and thecircumstances where payment for non-cash consideration may beconsidered as suitable subject to approval by the supervisor. There may,for example, be issues about the valuation of the non-cash components
or the interests of parties other than the insurer.
17.11.17 It may also be appropriate to treat certain contingent elements ofcapital as available capital resources in cases where the probability of
payment is expected to be sufficiently high (for example, the unpaid partof partly paid capital, contributions from members of a mutual insurer or
letters of credit, see Guidance 17.10.11).
17.11.18 Where a supervisor allows contingent elements of capital to be
included in the determination of capital resources, such inclusion would
be expected to be subject to meeting specific supervisory requirements
or prior supervisory approval. When assessing the appropriateness of
inclusion of a contingent element of capital, regard should be had to:• the ability and willingness of the counterparty concerned to
pay the relevant amount;• the recoverability of the funds, taking into account any
conditions which would prevent the item from being
successfully paid in or called up; and• any information on the outcome of past calls which have been
made in comparable circumstances by other insurers, which
may be used as an indication of future availability.
17.11.19 The availability of capital instruments may also be impaired whencapital is not fully fungible within an insurer to cover losses arising fromthe insurer’s business. Whereas the fungibility of capital andtransferability of assets is primarily an issue in the context of groupsolvency assessment, it may also be relevant for the supervision of an
insurer as a legal entity.
17.11.20 For example, this is the case where – as applies to certain forms ofwith-profit business in life insurance – part of the assets or surplus of theinsurer is segregated from the rest of its operations in a ring-fenced fund.
In such cases, assets in the fund may only be able to be used to meet
obligations to policyholders with respect to which the fund has been
established. In these circumstances, the insurer’s available capital
resources relating to the ring-fenced fund can only be used to coverlosses stemming from risks associated with the fund (until transferred outof that fund) and cannot be transferred to meet the insurer’s otherobligations.
Permanence
17.11.21 To provide suitable protection for policyholders for solvency purposes,
a capital element must be available to protect against losses for a
sufficiently long period to ensure that it is available to the insurer whenneeded. Supervisors may want to determine a minimum period that
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capital should be outstanding to be regarded as capital resources forsolvency purposes.
17.11.22 When assessing the extent of permanence of a capital element, regard
should be had to:• the duration of the insurer’s obligations to policyholders; 28• contractual features of the capital instrument which have aneffect on the period for which the capital is available, eg lockin clauses, step-up options or call options;• any supervisory powers to restrict the redemption of capital
resources; and• the time it might take to replace the capital element on suitableterms as it approaches maturity.
17.11.23 Similarly, if a capital element has no fixed maturity date, the noticerequired for repayment should be assessed against the same criteria.
17.11.24 It is important to take into account incentives to redeem a capitalelement prior to its maturity date which may exist in a capital element
and may effectively reduce the period for which the capital is available.
For example, a capital instrument which features a coupon rate which
increases from its initial level at a specified date after issue, may giverise to an expectation that the instrument will be paid back at that futurespecified date.
Absence from mandatory servicing requirements or encumbrances
17.11.25 The extent to which capital elements require servicing in the form ofinterest payments, shareholder dividend payments and principal
repayments should be considered, as it will affect the insurer’s ability toabsorb losses on a going concern basis.
17.11.26 Capital elements that have a fixed maturity date may have fixed
servicing costs that cannot be waived or deferred before maturity. The
presence of such features also affects the insurer’s ability to absorb
losses on a going concern basis and may accelerate insolvency if thepayment of a servicing cost results in the insurer breaching its regulatory
capital requirements.
17.11.27 A further consideration is the extent to which payments to capitalproviders or redemption of capital elements should be restricted or
subject to supervisory approval. For example, the supervisor may havethe ability to restrict the payment of dividends or interest and any
redemption of capital resources where considered appropriate topreserve the solvency position of the insurer. Insurers may also issue
capital instruments for which payments and redemptions are fully
discretionary or subject to supervisory approval according to thecontractual terms.
17.11.28 Some capital instruments are structured so as to restrict the payment
of dividends or interest and any redemption of capital resources where
28 The duration of the insurer’s obligations to policyholders should be assessed on an economic basis
rather than strict contractual basis.

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an insurer is breaching or near to breaching its regulatory capitalrequirements and/or is incurring loss. The payment of dividends orinterest may also be subordinated to policyholder interests in case ofwinding-up or insolvency. Such features will contribute to the ability of
the capital instrument to absorb losses on a wind-up basis provided thatany claims to unpaid dividends or interest are similarly subordinated.
17.11.29 It should also be considered whether the capital elements containencumbrances which may restrict their ability to absorb losses, such as
guarantees of payment to the capital provider or other third parties,
hypothecation or any other restrictions or charges which may prevent theinsurer from using the capital resource when needed. Where the capitalelement includes guarantees of payment to the capital provider or otherthird parties, the priority of that guarantee in relation to policyholders’rights should be assessed. Encumbrances may also undermine othercharacteristics such as permanence or availability of capital.
Determination of capital resources to meet regulatory capital requirements
17.11.30 Based on the assessment of the quality of the capital elements
comprising the total capital resources potentially available to the insurer,
the final capital resources suitable to meet the regulatory capitalrequirements can be determined.
17.11.31 Capital elements that are fully loss absorbent under both a going
concern and a wind-up perspective would generally be allowed to coverany of the different levels of regulatory capital requirements. However,the supervisor may choose to restrict the extent to which the stronger
solvency control levels (ie control levels which trigger more severe
supervisory interventions) may be covered by lower quality capital
resources or to establish minimum levels for the extent to which thesestronger requirements should be covered by the highest quality capital
resources. In particular, this applies to amounts of capital resources
which are intended to cover the MCR.
17.11.32 To determine the amount of an insurer’s capital resources, supervisors
may choose a variety of approaches:• approaches which categorise capital resources into different
quality classes (“tiers”) and apply certain limits/restrictions
with respect to these tiers (tiering approaches);• approaches which rank capital elements on the basis of theidentified
qualitycharacteristics(continuum-based
approaches); or• approaches which do not attempt to categorise or rank capitalelements, but apply individual restrictions or charges where
necessary.
To accommodate the quality of assets and quality of capital elements,
combinations of the above approaches have been widely used in various
jurisdictions for solvency purposes for insurance and other financial
sectors.
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17.11.33 To take into account the quality of capital instruments, a tiering
approach is commonly used in many jurisdictions and in other financial
sectors. Under a tiering approach, the composition of capital resources
is based on the categorisation of elements of capital according to thequality criteria set by the supervisor.
17.11.34 In many jurisdictions, capital elements are categorised into two or three
distinct levels of quality when considering criteria for, and limits on, thosecapital elements for solvency purposes. For example, one broad
categorisation may be as follows; 29• Highest quality capital - permanent capital that is fully
available to cover losses of the insurer at all times on a going
concern and a wind-up basis;• Medium quality capital - capital that lacks some of thecharacteristics of highest quality capital, but which provides adegree of loss absorbency during ongoing operations and issubordinated to the rights (and reasonable expectations) of
policyholders; and• Lowest quality capital - capital that provides loss absorbency
in insolvency/ winding-up only.
17.11.35 Under a tiering approach, the supervisor would set minimum or upper
levels for the extent to which required capital should comprise the various
categories or tiers (for example, high, medium, low) of capital elements.
Where established, the level may be expressed as a percentage ofrequired capital 30 (for example, a minimum level of 50% 31 of required
capital for high quality capital elements and/or an upper limit for lowest
quality capital might be 25% of required regulatory capital). There may
also be limits set on the extent to which required capital may becomprised of certain specific types of capital elements (for example,
perpetual subordinated loan capital and perpetual cumulative preference
share capital may be limited to 50% of required capital.)
17.11.36 What constitutes an adequate minimum or upper level may depend on
the nature of the insurance business and how the requirement interacts
with the various solvency control levels. A separation into tiers as set out
above assumes that all elements of capital can clearly be identified as
belonging to one of the specified tiers and that elements falling into anindividual tier will all be of the same quality. In reality, such distinctions
between elements of capital may not be clear cut and different elementsof capital will exhibit the above quality characteristics in varying degrees.
17.11.37 There are two potential policy responses to this fact. One is to set
minimum quality thresholds on the characteristics the capital must haveto be included in the relevant tier - as long as these thresholds are met
for a given element then it can be included in the relevant tier of capital
without limit. The other approach is to set minimum quality thresholds for
29 Capital elements categorised as being of highest quality are often referred to as core capital and lower

levels as supplementary capital, or similar.
30 Alternative approaches may also be used in practice, for example, where the levels are expressed asa percentage of available capital.
31 The percentages used may vary for supervisors in different jurisdictions
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limited inclusion in the relevant tier, but to set additional higher quality
thresholds for elements to be permitted to be included in that tier without
limit. This approach effectively sub-divides the tiers. It permits greater
recognition within a given tier for elements of capital which are more
likely to fulfil the quality targets specified for that tier.
17.11.38 Where a tiering approach is applied, this should ideally follow thedistinction between going concern capital and wind-up capital. Dividing
capital into these tiers is an approach that is also used in the context ofregulatory capital requirements for the banking sector.
Determination of capital resources to meet regulatory capital requirements –continuum-based approach
17.11.39 In other jurisdictions a continuum-based approach may be used inrecognising the differential quality of capital elements. Under thisapproach, elements of capital are not categorised, but rather ranked,
relative to other elements of capital on the basis of identified quality
characteristics set by the supervisor. The supervisor also defines theminimum acceptable level of quality of capital for solvency purposes andperhaps for different solvency control levels. In this way the capitalelements are classified from highest to lowest quality on a continuous
basis; only capital elements sitting above this defined minimum level on
the continuum, would be accepted as capital resources for solvency
purposes. Due consideration should again be given to the quality ofcapital elements to ensure that there is an appropriate balance of going
concern and wind-up capital.
Determination of capital resources to meet regulatory capital requirements - otherapproaches on determination of capital resources
17.11.40 The supervisor may also apply approaches that are not based on an
explicit categorisation of capital instruments, but more on an assessmentof the quality of individual capital instruments and their specific features.
For example, the terms of a hybrid capital instrument may not provide
enough certainty that coupon payments will be deferred in times ofstress. In such a case, the supervisor’s approach may limit (possibly
taking into account further quality criteria) the ability of that instrument tocover the regulatory capital requirements.
Determination of capital resources to meet regulatory capital requirements - choiceand combination of approaches
17.11.41 Each approach has advantages and disadvantages. Jurisdictions
should consider the organisation and sophistication of the insurance
sector and choose the best approach appropriate to the circumstances.
Whatever approach is used overall, it should be transparent and beconsistently applied so that capital resources are of sufficient quality ona going concern and a wind-up basis.
17.11.42 It is recognised that in some markets, only a limited range of
instruments (for example, pure equity) may meet the quality criteria set
out above. Accordingly, supervisors in such markets may wish to restrict
the range of instruments that may be included in capital resources forsolvency purposes or to apply procedures for prior approval as
appropriate.
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17.11.43 It is also important that the approach to the determination of capital
resources for solvency purposes is consistent with the framework andprinciples underlying the determination of regulatory capitalrequirements. This includes not only the implemented range of solvency
control levels but is also relevant with regard to the target criteria
underlying the regulatory capital requirements. In particular, the target
criteria for regulatory capital requirements and hence the approach todetermining capital resources should be consistent with the way in which
the supervisor addresses the two broad aims of capital from a regulatory
perspective as described in Guidance 17.2.6.
17.11.44 To illustrate this, suppose that in setting regulatory capitalrequirements the supervisor would consider the maximum probability
over a specified time period with which they are willing to let unforeseen
losses cause the insolvency of an insurer. In such a case, insurers would
need to maintain sufficient capital resources to absorb losses before
insolvency or winding-up occurs. Hence the determination of capital
resources would need to lay sufficient emphasis on the first objective
stated in Guidance 17.2.6 (loss absorbency under going concern), andcould not entirely rely on the second objective (loss absorbency solely
under insolvency or winding-up).
Additional guidance for insurance groups and insurance legal entities that are
members of groups
17.11.45 The considerations set out in Guidance 17.11.1 - 17.11.44 above apply
equally to insurance legal entity and group-wide supervision. See
Guidance 17.10.22 for additional guidance on the criteria for theassessment of the quality and suitability of capital resources for
insurance groups and insurance legal entities that are members ofgroups.
Multiple gearing and intra-group creation of capital
17.11.46 Double gearing may occur if an insurer invests in a capital instrumentthat counts as regulatory capital of its subsidiary, its parent or anothergroup entity. Multiple gearing may occur if a series of such transactions
exist.
17.11.47 Intra-group creation of capital may arise from reciprocal financing
between members of a group. Reciprocal financing may occur if an
insurance legal entity holds shares in or makes loans to another legal
entity (either an insurance legal entity or otherwise) which, directly or
indirectly, holds a capital instrument that counts as regulatory capital of
the first insurance legal entity.
17.11.48 For group-wide capital adequacy assessment with a group level focus,
a consolidated accounts method would normally eliminate intra-grouptransactions and consequently multiple gearing and other intra-group
creation of capital whereas, without appropriate adjustment, a legal entity
focus may not. Whatever approach is used, multiple gearing and otherintra-group creation of capital should be identified and treated in amanner deemed appropriate by the supervisor to largely prevent the
duplicative use of capital.
Leverage
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17.11.49 Leverage arises where a parent, either a regulated company or an
unregulated holding company, issues debt or other instruments which
are ineligible as regulatory capital or the eligibility of which is restricted
and down-streams the proceeds as regulatory capital to a subsidiary.
Depending on the degree of leverage, this may give rise to the risk that
undue stress is placed on a regulated entity as a result of the obligationon the parent to service its debt.
Fungibility and transferability
17.11.50 In the context of a group-wide solvency assessment, excess capital in
an insurance legal entity above the level needed to cover its own capitalrequirements may not always be available to cover losses or capitalrequirements in other insurance legal entities in the group. Free transfer
of assets and capital may be restricted by either operational or legal
limitations. Some examples of such legal restrictions are exchange
controls in some jurisdictions, surpluses in with-profits funds of life
insurers which are earmarked for the benefit of policyholders and rightsthat holders of certain instruments may have over the assets of the legal
entity. In normal conditions, surplus capital at the top of a group can be
down-streamed to cover losses in group entities lower down the chain.
However, in times of stress such parental support may not always beforthcoming or permitted.
17.11.51 The group-wide capital adequacy assessment should identify andappropriately address restrictions on the fungibility of capital andtransferability of assets within the group in both “normal” and “stress”
conditions. A legal entity approach which identifies the location of capitaland takes into account legally enforceable intra-group risk and capitaltransfer instruments may facilitate the accurate identification of, andprovision for, restricted availability of funds. Conversely an approach witha consolidation focus using a consolidated accounts method which starts
by assuming that capital and assets are readily fungible/transferable
around the group will need to be adjusted to provide for the restrictedavailability of funds.
General provisions on the use of an internal model to determine regulatory capitalrequirements
17.12

Where a supervisor allows the use of internal models to determine
regulatory capital requirements, the supervisor:• establishes appropriate modelling criteria to be used for thedetermination of regulatory capital requirements, which require
broad consistency among all insurers within the jurisdiction;and• identifies the different levels of regulatory capital requirements
for which the use of internal models is allowed.
17.12.1 Internal models can be considered in the dual contexts of:

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• a method by which an insurer determines its own economic
capital 32 needs; and• a means to determine an insurer's regulatory capital
resources and requirements, where appropriate.
In either case, the quality of the insurer’s risk management andgovernance is vital to the effective use of internal models. If the insurer
has supervisory approval, internal models can be used to determine theamount of the insurer’s regulatory capital requirements. However, an
insurer should not need supervisory approval, initial or ongoing, for
the use of its internal model in determining its own economic capitalneeds or management.
17.12.2 One of the main purposes of an internal model is to better integrate theprocesses of risk and capital management within the insurer. Amongother uses, internal models can be used to determine the economic
capital needed by the insurer and, if an insurer has supervisory approval,
to determine the amount of the insurer’s regulatory capitalrequirements. As a basic principle, an internal model that is to be used
for regulatory capital purposes should already be in established use fordetermining economic capital. The methodologies and assumptions
used for the two purposes should be consistent, any differences being
explainable in terms of the difference in purposes.
17.12.3 Where the supervisor allows a range of standardised and more tailoredapproaches for regulatory capital purposes, including internal models, aninsurer should have a choice as to which approach it adopts, 33 subject
to satisfying certain conditions established by the supervisor on the useof internal models for regulatory capital purposes.
17.12.4 Where there is a choice of approach allowed by a supervisor, it isinappropriate for an insurer to be able to adopt a process of “cherrypicking” between those approaches 34 – for example, by choosing to use
its model for regulatory capital purposes only when the model results ina lower capital requirement than a standardised approach. The IAIS
supports the use of internal models where appropriate as they can be amore realistic, risk-responsive method of calculating capitalrequirements, but discourages any “cherry-picking” practices by
insurers.
17.12.5 In particular, where the risk profile of an insurer which is using astandardised approach for calculating its regulatory capital requirements
is such that the assumptions underlying this approach are inappropriate,
the supervisor may use its powers to increase the insurer's capitalrequirement, or to require the insurer to reduce the risks it bears.
However, in such circumstances the supervisor should also consider
encouraging the insurer to develop a full or partial internal model which
32 Economic capital refers to the capital which results from an economic assessment of the insurer's

risks given the insurer’s risk tolerance and business plans.
33There are a number of considerations that the insurer would also have to make before deciding toinvest in constructing an internal model, one of which is cost. The IAIS is not advocating that all insurers
must have an internal model (although their use is encouraged where appropriate).
34 Refer to Guidance 17.12.14 in relation to “cherry-picking” in the particular context of partial internal
models.
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might enable its risk profile to be better reflected in its regulatory capitalrequirements.
17.12.6 Where the supervisor is aware that an insurer has an existing internal
model but has not sought approval to use it to calculate the regulatory
capital requirement, the supervisor should discuss this decision with theinsurer.
17.12.7 Effective use of internal models by an insurer for regulatory capital
purposes should lead to a better alignment of risk and capitalmanagement by providing incentives for insurers to adopt better risk
management procedures which can:• produce regulatory capital requirements that are more risk
sensitive and better reflect the supervisor’s target criteria; and• assist the integration of the internal model fully into theinsurer's strategic, operational and governance processes,
systems and controls.
Criteria for the use of an internal model to determine an insurer's regulatory capitalrequirements
17.12.8 Where a supervisor allows the use of internal models to determine
regulatory capital requirements, the supervisor should determine
modelling criteria, based upon the level of safety required by thesupervisor, to be used by an insurer adopting an internal model for that
purpose. These criteria should require broad consistency between all
insurers within the jurisdiction being based on the same broad level ofsafety requirements applied to the overall design and calibration of thestandardised approach to determining regulatory capital requirements.
Discussions with the insurance industry in a jurisdiction may also assistin achieving consistency. The supervisor should set out for which of thedifferent levels of regulatory capital requirements the use of internal
models is allowed and determine the modelling criteria for each level.
17.12.9 In particular, when considering whether an internal model may be usedin determining the MCR, the supervisor should take into account themain objective of the MCR (ie to provide the ultimate safety net for theprotection of policyholders) and the ability of the MCR to be defined in a
sufficiently objective and appropriate manner to be enforceable. If
internal models are allowed for determining the MCR, particular careshould be taken so that the strongest supervisory action that may benecessary if the MCR is breached can be enforced, for example if theinternal model is challenged in a court of law.
17.12.10 The IAIS does not prescribe specific solvency requirements which arecompulsory to all IAIS members. Notwithstanding this, the supervisor willneed to establish the appropriate modelling criteria to be used byinsurers to meet its regulatory capital requirements, and the insurer’s
internal models will need to be calibrated accordingly if used for that
purpose. The IAIS notes that some supervisors who allow the use ofinternal models to determine regulatory capital requirements have set a
confidence level for regulatory purposes, which is comparable with aminimum investment grade level. Some examples of modelling criteria
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include a 99.5% VaR 35 calibrated confidence level over a one year
timeframe, 36 a 99% TVaR37 over one year 38 and a 95% TVaR over theterm of the policy obligations. Different criteria apply for PCR and MCR.
17.12.11 If an internal model is used for regulatory capital purposes, the insurer
should ensure that its regulatory capital requirements determined by themodel are calculated in a way that is consistent with the objectives,principles and criteria used by the supervisor. For example, the insurer
may be able to apply the confidence level specified in the supervisors’modelling criteria directly to the probability distribution forecasts used in
its internal model. Alternatively, depending on the insurer’s own
modelling criteria for its economic capital, an insurer may have torecalibrate its internal model to the modelling criteria required by thesupervisor in order to use it for regulatory capital purposes. This will allow
internal models to have a degree of comparability to enable supervisors
to make a meaningful assessment of an insurer's capital adequacy,
without sacrificing the flexibility needed to make it a useful internal capitalmodel in the operation of the insurer's business. Further elaboration isprovided in Guidance 17.15.1 - 17.15.2.
17.12.12 It is noted that, due to the insurer-specific nature of each internal
model, internal models can be very different from each other.
Supervisors, in allowing the use of an internal model for regulatory capital
purposes, should preserve broad consistency of capital requirements
between insurers with broadly similar risks.
Partial internal models
17.12.13 The IAIS supports the use of partial internal models for regulatory
capital purposes, where appropriate. A partial internal model typicallyinvolves the use of internal modelling to substitute parts of astandardised approach for the determination of regulatory capitalrequirements. For example, an insurer could decide to categorise its
insurance contracts along business lines for modelling purposes. If theregulatory capital requirements for some of these categories are
determined by modelling techniques, while the capital requirements forother categories are determined using a standardised approach, thenthis would constitute the insurer using a partial internal model to calculate
regulatory capital.
17.12.14 Partial internal models are often used to smooth an insurer's transition
to full use of an internal model or to deal with instances such as themerger of two insurers, one of which uses an internal model, and theother which uses a standardised approach. Given the potential
complexity of a full internal model, use of a partial internal model could
be a satisfactory approach provided its scope is properly defined (and35 VaR – Value at Risk – an estimate of the worst expected loss over a certain period of time at a given
confidence level.
36 This is the level expected in Australia for those insurers that seek approval to use an internal model
to determine their MCR. It is also the level used for the calculation of the risk-based Solvency Capital
Requirement under the European Solvency II regime.
37 TVaR – Tail Value at Risk – the VaR plus the average exceedence over the VaR if such exceedence
occurs38 These are the modelling criteria of the Swiss Solvency Test.
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approved by the supervisor). Provided the reduced scope of the internal
model is soundly justified, the use of a partial internal model could beallowed as a permanent solution. However, as discussed above, there
could be a tendency for an insurer to adopt a “cherry-picking” approachin the use of internal models. This particularly applies where partial
modelling is allowed. The supervisor should place the onus on theinsurer to justify why it has chosen to only use internal models for certain
risks or business lines. Where this justification is not sound enough, thesupervisor should take appropriate action eg refuse or withdraw approvalof the model or impose a capital add-on until the model has developed
to a sufficient degree.
17.12.15 This ICP should be applied to both partial and full internal models.
Partial models should therefore be subject, as appropriate, to the fullrange of tests: the “statistical quality test”, “calibration test” and “use test”(see Guidance 17.13.1 - 17.17.8). In particular, an insurer should assess
how the partial internal model achieves consistency with the modelling
criteria specified by the supervisor for regulatory purposes. As part of theapproval process for regulatory capital use, an insurer should be
required to justify the limited scope of the model and why it considers
that using partial internal modelling for determining regulatory capitalrequirements is more consistent with the risk profile of the business than
the standardised approach or why it sufficiently matches regulatory
capital requirements. The insurer should clearly document the reasons
behind its decision to use partial internal models. If, for example, this is
to ease transition towards full internal models, the insurer should outline
a transitional plan, considering the implications for risk and capitalmanagement of the transition. Such plans and use of partial internal
models should be reviewed by the supervisor, who may decide to impose
certain restrictions on the partial model’s use for calculating regulatory
capital (for example, introducing a capital add-on during the transitional
period).
Additional guidance for group-wide internal models
17.12.16 Where a supervisor allows the use of group-wide internal models 39 todetermine regulatory capital requirements, the supervisor should
determine modelling criteria for such models, based upon the level ofsafety required by the supervisor applicable to an insurance group or an
insurance legal entity adopting an internal model for that purpose.
17.12.17 The modelling criteria for internal models for regulatory capital
purposes and the process for internal model approval that a supervisor
establishes should require broad consistency between group-wide

39 A group-wide internal model is a risk measurement system a group uses for its internal purposes toanalyse and quantify risks to the group as a whole as well as risks to the various parts of the group, todetermine the capital resources needed to cover those risks and to allocate capital resources acrossthe group. Group-wide internal models include partial models which capture a subset of the risks to thegroup and/or all the risks of a subset of the group. Group-wide internal models also include combinationsof models in respect of different parts of the group. An insurer’s internal model may be part of a broader
group-wide model rather than a standalone model.

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regulatory capital requirements and regulatory capital requirements ofindividual insurance legal entities.
17.12.18 Group-wide internal models can vary greatly depending on their groupspecific nature. In allowing the use of group-wide internal models forregulatory capital purposes, supervisors should preserve broadconsistency between insurance groups and insurers with broadly similarrisks eg insurance legal entities and insurance groups operating througha branch structure in a jurisdiction. The supervisor should designmodelling criteria and the process for model approval so as to maintainbroad consistency between the regulatory capital requirements
determined using internal models and standardised approaches.
17.12.19 The IAIS recognises that modelling criteria may differ amongsupervisors. For Insurance groups operating in multiple jurisdictions, thedegree of consistency in regulatory capital requirements across groupmembers may vary.
17.12.20 Each supervisor should set out for which group-wide regulatory capitalrequirements, corresponding to the solvency control level or levels which
apply to an insurance group, the use of group-wide internal models isallowed.
17.12.21 In particular, when the supervisor considers allowing the use of internal
models for the purpose of determining group-wide regulatory capitalrequirements at the MCR level, the issues relating to possible legal
challenges may differ from those encountered in respect of individual
insurance legal entities. For example, supervisors may need to work
together to establish and co-ordinate grounds for legal action in respectof the different insurance legal entities within a group.
Initial validation and supervisory approval of internal models
17.13

Where a supervisor allows the use of internal models to determine
regulatory capital requirements, the supervisor requires:• prior supervisory approval for the insurer’s use of an internal
model for the purpose of calculating regulatory capitalrequirements;• the insurer to adopt risk modelling techniques and approaches
appropriate to the nature, scale and complexity of its current
risks and those incorporated within its risk strategy andbusiness objectives in constructing its internal model for
regulatory capital purposes;• the insurer to validate an internal model to be used for regulatory
capital purposes by subjecting it, at least, to three tests:“statistical quality test”, “calibration test” and “use test”; and• the insurer to demonstrate that the model is appropriate forregulatory capital purposes and to demonstrate the results ofeach of the three tests.
Approval of the use of an internal model for determination of regulatory capitalrequirements

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17.13.1 Where insurers may be permitted to use internal models for calculating
regulatory capital requirements, the models used for that purpose should
be subject to prior supervisory approval. The onus should be placed on
the insurer to validate a model that is to be used for regulatory capital
purposes and provide evidence that the model is appropriate for those
purposes. The IAIS considers that an insurer should not needsupervisory approval for the use of internal models in determining its own
economic capital needs.
17.13.2 The supervisor may prescribe requirements which will allow it to assess
different models fairly and facilitate comparison between insurers within
its jurisdiction. However, overly prescriptive rules on internal model
construction may be counter-productive in creating models which arerisk-sensitive and useful for insurers. Therefore, although a certain levelof comparability can be achieved by the calibration requirements, full andeffective comparison across jurisdictions to align best practice may be
best achieved by dialogue between supervisors and industry.
17.13.3 The supervisor should require that in granting approval for the use of aninternal model to calculate regulatory capital requirements, it has
sufficient confidence that the results being produced by the model
provide adequate and appropriate measures of risk and capital. Although
the supervisor may encourage insurers to develop internal models that
better reflect their risks as soon as possible, this should not lead tomodels being approved until there is confidence that they are calibrated
correctly. The supervisor may therefore feel it necessary to evaluate aninternal model over a specified period of time, for example a few years,
prior to approval. For supervisors, approval of an internal model could
require considerable expertise (depending on the sophistication of themodel) which may need to be developed. In addition, it may benecessary to introduce different supervisory powers to allow the approvalof internal models.
17.13.4 The supervisor should use, at least, the “statistical quality test”,“calibration test” and “use test”, as the basis of its approval process.
While a broad range of internal model approaches may be suitable forinternal economic capital assessment purposes, and this should not be
subject to supervisory approval, supervisors may want to placerequirements on the internal model approaches that would be regarded
as acceptable for regulatory capital purposes. In approving the use of aninternal model for calculating regulatory capital requirements, thesupervisor should consider the primary role of the model as part of theinsurer's risk management procedures. Any requirements imposed by
the supervisor on the approval of a model for use in determining
regulatory capital requirements should not prevent the model from being
sufficiently flexible to be a useful strategic decision making tool whichreflects the insurer's unique risk profile. Consistent standards for theapproval of an insurer’s internal model should be applied by thesupervisor, regardless of whether the model is developed in-house by
the insurer or by an external party.
17.13.5 The “statistical quality test” and the “use test” are envisaged to be moreinsurer-specific measures which should allow the supervisor to gain anunderstanding of how a particular insurer has embedded its internal
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model within its business. The “calibration test” would be used by thesupervisor to assess the results from the internal model in comparison
to the insurer’s regulatory capital requirements and to those of otherinsurers.
17.13.6 In addition, the insurer should review its own internal model and validate
it so as to satisfy itself of the appropriateness of the model for use aspart of its risk and capital management processes. 40 As well as internal
review, the insurer may wish to consider a regular independent, external
review of its internal model by appropriate specialists.
Additional guidance for group-wide internal models
17.13.7 Each supervisor who permits the use of internal models for regulatory
capital purposes at legal entity and/or group level should require priorsupervisory approval for that purpose.
If an insurance group wishes to use its group-wide internal model for
regulatory capital purposes in more than one jurisdiction in which it
operates, the group may be subject to requirements that differ in a
number of ways. Examples of some areas of possible variation may
include:• modelling criteria (risk measure, time horizon, level of safety);• valuation bases for regulatory capital purposes;• the risks that have to be modelled;• treatment of intra-group transactions;• approach to group-wide capital adequacy (eg group level orlegal entity focus); and• recognition of diversification across the group.
A group-wide internal model therefore needs to be sufficiently flexible tomeet the differing requirements of each jurisdiction in which it is to be
used for regulatory capital purposes.
17.13.8 The involved supervisors of an insurance group that conducts insurance
business in more than one jurisdiction may consider their joint andcommon interests for the joint approval of the use of a group-wide
internal model for regulatory capital purposes. If so, it may improve theefficiency and effectiveness of the approval process if the supervisors
agree on common requirements for the process eg standardised
language or languages for the application process.
17.13.9 Alternatively, the supervisors may independently approve the use of agroup-wide internal model. Therefore, an insurance group seeking
approval for a group-wide internal model may receive permission fromone supervisor to use the model in that jurisdiction, while not receiving
approval in another jurisdiction.
17.13.10 Similarly, where an insurance legal entity operates in other jurisdictions
through a branch structure, the supervisors in those branch jurisdictions
40 Validation should be carried out by a different department or personnel to those that created theinternal model to facilitate independence.

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will have an interest in the solvency of the insurance legal entity. If local
branch supervisors in these jurisdictions are not satisfied with the capitalrequirements of the home supervisor, possibly because they are
determined using internal models, the local branch supervisors may
impose limitations on the branch operations. The home supervisor,
however, does not need to have the approval of the local branch
supervisors in order to approve the use of the insurance legal entity’s
internal model for its own purposes.
17.13.11 The degree of involvement of different supervisors in the approval
process depends on a number of factors as illustrated in Guidance
17.13.12 - 17.13.16.
17.13.12 In the simplest case, an insurance group operates in one jurisdiction
only. Clearly only the supervisor in that jurisdiction needs to be involvedin the group-wide internal model approval process. Where there is morethan one supervisor in a jurisdiction, eg where different insurance
activities of a group are supervised separately, then both may need to
be involved depending on the scope of the model. Nevertheless, someliaison with supervisors in other jurisdictions may be mutually beneficial
to facilitate convergence and comparability across jurisdictions in respectof internal model standards and practice.
17.13.13 In the case of an insurance group that operates in more than one
jurisdiction but only applies to use its group-wide internal model for
regulatory capital purposes in one jurisdiction, eg the parent’s
jurisdiction, the group does not need group-wide internal model approvalof other jurisdictions provided that it is using other approaches to meetthe capital requirements of those other jurisdictions. However, thesupervisor considering approval of the group-wide internal model may
wish to consult the other supervisors about the relevant insurance
markets, the group’s operations in those markets and the standard ofmodelling.
17.13.14 In the case of an insurance group that wishes to use its group-wide
internal model in more than one jurisdiction (eg to calculate insurance
legal entity PCRs), the supervisor of each of those jurisdictions should
consider approval of the specific application of the group-wide internal
model in its jurisdiction, having regard to the considerations in Guidance
17.13.15 - 17.13.18 below.
17.13.15 When considering approval of the use of a group-wide internal modelfor group-wide regulatory capital purposes, each supervisor should
consider:• its group-wide regulatory capital requirements;• whether and the extent to which its jurisdiction allows the useof internal models for regulatory capital purposes (eg PCR orboth PCR and MCR);• how its jurisdiction interacts with the other jurisdictions
potentially involved when supervisory intervention is being
considered; and• the arrangements for collaboration between the supervisors of
the legal entities within the insurance group.
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17.13.16 A supervisor may delegate the approval process to another supervisor
or agree to be bound by its decision while retaining supervisory
responsibility. Alternatively, a group-wide supervisor may have ultimate
decision-making authority over some or all of the supervisors involved. If
more than one jurisdiction is concerned, making such authority legallybinding may require a treaty between these jurisdictions. To be effective,
each arrangement requires a high level of collaboration between
supervisors. To require the model appropriately addresses all categories
of risk, the supervisor making the decision needs sufficient knowledge ofthe local circumstances in which the group operates.
17.13.17 Supervisors should require that the approval process for the use of agroup-wide internal model for regulatory capital purposes is sufficiently
flexible to achieve an approach appropriate to the nature, scale andcomplexity at each organisational level in an insurance group(group/sub-group/individual insurance legal entity). Risks which may
have a large impact at insurance legal entity level may have muchsmaller significance at insurance group level. Conversely, risks that may
have a small impact at insurance legal entity level may aggregate to havea larger impact on risk at the group level. The nature and complexity ofrisks may also vary at different levels in the insurance group.
17.13.18 Whether the group-wide internal model is appropriate for regulatory
purposes given the nature, scale and complexity of the risks depends on
the regulatory capital requirements of a jurisdiction. While the risk
coverage by an internal model may look reasonable from a group-wide
perspective, it may not be reasonable from the point of view of eachmember of the insurance group. For example, in a group of many nonlife insurers and one small life insurer it may be appropriate from an
overall perspective to place less emphasis on the modelling of the life
insurance risks. However this may not be appropriate from the life
insurer’s or supervisor’s perspective. In such circumstances, it may benecessary for the group to upgrade its model to include an adequate life
insurance risk component or to set up a self-contained internal model forthe life insurer in order to gain approval.
Statistical quality test for internal models
17.14

Where a supervisor allows the use of internal models to determine
regulatory capital requirements, the supervisor requires:• the insurer to conduct a “statistical quality test” which assesses
the base quantitative methodology of the internal model, todemonstrate the appropriateness of this methodology, including
the choice of model inputs and parameters, and to justify theassumptions underlying the model; and• that the determination of the regulatory capital requirement
using an internal model addresses the overall risk position of theinsurer and that the underlying data used in the model isaccurate and complete.
17.14.1 Given the importance of an embedded internal model to an insurer's risk
management policy and operations, an internal model would generally
be constructed to deliver a probability distribution of the required risk
capital rather than a “point estimate”. A range of approaches could

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constitute an effective internal model for risk and capital management
purposes, and supervisors should encourage the use of a range ofdifferent approaches appropriate to the nature, scale and complexity ofdifferent insurers and different risk exposures. There are several different
techniques to quantify risk which could be used by an insurer to construct
its internal model. In broad terms, these could range from basic
deterministic scenarios to complex stochastic models. Deterministic
scenarios would typically involve the use of stress and scenario testingreflecting an event, or a change in conditions, with a set probability tomodel the effect of certain events (such as a drop in equity prices) on theinsurer's capital position, in which the underlying assumptions would be
fixed. In contrast, stochastic modelling often involves simulating verylarge numbers of scenarios in order to reflect the likely distributions of
the capital required by, and the different risk exposures of, the insurer.
17.14.2 The IAIS recognises that there are numerous methodologies which an
insurer could use as part of its stress and scenario testing. For example,
an insurer may decide to model the effect of various economic scenarios,
such as a fall in equity prices or a change in interest rates, on its assets
and liabilities. Alternatively, an insurer could consider a run-off approach,where the effect of various scenarios on a specific portfolio of businessas it is run-off is examined. The insurer should use scenarios which it
regards as most appropriate for its business. Where the internal modelis used for regulatory capital purposes, the onus is on the insurer todemonstrate to the supervisor that the chosen methodology isappropriate to capture the relevant risks for its business. This includes
testing of the model to require that it can replicate its results on request
and that its response to variation in input data is adequate such as that
corresponding to changes in base or stress scenarios. Overall capitalrequirements derived from an internal model can be highly sensitive toassumptions on the effect of diversification across risks. Supervisors andinsurers should therefore give particular consideration to aggregation
issues. Conducting stress and scenario testing to determine the effect ofshocks may be a suitable tool to validate statistical assumptions.
17.14.3 Where an internal model is established to assess risks at a modular level,
ie on a risk-by-risk basis, in order to conduct an overall risk assessment,
the insurer should aggregate the results for each of these risks bothwithin and across business lines. Several methods exist to aggregate theseparate results allowing for diversification effects. The IAIS considers
that an insurer would generally be expected to decide how best to
aggregate and account for the risks to the whole of its business. The
determination of overall regulatory capital requirements by the internal
model should consider dependencies within, as well as across, risk
categories. Where the internal model allows for diversification effects,
the insurer should be able to justify its allowance for diversification effects
and demonstrate that it has considered how dependencies may increase
under stressed circumstances.
17.14.4 Internal models need high quality data in order to produce sufficiently
reliable results. The data used for an internal model should be current
and sufficiently credible, accurate, complete and appropriate. Hence, a“statistical quality test” should examine the appropriateness of theunderlying data used in the construction of the internal model. A
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“statistical quality test” would include the examination of the aggregationof data, the modelling assumptions and the statistical measures used toconstruct the internal model. This could include an annual (or more
frequent) review of the various items that are being measured (claims,
lapses, etc.) updated for the additional data available together with ascrutiny of data from previous periods to determine whether this data
continues to be relevant. Older data may no longer be relevant possibly
due to changes in risks covered, secular trends or policy conditions andguarantees attaching. Similarly, new data may not be of substantive use
when modelling items that require a long-term view of experience (suchas testing the predictions of cash flows for catastrophic events).
17.14.5 An insurer may not always have sufficient reliable data in-house. In
instances where an insurer lacks fully credible data it may rely on
industry or other sufficiently credible data sources to supplement its own
data. For example, a new company may lack its own historical data andso could use market data sources in constructing its internal model.
Some supervisors have published jurisdictional data which may be ofsome use.
17.14.6 Another possible source of data may be from reinsurers - whose datapool is typically larger and covers a wider spectrum of the market. It is,however, important to consider that such industry data may not be
entirely appropriate for all insurers. Reinsurers often only receive data inaggregated form and sometimes are only informed of larger claims orfrom smaller insurers whose market may not be applicable for all or many
insurers. Therefore, any data not specific to the insurer would need to becarefully considered before deciding it was appropriate for use as thebasis for an insurer's “statistical quality test”. Even where deemed
appropriate, it may still be necessary to adjust the data to allow fordifferences in features between the data source and the insurer.
17.14.7 In assessing suitability of data and of other inputs, eg assumptions, tothe internal model, expert judgment should be applied and supported byproper justification, documentation and validation.
17.14.8 As part of the “statistical quality test”, the insurer should be able todemonstrate that the base quantitative methodology used to construct
its internal model is sound and sufficiently reliable to support the model'suse, both as a strategic and capital management tool, and to calculate
the insurer's regulatory capital requirements, if appropriate. The
methodology should also be consistent with the methods used to
calculate technical provisions.
17.14.9 A “statistical quality test” should also include a review of the internal
model to determine whether the assets and products as represented in
the model truly reflect the insurer's actual assets and products. Thisshould include an analysis of whether all reasonably foreseeable andrelevant material risks have been incorporated, including any financial
guarantees and embedded options. Insurers should also consider
whether the algorithms used are able to take into account the action ofmanagement and the reasonable expectation of policyholders. Testingshould include future projections within the model and to the extent
practicable “back-testing” (the process of comparing the predictions fromthe model with actual experience).
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Additional guidance for group-wide internal models
17.14.10 For use in determining the regulatory capital requirements of an
insurance legal entity, a group-wide internal model should meet thesame standards as applicable to a stand-alone internal model of that
insurer.
17.14.11 For use for group-wide regulatory capital requirements, groupmembers should be sufficiently engaged with a group-wide internal
model and its application to their businesses (through their input to themodel, local Board involvement, capital allocation, performancemeasurement etc.), even if the insurance group does not use the model
to determine the regulatory capital requirements of individual groupmembers.
Calibration test for internal models
17.15

Where a supervisor allows the use of internal models to determine
regulatory capital requirements, the supervisor requires the insurer to
conduct a “calibration test” to demonstrate that the regulatory capitalrequirement determined by the internal model satisfies the specified
modelling criteria.
17.15.1 As part of a “calibration test”, where an internal model is used for
determining regulatory capital, the insurer should assess the extent towhich the output produced by its internal model is consistent with themodelling criteria defined for regulatory capital purposes, and hence,
confirm the validity of using its internal model for that purpose.
17.15.2 The “calibration test” should be used by the insurer to demonstrate thatthe internal model is calibrated appropriately to allow a fair, unbiased
estimate of the capital required for the particular level of confidence
specified by the supervisor. Where an insurer uses different modelling
criteria than those specified by the supervisor for regulatory capital
purposes, it may need to recalibrate its model to the supervisor’s
modelling criteria to achieve this.
Additional guidance for group-wide internal models
17.15.3 See Guidance 17.14.10 and 17.14.11 for additional guidance for groupwide internal models.

Use test and governance for internal models
17.16

Where a supervisor allows the use of internal models to determine
regulatory capital requirements, the supervisor requires:•the insurer to fully embed the internal model, its methodologies
and results, into the insurer’s risk strategy and operational
processes (the “use test”);• the insurer's Board and Senior Management to have overall
control of and responsibility for the construction and use of theinternal model for risk management purposes, and ensuresufficient understanding of the model's construction at
appropriate levels within the insurer's organisational structure.
In particular, the supervisor requires the insurer’s Board andSenior Management to understand the consequences of the
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internal model's outputs and limitations for risk and capitalmanagement decisions; and• the insurer to have adequate governance and internal controls
in place with respect to the internal model.
17.16.1 In considering the use of an internal model for regulatory capital
purposes by an insurer, the supervisor should not merely focus on its
use for that narrow purpose, but should consider the wider use of theinternal model by the insurer for its own risk and capital management.
17.16.2 The “use test” is the process by which the internal model is assessed interms of its application within the insurer's risk management andgovernance processes. In order for the insurer’s internal model to be
most effective it should be genuinely relevant for use within its businessfor risk and capital management purposes.
17.16.3 Where an insurer decides to adopt a higher confidence level than thelevel required for regulatory capital purposes for its own purposes, forexample, in order to maintain a certain investment grade rating, then“calibration” testing should also be conducted by the insurer to allow theinsurer to determine the level of capital needed at this higher level. The
insurer should then assess whether holding this amount of capital isconsistent with the insurer's overall business strategy.
17.16.4 The insurer should have the flexibility to develop its internal model as animportant tool in strategic decision making. An insurer should therefore
have the flexibility to use the most appropriate risk measure andmodelling techniques in its internal models. It may be beneficial if theinsurer is able to demonstrate why it has chosen a particular risk
measure, and it should include in its internal model an appropriate
recalibration or reconciliation, if necessary, between the modelling
criteria used in the model for its own risk and capital management
purposes and those set by the supervisor for regulatory capital purposes.
Differences between the economic capital and the regulatory capitalrequirements should be explicit and capable of being explained by the
insurer to its Board and the supervisor.
17.16.5 The “use test” is a key method by which the insurer can demonstrate thatits internal model is integrated within its risk and capital management
and system of governance processes and procedures. As part of the“use test”, an insurer should examine how the internal model is used for
operational management purposes, how the results are used to influence
the risk management strategy and business plan of the insurer, and how
Senior Management are involved in applying the internal model inrunning the business. An insurer should demonstrate to the supervisor
that an internal model used for regulatory capital purposes remains
useful and is applied consistently over time and that it has the full supportof and ownership by the Board and Senior Management.
17.16.6 The insurer's Senior Management should take responsibility for thedesign and implementation of the internal model, in order to ensure fullembedding of the model within the insurers' risk and capital management
processes and operational procedures. The methodology used inbuilding the model should be compatible with the overall enterprise risk
management framework agreed to by the Board and Senior
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Management. Although the Board and Senior Management may not beable to de-construct the internal model in detail, it is important that theBoard has overall oversight of the model's operation on an ongoing basis
and the level of understanding necessary to achieve this. The Board andSenior Management should also ensure that processes are in place toupdate the internal model to take into account changes in the insurer's
risk strategy or other business changes.
17.16.7 Various business units within the insurer may be involved in theconstruction and operation of the internal model, such as risk
management, capital management, finance and actuarial departments,
depending on the size of the insurer. The experience and technical abilityof staff involved in the construction and operation of the internal model
should be an important consideration for the insurer. For a model to pass
the “use test” it would be expected that an insurer would have aframework for the model's application across business units. This
framework should define lines of responsibility for the production and useof information derived from the model. It should also define the purpose
and type of management information available from the model, thedecisions to be taken using that information, and the responsibilities fortaking those decisions. The “use test” should also ensure the adequacy
of systems and controls in place for the maintenance, data feeds andresults of the model. The IAIS notes that internal models may requiresignificant IT resources and costs, which should be a consideration for
the insurer in developing its models.
17.16.8 The IAIS considers that governance processes and communication in
respect of an internal model are as important as its construction. An
internal model should be subject to appropriate review and challenge sothat it is relevant and reliable when used by the insurer. The key
elements and results from the internal model should be understood by
the key personnel within the insurer, including the Board, and not onlyby those who have constructed it. This understanding should ensure thatthe internal model remains a useful decision-making tool. If the internal
model is not widely understood, it will not be achieving its purpose andadding value to the business. The “use test” is key in ensuring therelevance of the internal model to the insurer’s business.
Additional guidance for group-wide internal models
17.16.9 See Guidance 17.14.10 and 17.14.11 for additional guidance for groupwide internal models.
Documentation for internal models
17.17

Where a supervisor allows the use of internal models to determine
regulatory capital requirements, the supervisor requires the insurer todocument the design, construction and governance of the internal model,
including an outline of the rationale and assumptions underlying its
methodology. The supervisor requires the documentation to be sufficient
to demonstrate compliance with the regulatory validation requirements forinternal models, including the statistical quality test, calibration test anduse test outlined above.
17.17.1 The insurer should document the design and construction of the internal
model sufficient for a knowledgeable professional in the field to be able

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to understand its design and construction. This documentation should
include justifications for and details of the underlying methodology,
assumptions and quantitative and financial bases, as well as informationon the modelling criteria used to assess the level of capital needed.
17.17.2 The insurer should also document, on an ongoing basis, thedevelopment of the model and any major changes, as well as instanceswhere the model is shown to not perform effectively. Where there isreliance on an external vendor/supplier, the reliance should be
documented along with an explanation of the appropriateness of the useof the external vendor/supplier.
17.17.3 The insurer should document the results of the “statistical quality test”,“calibration test” and “use test” conducted to enable the supervisor toassess the appropriateness of its internal model for regulatory capital
purposes.
Additional guidance for group-wide internal models
17.17.4 In view of the potential complexity of a group-wide internal model, theflexibility required and the potential need for multiple supervisory
approvals, it is essential that the group fully document all aspects of thegroup-wide internal model clearly and unambiguously. This enables
supervisors to identify what is approved and what is not approved.
Supervisors should require the insurance group to provide thoroughdocumentation of the scope of an internal model, clarifying what falls
within and outside of the model boundaries and what parts of the group
universe are modelled. Supervisory authorities should know theboundary to the internal model.
17.17.5 The documentation of the group-wide internal model should include atleast:• a full description of the risk profile of the insurance group andhow the group models those risks, including the underlying
central assumptions and methods;• the parts, entities and geographical locations of the insurancegroup and which are included or excluded from the scope ofthe model submitted for approval;• specification of which risks are modelled, with particular focus
on group-wide risks;• intra-group transactions such as (subordinated) loans andother hybrid instruments together with their different level oftriggers, guarantees, reinsurance, capital and risk transfer
instruments, contingent assets and liabilities; off-balance
sheet items and special purpose entities;• the effect of these instruments, either on individual insurance
legal entities or on the insurance group considered as one
single economic entity or on both, depending on supervisory
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• the flexibility of the model architecture to cope with central
assumptions ceasing to be valid;• more generally the insurance group’s processes for validating,
maintaining and updating the model including the use ofstress testing and scenario analysis and the results of thosetests and analyses;• how the model allows for and models fungibility of capital,transferability of assets and liquidity issues, the assumptions
made especially regarding the treatment of intra-grouptransactions and the free flow of assets and of liabilities acrossdifferent jurisdictions, and how the group uses the model foran analysis or a qualitative assessment of liquidity issues; and• the allocation of capital to insurance legal entities implied by
the group-wide model and how this would change in times ofstress for insurance groups established in more than one
jurisdiction. Such allocation is required by supervisors, even if
an insurance group uses a different allocation, eg by region orbusiness line, for management purposes.
17.17.6 If elements are omitted from the group-wide internal model, thesupervisors should require an explanation within the required
documentation, for example if and why a standardised approach is used
for some insurance legal entities, lines of business or risks.
17.17.7 The supervisors should require the insurance group to provide
documentation describing whether and how the modelling is consistentover different jurisdictions or insurance legal entities regarding, forexample, modelling criteria, risks, lines of business, intra-grouptransactions or capital and risk transfer instruments (CRTIs) with suitable
explanations for any differences in approach.
17.17.8 Diversification/concentration of risks means that some risks or positions
are offset or increased by other risks or positions. The supervisors should
require, within the framework of the required internal model
documentation, a description of how the insurance group:• incorporates diversification/concentration effects at therelevant different levels within the group-wide internal model;• measures such effects in normal and in adverse conditions;• confirms those measurements for reasonableness, and• allocates diversification effects across the group according tosupervisory requirements.
Credit for diversification effects should only be allowed whereappropriate having regard to risk correlations in adverse financial
conditions.
Ongoing validation and supervisory approval of the internal model
17.18

Where a supervisor allows the use of internal models to determine
regulatory capital requirements, the supervisor requires:

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• the insurer to monitor the performance of its internal model andregularly review and validate the ongoing appropriateness of themodel’s specifications. The supervisor requires the insurer todemonstrate that the model remains fit for regulatory capital
purposes in changing circumstances against the criteria of thestatistical quality test, calibration test and use test;• the insurer to notify the supervisor of material changes to theinternal model made by it for review and continued approval of
the use of the model for regulatory capital purposes;• the insurer to properly document internal model changes; and• the insurer to report information necessary for supervisory
review and ongoing approval of the internal model on a regularbasis, as determined appropriate by the supervisor. The
information includes details of how the model is embedded
within the insurer’s governance and operational processes andrisk management strategy, as well as information on the risks
assessed by the model and the capital assessment derived fromits operation.
17.18.1 Over time an insurer's business may alter considerably, as a result ofinternal factors or events (such as a change in insurer strategy) andexternal factors or events (such as a change in interest rates), so thatthe internal model may no longer fully capture the risks to which theinsurer is exposed unless adapted. The supervisor should reassess aninsurer's internal model and the results that it produces on a regular basis
against the criteria of the statistical quality test, calibration test and use
test so that it remains valid for use, both as a strategic decision-making
tool in the context of the insurer’s own risk and capital management, andas a means of calculating regulatory capital requirements whereappropriate. In general only material changes to the model (such aschanging the underlying model structure or the risk measure used) or to
the risks faced by the insurer should require the model to be reassessedby the supervisor. A “model change policy” could be agreed between the
supervisor and the insurer regarding the degree and timing of changes
made to the internal model. This would enable the insurer to enact minorchanges to its internal model without seeking prior supervisory approval(provided the changes are in accordance with the agreed policy), thereby
allowing the model to be updated in a quicker and more flexible way.
17.18.2 The insurer should be required to notify the supervisor of materialchanges to the internal model and to properly document changes toenable the supervisor to assess, for continued approval, the ongoingvalidity of the model for use in determining regulatory capitalrequirements. Following any material changes to an internal model, thesupervisor may give the insurer a reasonable amount of time so that the
updated model is embedded in its risk strategies and operational
processes.
17.18.3 The insurer should demonstrate that the data used in the internal model
remains appropriate, complete and accurate for this purpose.
17.18.4 The supervisor should take care that its ongoing validation requirements
do not unduly restrict the use of the internal model by the insurer for its
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own risk and capital management purposes and thereby reduce its ability
to comply with the use test.
Additional guidance for group-wide internal models
17.18.5 The insurance group should adjust the model for material changes ingroup composition and operations, including mergers, acquisitions andother structural changes of affiliated entities or jurisdictional changes.
17.18.6 The supervisor should require the insurance group to provide
documentation of material changes in group operations and the reasons
why continued use of the group-wide internal model would remain
appropriate following the change. If such reasons cannot be given or are
not sufficient the supervisor should require the group to propose
appropriate model changes as a result of the material change for reassessment of approval by the supervisor.
Supervisory responsibilities
17.18.7 The IAIS considers that it is essential that supervisors are able tounderstand fully the insurers' internal models and be able to appraise
their quality. To this end, the supervisor should have access toexperienced personnel with appropriate technical ability, as well as
sufficient resources. It is likely to take time for supervisors to acquire thenecessary experience to appraise an insurer’s internal model. Without
the experience and resources, the supervisor may be unable to reliably
approve the use of an insurer’s internal model for regulatory purposes.
The supervisor may wish to use external specialists that are considered
to have the appropriate experience, such as actuarial consultants,
accountancy firms and ratings agencies, to assist it in reviewing an
insurer's internal models. In such instances, the supervisor should retain
the final responsibility for review and approval of the use of the internal
model for regulatory purposes.
17.18.8 It may be appropriate for a supervisor to consider transitional measureswhen permitting insurers to use internal models for regulatory capital
purposes for their first time. Such measures will permit the necessary
time for both insurers and the supervisor to become familiar with theinternal models and their uses. For example, during a transition period,
the supervisor could include the use of partial internal modelling, to allow
the insurer to move gradually to full use of internal models or thesupervisor could require parallel reporting of regulatory capital
determined by both the internal model and standardised approach. The
supervisor may also consider applying a minimum capital level during
the transition period.
17.18.9 The supervisor may need to impose additional capital requirements(capital add-ons) or take other supervisory action to address any
identified weaknesses in an internal model, either prior to approving theuse of the model, as a condition on the use of the model or in the context
of a review of the ongoing validity of an internal model for regulatory
capital purposes. It may be necessary to introduce additional supervisory
powers, to allow such supervisory actions and measures, when internal
models are allowed for regulatory capital purposes by a supervisor.

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17.18.10 Where an insurer which is a subsidiary of an insurance group seeks
approval for the use of an internal model which itself is part of a broader“group model”, the supervisor of this subsidiary should conduct theapproval process in close co-operation with the group-wide supervisor.
In particular, the supervisor of the subsidiary should check the status of
the “group model” and seek information from the group-wide supervisor
about its own approval process.
Supervisory reporting
17.18.11 For supervisory approval purposes, supervisors should require theinsurer to submit sufficient information for them to be able to approvethe use of the internal model for regulatory capital purposes and to giveconfidence to the supervisor that the insurer is appropriately carrying out
its responsibility to manage its risks and protect the interests ofpolicyholders. This should include the results of analysis conductedunder the “statistical quality test”, “calibration test” and “use test”. While
supervisors should have the power to determine the exact nature andscope of the information they require, supervisory reporting should beappropriate to the nature, scale and complexity of an insurer's business.
17.18.12 The level of information on internal models necessary to allow
meaningful assessment by supervisors would be expected to include
appropriate information regarding the insurer's risk and capitalmanagement strategy – for example, how the model is embedded into
the insurer's governance procedures, overall business strategy,
operational procedures and risk processes. An insurer should reportdetails of the risks assessed by the model, including how these are
identified and measured, as well as information on the results of theinternal model analysis, the economic capital derived from these results
and how the results of the internal model compare to those derived fromthe supervisory standardised approach. 41

41 Supervisors may consider that the comparison between the capital requirements from an internal

model and a supervisory standardised approach should only be required during a transition period.

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Intermediaries
The supervisor sets and enforces requirements for the conduct of insuranceintermediaries, in order that they conduct business in a professional andtransparent manner.
18.0
Introductory Guidance
18.0.1

There is a diverse range of organisations and individuals carrying out
insurance intermediation, and channels through which this isundertaken. In order to ensure consumer protection and to promote alevel playing field amongst these actors, this ICP applies to thesupervision of those conducting the activity of insurance intermediation.
Some of the Standards under this ICP apply to the supervision of theindividuals providing insurance intermediation services to customers.
Other Standards apply to the organisation within which the insuranceintermediation is carried out; where this is the case, it is made clear in
the corresponding guidance. Where an insurer’s direct sales staff solicit,
negotiate or sell insurance as employees of the insurer, the supervisor
would apply the relevant Standards to the insurer.

18.0.2

Some intermediaries do not have direct contact with the customer but
act with other intermediaries to place business with insurers (such as
wholesale intermediaries). Even though they do not necessarily deal
directly with the purchaser of insurance, they perform one of thefunctions in the chain of soliciting, negotiating or selling insurance, andare within the scope of this ICP.

18.0.3

Where the Standards under this ICP apply to the intermediary as anorganisation, the supervisor should hold those responsible for theintermediary’s governance to account for implementation of therequirements.

18.0.4

Individuals or organisations which only refer (or introduce) potential
customers to an insurer or insurance intermediary, without carrying out
insurance intermediation, are excluded from the scope of this ICP. Also
excluded from the scope are persons, such as tax advisers or
accountants, who in conducting another professional activity provide:• advice on insurance cover on an occasional basis in thecourse of that other activity; or• information of a general nature on insurance products (without
advising on the choice of insurance product provider),provided that the purpose of that professional activity is not tointermediate an insurance contract.

18.0.5

Insurance intermediaries may also perform functions supplemental toinsurance intermediation, many of which may be described as
outsourced functions of the insurer. These supplemental functions may
include underwriting, premium collection, administration, management of
insurance claims, loss adjusting and claims appraisal. These functions
are excluded from the IAIS definition of insurance intermediation.

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However, in some jurisdictions these supplemental functions areincluded in their definition of insurance intermediation. The outsourcingof processes that are relevant to business conduct is addressed in other
ICPs (see ICP 19 Conduct of Business and – for insurers – ICP 8 Risk
Management and Internal Controls).
18.0.6

Insurance intermediation involves the interface between insurers andcustomers. Effective assessment of the quality of insuranceintermediation to a large extent requires supervisory consideration ofpolicies, processes and procedures that relate to individual customer
relationships and individual transactions.

18.0.7

Where intermediaries are part of a group, the application of appropriate
policies and processes on insurance intermediation should be consistentacross the group, recognising local requirements and specificities, andshould result in the fair treatment of customers on a group-wide basis.

Proportionality with regard to intermediaries
18.0.8Intermediation systems and practices are closely linked with jurisdictions’tradition, culture, legal regime and the degree of development of
insurance markets. For this reason, supervisory approaches toinsurance intermediation also tend to vary. Such diversity should betaken into consideration in implementing this ICP in order to promote thefair treatment of customers.

18.0.9In implementing this ICP, the supervisor should take into account that
there are various business models ranging from sole traders to large
enterprises, including specialist wholesale or reinsurance intermediaries.

18.0.10 The nature of the customers with which an intermediary interacts and thecomplexity of the products offered are also relevant to the supervisory
approach. Retail customers, in particular vulnerable consumers, havedifferent needs in terms of consumer protection than professional ones;
life products with an investment element are typically more complex than
general personal lines products.
18.0.11 In light of market diversity, in implementing this ICP, the supervisor
should consider focusing on the activity carried out by the intermediary,
to ensure consistency and minimise the opportunity for regulatory
arbitrage.
18.0.12 Supervisors are faced with balancing the need for consumers to receive
an appropriate level of protection and the benefits of innovation andcompetition. The supervisor should consider whether its licensing andsupervisory requirements impose unreasonable barriers to entry forsmall or emerging intermediary businesses, or inhibit beneficial
innovations, and thereby limit the accessibility of insurance coverage toconsumers.
Types of intermediaries
18.0.13 Intermediaries fall into two categories: i) acting primarily on behalf of theinsurer; or ii) acting primarily on behalf of the customer:• Where the intermediary acts primarily on behalf of the insurerand sells products for, and on behalf of, one or more insurers,
they are often referred to as “agent” or “producer”.
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Intermediaries may act for a single insurer (sometimes
referred to as “tied”) or several. The products they can offer
may be restricted by agency agreements with the insurer(s)concerned.
• Where the intermediary acts primarily on behalf of thecustomer, the intermediary is independent of the insurer(s)whose products he sells. Often referred to as “broker”, or“independent financial adviser”, they are able to selectproducts from those available across the market.
18.0.14 Some supervisors do not distinguish between different intermediary
categories in legislation and instead supervise according to the activity
performed. In some jurisdictions, it may be possible for an intermediaryto have a different status depending on the customer relationship andthe product or service being offered. In others, an intermediary is
prevented from acting in any capacity other than the one in which it has
been licensed to do business, in order to avoid conflicts of interest.
18.0.15 Intermediary operations range from large international organisations tolocal sole traders. Intermediary organisations sometimes operate as
independent enterprises or divisions of insurers or other financial
institutions, or as part of non-financial organisations. Insuranceintermediation may also be performed by digital means, such as website
and mobile phone applications.
18.0.16 Insurers use various distribution channels to market and sell insurance
products. These can include a variety of partners - such as car
dealerships, post offices, mobile phone operators, travel agents, otherfinancial institutions and other retailers - who offer insurance alongsideor as an add-on to the primary goods and services in which they trade.
In many cases the activities of these distribution channels would
constitute intermediation.
Intermediaries’ role in promoting public trust and confidence in the insurance sector
18.0.17 In most insurance markets, intermediaries serve as important distribution
channels of insurance. Their good conduct and professional competence
are essential to promote confidence in insurance markets.
18.0.18 It is in the interests of supervisors, in promoting fair, safe and stable
insurance markets, that the public has trust and confidence in theinsurance sector. Insurance intermediaries’ interface between
consumers and insurers gives them a key role in building and justifying
this public trust and confidence.
18.0.19 In some jurisdictions, intermediaries’ duty to act in a professional andtransparent manner is supported by professional bodies and otherinterested organisations. Such organisations encourage, amongst otherthings, the obtaining of professional qualifications, continuous
professional development, ethical behaviour, the fair treatment ofcustomers and better communication with the public. Such measures are
aimed at enhancing public confidence in insurance intermediaries
through raising professional standards.
Intermediaries’ role in promoting financial awareness
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18.0.20 Intermediaries can promote consumer protection by assisting consumers
to make better informed decisions about the products that they buy. This
helps to address a core consumer protection concern about asymmetries
of information between financial services product providers and the
public to whom the products are sold. The adoption of good conduct ofbusiness practices by insurers and insurance intermediaries helps toensure that customers are sufficiently informed on the insurance
products they are considering buying, before concluding a contract.
18.0.21 Enhancing financial awareness is a further means of ensuring that
consumers are aware of the types of products available to them andunderstand their purpose, how they work and their key features,
including cost. This understanding helps consumers to compare
products and to purchase insurance products that meet their needs.
Enhanced financial awareness can be achieved, for example, throughformal education initiatives and targeted awareness campaigns led byinsurers and intermediaries, individually or jointly.
18.0.22 The promotion of financial awareness may benefit consumers injurisdictions where consumer protection standards are weak or levels offinancial literacy are low. It is also especially important when dealing withmore complex financial products, particularly those with an investment
element.
18.0.23 Improved understanding by consumers of the terms and benefits theycan expect from insurance products may also lead to a reduction incomplaints against intermediaries or the insurers whose products theysell.
18.0.24 Insurance intermediaries are not the only stakeholders in promoting thefinancial awareness of consumers; governments, supervisors, social
interest organisations and insurers have a significant role to play inconsumer protection. Other stakeholders, using various communication
channels, are also able to play a significant role. Nevertheless,intermediaries’ face-to-face dealings with their customers and marketingof products to consumers place them in a position to contribute tostrengthening the financial awareness of the public on insurance
matters. Supervisors may therefore wish to encourage insuranceintermediaries to promote financial awareness.
18.0.25 A variety of means may be used by insurance intermediaries to promote
financial awareness, such as:• explaining face-to-face the features of products in whichcustomers may be interested, which may be particularly
important where their interest is in complex or long term
contracts;• providing references to specific websites or other referencematerial which gives relevant information, or publishing suchmaterial themselves;• making available, or suggesting other sources of, financial
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• participating in educational initiatives such as training
seminars.
18.0.26 In undertaking financial education initiatives, intermediaries should
ensure that the personnel involved have sufficient knowledge for thispurpose and that material or tools provided are up to date, free from error
to the extent practicable, and easily understood. Such initiatives may
target specific audiences, such as vulnerable groups.
18.0.27 Intermediaries’ initiatives to promote financial awareness, where
conducted with professionalism, may help to enhance both their own
reputation and that of the insurance sector.
Additional ICPs applicable to the supervision of intermediaries
18.0.28 ICP 19 (Conduct of Business) addresses conduct of businesssupervision in respect of both intermediaries and insurers, whereas thisICP addresses other aspects of supervision that are specific tointermediaries. Other ICPs that apply, generally or in part, to thesupervision of intermediaries are:
• ICP 21 Countering Fraud in Insurance; and• ICP 22 Anti-Money Laundering and Combating the Financingof Terrorism (AML/CFT).
Supervisory cooperation
18.0.29 In some jurisdictions, the supervision of insurance intermediaries is the
responsibility of a different authority than the insurance conduct ofbusiness supervisory authority. Even where the same authority is
responsible for conduct of business and intermediary supervision, thesupervisory responsibilities are often undertaken within different
departments. Where different authorities or departments are involved,
the insurance intermediary supervisor should communicate, andcooperate where possible, with other relevant authorities anddepartments to ensure an understanding of all the risks relevant to theirsupervision of insurance intermediaries.
18.1

The supervisor requires insurance intermediaries operating in its
jurisdiction to be licensed.
18.1.1

In some jurisdictions other terminology such as “authorisation” or“registration”, are used in place of “licensing”. For the purposes of thisICP these terms are collectively referred to as “licensing”.

18.1.2The supervisor may choose to license intermediaries at the legal entity
level or the individual level, or both. In some jurisdictions insuranceintermediation activities carried out by the insurer’s direct sales staff or
its authorised representatives are covered by the insurer’s licence; inothers these may require separate intermediary licensing.

18.1.3

Where licensing is at the legal entity level the supervisor may consider
whether the legal entity has in place procedures to ensure that theindividuals who conduct insurance intermediation under its responsibility
meet appropriate standards of professionalism and competence. The
supervisor may also wish to set its own requirements for approval of

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individuals, within an insurance intermediary, who conduct intermediarybusiness.
18.1.4

Different types of insurance business involve different levels ofcomplexity and risks and may require different levels of skill andexperience in their intermediation. The supervisor may wish to specify inthe licence the range of intermediation activities that it permits theinsurance intermediary to undertake, taking into account, for example,
the intermediary’s proposed business plan and areas of expertise.

18.1.5The licensing process should be designed to enable the supervisor to
reject a licence application where it considers that the applicant will beincapable of delivering fair consumer outcomes or where it cannot beeffectively supervised. For these purposes the supervisor may require
an application, together with additional information that may depend on
the type of licence being applied for, and may include items such as:• details of ownership, including all information necessary toprovide a full understanding of the insurance intermediary’sownership and control structure;• a business plan, including details of proposed business andfinancial projections;• the proposed sources and method of capitalisation;• information on personnel, in particular on proposed holders of
key functions;• details of any significant third party service providers;• details of the proposed auditor, where applicable;• details of professional indemnity insurance cover, including
amount and limitations, or comparable guarantee, whereapplicable;• business continuity plans;• if incorporated, relevant information on incorporation such as
memorandum and articles of association and certificate ofincorporation;• details of policies, procedures and controls in key areas suchas:
new business;client money;
complaints;
conflicts of interest;
compliance;
combating financial crime (including AML/CFT and fraud);
anda copy of the policy and supporting documents that govern
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confirmation of agreement to conduct of business rules
published by the supervisor.

The supervisor may require additional information to complete thelicensing process, upon request.
18.1.6The supervisor may set minimum financial resource requirements, forexample, to discourage market entrants with insufficient financial
resources and to help ensure that existing licensees have sufficientfinancial resources for business continuity purposes. Where this is thecase, such requirements may take into account factors such as thenature of the business to be intermediated, whether the intermediary
operates client accounts, the level of any professional indemnity
insurance and the level of operating expenses, to ensure that an
appropriately risk-based financial resource requirement is set.

18.1.7The supervisor should only issue a licence if the applicant meets theinitial licensing conditions.

18.1.8In specific and limited circumstances, the supervisor may have the power
to make exceptions to certain licensing requirements. The supervisor
should ensure that any such exceptions do not encourage regulatory
arbitrage or increase the risk to consumers.

18.1.9The supervisor should consider what licensing requirements areapplicable to intermediaries operating on a cross-border basis fromoutside the jurisdiction. These requirements should be transparent to
consumers, as well as to intermediaries, so that they can make an
informed decision when choosing to deal with intermediaries from otherjurisdictions.

18.1.10 The supervisor may consider the possibility of issuing periodicallyrenewable licences. An advantage of doing so would be to ensure formal
periodic reassessment of compliance with the regulatory licensing
requirements.
18.2

The supervisor ensures that insurance intermediaries licensed in its
jurisdiction are subject to ongoing supervisory review.
18.2.1The supervisor should require that initial licensing conditions, asapplicable, are maintained subsequent to the licence being issued andthat ongoing regulatory requirements are met. Where another authority
is responsible for setting the licensing requirements, the supervisor
should communicate, and cooperate where possible, with this authority.

18.2.2The supervisor may choose to take a risk-based approach in reviewing
on a targeted basis whether insurance intermediaries fulfil their licensing
and conduct of business requirements on an ongoing basis. Under suchan approach, supervisory review should take into account the differing
size of intermediaries, their likely impact on the market and the riskinessand complexity of their business.

18.2.3

In addition to monitoring ongoing compliance, the supervisor should
require that any breaches in licensing conditions or other supervisory
requirements are reported promptly.

Direct supervision
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18.2.4

Direct ongoing supervision may take various forms, both off-sitemonitoring and on-site inspection, as necessary, as well as othersupervisory tools. Further information on this topic is available in ICP 9
Supervisory Review and Reporting, but may require adaptation to makeit appropriate for the specific nature of intermediary business. Thebalance between off-site and on-site approaches will typically be
influenced by the number and nature of intermediaries in the market, as
well as the supervisor’s resources. The supervisor may take thesefactors into account when determining the balance between a proactive
and reactive approach to ongoing supervision.

18.2.5Off-site monitoring may include supervisory reporting, analysis ofcomplaints, thematic reviews and other forms of information. The
supervisor may specify information to be provided for off-site monitoring
purposes, including information to be reported routinely or on an ad hoc
basis. Supervisory reporting requirements may include:• financial statements, audited where applicable, or othercertification of the financial soundness of the intermediary;• auditor’s management letter, where applicable;• confirmation of professional indemnity cover (including
exclusions or limitations) or comparable guarantee;• information on the sources of and placement of business;• summary of movements on client money accounts, whereapplicable;• changes in key functions and significant owners;• financial links with insurers and other intermediaries (such as
through related party structures or service contracts);• types of products sold;• business partners;• staff compensation policy;• incentive arrangements;• claims data;• complaints data; and• details of advertising and marketing expenditure relating toparticular types of products or distribution channels.

18.2.6

Where the intermediary is an employee of the insurer, the supervisor
may determine that information provided by the insurer as part of theinsurer’s regular reporting responsibilities is sufficient, without requiring
separate reporting in respect of the intermediation activities conductedby the employee of the insurer.

18.2.7The supervisor may also use regular formal meetings with intermediaries
as a means of supplementing these off-site and on-site processes andprocedures. Where appropriate, the supervisor may use other tools,
such as “mystery shopping”, to evaluate whether the implementation of

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intermediaries’ internal policies and processes is resulting in fairoutcomes for customers.
18.2.8Where applicable, the supervisor should apply supervisory review
processes and procedures to insurance intermediaries at the level atwhich licensing takes place (entity or individual level) or at the insurer
level. Reporting requirements in respect of an insurer’s direct sales staff
would be the responsibility of the insurer.

18.2.9On-site inspections may consider areas such as:• corporate governance framework, including internal controls;• procedures and controls for combating financial crime;• review of client money accounts where applicable;• review of customer files;• review of complaints;• review of disclosure to customers and terms of businessagreements;• review of documentation of advice given and the reasons forthat advice; and• other relevant elements such as the strategy, businessactivities and business models, the treatment of customers,
and compliance with supervisory requirements.

18.2.10 Analysis of complaints may be a valuable source of information for thesupervisor, as well as for insurers and intermediaries, in identifying
possible risks of poor conduct in the area of insurance intermediation.
18.2.11 The supervisor may take a risk-based approach, where greater attention
is focused on higher risk areas. Examples include where:• Insurance intermediation includes the provision of advice;• the nature of the business intermediated is more complex;• customers are less sophisticated; and• there is an increased likelihood of conflicts of interest.
Indirect supervision
18.2.12 In some jurisdictions intermediaries are supervised indirectly through thesupervision of the insurers. The supervisor will need to take into accountthe extent to which such an approach achieves effective supervision.
Regardless of the approach, it is ultimately the supervisor’s responsibility
that intermediaries are effectively supervised.
18.2.13 An indirect approach may be more appropriate for agency intermediation
rather than the broker model.
18.2.14 Indirect supervision can relate to circumstances where the insurer relies
upon an intermediary to perform processes on its behalf. In such cases,
written agreements could be checked by the supervisor to assess therespective responsibilities. For example, insurers are expected to obtainappropriate documentation regarding their customers to demonstrate
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that appropriate customer due diligence and/or fact-finding procedures
have been carried out. Insurers will be assessed on the adequacy of theprocesses carried out and documentation obtained, including where theinsurer relies upon intermediaries to perform this work and supply the
documentation required.
18.2.15 Where the supervision of intermediaries is undertaken indirectly, thesupervisor should assess the insurer’s processes to monitor the work
undertaken by an intermediary on its behalf.
Self-regulatory organisations
18.2.16 A self-regulatory organisation (SRO) can be described as a nongovernment organisation that has the power to create and enforce
industry or professional regulations and standards. The self-regulatory
functions of an SRO can contribute to the supervision of intermediaries
through the requirements for, and enforcement of, professional
standards for its members.
18.2.17 In jurisdictions with an SRO for intermediaries, the supervisor should
assess whether the SRO meets appropriate standards before placing
any reliance on the SRO’s self-regulatory functions. The supervisor’s
assessment should consider matters such as whether the SRO:
• has sufficient independence;• has appropriate powers and resources to fulfil its mission andprovide effective self-regulation;• performs its self-regulatory functions adequately;• establishes and maintains standards that are sufficiently
robust; and• takes appropriate action to deal with any shortcomings.
18.2.18 An SRO’s regulations and standards may not address all the aspects ofthe supervision of insurance intermediaries for which the supervisor has
responsibility. Therefore, whilst the supervisor may choose to placesome reliance on the self-regulatory functions of an SRO, the supervisor
should retain overall responsibility for supervision.
Other
18.2.19 In addition to direct and indirect supervision of intermediaries, thesupervisor may use the supervision of insurers to gather information onand, to some extent, monitor intermediaries’ activities. This may include,for example, identifying whether particular intermediaries or particularmatters are the subject of regular or frequent complaints.
18.3

The supervisor requires insurance intermediaries to maintain appropriate
levels of professional knowledge and experience, integrity andcompetence.
Professional knowledge and experience
18.3.1

It is important that individuals carrying out the activity of insuranceintermediation have adequate professional knowledge. Professional
knowledge can be gained from experience, education and/or training.

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The attainment of relevant professional qualifications may demonstratethat a certain level of professional knowledge has been achieved.
18.3.2The supervisor should require that individuals carrying out the activity of
insurance intermediation have professional knowledge and experience
appropriate for the business which they intermediate. More complex
products or customer needs may require higher or more specialised
knowledge and experience. The knowledge and experience ofindividuals should also be appropriate for the type of business being
intermediated. Once professional qualifications have been achieved, it isimportant that individuals who continue to carry out the activity of
insurance intermediation keep their professional knowledge up to date.
In some jurisdictions, there are supervisory or statutory requirementsthat individuals carrying out the activity of insurance intermediation
should spend a specified minimum amount of time on continuous
professional development. In some jurisdictions, professional bodies
impose such a requirement on their members.

18.3.3The supervisor may consider recognising the qualifications of specified
professional bodies. Where a jurisdiction has no such professional body,consideration could be given to encouraging or recognising qualifications
obtained through professional bodies in other jurisdictions. The
supervisor may also consider recognising such qualifications wherethese are considered to be equivalent to, or exceed, the qualifications
available within the jurisdiction.

18.3.4

Intermediaries should be knowledgeable regarding the status of theinsurers whose products they sell. For example, they should be satisfied
that the insurer is licensed to sell insurance in the relevant jurisdiction,
as a branch or subsidiary, and should be aware of the financial status
and credit rating of the insurer and the applicability of any policyholder
protection schemes to that insurer’s products.

Integrity
18.3.5

It is essential that those carrying out the activity of insuranceintermediation act with integrity and high ethical standards. These relate
to the behaviour of the individuals concerned, such as:• being honest, trustworthy and open;• being reliable, dependable and respectful;• not taking unfair advantage;• not accepting or offering gifts where this might imply an
improper obligation.

18.3.6The supervisor may require individuals carrying out the activity of
insurance intermediation to be subject either to their organisation’s
internal policies and processes, or to the ethical standards ofprofessional bodies, that require integrity.

18.3.7The supervisor may establish its own expectations on integrity through,for example, the publication of codes of conduct with which suchindividuals are required to comply. Codes of conduct should becomplementary to the relevant legislation and may address any aspectof dealings between insurance intermediaries and their customers.

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18.3.8

Intermediary organisations should have procedures to assess theintegrity of those intermediating on their behalf. Such procedures should
include pre-employment checks as well as ongoing requirements. Preemployment checks should include, amongst other things, employment
history, any civil liability, criminal convictions, administrative actions byregulatory agencies and self-regulatory organisations, or pending legal
proceedings.

Competence
18.3.9The supervisor should require individuals carrying out the activity of
insurance intermediation to act only in respect of business for which they
have the required competence.

18.3.10 The supervisor should require insurance intermediaries to implement
policies and processes to assess the competence of individuals carryingout the activity of insurance intermediation. Assessment would beparticularly important in the case of new employees or where staff areassigned different or more challenging responsibilities. Competence
should also be monitored as an ongoing process for all relevant staff.
This may include actions such as:• observed interviews with customers;• review of customer files;• internal interviews; and/or• coaching.
18.3.11 An on-site inspection may provide an opportunity for the supervisor toassess competence, such as through file reviews and interviews of
selected staff.
Role of professional standards
18.3.12 SROs and other professional bodies can be instrumental in promoting
professional standards where they issue standards or codes with which
their members are required to comply. Standards required by relevant
SROs or other professional bodies may include areas such as:• acting with high ethical standards and integrity;• acting in the best interests of each client;• providing a high standard of service; and• treating customers fairly.
18.3.13 Members of an SRO or other professional body who are found to be inbreach of its professional standards may be subject to disciplinary
procedures such as suspension of, or exclusion from, membership.
18.3.14 In jurisdictions where there is reliance on the membership of aprofessional body, the supervisor may consider confirming that such abody has an effective disciplinary scheme in force. The supervisor may
nevertheless decide not to depend on such professional processes
entirely and deal with issues of an individual’s professional conduct
directly.
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18.4

The supervisor requires that insurance intermediaries apply appropriate
governance.
18.4.1An insurance intermediary’s governance framework may vary,depending upon the nature and scale of the intermediary and thecomplexity of its business, and may be subject to general company law.
However, each intermediary’s governance framework should be
sufficient to provide for sound and prudent management of the businessand to support the fair treatment of customers.

18.4.2In setting relevant governance requirements the supervisor should
consider the application of such requirements to sole traders and small
businesses operating as insurance intermediaries. Such requirements
for sole traders and small businesses will differ from those for larger
entities. Key areas where requirements may vary include internal
controls, segregation of duties, and compliance functions. Regardless,the supervisor should be satisfied that a sound level of governance isachieved and that there are no unacceptable risks, with the overriding
objective that customers are appropriately protected.

18.4.3

Good governance may be promoted by the supervisor, as well as otherauthorities, professional bodies and SROs, by publishing guidance (forexample, a Code of Practice) for insurance intermediaries on their
obligations in respect of governance-related matters. Guidance that may
help intermediaries meet governance requirements may include matterssuch as:• ensuring that those responsible for the intermediaryorganisation’s governance have the competence and integrity
to fulfil their respective roles;• ensuring appropriate standards for conduct of business;• ensuring there is regular monitoring of consumer outcomes;• ensuring that the making of key decisions is subject tosufficient discussion at Board level or with Key Persons inControl Functions as appropriate;• ensuring adequate human resources to conduct the business;• ensuring an appropriate level of internal controls of thebusiness;• ensuring appropriate disciplinary policies and processes forwrongdoing are in place;• maintaining adequate files and records and ensuring theiravailability for inspection;• maintaining appropriate controls over outsourced functions;and• compliance with all relevant legislation, including noninsurance legislation such as in respect of anti-money
laundering, fraud, etc.

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18.5

18.4.4

Relevant to governance, intermediaries are required to establish andimplement policies and processes on the fair treatment of customers thatare an integral part of their business culture (see Standard 19.2).

18.4.5

The governance of an insurer’s direct sales staff is the responsibility of
the insurer, and the governance of insurers is the subject of ICP 7(Corporate Governance). Although ICP 7 is otherwise not directly
applicable to intermediaries, it may be a useful source of information forintermediary supervisors.

The supervisor requires insurance intermediaries to disclose to customers,
at least:• the terms and conditions of business between themselves andthe customer;• the relationship they have with the insurers with whom they deal;and• information on the basis on which they are remunerated where apotential conflict of interest exists.
18.5.1

In addition to disclosing matters relating to intermediaries themselves,intermediaries are required to disclose information on insurance
products offered to customers (see Standards 19.5 and 19.6).

18.5.2In setting disclosure requirements, the supervisor may take into accountthat there are differences in:• the nature of different insurance products;• the level of sophistication of different customers; and• the way in which different types of insurance are transacted(for example, differences between commercial and personal(retail) lines).
The nature, timing and detail of disclosures may differ according to thecircumstances. Nevertheless, disclosure requirements should provide
adequate information to customers, taking into account these factors.

Terms of business18.5.3A terms of business agreement may be a convenient means by which an
insurance intermediary can provide important information to a customer
and satisfy many of the disclosure requirements. Such a document may
include information such as:• by whom they are licensed and supervised;• the type of business for which they are licensed;• whether they are independent or act on behalf of one or moreinsurers;• information on the basis on which they are remunerated;• the services provided, including whether they offer products
from a full range of insurers, from a limited range or from asingle insurer;

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• charging arrangements for the intermediation services;• cancellation rights in respect of the intermediation services;• notification of complaints;• client money arrangements, including treatment of interest;• confidentiality of information provided; and• the relevant law governing the agreement.
18.5.4

Insurance intermediaries should provide information on terms ofbusiness to customers and do so prior to an insurance contract being
entered into. Where there is an ongoing business relationship between
an intermediary and a customer, or once terms of business information
has initially been provided in the case of policy renewals, theintermediary should review whether reiterating this information isnecessary. Further information on terms of business might only benecessary where there are changes to the terms.

18.5.5

When insurance cover needs to be arranged immediately it may not be
possible to provide documentation of terms of business at the point of
arranging the contract. In such situations the information may beprovided orally and followed up with written documentation within areasonable period of time.

18.5.6The supervisor may recommend, or require, that a copy of the terms ofbusiness, signed by the customer, is retained as part of the insuranceintermediary’s records. Where insurance is intermediated over theinternet, the customer may be required to acknowledge the terms ofbusiness before a policy can be proceeded with. Electronic records
should also be retained by the intermediary.

Intermediary status
18.5.7

An insurance intermediary’s status may provide information to acustomer on the extent of products from which recommendations are
made and provide an indication of potential conflicts of interest. Where
the insurance intermediary is only able to select products from a single
insurer or from a limited range, the customer may wish to carry out theirown research to see whether they can obtain better terms or a moresuitable product elsewhere in the market.

18.5.8It is particularly important that insurance intermediaries provide
customers with information on their relationship with the insurers withwhom they deal, specifically whether they are independent or act for one
or more insurance companies, and whether they are authorised toconclude insurance contracts on behalf of an insurer or not.

18.5.9Potential conflicts of interest can arise for some intermediaries if theintermediary is part of a wider group or if the intermediary has a financial
interest, such as a shareholding, in an insurer or insurance group. Such
relationships should be disclosed to customers.

18.5.10 Information on the insurance intermediary’s status may be provided aspart of a terms of business agreement or separately. Because of its
importance, this information may also be highlighted verbally to thecustomer.
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Remuneration
18.5.11 Insurance intermediaries are generally remunerated by way of fees andcommissions, such as:• fees paid directly by the customer;• fees or commissions paid indirectly by the customer, by way
of deduction from premiums or funds invested; or• fees or commissions paid by the insurer.
18.5.12 Where insurers’ direct sales staff carry out insurance intermediation as
employees of the insurer, they may be salaried as well as receive any
applicable commission.
18.5.13 Information on charging structures may be important information tocustomers. For example, for insurance products with an investment
element, information on any fees or other costs deducted from the initialamount invested, as well as on fees or commissions deducted from theinvestment thereafter will be important.
18.5.14 Information on charging may be provided as part of a terms of businessagreement, or separately. As fees and commissions vary by product andbetween product providers, they may need to be provided separately foreach product recommended, often by inclusion in productdocumentation. Given their significance to some types of product, thisinformation may also be highlighted verbally to the customer.
18.5.15 The supervisor may also require that, upon a customer’s request to theintermediary, the customer is provided with further information on fees
and commissions, including the level of fees and commissions. Theintermediary should make the customer aware of his/her right to request
information on fees and commissions. Communication should be clear
and not misleading. In view of the impact of fees and commissions upon
insurance products with an investment element, the supervisor may
require that disclosure of fees and commissions is provided to customers
prior to contracts being entered into in respect of all such products.
18.5.16 Some forms of remuneration of insurance intermediaries potentially leadto a conflict of interest. For example, an intermediary may be tempted torecommend a product which provides higher fees or commissions thananother. Potential conflicts of interest for intermediaries may exist in avariety of circumstances (see ICP 19 Conduct of Business).
18.5.17 The supervisor should be satisfied that the intermediary has robust
procedures in place to identify and avoid, or manage, conflicts of interest,and deliver outcomes aligned with customers’ best interests. Where theycannot be avoided, or managed satisfactorily, this would result in theintermediary declining to act. Conflicts of interest may be managed or
avoided in different ways depending on the nature and severity of theconflict of interest (see Application Paper on Supervising the Conduct ofIntermediaries).
18.5.18 Additionally, circumstances in which conflicts of interest may arise may
be covered in the codes of conduct issued by SROs or other professional
bodies.
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18.5.19 The supervisor should be aware of the use of non-monetary benefits,
including, for example, “soft” commissions, offered by insurers tointermediaries. These may include less tangible inducements such asprofessional support, IT support, or corporate entertainment at sportingor cultural events. Such inducements may lead to conflicts of interest andare less transparent than fees or commissions and also need to be
avoided, managed or prohibited as appropriate.
18.6

The supervisor requires an insurance intermediary who handles clientmonies to have safeguards in place to protect these funds.
18.6.1In the course of carrying out its business, an insurance intermediary may:
• receive monies from a client for the payment of premiums toan insurer; and/or• receive monies from an insurer in respect of claims or
refunded premiums for onward payment to a client.

18.6.2

Some jurisdictions have specific legal requirements in respect of the
cash flows where monies are transferred via an intermediary from thecustomer to the insurer, and vice versa, including in determining whether
the customer or the insurer is at risk in respect of such funds.

18.6.3

Where funds are held at the risk of the client, they may be referred to as“client monies” or “client’s money”. The intermediary should haveadequate policies and processes in place for the safeguarding of suchfunds in the interests of their customers.

18.6.4

In some jurisdictions, premiums are deemed to have been paid to theinsurer as soon as the customer pays premiums to the intermediary. In
these circumstances the insurer, rather than the customer, bears the riskof allowing intermediaries to collect premiums on its behalf.

18.6.5The supervisor may require that an insurance intermediary’s clientmoney policies and processes cover matters such as the following:• client accounts are separate and clearly distinguishable fromthe intermediary’s own bank accounts;• client accounts are held with licensed banks within thejurisdiction, or specified other jurisdictions;• disallowing monies other than client monies within theaccount, except in specific circumstances such as to achieve
or maintain a minimum balance, to receive interest, or toreceive commission due to the intermediary;• monies are paid into the account promptly;• adequate financial systems and controls are maintained,
including authorisation of payments from the account;• adequate books and records are maintained and subject toaudit;• reconciliations are performed on a regular basis andreviewed;

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• discrepancies on the account are followed up promptly andresolved satisfactorily;• for each client, payments from a client account are not madebefore sufficient monies paid into the account have cleared,
thus ensuring that any balance held in respect of each client
is not negative; and• the treatment of interest.

18.7

18.6.6In the interest of safeguarding clients’ money, it is important that client
accounts cannot be used to reimburse creditors of the insuranceintermediary.

18.6.7

Where insurance intermediaries operate client accounts, the supervisor
may require that the terms and conditions of such accounts are disclosed
to their customers, including whether funds held in such accounts are at
the risk of clients or at the risk of the insurer.

Where appropriate, the supervisor takes supervisory measures against
licensed insurance intermediaries.
18.7.1The supervisor should initiate measures to prevent or respond to poor
conduct or breaches of regulatory requirements by an intermediary, witha view to mitigating adverse outcomes for customers. Where necessary,
the supervisor may use sanctions.

18.7.2The supervisory framework should allow for the exercise of judgementand discretion, and provide flexibility in the use of preventive measures,
corrective measure and sanctions.

18.7.3

In some instances, the supervisor may need to work with other relevant
authorities or bodies in order to take or enforce supervisory measures orsanctions against an intermediary.

Preventive measures
18.7.4

Where the supervisor assesses that there may be a material risk of an
insurance intermediary breaching supervisory requirements or toconsumer or policyholder interests in general, it should require insuranceintermediaries to take appropriate measures to mitigate both marketwide risks as well as risks from specific entities or individuals.

18.7.5In this regard, the supervisor may take proactive measures, such as
publishing guidance on good practices or warnings to the industry or
consumers.

Corrective measures
18.7.6

Where the insurance intermediary fails to meet supervisory
requirements, or where consumers may otherwise be at risk, thesupervisor should require corrective measures to be taken by the
insurance intermediary. This may occur, for example, where:• there is evidence of unfair treatment;• required information is not provided to customers;• policies and processes are inadequate (particularly where thisresults in inadequate due diligence work);

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• internal controls,
inadequate;

filekeepingordocumentationare• conflicts of interest are not adequately identified or managed;or• there are concerns over business continuity.
18.7.7

Supervisory measures should apply at either the entity level or individuallevel, as appropriate. These may include, for example:• requiring the implementation of enhanced policies andprocesses;• requiring further training;• restricting business activities;• suspending or barring specific individuals from engaging inintermediary business or being responsible for the corporate
governance of an intermediary organisation; or• suspending, revoking or not renewing the licence.

Sanctions18.7.8Where appropriate, the supervisor should impose sanctions on entities
or individuals. The range of sanctions may include, for example:• imposing fines;• barring individuals from acting in key roles or holding similarroles in the future; or• requiring
remediation,
includingpolicyholders where appropriate.

18.7.9compensation

toSanctions imposed should be commensurate with the nature andseverity of the shortcomings. Minor offences may be dealt with throughoral or written communications with the intermediary’s management andthen followed up, whereas more significant deficiencies may warrant
immediate or more significant action.

18.7.10 Jurisdictions should provide due process for an intermediary to appeal
supervisory measures.
18.8

18.9

The supervisor checks that the intermediary is taking the measuresrequired and escalates such measures if its concerns are not being
addressed.
18.8.1The supervisor should review the results of measures that it has requiredof an intermediary and the effectiveness of the actions taken.

18.8.2

If the action taken by the intermediary does not adequately address thesupervisor’s concern, the supervisor should require further measures.

18.8.3

Supervisory measures should be escalated in line with the supervisor’s
concern about the intermediary and the risk to consumers.

The supervisor takes measures against individuals or entities that conduct
insurance intermediation without the necessary licence.

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18.9.1

The supervisor should have in place mechanisms to identify whenunlicensed insurance intermediation is being carried out. Examples ofsuch mechanisms include monitoring media and advertising, review ofconsumer complaints and encouraging industry and other stakeholders
to notify the supervisor of suspicious activity.

18.9.2

When unlicensed insurance intermediation is identified, the supervisor
should act to address the issue. Examples include seeking court orders
to require the unlicensed individual or entity to stop the activity, informing
law enforcement authorities of criminal and/or civil concerns, andpublicising the fact that the individual/entity is not licensed to conduct
insurance intermediation.

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Conduct of Business
The supervisor requires that insurers and intermediaries, in their conduct of
insurance business, treat customers fairly, both before a contract is entered into
and through to the point at which all obligations under a contract have beensatisfied.
19.0
Introductory Guidance
19.0.1Requirements for the conduct of insurance business help to:• protect policyholders and promote fair consumer outcomes;• strengthen public trust and consumer confidence in theinsurance sector;• minimise the risk of insurers and intermediaries following
business models that are unsustainable or pose reputationalrisk, thereby complementing the risk management frameworkof a solvency regime; and• support a sound and resilient insurance sector by creatinglevel playing fields in terms of the basis on which insurers andintermediaries can compete while maintaining businesspractices that support the fair treatment of customers.

19.0.2

Fair treatment of customers encompasses achieving outcomes such as:• developing, marketing and selling products in a way that pays
due regard to the interests and needs of customers;• providing customers with information before, during and after
the point of sale that is accurate, clear, and not misleading;• minimising the risk of sales which are not appropriate tocustomers’ interests and needs;• ensuring that any advice given is of a high quality;• dealing with customer claims, complaints and disputes in a fair
and timely manner; and• protecting the privacy of information obtained from customers.

19.0.3

Conduct of business, including business practices, is closely linked withjurisdictions’ tradition, culture, legal regime and the degree ofdevelopment of the insurance sector. For this reason, supervisory
approaches to the conduct of business also tend to vary. Such diversity
should be taken into consideration in implementing this ICP, and related
standards and guidance material, in order to achieve the outcome of fairtreatment of customers. The fair treatment of customers encompasses
concepts such as ethical behaviour, acting in good faith and theprohibition of abusive practices.

19.0.4

Requirements for the conduct of insurance business may differ
depending on the nature of the customer with whom an insurer orintermediary interacts and the type of insurance provided. The scope of

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requirements for conduct of insurance business should reflect the risk of
unfair treatment of customers, taking into account the nature of thecustomer and the type of insurance provided.
19.0.5

As part of assessing the fulfilment of requirements for conduct of
insurance business, the supervisor should consider the consumer
outcomes that are being achieved under these requirements. This
includes consumer outcomes that arise due to industry-wide – as well as
insurer-specific – factors.

19.0.6

Supervisors may wish to issue guidelines or rules on their expectations
to help insurers and intermediaries achieve fair treatment of customers.
In addition, the supervisor could support industry guidelines or bestpractices with this objective.

19.0.7

Detailed conduct of business rules may not be appropriate forreinsurance transactions, where benefits under a policy are not affectedby the reinsurance arrangements (see ICP 13 Reinsurance and Other
Forms of Risk Transfer). Nonetheless, this does not relieve insurers andreinsurers of their duty to provide each other with complete and accurate
information.

Respective responsibilities
19.0.8The insurer has a responsibility for good conduct throughout theinsurance life-cycle, as it is the insurer that is the ultimate risk carrier.
However, where more than one party is involved in the design,
marketing, distribution and policy servicing of insurance products, thegood conduct in respect of the relevant service(s) is a shared
responsibility of those involved.

19.0.9Intermediaries typically play a significant role in insurance distribution but
may also be involved in other areas. Their interface between customers
and insurers gives them a key role, and their good conduct in performing
the services in which they are involved is critical in building and justifying
public trust and confidence in the insurance sector.

19.0.10 Insurers sometimes outsource specific processes, such as claims
handling, to third parties (including intermediaries). Where an insurer
outsources processes, the insurer should only deal with third parties
whose policies, procedures and processes are expected to result in fairtreatment of customers; the insurer retains ultimately responsibility for
those functions.
Cross-border and group considerations
19.0.11 Legislation should provide requirements with which insurers andintermediaries must comply, including foreign insurers andintermediaries selling products on a cross-border basis.
19.0.12 Effective assessment of the quality of conduct of insurance business
requires, to a large extent, supervisory consideration of strategies,
policies, processes, procedures and controls that apply to the provisionof insurance products and services to customers, and which are moreeasily assessed through supervision at the insurance legal entity, rather
than group, level.

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19.0.13 Where insurance legal entities are part of an insurance group, theapplication of appropriate policies and processes on conduct of businessshould be consistent across the group, recognising local requirements
and specificities, and should result in the fair treatment of customers ona group-wide basis. In addition, there are a number of other grouprelated aspects that are relevant to the supervision of conduct ofbusiness by insurers and intermediaries, such as:• public disclosure by the supervisor of the regulatory
requirements in respect of the offering of cross-borderinsurance;• disclosure to customers of the group to which an underwriterbelongs; and• the potential risks from group entities that could affect policies
being sold or administered.
The supervisor should consider the implications arising from groupstructures in applying the Standards of this ICP.
Supervisory cooperation
19.0.14 Supervisors should be aware of the conduct of business requirements
set by the regulators of other financial services sectors with a view tominimising unnecessary inconsistencies, possible duplication and thepotential for regulatory arbitrage.
19.0.15 In some jurisdictions responsibility for the supervision of insurers orintermediaries is shared between more than one authority, or between
different departments within a single authority, with different authorities
or departments responsible for conduct and prudential supervision.
Where this is the case, the relevant authorities or departments should
communicate, and cooperate where possible, to ensure that there is anunderstanding of all the relevant risks.
19.0.16 The supervisor should also consider having in place adequate
coordination arrangements to deal with conduct of business issues
arising in cross-border business.
Fair treatment of customers
19.1

The supervisor requires insurers and intermediaries to act with due skill,care and diligence when dealing with customers.
19.1.1

19.2

The supervisor should require insurers and intermediaries to havepolicies and processes in place to achieve this outcome, including taking
appropriate measures to ensure that their employees and agents meethigh standards of ethics and integrity.

The supervisor requires insurers and intermediaries to establish andimplement policies and processes on the fair treatment of customers, as anintegral part of their business culture.
19.2.1Supervisors should require insurers and intermediaries to have policies
and processes in place to achieve the fair treatment of customers andshould monitor whether such policies and processes are adhered to.

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19.2.2

Proper policies and processes dealing with the fair treatment ofcustomers are likely to be particularly important with respect to retailcustomers, because of the greater asymmetry of information that tends
to exist between the insurer or intermediary and the individual retailcustomer.

19.2.3

Supervisory requirements with respect to fair treatment of customers
may vary depending on the legal framework in place in a particularjurisdiction. The desired outcome of fair treatment of customers may beachieved through a variety of approaches, with some jurisdictions
favouring a principles-based set of requirements, some favouring arules-based approach, and others following some combination of
approaches.

19.2.4

Ensuring the achievement of fair outcomes for customers will tend torequire that insurers and intermediaries adopt the fair treatment ofcustomers as an integral part of their business culture, and that policies
and processes to support this objective are properly embedded in theorganisation. Embedding a culture of fair treatment of customers may
include the following:• Strategy: Fair treatment of customers should be an objective
taken into consideration in the design of the business strategy,
product design, product distribution, and productperformance.
• Leadership: Overall responsibility for fair treatment ofcustomers should be at the level of the Board and Senior
Management, who should design, implement, and monitor
adherence to, policies and processes aimed at ensuring that
customers are treated fairly. This sets the tone for thebusiness.
• Decision making: All decisions that impact on customers
should be subject to particular scrutiny in terms of whether
they support the fair treatment of customers.
• Internal controls: Monitoring the fair treatment of customers
requires relevant management information to be identified,collected and evaluated. Internal reports should include themost useful information and indicators to allow the Board andSenior Management to measure the insurer’s orintermediary’s performance with respect to fair treatment ofcustomers. Mechanisms and controls should be establishedto ensure that departures from policies and processes as wellas other situations that jeopardise the interests of customers,
are promptly remedied.
• Performance management: Appropriate attention should be
paid to the recruitment of staff and agents who meet highstandards of ethics and integrity. Relevant staff should betrained to deliver appropriate outcomes in terms of fairtreatment of customers. Evaluation of performance should
include the contribution made to achieving these outcomes.

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There should be appropriate performance management
consequences for staff who fail to meet these standards.
• Reward: Remuneration and reward strategies should takeaccount of the fair treatment of customers. Reward structuresneed to reflect quality issues and not encourage or reward theunfair treatment of customers. Remuneration structures thatcreate conflicts of interest may lead to poor customer
outcomes.
19.2.5

19.3

Insurers’ and intermediaries’ strategies, policies and processes dealing
with the fair treatment of customers should be made available to thesupervisor. The supervisor should encourage insurers andintermediaries to make relevant policies and processes publicly available
as good practice, in particular their claims handling, complaints handlingand dispute resolution policies and processes.

The supervisor requires insurers and intermediaries to avoid or properly
manage any potential conflicts of interest.
19.3.1In their dealings either with each other or with customers, insurers andintermediaries may encounter conflicts of interest.

19.3.2

Where conflicting interests compete with duties of care owed tocustomers, they can create risks that insurers and intermediaries will not
act in customers’ best interests. Conflicts of interest can arise fromcompensation structures as well as other financial and non-financial
incentives.

19.3.3

Where compensation structures do not align the interests of the insurer
and intermediary, including those of the individuals carrying out
intermediation activity, with the interests of the customer, they canencourage behaviour that results in unsuitable sales or other breach of
the insurer’s or intermediary’s duty of care towards the customer.

19.3.4

Other incentives that may create a conflict of interest include
performance targets or performance management criteria that are
insufficiently linked to customer outcomes. They also include thesoliciting or accepting of inducements where this would conflict with theinsurer’s or intermediary’s duty of care towards its customers.

19.3.5An inducement can be defined as a benefit offered to an insurer orintermediary, or any person acting on its behalf, incentivising thatfirm/person to adopt a particular course of action. This may include cash,
cash equivalents, commission, goods and hospitality. Where
intermediaries who represent the interests of customers receive
inducements from insurers, this could result in a conflict of interest that
could affect the independence of advice given by them.

19.3.6

As an insurance intermediary interacts with both the customer and theinsurer, an intermediary is more likely than an insurer to encounter
conflicts of interest. For an insurance intermediary, examples of where aconflict of interest may occur include:• where the intermediary owes a duty to two or more customers
in respect of the same or related matters – the intermediary

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may be unable to act in the best interests of one without
adversely affecting the interests of the other;• where the relationship with a party other than the customer
influences the advice given to the customer;• where the intermediary is likely to make a financial gain, or
avoid a financial loss, at the expense of the customer;• where the intermediary has an interest in the outcome of aservice provided to, or a transaction carried out on behalf of,a customer which is distinct from the customer’s interest;• where the intermediary has significant influence over thecustomer’s decision (such as in an employment relationship)
and the intermediary’s interest is distinct from that of thecustomer;• where the intermediary receives an inducement to provide aservice to a customer other than the standard or “flat” fee orcommission for that service; and• where the intermediary has an indirect interest in the outcomeof a service provided to, or a transaction carried out on behalfof, a customer due to an association with the party that directly
benefits (such as soliciting insurance products which are soldtogether with other financial services in a bancassurance
relationship) and where such indirect interest is distinct fromthe customer’s interest (such as the cross-selling or selfplacement of business).

19.4

19.3.7The supervisor should require that insurers and intermediaries take allreasonable steps to identify and avoid or manage conflicts of interest,and communicate these through appropriate policies and processes.

19.3.8

Appropriate disclosure can provide an indication of potential conflicts ofinterests, enabling the customer to determine whether the sale may be
influenced by financial or non-financial incentives. It can thus help inmanaging conflicts of interest where it empowers consumers to identify
and challenge or avoid potentially poor advice or selling that may arise
through the conflict of interest. However, managing conflicts of interest
through disclosure or obtaining informed consent from customers, has
limitations, including where the customer does not fully appreciate theconflict or its implications, and could be seen to place an unreasonableonus on the customer.

19.3.9Where conflicts of interest cannot be managed satisfactorily, this should
result in the insurer or intermediary declining to act. In cases where thesupervisor may have concerns about the ability of insurers andintermediaries to manage conflicts of interest adequately, the supervisor
may consider requiring other measures.

The supervisor requires insurers and intermediaries to have arrangements
in place in dealing with each other to ensure the fair treatment of customers.
19.4.1The supervisor should require insurers to conduct business only withintermediaries that are licensed, and to verify that the intermediaries

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under such arrangements have the appropriate knowledge and ability
with which to conduct such business.
19.4.2The supervisor may require insurers to report any significant issues ofwhich they become aware and have transparent mechanisms to handle
complaints against intermediaries. This may include identifying whether
particular intermediaries or particular matters are the subject of regularor frequent complaints. Documentation on this will enable insurers toreport recurring issues to the supervisor where the matters identified may
be relevant to the supervisor’s assessment of the intermediaries
concerned.

19.4.3

Supervisory measures to prevent or respond to a breach of regulatory
requirements by an intermediary may include action against insurers in
the case of direct sales or where an insurer knowingly cooperates withan intermediary that is in breach of its regulatory requirements.

19.4.4

Insurers and intermediaries should ensure that written agreements are
established in respect of their business dealings with each other, toclarify their respective roles and promote the fair treatment of customers.
Such agreements would include, where relevant, respective
responsibilities on matters such as:• product development;• product promotion;• the provision of pre-contractual and point of sale information
to customers;• post-sale policy servicing;• claims notification and handling;• complaints notification and handling;• management information and other documentation requiredby the insurer;• remedial measures; and• any other matters related to the relationship with customers.

Product development and pre-contractual stage
19.5

The supervisor requires insurers to take into account the interests ofdifferent types of consumers when developing and distributing insurance
products.
19.5.1This can be achieved through a product approval approach, a“principles-based” approach or a combination of both. In a productapproval approach, the supervisor requires insurers to submit insurance
product proposals for supervisory review and approval prior to productlaunch. In a “principles-based” approach, the onus is placed on theinsurer’s Board and Senior Management to ensure that products anddistribution strategies are developed in accordance with the principles.

19.5.2

In some cases, product development is undertaken by intermediaries onbehalf of insurers for whom they act. In such cases, the intermediaries
involved are responsible for taking customers’ interests and needs into

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account in performing this work. Nevertheless, the insurer should retain
oversight of, and remains accountable for, the development of its
products and its distribution strategies.
Product approval approach
19.5.3

Where supervisors have the power to approve contract conditions or
pricing, the approval process should balance the protection of customers
against the potential benefits to customers of innovation and choice ininsurance products. For example, supervisory approval of contract
conditions or pricing is likely to be more appropriate in certain
circumstances, such as where the insurer is dealing with less financiallycapable or vulnerable customers, where products are new to the market
or complex, or insurance contracts that are required by law such as
automobile liability insurance or health insurance.

19.5.4In such situations the supervisor may review products for compliancewith things such as:• mandated policy limits;• coverage of specified risks, procedures or conditions;• absence of prohibited exclusions; and• compliance with specifically required policy language.

Principles-based approach
19.5.5

Where supervisors follow a more principles-based approach,supervisors may issue guidance in terms of what is expected of insurers
and intermediaries. This may include the following:• Development of products and distribution strategies should
include the use of adequate information to assess the needsof different consumer groups.
• Product development (including a product originating from athird party) should provide for a thorough assessment of themain characteristics of a new product and of the related
disclosure documents by every appropriate department of theinsurer.
• Before bringing a product or service to the market, the insurer
should carry out a diligent review and testing of the product inrelation to its business model, the applicable laws andregulations and its risk management approach. In particular,
the policies, procedures and controls put into place should
enable the insurer to:offer a product that delivers the reasonably expected
benefits;
target the consumers for whose needs the product is likely
to be appropriate, while preventing, or limiting, access by
consumers for whom the product is likely to beinappropriate;

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ensure that distribution methods are appropriate for the
product, particularly in light of the legislation in force andwhether or not advice should be provided;
assess the risks resulting from the product by considering,
among other things, changes associated with theenvironment or stemming from the insurer’s policies that
could harm customers; andmonitor a product after its launch to ensure it still meetsthe needs of target customers, assess the performance ofthe various methods of distribution used with respect tosound commercial practices and, if necessary, take thenecessary remedial action.

• Insurers should provide relevant information to intermediaries
to ensure that they understand the target market (and thus
reduce the risk of mis-selling), such as information related tothe target market itself, as well as the characteristics of the
product.
• The intermediary should, in return, provide information to theinsurer on the types of customers to whom the product is sold
and whether the product meets the needs of that target
market, in order to enable the insurer to assess whether its
target market is appropriate and to revise its distribution
strategy for the product, or the product itself, when needed.
19.5.6

19.6

Supervisors may require insurers to submit specific information relating
to the manner in which the development of insurance products complies
with the legislated principles at any time, including prior to the launch of
the product (pre-notification).

The supervisor requires insurers and intermediaries to promote products
and services in a manner that is clear, fair and not misleading.
19.6.1

The insurer should be responsible for providing promotional material thatis accurate, clear and not misleading not only to customers but also tointermediaries who may rely on such information.

19.6.2

Before an insurer or intermediary promotes an insurance product, it
should take reasonable steps to ensure that the information provided isaccurate, clear and not misleading. Procedures should provide for an
independent review of promotional material intended for customers otherthan by the person or organisation that prepared or designed it. For
example, where promotional material is developed by an intermediary on
behalf of an insurer, the insurer should verify the accuracy of promotional
material before it is used.

19.6.3

If an insurer or intermediary becomes aware that the promotional
material is not accurate and clear or is misleading, it should:• inform the insurer or intermediary responsible for thatmaterial;• withdraw the material; and• notify any person that it knows to be relying on the information
as soon as reasonably practicable.

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19.6.4

In addition, to promote products in a fair manner, the information
provided by an insurer or intermediary should:• be easily understandable;• accurately identify the product provider;• be consistent with the coverage offered;• be consistent with the result reasonably expected to beachieved by the customers of that product;• state prominently the basis for any claimed benefits and any
significant limitations; and• not hide, diminish or obscure important statements or
warnings.

19.7

The supervisor requires insurers and intermediaries to provide timely, clear
and adequate pre-contractual and contractual information to customers.
19.7.1

The insurer or intermediary should take reasonable steps to ensure thata customer is given appropriate information about a product in order thatthe customer can make an informed decision about the arrangements
proposed. Such information is also useful in helping customers
understand their rights and obligations after sale.

19.7.2

Where insurers use intermediaries for the distribution of insurance
products, the insurer should be satisfied that the intermediaries involved
are providing information to customers in a manner that will assist themin making an informed decision.

Timing of the provision of information to customers
19.7.3Customers should be appropriately informed before and at the point ofsale. Information should enable an informed decision to be made by thecustomer before entering into a contract. In determining what is “timely”,
an insurer or intermediary should consider the importance of theinformation to the customer's decision-making process and the point at
which the information may be most useful.

Clear delivery of information to customers
19.7.4

Information should be provided in a way that is clear, fair and not
misleading. Wherever possible, attempts should be made to use plain
language that can easily be understood by the customer.

19.7.5Mandatory information should be prepared in written format, on paper orin a durable and accessible medium (electronic, for instance).

19.7.6Focus should be on the quality rather than quantity of information, as
there is a risk that if the disclosure becomes too voluminous then thecustomer may be less likely to read the information.

19.7.7

The quality of disclosure may also be improved by the introduction of astandardised format for disclosure (such as a product information sheet),which will aid comparability across competing products and allow for amore informed choice. Standard formats should be tested to ensure thatthey help understandability.

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19.7.8

There is likely to be an enhanced need for clear and simple disclosurefor more complex or “bundled” products, which are difficult for consumers
to understand, such as packaged retail insurance-based investment
products (PRIIPS), particularly regarding the costs, risks involved andperformance.

19.7.9Insurers and intermediaries should be able to demonstrate to thesupervisor that customers have received information necessary tounderstand the product.

Adequacy of information provided to customers
19.7.10 The information provided should be sufficient to enable customers tounderstand the characteristics of the product they are buying and help
them understand whether and why it may meet their requirements.
19.7.11 The level of information required will tend to vary according to matterssuch as:• the knowledge and experience of a typical customer for thepolicy in question;• the policy terms and conditions, including its main benefits,
exclusions, limitations, conditions and its duration;• the policy's overall complexity;• whether the policy is bought in connection with other goods
and services; and• whether the same information has been provided to thecustomer previously and, if so, when.
Disclosure of product features
19.7.12 While the level of product information required may vary, it should include
information on key features, such as:• the name of the insurer, its legal form and, where relevant, thegroup to which it belongs;• the type of insurance contract on offer, including the policy
benefits;• a description of the risk insured by the contract and of the
excluded risks;• the level of the premium, the due-date and the period for which
the premium is payable, the consequences of late or nonpayment, and provisions for premium reviews;• the type and level of charges to be deducted from or added tothe quoted premium, and any charges to be paid directly by
the customer;• when the insurance cover begins and ends; and• prominent and clear information on significant or unusualexclusions or limitations. A significant exclusion or limitation is
one that would tend to affect the decision of consumers
generally to buy. An unusual exclusion or limitation is one that
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is not normally found in comparable contracts. In determining
what exclusions or limitations are significant, an insurer orintermediary should, in particular, consider the exclusions orlimitations that relate to the significant features and benefits ofa policy and factors which may have an adverse effect on thebenefit payable under it. Examples of significant or unusualexclusions or limitations may include:
deferred payment periods;
exclusion of certain conditions, diseases or pre-existing
medical conditions;moratorium periods;
limits on the amounts of cover;limits on the period for which benefits will be paid;
restrictions on eligibility to claim such as age, residence or
employment; andexcesses.

19.7.13 Where a policy is bought in connection with other goods or services, thepremium should be disclosed separately from any other prices. It should
be made clear whether buying the policy is compulsory and, if so,whether it can be purchased elsewhere.
19.7.14 For investment-based insurance products, information on investment
performance is generally provided. Where this includes an indication ofpast, simulated or future performance, the information should include
any limits on upside or downside potential and a prominent warning thatpast performance is not a reliable indicator of future performance.
19.7.15 A helpful means to ensure that accurate and comprehensible information
is provided to the customer is a product information sheet containing
information on key product features that are of particular significance tothe conclusion or performance of the insurance contract. The productinformation sheet should be clearly identified as such and it should bepointed out to the customer that the information is not exhaustive. Insofar
as the information concerns the content of the contract, reference should
be made as appropriate to the relevant provisions of the contract or to
the general policy conditions underlying the contract. Insurers, andintermediaries where they are involved, should consider the use ofevaluation by third parties, such as consumer testing, in developing
product information sheets in order to ensure their understandability.
Disclosure of rights and obligations
19.7.16 Retail customers, in particular, often have only limited knowledge about
the legal rights and obligations arising from an insurance contract. Before
an insurance contract is concluded, the insurer or intermediary, should
inform a retail customer on matters such as:• General provisions – including applicable law governing thecontract;• Obligation to disclose material facts – including prominent andclear information on the obligation on the customer to disclose
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material facts truthfully. Ways of ensuring a customer knows
what he or she must disclose include explaining the duty todisclose all circumstances material to a policy and what needs
to be disclosed, and explaining the consequences of any
failure to make such a disclosure. Alternatively, rather than an
obligation of disclosure, the customer may be asked clear
questions about any matter material to the insurer;• Obligations to be complied with when a contract is concluded
and during its lifetime, as well as the consequences of noncompliance;• Obligation to monitor cover – including a statement, where
relevant, that the customer may need to review and update
the cover periodically to ensure it remains adequate;• Right to cancel – including the existence, duration andconditions relating to the right to cancel. If there are any
charges related to the early cancellation or switching of apolicy, this should be prominently disclosed;• Right to claim benefits – including conditions under which thepolicyholder can claim and the contact details to notify a claim;• Obligations on the customer in the event of a claim; and• Right to complain – including the arrangements for handlingpolicyholders' complaints, which may include an insurer’s
internal claims dispute mechanism or the existence of an
independent dispute resolution mechanism.
19.7.17 Where applicable, the customer may also be provided with information
on any policyholder protection scheme or compensation scheme in thecase of an insurer not being able to meet its liabilities and any limitations
on such a scheme.
19.7.18 If the insurance undertaking is a foreign insurer, the insurer orintermediary should be required to inform the customer, before any
commitment is entered into, of details such as:• the home authority responsible for the supervision of theinsurer;• the jurisdiction in which the head office or, where appropriate,
the branch with which the contract is to be concluded issituated; and• the relevant provisions for making complaints or independent
dispute resolution arrangements.
Disclosure specific to internet sales or sales through other digital means
19.7.19 Insurers and intermediaries are increasingly using digital distribution
channels to market and sell insurance products, including internet andmobile phone solutions
19.7.20 It may be more difficult for consumers to understand from which location
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where they are licensed. This may especially be the case where morethan one insurer or intermediary is involved in the distribution chain.
19.7.21 In conducting insurance business through digital channels, insurers andintermediaries should take into account the specificities of the medium
used, and use appropriate tools to ensure that customers receive timely,
clear and adequate information that helps their understanding of theterms on which the business is conducted.
19.7.22 The supervisor should require that insurers and intermediaries which
offer insurance products through digital means disclose relevantbusiness and contact information (eg on their website), such as:• the address of the insurer’s head office and the contact detailsof the supervisor responsible for the supervision of the head
office;• contact details of the insurer, branch or intermediary, and of
the supervisor responsible for the supervision of the business,
if different from the above;• the jurisdictions in which the insurer or intermediary is legallypermitted to provide insurance;• procedures for the submission of claims and a description of
the claims handling procedures; and• contact information on the authority or organisation dealing
with dispute resolution and/or consumer complaints.
19.7.23 The supervisor should apply to digital insurance activities requirements
on transparency and disclosure so as to provide an equivalent level ofprotection to customers as those applied to insurance businessconducted through non-digital means.
19.8

Where customers receive advice before concluding an insurance contract
the supervisor requires that the advice provided by insurers andintermediaries takes into account the customer’s disclosed circumstances.
19.8.1

Advice goes beyond the provision of product information and relates
specifically to the provision of a personalised recommendation on a
product in relation to the disclosed needs of the customer.

19.8.2The insurer or the intermediary should make it clear to the customer
whether advice is provided or not.

19.8.3

Insurers and intermediaries should seek the information from theircustomers that is appropriate for assessing their insurance demands andneeds, before giving advice. This information may differ depending on
the type of product and may, for example, include information on thecustomer’s:• financial knowledge and experience;• needs, priorities and circumstances;• ability to afford the product; and• risk profile.

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19.8.4

The supervisor may wish to specify particular types of policies orcustomers for which advice is not required to be given. Typically, thismay include simple to understand products, products sold to customer
groups that have expert knowledge of the type of product or, where
relevant, mandated coverage for which there are no options. Even if noadvice is given the supervisor may require the insurer or intermediary totake into account the nature of the product and the customer’s disclosed
circumstances and demands and needs.

19.8.5

In cases where advice would normally be expected, such as complex orinvestment-related products, and the customer chooses not to receive
advice, it is advisable that the insurer or intermediary retains an
acknowledgment by the customer to this effect.

19.8.6The basis on which a recommendation is made should be explained anddocumented, particularly in the case of complex products and productswith an investment element. All advice should be communicated in aclear and accurate manner, comprehensible to the customer. Where
advice is provided, this should be communicated to the customer inwritten format, on paper or in a durable and accessible medium, and arecord kept in a “client file”.

19.8.7The insurer or intermediary should retain sufficient documentation todemonstrate that the advice provided was appropriate, taking into
account the customer’s disclosed circumstances.

19.8.8In addition, insurers and intermediaries should review the “client files” ofthose under their responsibility to exercise control after the fact on thequality of the advice given, take any necessary remedial measures withrespect to the delivery of advice and, if applicable, be in a position to
examine fairly any complaints submitted to it.

19.8.9There should be a responsibility on the insurer and the intermediary to
promote quality advice. In order to ensure the delivery of quality advice,
the insurer and intermediary should, in particular, establish continuous
training programmes that allow the persons giving advice to:• keep abreast of market trends, economic conditions,innovations and modifications made to the products andservices;• maintain an appropriate level of knowledge about theirindustry segment, including the characteristics and risks of the
products and services;• know the applicable legal and regulatory requirements;• know the requirements for the communication of information
regarding the products and services and for appropriate
disclosure of any situation liable to compromise theimpartiality of the advice given or limit such advice; and• be familiar with the documentation regarding the products andservices and answer reasonably foreseeable questions.
This could include insurers providing training to their sales staff and tointermediaries in respect of specific products.

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Policy servicing
19.9

The supervisor requires insurers to:• service policies appropriately through to the point at which all
obligations under the policy have been satisfied;• disclose to the policyholder information on any contractualchanges during the life of the contract; and• disclose to the policyholder further relevant information
depending on the type of insurance product.
19.9.1For the purposes of this standard, “policyholder” refers only to the party
to whom a contract of insurance is issued by an insurer (as opposed tothe broader IAIS definition).

19.9.2

Supervisors should require insurers to satisfy obligations under a policy
in an appropriate manner and in accordance with the contractuallyagreed terms and legal provisions. This should include fair treatment in
the case of switching between products or early cancellation of a policy.
To enable them to do so, insurers should maintain a relationship with thecustomer throughout the policy lifecycle.

19.9.3

Although ongoing policy servicing is traditionally seen as primarily the
responsibility of the insurer, intermediaries are often involved,
particularly where there is an ongoing relationship between the customer
and the intermediary. The insurer should remain ultimately responsible
for servicing policies throughout their life-cycle, and ensuring thatintermediaries have appropriate policies and processes in place inrespect of the policy servicing activities that they perform on the insurer’s
behalf.

19.9.4

Policy servicing includes the provision of relevant information tocustomers throughout the life of the policy.

Information on the insurer
19.9.5

Information to be disclosed by the insurer to the policyholder includes:• any change in the name of the insurer, its legal form or theaddress of its head office and any other offices as appropriate;• any acquisition by another undertaking resulting inorganisational changes as far as the policyholder isconcerned; and• where applicable, information on a portfolio transfer (including
policyholders’ rights in this regard).

Information on terms and conditions
19.9.6

Insurers should provide evidence of cover (including policy inclusions
and exclusions) promptly after inception of a policy.

19.9.7

Information to be provided on an ongoing basis, including changes inpolicy terms and conditions or amendments to the legislation applicableto the policy, will vary by type of policy and may cover for example:

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• main features of the insurance benefits, in particular details on
the nature, scope and due-dates of benefits payable by the
insurer;• the total cost of the policy, expressed appropriately for thetype of policy, including all taxes and other cost components;
premiums should be stated individually if the insurance
relationship comprises several independent insurance
contracts or, if the exact cost cannot be provided, information
provided on its basis of calculation to enable the policyholder
to verify the cost;• any changes to the cost structure, if applicable, stating thetotal amount payable and any possible additional taxes, fees
and costs not levied via or charged by the insurer, as well as
any costs incurred by the policyholder for the use ofcommunication methods if such additional costs arechargeable;• duration of the contract, terms and conditions for (early)
termination of the contract and contractual consequences;• means of payment of premiums and duration of payments;• premiums for each benefit, both main benefits andsupplementary benefits;• information to the policyholder about the need to report
depreciation/appreciation;• information to the policyholder aboutcircumstances related to the contract;otherunique• information on the impact of a switch option of an insurance
contract;• information on a renewal of the contract; and• information on the ongoing suitability of the product, if such a
service is provided by the insurer or intermediary.
19.9.8Additional information provided to the policyholder regarding productswith an investment element should at least include:• participation rights in surplus funds;• the basis of calculation and state of bonuses;• the current surrender value;• premiums paid to date; and• for unit-linked life insurance, a report from the investment firm(including performance of underlying funds, changes ofinvestments, investment strategy, number and value of theunits and movements during the past year, administration
fees, taxes, charges and current status of the account of thecontract).

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19.9.9

19.10

Where there are changes in terms and conditions, the insurer should
notify the policyholder of their rights and obligations regarding suchchanges and obtain the policyholder’s consent as appropriate.

The supervisor requires insurers to handle claims in a timely, fair andtransparent manner.
19.10.1 Supervisors should require that insurers have fair and transparent claims
handling and claims dispute resolution policies and processes in place.
Claims handling19.10.2 Insurers should maintain written documentation on their claims handlingprocedures, which include all steps from the claim being raised to its
settlement. Such documentation may include expected timeframes forthese steps, which might be extended in exceptional cases.
19.10.3 Claimants should be informed about procedures, formalities andcommon timeframes for claims settlement.
19.10.4 Claimants should be given information about the status of their claim ina timely and fair manner.
19.10.5 Claim-determinative factors such as depreciations, discounting or
negligence should be illustrated and explained in comprehensive
language to claimants. The same applies where claims are denied inwhole or in part.
19.10.6 Sometimes intermediaries serve as an initial contact for claimants, which
may be in the common interest of the policyholder, intermediary andinsurer.
19.10.7 A fair claims assessment process requires avoidance of conflicts ofinterest, as well as appropriate competence and ongoing training of thestaff involved.
19.10.8 Competence requirements for claims assessment differ depending on
the type of insurance policy and generally include technical and legal
expertise.
Claims disputes
19.10.9 In the course of claims settlement, a dispute may arise between theclaimant and the insurer on the claims settlement amount, or coverage.
Staff handling claims disputes should be experienced in claims handlingand be appropriately qualified.
19.10.10 Dispute resolution procedures should follow a balanced and impartial
approach, bearing in mind the legitimate interests of all parties involved.
Procedures should avoid being overly complicated, such as having
burdensome paperwork requirements. Decisions should include thereasoning in clear language relating closely to the specific disputableissues.
19.10.11 Supervisors may encourage insurers to have mechanisms in place toreview claims disputes within the insurer to promote fair play andobjectivity in the decisions.
Outsourcing

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19.10.12 If any of the claims handling processes are outsourced in part or in full,then supervisors should require insurers to maintain close oversight andultimate responsibility for the provision of fair and transparent claims
handling and claims dispute resolution.
19.11

The supervisor requires insurers and intermediaries to handle complaints
in a timely and fair manner.
19.11.1 A complaint can be defined as an expression of dissatisfaction about theservice or product provided by an insurer or intermediary. It may involve,
but should be differentiated from, a claim and does not include a pure
request for information.
19.11.2 Insurers and intermediaries should establish policies and processes todeal in a fair manner with complaints which they receive. These should
include keeping a record of each complaint and the measures taken for
its resolution.
19.11.3 Insurers and intermediaries should make information on their policies
and processes on complaints handling available to customers.
19.11.4 Insurers and intermediaries should respond to complaints without
unnecessary delay; complainants should be kept informed about thehandling of their complaints.
19.11.5 Insurers and intermediaries should analyse the complaints they receive
to identify trends and recurring risks. Analysis of what leads to individualcomplaints can help them to identify, and enable them to correct,
common root causes.
19.11.6 Insurers should analyse complaints that they receive againstintermediaries in respect of products that the intermediaries have
distributed on their behalf, to enable them to assess the complete
customer experience and identify any issues that need to be addressed.
19.11.7 Supervisors may choose to have their own complaints monitoring
systems in place in order to benefit from the findings resulting frompolicyholder complaints.
19.11.8 Some insurers and intermediaries may decide to establish a mechanism
to review complaints, in order to ensure respective policies on complainthandling are in place.
Independent dispute resolution mechanisms
19.11.9 It is important that there are simple, affordable, easily accessible andequitable mechanisms in place, independent of insurers andintermediaries, to resolve disputes that have not been resolved by the
insurer or intermediary. Such mechanisms, collectively referred to here
as Independent Dispute Resolution (IDR) mechanisms, may vary acrossjurisdictions and may include mediation, an independent review
organisation, or an ombudsman. These are out of court mechanisms.
19.11.10 IDR mechanisms often operate on the basis of a code of procedure, orin some cases legislative rules, and may be restricted to retailpolicyholders. They are sometimes free of charge for such policyholders.
Decisions are generally non-binding for the policyholder but may bebinding for the insurer or intermediary within certain limits. As consumers

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may still avail themselves of court processes if the dispute is notsatisfactorily resolved, it is usually agreed that the period of limitation issuspended during an IDR procedure.
19.11.11 Mediators serving IDR mechanisms should meet high standards ofprofessional knowledge, integrity and competence. This would be
evidenced, for example, where the mediator is qualified to exercise thefunctions of a judge and is well grounded in the field of insurance law.
Although IDR mechanisms are usually financed by insurers and/orintermediaries, their mediators must be independent from them. Doubts
over independence may be expected if the mediator:• is subject to instructions from insurers/intermediaries;• is a former employee of an insurer/intermediary; or• simultaneously performs other functions which could affecttheir independence.
19.12

The supervisor requires insurers and intermediaries to have policies andprocesses for the protection and use of information on customers.
19.12.1 Insurers and intermediaries collect, hold, use or communicate to third
parties information on their customers in the course of their business. It
is important that they have in place policies and processes on theappropriate use and, in the case of personal information, the privacy ofsuch data.
Protecting the privacy of personal information
19.12.2 Significant amounts of the information collected, held or processed
represent customers’ financial, medical and other personal information.
Security over such information is extremely important, regardless of theformat of the information (eg whether physical or electronic). Hencesafeguarding personal information on customers is one of the key
responsibilities of the financial services industry.
19.12.3 Legislation identifies the provisions relating to privacy protection underwhich insurers and intermediaries are allowed to collect, hold, use orcommunicate personal information on customers to third parties.
Generally, the legislation also identifies who is the competent authority.
19.12.4 Although data protection laws vary from jurisdiction to jurisdiction,
insurers and intermediaries should have a clear responsibility to provide
their customers with a level of comfort regarding the security of theirpersonal information.
19.12.5 In view of the sensitivity of private information and the risks to consumers
and to the insurance sector in the event of failures to protect the privacyof such information, the supervisor should be satisfied that insurers andintermediaries have sufficient safeguards in place to protect the privacyof personal information on customers. To achieve this the supervisor
should require insurers and intermediaries to have appropriate policies
and processes in place. Such policies and processes should seek toembed the importance of protecting the privacy of personal information
within the organisation, as well as provide appropriate management of
the risks. Examples of areas that may be covered include:

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• ensuring that the Board and Senior Management are awareof the challenges relating to protecting the privacy of personal
information on customers;• demonstrating that privacy protection is part of theorganisation’s culture and strategy, through measures suchas training to employees that promotes awareness of internaland external requirements on this subject;• implementing policies, procedures and internal control
mechanisms that support the objectives of protecting theprivacy of personal information on customers and assess therisks associated with potential failure to protect the privacy of
personal information;• assessing the potential impact of new and emerging risks that
could threaten the privacy of personal information, such as therisk of cyber attacks, and taking appropriate steps to mitigate
these through measures such as internal controls, technology
and training; and• determining the response measures that may be needed
where a failure to protect the privacy of personal information
occurs, including matters such as timely notification toaffected customers and competent authorities.
In assessing policies and processes to protect the privacy of personal
information on customers, depending on the jurisdiction, the supervisor
may need to liaise with the relevant competent authority.
Protection against the misuse of customer information
19.12.6 Insurers and intermediaries use personal and other information on
customers for a variety of purposes within the course of business that
include, amongst other things, product development, marketing, productpricing, and claims management.
19.12.7 The supervisor should not allow insurers and intermediaries to use
customer information that they collect and hold in a manner that resultsin unfair treatment. Insurers and intermediaries should have appropriate
policies and processes in place. The measures that the supervisor
should expect such policies and processes to cover may include:• ensuring that the appropriate technology is available and inplace to manage adequately the personal and otherinformation an insurer or intermediary is holding on acustomer;• implementing policies and processes relating to the use ofdata, ensuring that the data collected is not used in an unfair
manner including when processed through algorithms or othertechnologies;• ensuring that such policies and processes provide that
customer data will not be abused to circumvent rules onprohibitions on aggressive marketing practices ordiscrimination;
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• ensuring that customers have a right to access and, if needed,
to correct data collected and used by insurers andintermediaries; and• ensuring that group structures are not abused to circumvent
prohibitions on the sharing of personal information.
In assessing policies and processes to prevent the use of customer
information in a manner that results in unfair treatment, depending on
the jurisdiction, the supervisor may need to liaise with the relevant
competent authority.
Outsourcing
19.12.8 Insurers and intermediaries should be aware of outsourcing risk,
especially when the outsourcing agreement is reached with firms in
another jurisdiction. Insurers and intermediaries should ensure that thefirms to which they outsource processes have adequate policies andprocesses in place for the protection and use of private information on
customers they have in their records.
Data access in the event of reorganisation
19.12.9 All the necessary data required in the event of restructuring, resolution
and liquidation should, subject to data protection requirements, beaccessible and readable at the insurer’s or intermediary’s domicile at any
time. This includes all customer-related data, such as claims and policy
data.
Information supporting fair treatment
19.13

The supervisor publicly discloses information that supports the fairtreatment of customers.
19.13.1 The supervisor should publish the policyholder protection arrangementsthat are in place for insurance contracts sold within its jurisdiction andinsurers subject to its supervision, and confirm the position ofpolicyholders dealing with insurers and intermediaries not subject tooversight or supervision within its jurisdiction.
19.13.2 The supervisor should give information to the public about whether andhow local legislation applies to the cross-border offering of insurance,such as through digital channels.
19.13.3 The supervisor should issue warning notices to consumers whennecessary in order to avoid transactions with insurers or intermediaries
that are unlicensed or subject to a suspended or revoked licence.
19.13.4 The supervisor should publish information that promotes consumers’
understanding of insurance contracts as well as steps that consumers
can take to protect themselves and make informed decisions.
19.13.5 The supervisor should have requirements regarding the public disclosure
by insurers of information on their business activities, performance andfinancial position, in order to enhance market discipline, consumerawareness, and understanding of the risks to which insurers are exposed(see ICP 20 Public Disclosure).

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Public Disclosure
20.0

The supervisor requires insurers to disclose relevant and comprehensive
information on a timely basis in order to give policyholders and market
participants a clear view of their business activities, risks, performanceand financial position.
Introductory Guidance
20.0.1

Public disclosure of material information is expected to enhance market
discipline by providing meaningful and useful information topolicyholders to make decisions on insuring risks with the insurer, and tomarket participants (which includes existing and potential investors,
lenders and other creditors) to make decisions about providing resources
to the insurer.

20.0.2

So far as practicable, information should be presented in accordancewith any applicable jurisdictional, international standards or generally
accepted practices so as to aid comparisons between insurers.

20.0.3In setting public disclosure requirements, the supervisor should take into
account the information provided in general purpose financial statements
and complement it as appropriate. The supervisor should note that
insurers which provide public general purpose financial reports maylargely comply with jurisdictional disclosure standards that are reflectiveof this ICP. Where a supervisor publishes on a regular and timely basis
information received from insurers, the supervisor may decide that those
insurers do not need to publicly disclose that same information.

20.0.4To the extent that there are differences between the methodologies usedin regulatory reporting, general purpose financial reporting and any otheritems for public disclosure, such differences should be explained andreconciled where possible.

20.0.5The supervisor’s application of disclosure requirements will depend on
the nature, scale and complexity of insurers. For example, it may beoverly burdensome for a small, private insurer to meet the samerequirements developed for large, publicly traded insurers. Whiledisclosure requirements may vary, the outcome should promote market
discipline and provide policyholders and market participants withadequate information for their needs.

20.0.6

Additionally, the supervisor may decide not to apply disclosure
requirements if there is no potential threat to the financial system, nopublic interest need for disclosure, and no legitimately interested party is
prevented from receiving information. It is expected that such situations
would be exceptional, but could be more relevant for certain types of
insurers (for example, captive insurers).

20.0.7

Public disclosure may include a description of how information isprepared, including methods applied and assumptions used. Disclosureof methods and assumptions may assist policyholders and market
participants in making comparisons between insurers. Accounting andactuarial policies, practices and procedures differ not only between
jurisdictions but also between insurers within the same jurisdiction.

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Meaningful comparisons can be made only where there is adequate
disclosure of how information is prepared.
20.0.8Similarly, meaningful comparisons from one reporting period to anothercan be made only if the reader is informed how the methods andassumptions of preparation have changed and, if practicable, the impactof that change. Changes over time may not be seen as arbitrary if thereasons for changes in methods and assumptions are explained. If an
insurer uses methods and assumptions in the preparation of information
which are consistent from period to period, and discloses these, it willassist in the understanding of trends over time.

20.0.9Where changes in methods and assumptions are made, the nature ofsuch changes, the reason for them and their effects, where material,
should be disclosed. It may be helpful if information is presented in amanner that facilitates the identification of patterns over time, including
providing comparative or corresponding figures from previous periods(eg by presenting loss triangulations).

20.0.10 In establishing disclosure requirements for its jurisdiction, the supervisor
should consider the need for disclosures that deliver key information
rather than unnecessary volumes of data. Excessive disclosure
requirements will not lead to effective disclosures for policyholders andmarket participants and will be burdensome for insurers.
20.0.11 In establishing disclosure requirements, the supervisor should take into
account proprietary and confidential information. Proprietary information
comprises information on characteristics and details of, for example,
insurance products, markets, distribution and internal models andsystems that could negatively influence the competitive position of an
insurer if made available to competitors. Information about policyholders
and insured parties is usually confidential under privacy legislation orcontractual arrangements.
20.0.12 Proprietary and confidential information affects the scope of the required
disclosure of information by insurers about their customer base anddetails on internal arrangements (for example, methodologies used orparameter estimates data). The supervisor should strike an appropriatebalance between the need for meaningful disclosure and the protectionof proprietary and confidential information.
20.0.13 A consolidated group as determined under applicable accounting
standards may differ from a group for the purposes of insurance
supervision (see ICP 23 Group-wide Supervision). In circumstanceswhere this is the case, the supervisor may require disclosures based on
the scope of the group for supervisory purposes. Where an insurer’s
scope of the group is different under applicable accounting standards
and solvency standards, it may be appropriate if reasons are provided
and an explanation given about the basis on which disclosures havebeen provided.
20.0.14 Disclosures by insurance legal entities may cross-refer to existing public
disclosures to avoid duplication.
20.1

Subject to their nature, scale and complexity, insurers make audited
financial statements available at least annually.

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20.1.1

20.2

Where audited financial statements are not required by the supervisor
given the nature, scale and complexity of an insurer (for example, for asmall local branch office of a foreign insurer), the supervisor may requirethat similar information is made publicly available by other means.

Insurers disclose, at least annually and in a way that is publicly accessible,
appropriately detailed information on their:• company profile;• corporate governance framework;• technical provisions;• insurance risk exposure;• financial instruments and other investments;• investment risk exposure;• asset-liability management;• capital adequacy;• liquidity risk; and• financial performance.
20.2.1

In developing disclosure requirements, the supervisor may consider
whether such disclosures are:• easily accessible and up-to-date;• comprehensive, reliable and meaningful;• comparable between different insurers operating in the same
market;• consistent over time so as to enable relevant trends to bediscerned; and• aggregated or disaggregated so that useful information is not
obscured.

20.2.2

Information should be disseminated in ways best designed to bring it to
the attention of policyholders and market participants, but taking into
account the relative effectiveness and costs of different methods ofdissemination (for example, printed versus digital methods).

20.2.3

Information should be provided with sufficient frequency and timelinessto give a meaningful picture of the insurer to policyholders and market
participants. The need for timeliness will need to be balanced againstthat for reliability.

20.2.4Disclosure requirements may also have to balance the interests ofreliability against those of relevance or usefulness. For example, in somelong-tail classes of insurance, realistic projections as to the ultimate costof incurred claims are highly relevant. However, due to uncertainties,
such projections are subject to a high degree of inherent errors of
estimation. Qualitative or quantitative information can be used to convey
to users an understanding of the relevance and reliability of theinformation disclosed.

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20.2.5

Information should be sufficiently comprehensive to enable policyholders
and market participants to form a well-rounded view of an insurer’s
financial condition and performance, business activities, and the risks
related to those activities. In order to achieve this, information should be:• well-explained so that it is meaningful;• complete so that it covers all material circumstances of an
insurer and, where relevant, those of the group of which it is amember; and• both appropriately aggregated so that a proper overall pictureof the insurer is presented and sufficiently disaggregated sothat the effect of distinct material items may be separately
identified.

20.2.6

Information should, so far as practicable, reflect the economic substanceof events and transactions as well as their legal form. The information
should be neutral (ie, free from material error or bias) and complete in allmaterial respects.

Company Profile
20.3

Disclosures include information about the insurer’s company profile suchas:
• the nature of its business;• its corporate structure;• key business segments;• the external environment in which it operates; and• its objectives and the strategies for achieving those objectives.
20.3.1The overall aim for the company profile disclosure is for insurers toprovide a contextual framework for the other information required to bemade public.

20.3.2Disclosures on the nature of the insurer’s business and its external
environment should assist policyholders and market participants inassessing the strategies adopted by the insurer.

20.3.3Disclosures may include information about the insurer’s corporate
structure, which should include any material changes that have takenplace during the year. For insurance groups, where provided, suchdisclosures should focus on material aspects, both in terms of the legal
entities within the corporate structure and the business functions
undertaken within the group. In the event of differences in thecomposition of a group for supervisory purposes and for public reporting
purposes, it would be useful if a description of the entities constituting
those differences was also provided.

20.3.4Disclosures may include information on the key business segments,
main trends, factors and events that have contributed positively or
negatively to the development, performance and position of thecompany.

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20.3.5

Disclosures may include information on the insurer’s competitive position
and its business models (such as its approach to dealing and settlingclaims or to acquiring new business) as well as significant features ofregulatory and legal issues affecting its business.

20.3.6Disclosures may include information about company objectives,
strategies and timeframes for achieving those objectives, including theapproach to risk appetite, methods used to manage risks, and key
resources available. To enable policyholders and market participants toassess these objectives, and the insurer's ability to achieve them, it may
be appropriate if the insurer also explains significant changes in strategy
compared to prior years.

20.3.7

Key resources available may include both financial and non-financial
resources. For non-financial resources the insurer may, for example,
provide information about its human and intellectual capital.

Corporate Governance Framework
20.4

The supervisor requires that disclosures about the insurer’s corporate
governance framework provide information on the key features of theframework, including its internal controls and risk management, and how
they are implemented.
20.4.1

Disclosures should include the manner in which key business activities
and control functions are organised, and the mechanism used by the
Board to oversee these activities and functions, including for changes to
key personnel and management committees. Such disclosures should
demonstrate how the key activities and control functions fit into an
insurer’s overall risk management framework.

20.4.2

Where a material activity or function of an insurer is outsourced, in partor in whole, disclosures may include the insurer’s outsourcing policy andhow it maintains oversight of, and accountability for, the outsourced
activity or function.

Technical Provisions
20.5

The supervisor requires that disclosures about the insurer’s technicalprovisions are presented by material insurance business segment andinclude, where relevant, information on:• the future cash flow assumptions;• the rationale for the choice of discount rates;• the risk adjustment methodology where used; and• other information as appropriate to provide a description of themethod used.
20.5.1

Disclosures related to technical provisions should provide information on
how those technical provisions are determined. As such, disclosures
may include information about the level of aggregation used and theamount, timing and uncertainty of future cash flows in respect of
insurance obligations.

20.5.2Disclosures should include a presentation of technical provisions andreinsurance assets on a gross basis. However, it may be useful to have

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information about technical provisions presented on both a net and grossbasis.
20.5.3

Information may be disclosed about the method used to derive theassumptions for calculating technical provisions, including the discountrate used. Disclosures may also include information about significant
changes in assumptions and the rationale for the changes.

20.5.4

When applicable, information about the current estimate and margin overthe current estimate may include the methods used to calculate them,whether or not these components of technical provisions are determined
separately. If the methodology has changed since the last reporting
period, it would be useful to include the reasons for the change and any
material quantitative impact.

20.5.5It may be useful if the insurer provides an outline of any model(s) usedand describe how any range of scenarios regarding future experiencehas been derived.

20.5.6Disclosures may include a description of any method used to treat
acquisition costs and whether future profits on existing business havebeen recognised.

20.5.7

Where surrender values are material, disclosures may include theinsurer’s surrender values payable.

20.5.8Disclosure of a reconciliation of technical provisions from the end of theprevious year to the end of the current year may be particularly useful.

20.5.9Disclosure of technical provisions may be presented in two parts:• one part that covers claims from insurance events which havealready taken place at the date of reporting (claims provisions
including incurred but not reported (IBNR) and incurred but
not enough reported (IBNER) provisions) and for which there
is an actual or potential liability; and• another part that covers losses from insurance events which
will take place in the future (for example, the sum of provision
for unearned premiums and provision for unexpired risks (alsotermed premium deficiency reserve)).

20.5.10 Providing this disclosure in two parts is particularly important for lines of
insurance business where claims may take many years to settle.
Life insurers
20.5.11 It may be useful if the disclosures include key information on theassumed rates, the method of deriving future mortality and disability
rates, and whether customised tables are applied. Disclosures may
include a life insurer’s significant assumptions about future changes ofmortality and disability rates.
20.5.12 It may enhance policyholder and market participant understanding if
disclosures include information on the conditions for the amount andtiming of the allocation of participation features and how such featuresare valued in technical provisions. Required disclosures could include
whether participation features are based on: the performance of a groupof contracts; the realised/unrealised investment returns from a pool of
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assets; the profit or loss of the company; or any other element.
Disclosures could also be required on the extent to which such features
are contractual and/or discretionary.
20.5.13 Disclosures may include quantitative information on the life insurer’s
minimum participation features and actual distributions to policyholders.
For example, the following quantitative information may be shown by
segment:• guaranteed policyholder benefits paid; and• additional policyholder benefits paid which arise from profit
sharing clauses.
20.5.14 Disclosures may include the assumptions and methodologies employed
to value significant guarantees and options, including the assumptions
concerning policyholder behaviour.
Non-life insurers
20.5.15 In order to enable policyholders and market participants to evaluate
trends, disclosures for non-life insurers may include historical data about
earned premiums compared to technical provisions by class of business.
To assess the appropriateness of assumptions and methodology used
for determining technical provisions, historical data on the run off result
and claims development could be disclosed.
20.5.16 To facilitate the evaluation of a non-life insurer’s ability to assess the sizeof the commitments to indemnify losses covered by the insurance
contracts issued, disclosures for non-life insurers may include the run off
results over many years, to enable policyholders and market participantsto evaluate long-term patterns (for example, how well the insurer
estimates the technical provisions). The length of the time period shouldreflect how long-tailed the distribution of losses is for the insuranceclasses in question.
20.5.17 Non-life insurers may disclose information on the run off results forincurred losses and for the provisions for future losses.
20.5.18 Disclosures for non-life insurers may include the run off results as a ratioof the initial provisions for the losses in question. When discounting isused, disclosures should include the effect of discounting.
20.5.19 Except for short-tail business, the supervisor may require non-life
insurers to disclose information on the development of claims in a claims
development triangle. A claims development triangle shows the insurer's
estimate of the cost of claims (claims provisions and claims paid), as ofthe end of each year, and how this estimate develops over time. This
information should be reported consistently on an accident year orunderwriting year basis and reconciled to amounts reported in thebalance sheet.
Insurance Risk Exposures
20.6

The supervisor requires that disclosures about the insurer’s reasonably
foreseeable and material insurance risk exposures, and their management,
include information on:

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•the nature, scale and complexity of risks arising from its
insurance contracts;• the insurer’s risk management objectives and policies;• models and techniques for managing insurance risks (including
underwriting processes);• its use of reinsurance or other forms of risk transfer; and•its insurance risk concentrations.

20.6.1

Disclosures may include a quantitative analysis of the insurer’s
sensitivity to changes in key factors both on a gross basis and taking into
account the effect of reinsurance, derivatives and other forms of risk
mitigation on that sensitivity. For example, disclosures may include asensitivity analysis by life insurers to the changes in mortality anddisability assumptions or sensitivities to increased claim inflation by nonlife insurers.

20.6.2

Where an insurance group includes legal entities in other sectors,
disclosures may include the risk exposure of the insurance legal entities
from those other entities and procedures in place to mitigate those risks.

20.6.3Disclosures may include a description of the insurer’s risk appetite andits policies for identifying, measuring, monitoring and controllinginsurance risks, including information on the models and techniquesused.

20.6.4Disclosures may include information on the insurer’s use of derivatives
to hedge risks arising from insurance contracts. This information may
include a summary of internal policies on the use of derivatives.

20.6.5Disclosure of how an insurer uses reinsurance and other forms of risk
transfer may enable policyholders and market participants to understandhow the insurer controls its exposure to insurance risks.

20.6.6

Quantitative data on an insurer’s reinsurance Disclosure may include theinsurer’s overall reinsurance programme to explain the net risk retained
and the types of reinsurance arrangements made (treaty, facultative,
proportional or non-proportional) as well as any risk mitigating devices
that reduce the risks arising out of the reinsurance cover.

20.6.7It may be beneficial if disclosures separately detail the reinsurers’ shareof technical provisions and receivables from reinsurers on settled claims.
Further quantitative disclosures on reinsurance may include:• the credit quality of the reinsurers (for example, by grouping
reinsurance assets by credit rating);• credit risk concentration of reinsurance assets;• the nature and amount of collateral held against reinsurance
assets;• the development of reinsurance assets over time; and• the ageing of receivables from reinsurers on settled claims.

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20.6.8

It may be useful if disclosures include the impact and planned action
when the expected level or scope of cover from a reinsurance/risk
transfer contract is not obtained.

20.6.9Description of the insurer's risk concentrations may include, at least,
information on the geographical concentration of insurance risk, theeconomic sector concentration of insurance risk, the extent to which therisk is reduced by reinsurance and other risk mitigating elements and, ifmaterial, the risk concentration inherent in the reinsurance cover.

20.6.10 Disclosures may include the geographical concentration of premiums.
The geographical concentration may be based on where the insured risk
is located, rather than where the business is written.
20.6.11 If material, disclosures may include the number of reinsurers that itengages, as well as the highest concentration ratios. For example, itwould be appropriate to expect an insurer to disclose its highest premium
concentration ratios, which shows the premiums ceded to an insurer’s
largest reinsurers in aggregate, as a ratio of the total reinsurance
premium ceded.
Financial Instruments and Other Investments
20.7

The supervisor requires that disclosures about the insurer’s financial
instruments and other investments include information on:• instruments and investments by class;• investment management objectives, policies and processes;
and• values, assumptions and methods used for general purpose
financial reporting and solvency purposes, as well as an
explanation of any differences, where applicable.
20.7.1For the purposes of disclosure, an insurer may group assets andliabilities with similar characteristics and/or risks into classes and thendisclose information segregated by those classes.

20.7.2

Where investment management objectives, policies and processes differ
between segments of an insurer’s investment portfolio, disclosures
should be sufficient to provide an understanding of those differences.

20.7.3

When providing disclosures around the uncertainty of reported values offinancial instruments and other investments, it may be useful if the effectof derivatives on that uncertainty is also disclosed.

Investment Risk Exposures
20.8

The supervisor requires disclosures about the insurer’s material
investment risk exposures, and their management.
20.8.1

Disclosures may include quantitative information, about its exposure to:• currency risk;• market risk;• credit risk; and• concentration risk.

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20.8.2

The risks listed above may affect both assets and liabilities. For example,
market risk arising from interest rate movement may be reflected inchanges in the valuation of an insurer’s fixed income investments as well
as changes in the valuation of insurance liabilities if they are discounted
using market interest rates. Changes in interest rates may also change
the amounts that an insurer has to pay for its variable rate borrowings.
Therefore, required disclosure may include the risk exposure arisingfrom both an insurer’s assets and its liabilities.

20.8.3Disclosures may include the investment return achieved together withthe risk exposure and investment objective. Disclosure of risk exposures
can provide policyholders and market participants with valuable insight
into both the level of variability in performance that one can expect when
economic or market conditions change, and the ability of an insurer toachieve its desired investment outcome.

20.8.4For investment risk exposures, disclosures may include the intra-period
high, median and low exposures where there have been significant
changes in exposure since the last reporting date. Disclosures may also
include the amount bought and sold during a reporting period as a proxy
for turnover. Such disclosure of risk exposures may also be required foreach asset class.

20.8.5

In jurisdictions that require investment disclosures to be grouped by risk
exposure, the disclosures should provide information about the risk
management techniques used to measure the economic effect of risk
exposure. Such disclosure may include an analysis by type of asset
class.

20.8.6Disclosures may include information on its use of derivatives to hedge
investment risks, including a summary of internal policies on the use ofderivatives.

20.8.7

Disclosures may include information on whether or not the insurer it
carries out stress tests or sensitivity analysis on its investment risk
exposures (for example, the change in capital resources as a percentage
of total assets corresponding to a 100 basis point change in interest
rates), and, if so, disclose the model, process and types of assumptions
used and the manner in which the results are used as part of its
investment risk management practices.

20.8.8For debt securities, disclosures on the sensitivity of values to market
variables including credit spreads may include breakdowns by credit
rating of issue, type of issuer (eg government, corporate) and by period
to maturity.

20.8.9In addition to breakdowns on ratings and types of credit issuers, theinsurer should disclose the aggregate credit risk arising from off-balance
sheet exposures.

Asset-Liability Management
20.9

Disclosures about the insurer’s asset-liability management (ALM) include
information on:• ALM in total and, where appropriate, at a segmented level;

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• the methodology used and the key assumptions employed inmeasuring assets and liabilities for ALM purposes; and• any capital and/or provisions held as a consequence of amismatch between assets and liabilities.
20.9.1

To provide information on its ALM approach, disclosures may include
qualitative information explaining how the insurer manages assets andliabilities in a co-ordinated manner. The explanation could take into
account the ability to realise its investments quickly, if necessary, without
substantial loss, and sensitivities to fluctuations in key market variables(including interest rate, exchange rate, and equity price indices) andcredit risks.

20.9.2

Where an insurer’s ALM is segmented (eg by different lines of business),
disclosures may include information on ALM at a segmented level.

20.9.3

Where derivatives are used, it may be useful if the disclosures include a
description of both the nature and effect of their use.

20.9.4Disclosures may include the insurer’s sensitivity of regulatory capital
resources and provisions for mismatching to:• changes in the value of assets; and• changes in the discount rate or rates used to calculate thevalue of the liabilities.

Capital Adequacy
20.10

Disclosures about the insurer’s capital adequacy include information on:• its objectives, policies and processes for managing capital andassessing capital adequacy;• the solvency requirements of the jurisdiction(s) in which theinsurer operates; and• the capital available to cover regulatory capital requirements. If
the insurer uses an internal model to determine capital
resources and requirements, information about the model isdisclosed.
20.10.1 Information about objectives, policies and processes for managing
capital adequacy assist in promoting the understanding of risks andmeasures which influence the capital calculation and the risk appetitethat is applied.
20.10.2 It may be useful if the insurer discloses information to allow market
participants to assess the quantity and quality of its capital in relation toregulatory capital requirements.
20.10.3 Disclosures may include qualitative information about its management of
capital regarding:• instruments regarded as available capital;• key risks and measures which influence the capital
calculation; and• the insurer’s risk appetite.

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20.10.4 It may be useful if the disclosures include a description of any variationin the group as defined for capital adequacy purposes from thecomposition of the group used for general purpose financial reporting
purposes.
Liquidity Risk
20.11

The supervisor requires that disclosures about the insurer’s liquidity risk
include sufficient quantitative and qualitative information to allow ameaningful assessment by market participants of the insurer’s material
liquidity risk exposures.
20.11.1 Disclosures on liquidity risk should include:• quantitative information on the insurer’s sources and uses ofliquidity, considering liquidity characteristics of both assets
and liabilities; and• qualitative information on the insurer’s liquidity risk exposures,
management strategies, policies and processes.
20.11.2 Disclosures should discuss known trends, significant commitments andsignificant demands. Disclosures should also discuss reasonably
foreseeable events that could result in the insurer's liquidity position
improving or deteriorating in a material way.

Financial Performance
20.12

Disclosures about the insurer’s financial performance, in total and at asegmented level include information on:• earnings analysis;• claims statistics including claims development;• pricing adequacy; and• investment performance.
General financial performance
20.12.1 Disclosures should help policyholders and market participants better
understand how profit emerges over time from new and in-force
insurance contracts.
20.12.2 Disclosure may include a statement of changes in equity showing gains
and losses recognised directly in equity as well as capital transactions
with, and distributions to, shareholders, and profit sharing with
policyholders.
20.12.3 Disclosures may include information on its operating segments and how
they were determined.
20.12.4 An operating segment is a component of an entity that engages inbusiness activities from which it may earn revenues and incur expenses
and whose operating results are regularly reviewed by the entity’s
management to make decisions about resources to be allocated.
Examples of features by which business is segmented are:• type of business: life insurance, non-life insurance,
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• mix of organisational and geographic approach: eg
insurance jurisdiction X, insurance jurisdiction Y, insurance(other), asset management jurisdiction Z.
20.12.5 Disclosures may include the impact of amortisation and impairment ofintangible assets on financial performance.
Technical performance
20.12.6 The insurer may provide statements of profit and loss that include theresults, both gross and net of reinsurance, of their underwriting by broadlines of business.
20.12.7 , If the insurer is a ceding insurer, disclosures may include gains andlosses recognised in profit or loss on buying reinsurance.
Technical performance for non-life insurers
20.12.8 In order to judge how well insurance premiums cover the underlying riskof the insurance contracts and the administration expenses (pricing
adequacy), disclosures may include data on:• loss ratio;• expense ratio;• combined ratio; and• operating ratio.
20.12.9 These ratios should be calculated from the profit and loss account of thereporting year and be gross of reinsurance in order to neutralise theeffect of mitigation tools on the technical performance of the directbusiness. Gains on reinsurance cannot be expected to continue
indefinitely without price adjustments from reinsurers. If the net ratios arematerially different from the gross ratios, then both ratios should be
disclosed. The ratios should be measured either on an accident year oran underwriting year basis.
20.12.10 When discounting is used, disclosures may include information on the
discount rates used and method of discounting to be disclosed. The
discount rates should be disclosed at an appropriate level of aggregation
by duration, for example, for each of the next five years and the averagerate for claims expected to be paid after five years.
20.12.11 Such disclosure should be accompanied by supporting narrative,
covering an appropriate period, to enable policyholders and market
participants to evaluate long-term trends better. Information relating toprevious years should not be recalculated to take into account present
information. The length of the period may reflect the historical volatility ofthe particular class of insurance business.
20.12.12 It may be appropriate in the case of high volume, homogeneousclasses, for the supervisor to require insurers to disclose statisticalinformation on claims. For instance, the insurer could describe the trend
in the number of claims and the average size of claims. To be relevant,this information should be linked to the level of business (eg number ofpolicies or earned premiums).
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20.12.13 In principle, the trend in claims may reflect the development ininsurance risks. As it is difficult to point to one good measurement
method of insurance risk, several can be considered. However, , it would
be normal for non-life insurers to be required to disclose historical dataaccompanied by supporting narrative at least on:• the mean cost of claims incurred (ie, the ratio of the total costof claims incurred to the number of claims) in the accounting
period by class of business; and• claims frequency (for example, the ratio of the number ofclaims incurred in the reporting period to the average numberof insurance contracts in existence during the period).
Source of earnings analysis for life insurers
20.12.14 Where an applicable jurisdictional standard does not require a similar
analysis to be disclosed, it may be useful for disclosures to include
expected earnings on in-force business. This represents the earnings on
the in-force business that were expected to be realised during thereporting period. Examples of this include expected release of risk
margins, net management fees, and earnings on deposits.
20.12.15 Life insurers may disclose the impact of new business. This represents
the point-of-sale impact on net income of writing new business during
the reporting period. This is the difference between the premium
received and the sum of the expenses incurred as a result of the saleand the new technical provisions established at the point of sale. This isalso affected by any methodology used to defer and amortise acquisition
expenses.
20.12.16 It may be useful for life insurers to disclose experience gains andlosses. This represents gains and losses that are due to differences
between the actual experience during the reporting period and thetechnical provisions at the start of the year, based on the assumptions atthat date.
20.12.17 Life insurers may disclose the impact on earnings of management
actions and changes in assumptions.
20.12.18 An example of a Source of Earnings analysis table for a life insurer isprovided below.
Example: Source of Earnings
Segment A

Segment B

Total

Current

Previous

Current

Previous

Current

Previous

Year

Year

Year

Year

Year

Year

Expected earnings
on in-force business
Impact of new
business
Experienced gains
and losses:

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Investment
Mortality
Expenses
Other
Additional items:
Changes inassumptions
Earnings on
surplus
Other
Income taxes= Net income

Investment performance
20.12.19 Investment performance is one of the key determinants of an insurer’s
profitability. For many life insurance policies, returns that policyholders
receive are either directly or indirectly influenced by the performance ofan insurer’s investments. Disclosure of investment performance is,therefore, essential to policyholders and market participants.
20.12.20 Disclosure of investment performance may be made on appropriate
subsets of an insurer’s assets (for example, assets belonging to theinsurer’s life insurance business, assets belonging to statutory or
notionally segregated portfolios, assets backing a group of investmentlinked contracts, assets grouped as the same asset class).
20.12.21 For investment performance related to equity securities, debt
securities, properties and loans, the disclosures may include abreakdown of income (eg dividend receipts, interest income, rental
income), realised gains/losses, unrealised gains/losses, impairments
including changes in loan loss provisions and investment expenses.
Non-GAAP Financial Measures
20.13

Insurers that publicly disclose non-GAAP financial measures are required
to adhere to the specified practices regarding those measures, whereapplicable.
20.13.1 In many jurisdictions, publicly-listed insurers are expected to adhere to
specific practices, for disclosure of non-GAAP financial measures, whichhave been promulgated by the domestic securities supervisor. The
supervisor could consider standards promulgated by the domestic
securities supervisor appropriate.
20.13.2 If no such requirements exist from the domestic securities supervisor
for non-GAAP financial measures, the supervisor may promulgate
requirements for insurers based on considerations of best practices
and existing international guidance from key standard setting bodies
dealing with financial disclosures.

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Countering Fraud in Insurance
The supervisor requires that insurers and intermediaries take effective measures todeter, prevent, detect, report and remedy fraud in insurance.
21.0
Introductory Guidance
21.0.1

Fraud in insurance (including reinsurance) is a deceptive act or omission
intended to gain advantage for a party committing the fraud (thefraudster) or for other parties. Most jurisdictions have legal provisions
against fraud in insurance. In many jurisdictions, instances of fraud are
criminal acts.

21.0.2Fraud in insurance can take many forms and be perpetrated by any party
involved in insurance, including insurers, insurers’ managers and staff,
intermediaries, accountants, auditors, consultants, claims adjusters,
third party claimants and policyholders.

21.0.3Fraud poses a serious risk to all financial sectors; fraud in insurance
results in reputational as well as financial damage and social andeconomic costs. In the insurance sector, both insurers and policyholders
bear the costs. Losses caused by fraudulent activities affect insurers’
profits and potentially their financial soundness. To compensate,
insurers raise premiums and this results in higher costs for policyholders.
Fraud may also result in the policyholder discovering that they are notinsured for risks they believed were covered, which can have a material
impact on both customers and businesses. For these reasons, fraud may
reduce consumer and shareholder confidence. It can affect the
reputation of individual insurers, insurance groups, the insurance sector
and, potentially, economic stability more broadly.

21.0.4

Countering fraud is in principle the concern of the individual insurers andintermediaries. Insurers and intermediaries need to understand and takesteps to minimise their vulnerability to fraud.

21.0.5

Responsibility for ensuring that insurers and intermediaries haveadequate fraud risk management ultimately lies with the Board andSenior Management of the insurer or intermediary.

21.0.6The supervisor is one of the competent authorities that has an importantrole to play in countering fraud in insurance in its jurisdiction. There may
be jurisdictions where several authorities have a responsibility for
deterring, preventing, detecting, reporting and remedying fraud ininsurance.

21.0.7

Fraud in insurance is an issue for supervisors if the risk of fraud is notaddressed adequately. Therefore, supervisors should pay appropriate
attention as to whether insurers and intermediaries have adequate andeffective policies, procedures and controls in place to deter, prevent,detect, report and remedy fraud (see Application Paper on Deterring,
Preventing, Detecting, Reporting and Remedying Fraud in Insurance).

21.0.8The increasing integration of financial markets and the growing numberof internationally active insurers and intermediaries make fraud and its
potential global implications an important issue to address at the

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international level. Therefore, it is important that supervisors
communicate with one another in addressing fraud across jurisdictions.
21.0.921.1

The supervisor should consider the application of these standards,
particularly for intermediaries, taking into account that there are various
business models ranging from sole traders to large enterprises.

Fraud in insurance is addressed by legislation which prescribes adequate
sanctions for committing such fraud and for prejudicing an investigation
into fraud.
21.1.1Legislation should contain offences and sanctions for committing fraud
and for prejudicing an investigation into fraud. It should also provide theability:• to obtain documents and information, together withstatements made by relevant individuals, for intelligence andinvestigation purposes, for disclosure to appropriate
authorities;• to restrain assets which represent, or are believed torepresent, the proceeds of fraud; and• to confiscate assets which are, or are believed to be, theproceeds of fraud.

21.1.221.2

It may be helpful for anti-fraud legislation to provide appropriate civil andcriminal immunity for fraud reporting in good faith, including where no
fraud was subsequently found to have occurred.

The supervisor has a thorough and comprehensive understanding of thetypes of fraud risk to which insurers and intermediaries are exposed. The
supervisor regularly assesses the potential fraud risks to the insurance
sector and requires insurers and intermediaries to take effective measures
to address those risks.
21.2.1The supervisor should identify the main vulnerabilities in its jurisdiction,
taking into account independent risk assessments where relevant, andaddress them accordingly. These are not static assessments. They willchange over time, depending on how circumstances develop, and how
threats evolve.

21.2.2The supervisor should
understanding of:

have

a

thoroughandcomprehensive• the activities undertaken and products and services offered byinsurers and intermediaries; and• internal, policyholder, claims and intermediary fraud.
21.2.3

21.3

The supervisor should consider the potential fraud risks alongside otherrisk assessments (including governance and market conduct) arisingfrom its wider duties and be aware of the relevance of fraud to the duties
it carries out in respect of other ICPs and standards.

The supervisor has an effective supervisory framework to monitor andenforce compliance by insurers and intermediaries with the requirements
to counter fraud in insurance.

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21.3.1

The supervisor should issue anti-fraud requirements by way ofregulations, instructions or other documents or mechanisms that set out
enforceable requirements with sanctions for non-compliance with therequirements.

21.3.2The supervisor should issue guidance to insurers and intermediaries thatwill assist them to counter fraud effectively and to meet the requirements
set by the supervisor.

21.3.3The supervisor should have sufficient financial, human and technicalresources to counter fraud, including the resources needed to be able toissue and enforce sanctions in relation to complex cases where insurers
or intermediaries oppose such sanctions.

21.3.4The staff of the supervisor engaging in anti-fraud activity should beappropriately skilled and provided with adequate and relevant training on
countering fraud. Examples of issues to be covered under adequate andrelevant training for the staff of the supervisor include fraud legislation(including offences), fraud typologies, techniques to be used bysupervisors to ensure that insurers and intermediaries are complying
with their obligations, and the issue and enforcement of sanctions.
Similarly, insurers and intermediaries should provide relevant training on
anti-fraud measures to Board Members, Senior Management and otherstaff as appropriate.

21.3.5The supervisor should take account of the risk of fraud at each stage ofthe supervisory process, where relevant, including the licensing stage.

21.3.6The supervisor should assess whether insurers and intermediaries haveadequate fraud risk management systems in place which are reviewed
regularly. Insurers and intermediaries should be able to demonstrate to
the supervisor that they have effective management of their fraud risk
and possible risks to their solvency or continuity caused by fraud. The
supervisor should at least assess whether insurers and intermediaries:• have effective policies, procedures and controls in place todeter, prevent, detect, report and remedy fraud;• have an independent internal audit function and periodically
carry out fraud-sensitive audits; and• have allocated appropriate resources to deter, prevent,detect, record and, as required, promptly report fraud to therelevant authorities.

21.3.721.3.8The supervisor should use both off-site monitoring and on-site
inspections to:•evaluate the effectiveness of the internal control system of
insurers and intermediaries to manage fraud risks; and•recommend or require appropriate remedial action where theinternal control system is weak and monitor the implementationof such remedial actions.

As particular fraud risks arise from claims, the supervisor should coverclaims management processes in its supervision. This may include
reviewing and assessing claims data, the quality of client acceptances,

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and claims handling processes. Regarding the risks of fraud occurring in
the underwriting process, the supervisor should review relevant
processes and controls, in particular those concerned with verification ofcustomer information.
21.3.9The supervisor should have the power to take appropriate corrective andremedial action where insurers and intermediaries do not implement antifraud requirements effectively or in cases of fraud committed by the
insurer or intermediary. Depending on the severity of the situation andlevel of supervisory powers, this could include letters to management,
directions, fines, the suspension of business, the appointment ofalternative management and redress to customers.

21.3.10 Where a supervisor identifies suspected criminal activities in an insurer
or intermediary it should ensure that relevant information is provided to
the financial intelligence unit (FIU) and appropriate law enforcement
agency and any other relevant supervisors.
21.4

The supervisor regularly reviews the effectiveness of the measures insurers
and intermediaries and the supervisor itself are taking to deter, prevent,detect, report and remedy fraud. The supervisor takes any necessary action
to improve effectiveness.
21.4.1

The review of effectiveness should take risk into account and assess
whether established regulations and supervisory practices are being
enforced.

21.4.2This review could cover aspects such as:• the risks of fraud in the insurance sector and whether these
are adequately addressed by the risk-based approach of thesupervisor;• the adequacy of the supervisor’s resources and training;• whether the number and content of on-site inspections
relating to anti-fraud measures are adequate;• whether off-site supervision of anti-fraud measures isadequate;• the findings of on-site inspections, including the effectivenessof training and implementation by insurers and intermediaries
of anti-fraud measures;• action taken by the supervisor against insurers andintermediaries;• input from other authorities with anti-fraud responsibilities,
such as information on fraud prosecutions and convictions;• the number and nature of requests for information from otherauthorities concerning anti-fraud matters; and• the adequacy of the requirements, guidance and otherinformation provided by the supervisor to the sector which
may vary on the basis of the business undertaken.

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Such reviews should enable the supervisor to identify any necessary
actions which need to be taken to improve effectiveness.
21.4.3The supervisor should consider contributing to or promoting anti-fraud
initiatives such as:• working with relevant industry and trade associations toencourage and maintain an industry-wide approach todeterring, preventing, detecting, reporting and remedying
fraud;• the establishment of anti-fraud committees consisting ofindustry or trade organisations, law enforcement agencies,
other supervisors, other authorities and possibly consumer
organisations as a platform to address fraud in insurance – forexample, by discussing trends, risks, policy issues, profiles
and modus operandi;• the establishment of a fraud database on suspected and/or
confirmed fraud attempts; insurers could be requested or
required to submit information and statistics with respect tothese attempts;• the exchange of information between insurers andintermediaries on fraud and fraudsters including, as
appropriate, through the use of databases to the extent
permitted by local legislation• the enhancement of consumer/policyholder awareness on
insurance fraud and its effects through effective education andmedia campaigns; and• cooperation between organisations involved with combating
fraud in the insurance sector, such as organisations foraccountants, forensic auditors and claims adjustors.

21.5

21.4.4

Whenever a supervisor is informed of substantiated suspicious
fraudulent activities which may affect insurers, intermediaries or the
insurance industry as a whole, it should consider whether to convey
warning information to insurers and intermediaries to the extent
permitted by local legislation.

21.4.5The supervisor should maintain records on the number of on-site
inspections relating to the combating of fraud measures and on
sanctions it has issued to insurers and intermediaries with regard to
inadequate anti-fraud measures.

The supervisor has effective mechanisms in place, which enable it tocooperate, coordinate and exchange information with other competentauthorities, such as law enforcement authorities, as well as othersupervisors concerning the development and implementation of policies
and activities to deter, prevent, detect, report and remedy fraud ininsurance.
21.5.1

Mechanisms of cooperation and coordination should normally address:

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• operational cooperation and, where appropriate, coordination
between supervisors and other anti-fraud competentauthorities; and• policy cooperation and, where appropriate, coordination
across all relevant anti-fraud competent authorities.
21.5.2

Where the supervisor identifies suspected fraud in insurers orintermediaries it should ensure that relevant information is provided to
the FIU and appropriate law enforcement agency and any other relevantsupervisors.

21.5.3The supervisor should take all necessary steps to cooperate andexchange information with other relevant authorities. There should becontact by the supervisor with the FIU and appropriate law enforcement
agency to ascertain any concerns it has and any concerns expressed byinsurers and intermediaries and to obtain feedback on trends in reported
cases.

21.5.4The supervisor should consider appointing within its office a contact for
anti-fraud issues and for liaising with other competent authorities topromote an efficient exchange of information.

21.5.5The supervisor should maintain records on the number and nature offormal requests for assistance made by or received from supervisors or
law enforcement agencies concerning fraud or potential fraud, including
whether the request was granted or refused.

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Anti-Money Laundering and Combating the Financing of Terrorism
The supervisor requires insurers and intermediaries to take effective measures tocombat money laundering and terrorist financing. The supervisor takes effective
measures to combat money laundering and terrorist financing.
22.0
Introductory Guidance
22.0.1

The insurance sector is potentially at risk of being misused for money
laundering and terrorist financing. This exposes the insurance sector tolegal, operational and reputational risks.

22.0.2

Money laundering (ML) is the processing of criminal proceeds to disguisetheir illegal origin. When criminal activity generates substantial profits,
the individual or group involved must find a way to control and “legitimize”
funds without attracting attention to the underlying activity or the persons
involved. Criminals do this by disguising the sources, changing the form,or moving the funds to a place where they are less likely to attract
attention, and therefore may use the financial sector, including theinsurance sector, to do so. Examples of criminal activity which may
generate large profits and lead to money laundering include
embezzlement, tax evasion, insider trading, bribery, cyber-crimes, illegalarms sales, smuggling, drug trafficking, prostitution, human trafficking,as well as corruption and organised crime.

22.0.3

Terrorist financing (TF) is the financing of terrorist acts, and of terrorists
and terrorist organisations. It refers to the wilful provision or collection offunds by any means, directly or indirectly, with the unlawful intention thatthey should be used, or in the knowledge that they are to be used, in fullor in part to carry out a terrorist act by a terrorist organisation or by anindividual terrorist, or to support terrorists or terrorist organisations.
Terrorist financing offenses may constitute predicate offenses for thecrime of money laundering, in accordance with applicable law.

22.0.4

The Financial Action Task Force (FATF) is an inter-governmental body,established to set international standards for anti-money laundering(AML) and combating the financing of terrorism (CFT). The FATF
standards are comprised of its individual recommendations together withinterpretive notes and the applicable definitions in the FATF glossary. In
this ICP the term FATF Recommendations encompasses all of thesecomponents of the FATF standards. The FATF Recommendations are
directed at jurisdictions and supervisors should therefore reference theirown national risk assessment, applicable laws and regulations withrespect to AML/CFT.

22.0.5The IAIS is a FATF Observer Organisation and, accordingly, endorses
the FATF Recommendations. This ICP is intended to be consistent with
the FATF Recommendations; however, compliance with the FATF
Recommendations does not necessarily imply observance of ICP 22 nordoes observance of ICP 22 necessarily imply compliance with the FATF
Recommendations.

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22.0.6

According to the FATF:• the ML/TF risks associated with the insurance sector are
generally lower than those associated with other financial
products (such as loans or payment services) or othersectors (such as banking); and• many life insurance products are not sufficiently flexible tobe the first vehicle of choice for money launderers.
However, as with other financial products, there is a risk that the funds
used to purchase life insurance may be the proceeds of crime.

22.0.7This ICP applies to the underwriting and placement of life insurance andother investment-related insurance. Depending upon the jurisdiction’s
assessment of the ML/TF risk posed by the non-life sector, thejurisdiction should consider whether and to what extent to apply this ICP
to that sector as well.

22.0.8The FATF Recommendations require jurisdictions to designate a“competent authority” or authorities to have responsibility for ensuringthat financial institutions (including insurers and intermediaries)
adequately comply with the jurisdiction’s approach to implementing the
FATF Recommendations to combat ML/TF. The AML/CFT competentauthority is often designated by a jurisdiction’s legislation. There may bejurisdictions where several authorities have AML/CFT responsibilities forthe insurance sector. Competent authorities may include supervisors,law enforcement agencies and a financial intelligence unit (FIU) which
serves as a jurisdictional centre for receiving and analysing information(such as suspicious transaction reports) and disseminating information
regarding potential ML/TF.

22.0.9In some jurisdictions, the supervisor may not be designated as an
AML/CFT competent authority, but nevertheless all supervisors must
understand the risk of ML/TF to the insurance sector and take steps tohelp combat such risk.

22.0.10 The standards and guidance related to ICP 22 are divided into two parts.
Part A applies where the supervisor is a designated AML/CFT competentauthority, or acts on behalf of such designated competent authority. Part
B applies where the supervisor is not a designated AML/CFT competentauthority. To demonstrate observance of this ICP the supervisor mustmeet the requirements of the standards in either Part A or Part B, or both,according to the circumstances of its jurisdiction.
22.0.11 In implementing this ICP, the supervisor may consider as relevant
various guidance available from the FATF, including its “Guidance for a
Risk-Based Approach for the Life Insurance Sector” (FATF Guidance).
The FATF Guidance, which is non-binding, aims to support the design
and implementation of a Risk-Based Approach (RBA) to AML/CFT forthe life insurance sector, taking into account applicable ML/TF risk
assessments and legal and regulatory frameworks to combat money
laundering and terrorist financing. The RBA concept is related to, but
distinct from, the overarching concept of risk-based supervision thatapplies to all ICPs.
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22.0.12 As described in the ICP Introduction, this ICP applies to the supervisionof insurance legal entities and, unless otherwise specified, to insurancegroups. The supervisor may also consider FATF Guidance concerningsupervision and mitigation of ML/TF risks at the group-wide level.
22.0.13 Certain FATF Recommendations require that supervision be applied tothe implementation of targeted financial sanctions (TFS) related toterrorism, terrorist financing and financing of proliferation of weapons ofmass destruction. Adherence to TFS is not subject to the RBA describedin this ICP and TFS is not further addressed in this ICP. Whether
insurance supervisors have responsibilities for TFS will depend upon theparticular jurisdictional arrangements in place.
Part A: Where the supervisor is a designated AML/CFT competent authority
22.1

The supervisor:• has a thorough and comprehensive understanding of the ML/TF
risks to which insurers and/or intermediaries are exposed;• uses available information to assess the ML/TF risks to theinsurance sector in its jurisdiction on a regular basis; and• applies a Risk-Based Approach (RBA) consistent with FATF
Recommendations.
22.1.1

Consistent with the FATF Recommendations, RBA refers to:• the general process by which a supervisor, according to its
identification, understanding and assessment of risks,
allocates its resources to AML/CFT supervision; and• the specific process of supervising institutions (ie insurers
and intermediaries, as applicable) that apply an AML/CFT
RBA.

Understanding ML/TF risks
22.1.2The supervisor should have a thorough and comprehensive
understanding of the ML/TF risks to which insurers and intermediaries
are exposed arising from the activities undertaken and products andservices offered by insurers and intermediaries.

22.1.3In the context of ML/TF, “risk” encompasses threats, vulnerabilities, andconsequences in relation to products (including services andtransactions), geography, customers and delivery channels.

22.1.4

Some of the examples of attributes included below can be expected overthe course of a long-term insurance contract and are not necessarily
inherently suspicious, but rather should be viewed as factors to consider
with respect to AML/CFT RBA.

22.1.5

Product-related risk refers to the vulnerability of a product to ML/TF
based on its design. The following are examples of product attributes
which may tend to increase the ML/TF risk profile:• acceptance of very high value or unlimited value payments
or large volumes of lower value payments;

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• acceptance of non-traceable payments such as cash,
money orders, cashier cheques, or virtual assets;• acceptance of frequent payments outside a normal
premium or payment schedule;• allowance of withdrawals at any time or early surrender,
with limited charges or fees;• products that allow for high cash values;• products that accept high amount lump sum payments,
coupled with liquidity features;• products with provisions that allow a policy to be cancelledwithin a stipulated timeframe and the premiums paid to berefunded; and• products that allow for assignment without the insurer
being aware that the beneficiary of the contract has beenchanged until such time as a claim is made.
22.1.6

Product-related risk also encompasses the vulnerability of a product touse by a third party or to unintended use based on the methods oftransactions available (ie service- and transaction-related risk). The
following are examples of service and transaction attributes which may
tend to increase the ML/TF risk profile:• products with features or services which make it possible
for customers to use the product in a way that isinconsistent with its purpose (for example, an insurance
policy intended to provide long term investment opportunity
but which allows frequent or low fee deposit / withdrawal
transactions);• customer is not the payer or recipient of the funds;• products with features that allow loans to be taken against
the policy (particularly if frequent loans can be taken and/or
repaid with cash);• acceptance to be used as collateral for a loan and/or written
in a discretionary or other increased risk trust;• payment source or recipient of funds are outside of thejurisdiction (eg insurer in jurisdiction A and payment sourcein jurisdiction B); and• significant, unexpected, or unexplained change incustomer’s pattern of payment, withdrawal, or surrender.

22.1.7

Geographic-related risk refers to the risk that a market’s or customer’s
geographic location or connections will enhance vulnerability to ML/TF.
The following are examples of geographic attributes which may tend toincrease the ML/TF risk profile:• jurisdictions identified by credible sources as having weak
governance, law enforcement and regulatory regimes,

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including jurisdictions identified by FATF statements as
having weak AML/CFT regimes;• jurisdictions identified by credible sources as having
significant levels of organised crime, corruption, or othercriminal activity, including source or transit countries forillegal drugs, human trafficking, smuggling and illegal
gambling; and• jurisdictions subject to sanctions, embargoes, or similar
measures issued by international organisations (such as
the United Nations).
22.1.8Customer-related risk refers to the risk that the insurer is doing businesswith a customer who is not adequately identified or may be involved with
ML/TF. Customer-related risk factors include: customer identity; thirdparty involvement; customer source of wealth and funds; politically
exposed customers; and known criminals or terrorists. The following are
examples of customer attributes which may tend to increase the ML/TF
risk profile:• structure of a legal entity that is a customer, policyholder,or beneficiary obscures or makes it difficult to identify theultimate beneficial owner or controlling interests;• customer is reluctant to provide identification; exhibits
difficulty producing identification; or provides identification
documents of questionable authenticity;• involvement of a gatekeeper or a third party apparently
unrelated to the customer;• higher risk business or occupation (such as those that are
cash-intensive);• mismatch between wealth and income of the customer andproposed premium amounts, deposit amounts or policy
limits;• customer is associated with negative news which may
affiliate the customer with allegations of criminal behaviour;or has ties to or is on a designated sanctions list; and• customer is considered a politically exposed person.

22.1.9Delivery channel refers to the method offered to or used by a customer
to start a new policy or account. Delivery channel-related risk refers to
the vulnerability of the delivery channel to ML/TF based on attributes that
may make it easier to obscure customer identity or the source of funds.
The following are examples of delivery channel attributes which may
tend to increase the ML/TF risk profile:• non face-to-face sales without adequate safeguards forconfirmation of identification or to mitigate the risks ofidentity fraud; and• payments via intermediary that may obscure the source of
payment (eg long chain of intermediaries).

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Assessing ML/TF risks
22.1.10 The supervisor should assess the main ML/TF risks to the insurance
sector in its jurisdiction. Such risk assessments may provide forrecommendations on the allocation of responsibilities and resources at
the jurisdictional level based on a comprehensive and up-to-dateunderstanding of the risks. These assessments will change over time,depending on how circumstances develop, and how risks evolve. For thisreason risk assessments should be undertaken on a regular basis andkept up to date.
22.1.11 The supervisor should consider the potential ML/TF risks alongside otherrisk assessments (for example, governance and market conduct) arisingfrom its wider duties.
22.1.12 When a jurisdiction-wide risk assessment has been conducted (forexample, during a National Risk Assessment (NRA) process as
contemplated in FATF Recommendations, if applicable), the supervisor
should have access to the results and take them into account. The
supervisor should participate in such an assessment to inform theassessment and to improve its understanding of the risks.
22.2

The supervisor:• issues to insurers and/or intermediaries enforceable means on
AML/CFT
obligations
consistent
with
the
FATF
Recommendations, for matters which are not in primarylegislation;• establishes guidance that will assist insurers and/orintermediaries to implement and comply with their respective
AML/CFT requirements; and• provides insurers and/or intermediaries with adequate andappropriate feedback to promote AML/CFT compliance.
22.2.1

While the FATF Recommendations require the basic obligations ofcustomer due diligence (CDD), record keeping and the reporting of
suspicion to be set in primary legislation, the more detailed elements fortechnical compliance may be set in primary legislation or enforceablemeans (ie regulations, guidelines, instructions or other documents ormechanisms) that set out enforceable requirements in mandatory
language with sanctions for non-compliance.

22.2.2

In some jurisdictions the supervisor, while an AML/CFT competentauthority, may not be empowered to issue enforceable means; in thatcase the supervisor should cooperate and coordinate with the relevant
authority holding such power.

22.2.3The supervisor should require insurers and/or intermediaries to takeappropriate steps to identify, assess and understand their ML/TF risks inrelation to products (including services and transactions), geography,
customers and delivery channels. The supervisor should also require
insurers and intermediaries to manage and mitigate the ML/TF risks thathave been identified.

22.2.4The supervisor should promote a clear understanding by insurers andintermediaries of their AML/CFT obligations and ML/TF risks. This may

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be achieved by engaging with insurers and intermediaries and byproviding information on supervision. For example, the supervisor may
provide guidance on issues covered under the relevant FATF
Recommendations (as implemented in primary legislation or enforceablemeans) including possible techniques and methods to combat ML/TF
and any additional measures that insurers and/or intermediaries could
take to ensure that their AML/CFT measures are effective. Suchguidance may not necessarily be enforceable but will assist insurers
and/or intermediaries to implement and comply with AML/CFT
requirements.
22.2.5

22.3

Examples of appropriate feedback mechanisms used by the supervisor
may include information on current ML/TF techniques, methods andtrends (typologies), sanitised examples of actual ML/TF cases, examplesof failures or weaknesses in AML/CFT systems by insurers andintermediaries, and lessons to be learned. It may be appropriate for thesupervisor to refer to guidance or contribute to feedback from othersources, for example industry guidance and resources made available
by the FATF.

The supervisor has an effective supervisory framework to monitor andenforce compliance by insurers and/or intermediaries with AML/CFT
requirements.
22.3.1The supervisor should take into account the risk of ML/TF at each stageof the supervisory process, where relevant, including the licensing stage.

22.3.2The supervisor should have adequate financial, human and technicalresources to combat ML/TF. Staff of the supervisor should beappropriately skilled and provided with adequate and relevant training forassessing and combating ML/TF risks, including the necessary skills andknowledge to assess the quality and effectiveness of an insurer’s andintermediary’s AML/CFT systems and controls.

22.3.3The supervisor should subject insurers and/or intermediaries tosupervisory review (off-site monitoring and/or on-site inspection) of theircompliance with the AML/CFT requirements and, on the basis of theinformation arising from such monitoring and any other informationacquired, assess the ML/TF risk profile of the insurer or intermediary.

22.3.4

The frequency and intensity of supervisory review should be based on:• the ML/TF risks present in the jurisdiction including as
identified in an NRA, if applicable, or other jurisdiction-widerisk assessment;• the characteristics of insurers and/or intermediaries, inparticular their number and diversity and the degree of
discretion allowed to them under the RBA;
• the ML/TF risks and the policies, internal controls andprocedures of each insurer and/or intermediary, as
identified by the supervisor’s assessment of their ML/TF
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• the inherent and residual risks in relation to the particularinsurer or intermediary based on the firm’s own RBA of its
ML/TF risks.

22.4

22.3.5The supervisor should require insurers and/or intermediaries toundertake AML/CFT assessments on a regular basis, and to develop
ML/TF risk profiles of their products (including services andtransactions), geography, customers and delivery channels. The
supervisor should require insurers and intermediaries to put in place risk
management and control measures to effectively address identified
risks.

22.3.6The supervisor should have the power and resources to takeproportionate, dissuasive and effective measures (including sanctions
and other remedial and corrective measures) where insurers andintermediaries do not implement AML/CFT requirements effectively.

22.3.7The supervisor should also require insurers and intermediaries toprovide regular and timely training in AML/CFT to Board Members,
Senior Management and other staff as appropriate, which is supported
by a communication strategy which ensures that notification of significant
changes in AML/CFT policies are regularly and timely provided.

The supervisor regularly reviews the effectiveness of the measures that
insurers and/or intermediaries and the supervisor itself are taking on
AML/CFT. The supervisor takes any necessary action to improve
effectiveness.
22.4.1

Reviews should include regular assessment by the supervisor of theeffectiveness of implementation by insurers and/or intermediaries of
AML/CFT requirements and of its supervisory approach, including theextent to which the supervisor’s actions have an effect on compliance by
insurers and/or intermediaries.

22.4.2

These reviews may cover aspects such as:• the ML/TF risks of a particular insurer and/or intermediaryand whether these are adequately addressed by the firm’s
RBA;• the adequacy of resources and training of both thesupervisor and the insurance sector;• whether AML/CFT off-site monitoring is adequate;• whether the number and content of on-site inspections
relating to AML/CFT measures is adequate;• the findings of off-site monitoring and on-site inspections,
including the effectiveness of training and implementation
by insurers and intermediaries of AML/CFT measures;• measures and sanctions taken by the supervisor against
insurers and/or intermediaries;• input from other AML/CFT authorities and the FIU on theinsurance sector, such as the number and pattern of

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suspicious transaction reports made by insurers and/orintermediaries;• the number and nature of requests for information fromother authorities concerning AML/CFT matters;• the adequacy of the requirements, guidance and otherinformation provided by the supervisor to the insurance
sector and feedback received from the insurance sector;
and• the number and type of ML/TF prosecutions andconvictions in the insurance sector.
Such reviews should enable the supervisor to identify any necessary
actions which need to be taken to improve effectiveness of the AML/CFT
measures being taken by insurers, and/or intermediaries and thesupervisor itself.
22.4.322.5

The supervisor should maintain records on the frequency of off-sitemonitoring and number of on-site inspections relating to AML/CFT andon any measures it has taken or sanctions it has issued against insurers
and/or intermediaries with regard to inadequate AML/CFT measures or
non-compliance with AML/CFT requirements.

The supervisor has effective mechanisms in place which enable it tocooperate, coordinate and exchange information for AML/CFT purposeswith other domestic authorities as well as with supervisors in otherjurisdictions.
22.5.1

Effective prevention and mitigation of ML/TF is enhanced by close
cooperation within a supervisor’s organisation and among supervisors,
the FIU, law enforcement agencies and other relevant authorities.
Mechanisms of cooperation, coordination and exchange of information
among relevant authorities should be documented and normallyaddress:• Operational cooperation
coordination; and

and,

where

appropriate,• policy cooperation and, where appropriate, coordination.
22.5.2

Where the supervisor identifies suspected ML/TF in insurers orintermediaries, it should ensure that relevant information is provided in atimely manner to the FIU, any appropriate law enforcement agency andother relevant authorities.

22.5.3The supervisor should take all necessary steps to cooperate, coordinate
and exchange information with the other relevant authorities. The
supervisor should communicate with the FIU and appropriate law
enforcement agency to ascertain any concerns it has and any concerns
expressed on AML/CFT compliance by insurers and intermediaries, toobtain feedback on trends in reported cases, and to obtain information
regarding potential ML/TF risks to the insurance sector.

22.5.4

To promote an efficient exchange of information, the supervisor should
consider identifying within its office a point of contact for AML/CFT issues
and to liaise with other relevant authorities.

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22.5.5

The exchange of information for AML/CFT purposes is subject toconfidentiality considerations (see ICP 3 Information Exchange andConfidentiality Requirements).

Part B: Where the supervisor is not a designated AML/CFT competent authority
22.6

22.7

The supervisor is aware of and has an understanding of ML/TF risks towhich insurers and/or intermediaries are exposed. The supervisor liaises
with and seeks to obtain information from the designated competentauthority relating to AML/CFT by insurers and intermediaries.
22.6.1The supervisor should have an understanding of the ML/TF risks towhich insurers and/or intermediaries are exposed arising from activities
undertaken in relation to products (including services and transactions),
geography, customers and delivery channels, and the jurisdiction’s
approach to assessing and mitigating them.

22.6.2To enhance such understanding, it is helpful if the supervisor has accessto the NRA, if applicable, or other jurisdiction-wide risk assessment.

22.6.3The supervisor should be able to make a more informed evaluation andjudgment on the soundness of insurers and intermediaries by receiving
information from the designated AML/CFT competent authority. Suchinformation may be relevant to the risk profile of, or to the effectivenessof risk management by, an insurer or intermediary. The contents of thisinformation may include the level of ML/TF risks to which insurers and/orintermediaries are exposed, and the designated competent authority’sviews on the corporate governance, risk management and internal
control measures of supervised entities relevant to AML/CFT.

22.6.4The designated AML/CFT competent authority may have information onbreaches of AML/CFT requirements that should be taken into
consideration by the supervisor in its supervisory activities, such as whenevaluating the suitability of the Board, Senior Management and Key
Persons in Control Functions, including when reviewing licenceapplications.

The supervisor has effective mechanisms in place which enable it tocooperate, coordinate and exchange information for AML/CFT purposeswith relevant domestic authorities as well as with supervisors in otherjurisdictions.
22.7.1

Effective prevention and mitigation of ML/TF is enhanced by close
cooperation within a supervisor’s organisation and among supervisors,
the FIU, law enforcement agencies and other relevant authorities.
Mechanisms of cooperation, coordination and exchange of information
among relevant authorities should be documented and normally address
operational cooperation and, where appropriate, coordination.

22.7.2

When the supervisor becomes aware of information on ML/TF risks, it
should provide relevant information to the designated AML/CFT
competent authority. When the supervisor identifies suspected ML/TF in
insurers and/or intermediaries, it should ensure that relevant information
is provided to the FIU, appropriate law enforcement agencies and any
relevant supervisors.

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22.7.3

As part of its cooperation with the designated AML/CFT competentauthority, the supervisor should provide input into the effectiveness of
the AML/CFT framework. This may help the designated competentauthority in its consideration of the framework’s effectiveness.

22.7.4The exchange of information for AML/CFT purposes is subject toconfidentiality considerations (see ICP 3 Information Exchange andConfidentiality Requirements).

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Group-wide Supervision
The group-wide supervisor, in cooperation and coordination with other involved
supervisors, identifies the insurance group and determines the scope of groupsupervision.
23.0
Introductory Guidance

CF 9.16
CF 9.17

CF 23.0.a

23.0.1

Involved supervisors should seek agreement amongst themselves on
the identification of the insurance group, including the head of theinsurance group, and the scope of group-wide supervision to ensure that
gaps or duplication in regulatory oversight between jurisdictions do notoccur. If agreement cannot be reached in a timely manner, the ultimate
responsibility for determining the identification of the insurance groupand scope of group-wide supervision rests with the group-wide
supervisor. Decisions should be undertaken on a case-by-case basis
and may include discussion with the insurance group.

23.0.2

The group-wide supervisor cooperates and coordinates with other
involved supervisors, and should be accountable for the appropriatenessof the identification of the insurance group and the determination of thescope of group supervision. In particular, in the case of insurance groups
that operate on a cross-border basis, the group-wide supervisor shouldbe able to explain the appropriateness of the identification of theinsurance group and the determination of the scope of group supervision
to involved supervisors in other jurisdictions. The identification of theinsurance group and scope of group supervision should be reviewed
regularly by the group-wide supervisor, in cooperation and coordination
with other involved supervisors.

23.0.3

The group-wide supervisor should require the head of the insurancegroup to provide information needed on an ongoing basis to identify the
insurance group and to determine the scope of group-wide supervision.
The head of the insurance group provides the information to the groupwide supervisor, who disseminates it to the other involved supervisors
as needed.
dd

The group-wide supervisor, in cooperation with other involved
supervisors, determines whether an insurance group or an insurance
legal entity operating through branches, is an IAIG after considering
whether it meets both the following criteria:• Internationally active:o Premiums are written in three or more jurisdictions;ando Gross written premiums outside of the homejurisdiction are at least 10% of the group’s total grosswritten premiums.
• Size (based on a three-year rolling average):

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o Total assets are at least USD 50 billion, oro Total gross written premiums are at least USD 10
billion.
CF 23.0.a.1

The criteria should be assessed based on the insurance group’sreported financial statements, either on a consolidated basis whenavailable or as otherwise submitted to the group-wide supervisor.
Intra-group transactions should be eliminated when calculating theamount of insurance business written in each jurisdiction and total
insurance business written, and when calculating the total assets ofthe group.

CF 23.0.a.2“Total assets” are, at least, group assets related to the insurance
business of the group.

CF 23.0.a.3“Gross written premiums” represent a measure of the volume of
insurance business being written. Where alternative but similar
volume measures are required under the accounting framework
applicable to the group, then these alternative measures may be used
as a more practical way of deciding if a group meets the criterion for
an IAIG. An example of an alternative measure may be “premiums
received” as required for disclosure purposes under International
Financial Reporting Standard 17.

CF 23.0.a.4

Although an insurance legal entity that has no parent or subsidiaries
is not an insurance group, it should be regarded as an IAIG if it
operates on a branch basis in foreign jurisdictions and meets thecriteria. The supervisor of this entity, in cooperation with other involved
supervisors, would determine whether the IAIG criteria are met.
References to a ‘group’ in this context would include such entities
operating through branches which are identified as IAIGs.

CF 23.0.a.5

For the purposes of assessing groups against the internationally active
criterion, the United States of America should be regarded as a single
jurisdiction and member states of the European Union should be
regarded as separate jurisdictions.

CF 23.0.a.6

Any involved supervisor may prompt the process of identifying an
IAIG. If no group-wide supervisor has been determined, the supervisor
most demonstrating the characteristics of a group-wide supervisor
should invite involved supervisors to participate in the process ofdetermining whether a group is an IAIG.

CF 23.0.a.7

The scope of an insurance group should be determined before
considering whether the criteria for determining whether the group is
an IAIG are met.

CF 23.0.a.8

If there is already a supervisory college for a group, it should be used
to facilitate the determination as to whether the group is an IAIG.

CF 23.0.b

In limited circumstances the group-wide supervisor has discretion todetermine that a group is not an IAIG even if it meets the criteria or that agroup is an IAIG even if it does not meet the criteria.

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CF 23.0.b.1

If discretion has been used, then the reasons for exercising suchdiscretion should be based on verifiable and documented quantitativeand qualitative information.

CF 23.0.b.2

Examples of situations where a group-wide supervisor may exercise
discretion to determine that a group is an IAIG despite not meeting all
the criteria are where:• an other involved supervisor requests that the group betreated as an IAIG owing to the materiality of theoperations in its jurisdiction;• the group is expected to meet the criteria in the near futureowing to mergers or acquisitions;• the group’s international activity or size have decreased
owing to some temporary or transitory effect such as an
economic shock or exchange rate fluctuations and it would
not be reasonable to alter the group’s identification as an
IAIG for a short period;• the group has related entities which are not included in the
consolidated financial statements, but which are relevantto the risks of the group;• the group has significant off-balance sheet assets (suchas funds under management held on behalf of investors)
which arise from insurance operations and so are more
appropriately included in the total assets when assessing
the group against the size criterion;• the group changes or rearranges its business activities toavoid meeting the IAIG criteria including by splitting theinsurance business into multiple sub-groups with separate
operational controllers.

CF 23.0.b.3

Examples of situations where a group-wide supervisor may exercise
discretion to determine that a group is not an IAIG despite meeting thecriteria are where:• the group will cease to meet the criteria in the near futureowing to, for example, disposals of some or all of its
insurance business;• the group’s international activity or size have increased
owing to some temporary or transitory effect such as an
economic shock or exchange rate fluctuations and it would
be unreasonable to identify the group as an IAIG for ashort period; and• the group’s business outside of the home jurisdiction
exceeds 10% in aggregate but its business in any one
jurisdiction outside the home jurisdiction is negligible.

CF 23.0.c

The group-wide supervisor notifies the group of its decision to identify it
as an IAIG and reasons for that decision.

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CF 23.0.d

23.1

The group-wide supervisor, in cooperation with other involved
supervisors, regularly reviews previously made determinations
concerning whether a group is an IAIG.

CF 23.0.d.1

Such reviews should take place at least once every three years.

CF 23.0.d.2

An ad hoc assessment should take place in circumstance where asignificant change or event may impact the identification of a group as
an IAIG.

The group-wide supervisor, in cooperation and coordination with other
involved supervisors, identifies all legal entities that are part of theinsurance group.
23.1.1

To ascertain the identity of an insurance group, supervisors should first
identify all insurance legal entities within the corporate structure.

23.1.2

Supervisors should then identify all entities which have control overthose insurance legal entities in the meaning provided for in the definition
in ICP 6 (Changes in Control and Portfolio Transfers). If this results inonly one identified entity, this entity is the head of the insurance group.
If there is more than one entity with control over the insurance legal
entities, supervisors should identify the head of the insurance group suchas the entity which has the greatest level of control over the insurance
business.

23.1.3

A practical method for determining the entities within the insurance groupis often to start with entities included in the consolidated accounts. The
head of an insurance group including an insurance-led financial
conglomerate is at least one of the following:• an insurance legal entity• a holding company
The identified insurance group includes the head of the insurance group
and all the legal entities controlled by the head of the insurance group.
Legal entities within a group could include:• operating and non-operating holding companies (includingintermediate holding companies);• other regulated entities such as banks and/or securities
companies;• non-regulated entities; and• special purpose entities.
In addition to considering the consolidated accounts, the supervisor
should consider other relationships such as• common Directors;• membership rights in a mutual or similar entity;• involvement in the policy-making process; and• material transactions.
The insurance group may be

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• a subset/part of a bank-led or securities-led financial
conglomerate; or• a subset of a wider group, such as a larger diversified
conglomerate with both financial and non-financial entities.

CF 9.18
CF 9.19

23.1.4

Examples of the types of group structures that could be captured by thedefinition of insurance groups are provided in the diagrams below (Figure23.1, 23.2, 23.3 and 23.4). These examples are for purposes ofillustration only, and are not intended to set forth all possible forms of
insurance groups.

23.1.5The ICPs’ definition of “insurance group” may be different from thedefinitions used in other contexts, such as accounting or tax purposes.
Gc

CF 23.1.a

The group-wide supervisor identifies the Head of the IAIG as the legal
entity which controls all of the insurance legal entities within the group
and non-insurance legal entities which pose risk to the insurance
operations.

CF 23.1.b

When identifying the Head of the IAIG, the group-wide supervisor
considers both control as defined in ICP 6 (Changes in control andportfolio transfers) and operational control.

CF 23.1.b.1

Operational control means the ability in practice, whether or not a legal
right exists, to do some or all of the following:• select, appoint, or remove Board Members of related
entities;• determine remuneration of Board Members of related
entities;• set or influence capital expenditure and investment plans;• set a dividend strategy and levels of surplus capital to beretained;• determine new lines of business to be undertaken;• set risk management policies and processes; and• require reporting of management information.

CF 23.1.c

When identifying the Head of the IAIG, if there is more than one entity
which controls all of the insurance legal entities, the group-wide
supervisor determines the Head of the IAIG to be the entity that exercises
the greatest level of control over all the insurance legal entities byconsidering the following factors:• the proportion of the insurance business relative to otherbusinesses it controls;• the degree of operational control; and• the degree of shareholder control.

CF 23.1.c.1

Considering the above factors is particularly relevant when an IAIG
has a vertical structure with several intermediate holding companies,

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is a financial or industrial conglomerate, or has several insurance subgroups.
CF 23.1.c.2

Consideration of which entity controls the greatest proportion of
insurance business relative to other business may lead the group-wide
supervisor to determine that the Head of the IAIG is an intermediateholding company rather than the ultimate parent of the group.

CF 23.1.c.3

Consideration of where operational control is greatest may lead thegroup-wide supervisor to determine that the Head of the IAIG is anintermediate holding company rather than the ultimate parent of thegroup. It may also lead the group-wide supervisor to determine that
one insurance legal entity is the Head of the IAIG by virtue of its
operational control over another insurance legal entity even where it
does not own that entity.

CF 23.1.c.4

Consideration of where shareholder control is greatest may lead thegroup-wide supervisor to determine that the ultimate parent in a
conglomerate is the Head of the IAIG rather than an intermediateholding company.

CF 23.1.d

The group-wide supervisor considers that a non-insurance legal entity
within the group poses risk to the insurance operations where there is:• a linkage between the insurance operations and the noninsurance legal entity (other than an investment in or from thenon-insurance legal entities) that could adversely affect theinsurance operations; and• a lack of adequate safeguards, including additional capital, tomitigate risks arising from any such linkages.

CF 23.1.d.1

Consideration of the control exerted over non-insurance legal entities
within the group may lead the group-wide supervisor to determine thatthe Head of the IAIG is the ultimate parent of the group rather than anintermediate holding company.

CF 23.1.d.2

A parent of the insurance legal entities is less likely to pose a risk to
the insurance operations if the only linkage between it and theinsurance legal entities is of the nature of a passive investment and sono operational control is being exerted.

CF 23.1.d.3

The group-wide supervisor should be able to require preventive or
corrective measures at the same level at which all the risks toinsurance operations in the group (including funding risks) are
mitigated by capital.

CF 23.1.e

Where a legal entity controls all insurance legal entities within the group
and non-insurance legal entities which pose risks to the insurance
operations, the group-wide supervisor has discretion to identify asubsidiary of that entity as the Head of the IAIG if:• prudential supervision is exercised by another financial sector
supervisor over that entity; and• the group-wide supervisor can rely on the other financial
sector supervisor to provide sufficient information concerning

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risk that this entity and the legal entities it controls pose to theinsurance operations.
CF 23.1.e.1

The Head of an IAIG should not be a bank when:• that bank is subject to prudential supervision exercised byanother financial supervisor; and• the group-wide supervisor is able to rely on this otherfinancial sector supervisor to obtain information on thewider group and to ensure that the group is adequately
capitalised.

CF 23.1.e.2

CF 23.1.f

The group-wide supervisor provides the supervisory college with themain reasons and judgements it made when identifying the Head of the
IAIG.

CF 23.1.f.1

23.2

If this precludes there being a single Head of the IAIG which controls
all the insurance legal entities, then the group may be supervised as
two or more separate IAIGs even if separately those IAIGs would notmeet the size and international activity criteria.

As the supervisory college may qualify as a crisis management groupfor the IAIG (IAIG CMG), when identifying the Head of the IAIG, thegroup-wide supervisor should understand where resolution powers
are applicable. The Head of the IAIG identified for prudential
supervision purposes may not be the same as the entity at the level ofwhich resolution powers will apply.

The group-wide supervisor, in cooperation and coordination with other
involved supervisors, determines the scope of group-wide supervision.
23.2.1

Involved supervisors should consult and agree on the scope of groupwide supervision of the insurance group to ensure that there are no gaps
and no unnecessary duplication in supervision among jurisdictions.

23.2.2A practical method to determine the entities to capture within the scopeof group-wide supervision is to start with entities included in the
consolidated accounts. Entities that are not included in consolidated
accounts should be included if they are relevant from the perspective ofrisk (non-consolidated entities also subject to supervision) or control. The
entities that may be captured within the scope of group-wide supervision
may either be incorporated or unincorporated.

23.2.3

In considering the risks to which the insurance group is exposed it isimportant to take account of those risks that emanate from the wider
group within which the insurance group operates.

23.2.4

Individual entities within the insurance group may be excluded from thescope of group-wide supervision if the risks from those entities are
negligible or group-wide supervision is impractical.

23.2.5The exclusion or inclusion of entities within the scope of group-wide
supervision should be regularly re-assessed.

23.2.6It should be noted that the supervisory approach to entities/activities
within the insurance group may vary depending on factors such as theirtypes of business, legal status and/or nature, scale and complexity of

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risks. Although an insurance group as a whole should be subject togroup-wide supervision, not all quantitative and qualitative supervisory
requirements applied to an insurance legal entity should necessarily beapplied to other entities within the group, to the insurance group as awhole, or to a sub-group collectively.
CF 9.20
CF 9.21Rd

CF 23.2.a

In conducting group-wide supervision, the group-wide supervisor
obtains information necessary to apply standards to the Head of the IAIG
concerning all the legal entities controlled by the Head of the IAIG (theIAIG) including from:• the Head of the IAIG;• with the cooperation of other involved supervisors, insurance
legal entities controlled by the Head of the IAIG; and• other non-insurance legal entities, whether or not controlled
by the Head of the IAIG.
The group-wide supervisor decides from which legal entities information
should be sought.

CF 23.2.a.1

The group-wide supervisor may need to obtain information about
related group entities, such as:• any intermediate holding company or ultimate parent of the
Head of the IAIG;• any significant owner of the IAIG;• any person exerting significant influence over the IAIG;• any financial entity which is subject to supervision by anauthority other than an insurance supervisor; or• entities excluded from the consolidated data used toassess group solvency.

CF 23.2.a.2

Where there are entities related to the Head of the IAIG from which
information is necessary for supervisory purposes, then the groupwide supervisor should obtain that information from those entities orfrom other sources, for example:• the Head of the IAIG (insofar as the Head of the IAIG canlegally procure that information);• any supervisor of a related non-insurance financial entity;or• the members of the Board, Senior Management and Key
Persons in Control Functions involved in the insurance
business, irrespective of the entity employing those
persons.

CF 23.2.a.3

The group-wide supervisor should understand how risks in nonregulated related group entities affect, for example, the risk
management and capital adequacy of the IAIG. However this does not
require the group-wide supervisor to supervise directly such entities.

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23.3

The group-wide supervisor and other involved supervisors do not narrow
the identification of the insurance group or the scope of group-wide
supervision due to lack of legal authority or supervisory power overparticular legal entities.
23.3.1

In some jurisdictions, the supervisor may not be granted legal authority
or supervisory power for the direct supervision of some entities within theidentified insurance group or the scope of group-wide supervision. Thesemay include legal entities regulated in another sector or non-regulated
entities within the same jurisdiction.

23.3.2

Where a supervisor has no direct legal power over certain legal entities
in the scope of the group-wide supervision, the supervisor will use its
power over regulated entities and/or consult with other involved
supervisors to obtain similar supervisory outcomes.

Illustrations to assist the identification of insurance groups
Figure 23.1 Insurance Group
Insurance Group

Head of the Insurance group

Insurance Legal
EntityPublicIAIS ICPs and ComFrame – November 2019

Insurance Legal
EntityNon-regulated
Subsidiary

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Figure 23.2 Financial Conglomerate

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Figure 23.3 Insurance-led Financial Conglomerate
Insurance-led Financial Conglomerate

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Figure 23.4 Wider group

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Macroprudential Supervision
The supervisor identifies, monitors and analyses market and financial
developments and other environmental factors that may impact insurers and theinsurance sector, uses this information to identify vulnerabilities and address,
where necessary, the build-up and transmission of systemic risk at the individual
insurer and at the sector-wide level.
24.0
Introductory guidance
24.0.1This ICP focuses on the general processes and procedures supervisors
should have in place with respect to macroprudential supervision, as partof the overall supervisory framework (see ICP 9 Supervisory Review andReporting). A jurisdiction’s macroprudential supervision processes andprocedures should be proportionate to the nature, scale and complexityof its insurance sector’s exposures and activities.

24.0.2

Macroprudential supervision consists of data collection, market and trend
analysis, systemic risk assessment, supervisory response andtransparency. It identifies and, where necessary, addresses both
vulnerabilities of individual insurers and the insurance sector to shocks(inward risks) and the build-up of systemic risk at the individual insurer
level or the sector as a whole (outward risks). Inward risks include
insurance and financial market developments, which may impact theinsurance sector. Outward risks refer to the risks that individual insurers
or the insurance sector may pose to the financial system and the real
economy. Macroprudential supervision contributes to financial stability byminimising the incidence and impact of externalities on the financial
system and real economy generated or amplified through the distress ordefault of individual insurers or common behaviours.

24.0.3Macroprudential supervision involves the identification, monitoring andassessment of:• sector-wide vulnerabilities and common exposures in theinsurance sector; and• the risk of amplification and transmission of shocks to the financial
system and real economy caused by:
the size, complexity, lack of substitutability and/orinterconnectedness of a distressed or failing insurer; orcollective actions or distress of a sufficiently large number of
insurers undertaking similar activities and thus exposed tocommon risks.

24.0.4

Systemic risk may be defined as the risk of disruption to financial services
that is caused by an impairment of all or parts of the financial system andhas the potential to have serious negative consequences for the real
economy. Systemic impact may originate from individual or sector-wide
exposures to liquidity risk, interconnectedness (macroeconomic andcounterparty exposure) or lack of substitutability as well as from other

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risks. These risks may spread to other parts of the financial system via
asset liquidation, exposures or critical functions.
24.0.5Macroprudential supervision can help identify the need for supervisory
measures. In its macroprudential supervision, the supervisor should also
take into account the material risks that non-insurance legal entities andactivities may pose to insurance legal entities, insurance groups and thewider financial system.

24.0.6The supervisory framework should allow the supervisor to respond in atimely manner to findings from the analysis performed as part of its
macroprudential supervision.

Data collection for macroprudential purposes
24.1

The supervisor collects data necessary for its macroprudential supervision.
24.1.1

Data collection for macroprudential purposes should take into account thefollowing general aspects:• Efficiency of data collection: the supervisor should examine costs
and benefits when considering data collection. Data collections
should be aligned with their respective usage. The supervisor
should first make use of all available data sources and thencalibrate its data requests and data processing capabilities;• Data validation: before analysing data and providing
recommendations on the findings, the supervisor should validate
data used in its assessment;• Data quality assurance: the supervisor should regularly evaluate
the appropriateness of data collected and data needs to capture
market developments and address deficiencies in:
the type of data collected;
its ability to process data in a timely and/or complete way
and;
its ability to collect ad hoc data in a timely manner.

• Scope: for sector-wide assessments, data collection should covera representative sample of the respective market or risk;• Consistency: regular data collections of a standardised set of
information should remain consistent over time in order to analysetrends. The supervisor should, however, consider the evolving
nature of the relevant exposures; and• Ad hoc data collection: in order to address emerging risks, thesupervisor should have processes in place that allow for ad hoc
data collections.
24.1.2

To support the assessment of liquidity risk, the supervisor should collectdata that provide sufficient indications on possible liquidity mismatch
between assets and liabilities both at individual and sector-wide level.
Reporting requirements on liabilities should include, but not be limited to,
information on the surrender value of insurance products, productfeatures that increase or decrease the propensity for early pay outs undercertain circumstances (such as penalties or delays in the ability to accessPublicIAIS ICPs and ComFrame – November 2019

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the cash value of a policy), and the maturity or redemption structure of
non-insurance liabilities. On the asset side information on the degree ofliquidity of the assets and on the potential margin call on derivatives
should be collected.
24.1.3

To support the assessment of macroeconomic exposure, the supervisor
should collect data that is sufficiently granular to enable an analysis of an
insurer’s, as well as the insurance sector’s vulnerability to macroeconomic
shocks (such as sensitivity to interest rate movements) and generalmarket movements (such as sensitivity to equities and fixed income asset
movements).

24.1.4

To support the assessment of counterparty risk, the supervisor shouldcollect data that includes the concentration of the assets and liabilities,
with regard to counterparties, markets (such as equity or debt), sectors(such as financial or real estate), and geographical areas.

24.1.5The supervisor should collect microeconomic data, such as insurance
pricing, underwriting, expenses, claims inflation, reinsurance, intra-grouptransactions, and general developments in the insurance sector (forexample, the development of claims, earned and guaranteed interest
rates, reserves, pandemics, and changes in morbidity and mortality,
longevity, changes in the frequency and severity of catastrophes changes
in medical expense inflation and changes in law). In addition, thesupervisor may collect data on both the asset and the liability structure of
insurers, including those that are related to non-insurance activities. The
supervisor should consider having established processes andcommunication channels on microeconomic data collection with other
involved supervisors when an insurer operates in multiple jurisdictions.

24.1.6The supervisor should collect macroeconomic data to complement
information mainly gathered as a result of supervisory reporting. Data may
include general domestic and international macroeconomic variables(such as interest rates, exchange rates, inflation or balance of payments,
as well as data on market structure and competitiveness) which could
identify macroeconomic instabilities and sources of risk both in thedomestic and the global economy. Macroeconomic data may be used toassess the exposure of insurers’ portfolios of both assets and liabilities toeconomy-wide factors. For insurers operating in multiple jurisdictions, thesupervisor should consider collecting relevant macroeconomic data formaterial jurisdictions.

Insurance sector analysis
24.2

The supervisor, as part of its macroprudential supervision, performs
analysis of financial markets and the insurance sector that:• is both quantitative and qualitative;• considers historical trends as well as the current risk
environment; and• considers both inward and outward risks.
24.2.1

To enable macroprudential supervision, the supervisor should haveprocesses and procedures in place that would allow for analysis on
insurance sector trends that could potentially result in externalities to the

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wider financial system and/or adversely impact the insurance sector.
These trends include changes in economic conditions and technology, as
well as environmental, social and governance developments. Suchprocesses and procedures should also recognise that changes in the
exposures of insurers can potentially have macroprudential risk
implications.
Quantitative and qualitative analysis
24.2.2

Quantitative
analysisincludesidentifying
trends,outliers,
interconnectedness and/or risk concentrations of existing or newly
identified vulnerabilities. Typical methods of quantitative analysis may
include• horizontal reviews;• descriptive statistics;• trend analysis; and• statistical modelling using past data.

24.2.3

Qualitative analysis includes performing assessments based on
judgment, experience, information and any other factors that either cannot
be measured or quantified with typical methods. Qualitative analysis may
be particularly relevant for the assessment of low probability high impact
type of events with limited quantifiable data available.

24.2.4The supervisor should conduct horizontal reviews to reveal the range ofpractices among insurers relevant to a common subject (for example, theassessment of the appropriateness of insurers’ assumptions used forreserving). A horizontal review may help to determine which insurers are
outliers, and as such provides the supervisor with a reference for potential
further actions. A horizontal review may provide an aggregated view of
the risks linked to certain exposures and/or activities and may also help
determine whether industry practice as a whole is effective enough toaddress the risks embedded in the activity.

24.2.5To make horizontal reviews effective, the following may be taken into
account:• where peer groups are used, the choice of the peer group canhave an impact on the outcome of the review. The supervisor
should carefully consider the criteria for including insurers in apeer group;• when reviewing an insurer operating in multiple jurisdictions, thegroup-wide supervisor should form a group-wide perspective.
Such a perspective can build on analyses performed by a peer
authority or a third party (including international organisations
such as the IAIS, IMF and World Bank);• the results of horizontal reviews performed within a single
jurisdiction can be beneficial to the supervisory community as awhole, especially as they may relate to systemic risk to theinsurance sector. The supervisor may also consider suitable fora
for the communication of information that is not necessarily
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• horizontal reviews need not always be complex exercises. Simple
horizontal outlier analysis on readily available insurer reports canoften provide helpful supervisory insight. Simple analysis of someof these reports, including trends and peer comparisons, may help
the supervisor to identify areas of potential risk and help it to target
future work.
Historic trends and current risk environment
24.2.6The supervisor should have in place an appropriate form of stress testing,which is applied to the insurance sector as a whole or to a significant subsample of insurers, selected according to the exposures to specific risks
to be assessed. Outcomes of insurance sector and financial market
analysis should be considered in the development of severe but stillplausible scenarios to be tested in such exercises. Scenarios shouldreflect the current market environment and potential unfavourable
evolutions in terms of changes in markets and insurance specific risk
exposures. In order to contextualise the results, the supervisor shouldtake into account the characteristics of the supervisory framework and thestructure of the insurer’s assets and liabilities. Following a stress test
exercise, the supervisor should discuss potential vulnerabilities andpotential mitigating actions with the relevant insurers.

24.2.7

While many data items are backward looking, insurance sector analysis
should be forward looking, to the extent possible, when developing
scenarios to capture potential future developments. Stress scenarios
should take into account ways that market dynamics have changed, which
may make historical data less relevant.

24.2.8The supervisor should use stress tests to identify vulnerabilities and risks
and assess the impacts to the insurance sector and for individual insurers.
Additionally, stress scenarios should be used to identify how thosepotential impacts may spread.

Inward and outward risks
24.2.9When assessing both inward and outward risks, the supervisor should
assess insurers’ exposures to liquidity risk, interconnectedness(macroeconomic and counterparty exposure), lack of substitutability andother risks. Assessing inward risks refers to the extent insurers may be
exposed to, or vulnerable to, a certain risk within the insurance sector,
whereas the outward risk refers to the situation in which thesevulnerabilities would generate externalities which may then propagate toother financial markets or the real economy.

24.2.10 The supervisor should monitor the liquidity of an insurer’s invested assets
relative to its insurance liabilities based on their characteristics.
Additionally, the supervisor should analyse the potential that a large
insurer’s operations could require it, or a sufficiently large number of
insurers, to engage in asset sales of a significant size. The supervisor
should assess the funding structure of insurers and their reliance on shortterm funding.
24.2.11 The supervisor should monitor interconnectedness with the financial
system (for example, via intra-financial assets and liabilities orderivatives). As these exposures can be on a cross-jurisdictional andPublicIAIS ICPs and ComFrame – November 2019

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cross-sectoral basis, the supervisor should cooperate with supervisors inother relevant jurisdictions and sectors.
24.2.12 Macroeconomic exposure in insurance liabilities depends on thecharacteristics of applicable investment guarantees as well as othercontractual provisions and the complexity of the underlying risks.
Monitoring of macroeconomic exposure should recognise the relationshipbetween the assets and liabilities of the insurer. Stress tests can be used
to support monitoring of this exposure.
Assessing systemic importance
24.3

The supervisor has an established process to assess the potential systemic
importance of individual insurers and the insurance sector.
24.3.1The supervisor should take a total balance sheet approach (see ICP 16
Enterprise Risk Management for Solvency Purposes) when considering
the potential systemic importance of an insurer. When analysing systemicrisk stemming from the insurance sector, the supervisor should at leastconsider common exposures and activities.

24.3.2The supervisor should consider the type of policies underwritten by
insurers and the activities insurers are engaged in, such as the degree ofengagement in derivatives activity and reliance on short-term market
activity. The supervisor should also consider the interconnectedness withother financial institutions, and the role of the insurance sector within the
broader financial system.

24.3.3

As part of its assessment, the supervisor should consider emerging
developments that may affect the insurance sector’s risk exposures.
Additionally, the supervisor should cooperate and coordinate with otherfinancial sector supervisors (such as banking, securities and pension
supervisors, central banks and government ministries) to gain additional
perspectives on the potential change in the risk exposures of insurers
stemming from evolutions of other markets.

24.3.4The supervisor should communicate the findings of its assessment as
appropriate, to either individual insurers or the sector. The supervisor
should require insurers to take action necessary to mitigate any particularvulnerabilities that have the potential to pose a threat to financial stability.

Supervisory response
24.4

The supervisor uses the results of its macroprudential supervision, andconsiders the potential systemic importance of insurers and the insurance
sector, when developing and applying supervisory requirements.
24.4.1

A macroprudential perspective in the development and application ofsupervisory requirements may help limit the build-up of systemic risks andcontribute to the resilience of the financial system. The supervisor should
ensure that there is an appropriate interaction between its
macroprudential analysis and assessment activities, on the one hand, andmicroprudential supervision, on the other hand.

24.4.2

As part of introducing supervisory requirements into its supervisory
framework, the supervisor should consider implementing supervisory
measures based on macroprudential concerns. Many macroprudential
tools are, in effect, microprudential instruments developed or applied with

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a macroprudential perspective in mind. By mitigating risk exposures,some measures that are intended to protect policyholders may also
contribute to financial stability by decreasing the probability andmagnitude of any negative systemic impact.
24.4.3The supervisor should determine the depth and level of supervision basedon its assessment of the systemic importance of individual insurers or the
insurance sector (see ICP 9 Supervisory Review and Reporting). The
supervisor should act to reduce systemic risk when identified within its
jurisdiction through an appropriate supervisory response. In jurisdictions
where one or more insurers have been assessed as systemicallyimportant, or a number of insurers are contributing to systemic risk, thesupervisor should have supervisory requirements targeted at those
insurers to mitigate systemic risk. The supervisor should extend certain
requirements as necessary to an insurer and/or a number of insurers thatit has assessed to be systemically important.

24.4.4

Specific supervisory responses may relate to:• requirements on insurers:
enterprise risk management (see ICP 16 Enterprise Risk
Management for Solvency Purposes);
disclosures (see ICP 20 Public Disclosure);• preventive or corrective measures (see ICP 10 Preventive
Measures, Corrective Measures, and Sanctions); and• crisis management and planning:crisis management, including crisis management groups(see ICP 25 Supervisory Cooperation and Coordination);andrecovery and resolution planning (see ICP 12 Exit from theMarket and Resolution and ICP 16 Enterprise Risk
Management for Solvency Purposes).

24.4.5

Supervisory requirements may be intended to mitigate the potential spillover effects from the distress or disorderly failure of an individual insurer
or from the common exposures or behaviours of a group of insurers or
across the sector. In the latter case, supervisory requirements may havedifferent effects during different phases of the economic, underwriting or
credit cycle. Therefore, the supervisor may develop requirements that are
time-varying in nature, depending on the economic environment. The
activation of such time-varying requirements could be rules-based (forexample triggered automatically given a pre-defined condition) or
discretionary (ie upon explicit decision by the supervisor). A rules-based
approach may be more transparent but requires regular assessments of
its adequacy under changing conditions affecting the insurance business.

Transparency
24.5

The supervisor publishes relevant data and statistics on the insurance
sector.
24.5.1The publication of data and statistics by the supervisor may enhancemarket efficiency by allowing market participants to make more informed

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decisions and reducing the cost to the public of acquiring insurance sector
information. Moreover, the publication of data may serve as a market
disciplining mechanism by facilitating comparisons of an individual insurer
to the sector as a whole.
24.5.2The supervisor may provide access to sufficiently detailed data either by
publishing data itself or by providing others with adequate means for
publishing data. This could be achieved by engaging a government
statistical office or cooperating with the local insurance sector; provided
the supervisor is satisfied with the accuracy, completeness, frequency
and timeliness of such publication.

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Supervisory Cooperation and Coordination
The supervisor cooperates and coordinates with involved supervisors andrelevant authorities to ensure effective supervision of insurers operating on across-border basis.
25.0
Introductory Guidance
25.0.1Supervisors of the different insurance legal entities within an insurancegroup with cross-border activities should coordinate and cooperate in the
supervision of the insurance group as a whole. Supervisors of different
insurance legal entities which are not part of the same group may alsoneed to cooperate and coordinate particularly where the insurers areconnected through reinsurance treaties or when difficulties in one insurer
may affect the market more generally, such as in resolution situations(see ICP 12 Exit from the Market and Resolution).

25.0.2

Supervisors may draw upon several supervisory practices to facilitatecross-border cooperation and coordination. These practices include theidentification of a group-wide supervisor and the use of coordination
arrangements, including supervisory colleges.

25.0.3

The group-wide supervisor is one of the involved supervisors and ischosen to lead group-wide supervision of an insurance group. The
group-wide supervisor should facilitate and lead the cooperation andcoordination between the other involved supervisors and engage themin the relevant supervisory decisions regarding the insurance group. The
group-wide supervisor is ultimately responsible for delivering effective
and efficient group-wide supervision. The other involved supervisors
should provide the group-wide supervisor with information regarding
insurance legal entities they supervise and otherwise participate ingroup-wide supervision. The procedures for systematic or ad hoc
information exchange should be agreed with the other involved
supervisors. The sharing of information by the group-wide supervisor
and the other involved supervisors should be subject to confidentiality
requirements (see ICP 3 Information Sharing and Confidentiality
Requirements).

25.0.4The undertaking of cooperation and coordination should not be taken to
imply joint decision making authority or any delegation of an individual
supervisor’s responsibilities. Supervisory decisions remain within the
responsibility of each of the involved supervisors.

Supervisory Recognition
25.0.5

Supervisors wishing to determine whether they can recognise and rely
upon another supervisory regime for the purpose of group-wide
supervision and designation of supervisory tasks should carry out anassessment of the acceptability of the counterpart’s regime reflecting thelevel or objective of supervisory recognition sought. Supervisors may use
different processes to conduct a supervisory recognition assessment.
The form of recognition and the criteria used for assessment will varydepending on its purpose.

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25.1

25.0.6

When the assessment has been finalised, the decision as to whether torecognise the supervisor should be communicated to the subject of theassessment. If recognition is not possible, the areas where the criteria
were not met should be communicated and the supervisors should
discuss how recognition may be achieved in future. A process forreassessment could then be established.

25.0.7

Following recognition, the supervisor should periodically assess whether
a recognised supervisor continues to meet the criteria for recognition.

25.0.8The terms of supervisory recognition, as well as specific roles andresponsibilities, may be set out in unilateral statements, bilateralagreements, or multilateral agreements.

The supervisor discusses and agrees with the involved supervisors whichof them is the group-wide supervisor for cross-border insurance groups
operating in its jurisdiction.
25.1.1

In principle, the home supervisor of the head of the insurance groupshould be considered first to take the role of the group-wide supervisor
in accordance with its authority and powers in its jurisdiction. In somejurisdictions, the legal or regulatory system may include provisions whichallow or require the designation of a group-wide supervisor.

25.1.2

In case a different or several involved supervisors fulfil the conditions to
be considered as a group-wide supervisor, factors to consider regarding
the identification of a group-wide supervisor should include:• the location of the insurance group's head office, given that
this is where the group's Board and Senior Management ismost likely to meet;• where the registered head office is not the operational headof the insurance group, the location where:othe main business activities are undertaken;othe main business decisions are taken;othe main risks are underwritten; and/orothe largest balance sheet total is located; and• the involved supervisors’ resources, skills, authorities andpowers in their jurisdictions.
CF 9.22
CF 9.23

Sds

CF 25.0.a.1

25.2

When determining the group-wide supervisor of an IAIG, the involved
supervisors should consider which supervisor would have direct
powers over the Head of the IAIG (see ComFrame material under ICP
10 Preventive Measures, Corrective Measures and Sanctions).

As a group-wide supervisor, the supervisor:• understands the structure and operations of the insurancegroup; and• leads group-wide supervision, taking into account assessments
made by the other involved supervisors.
Overall responsibilities of a group-wide supervisor

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25.2.1

Once identified, the group-wide supervisor should be responsible forcoordinating the input of insurance legal entity supervisors in undertaking
group-wide supervision as a supplement to the existing insurance legal
entity supervision.

25.2.2

Responsibilities of the group-wide supervisor should include:• chairing of the supervisory college (where one exists), or
consider establishing one if not in place yet;• determination of the scope of group supervision;• leadership, planningsupervisory activities;

andcoordinationofgroup-wide• aggregation of group-wide information and dissemination of
the relevant information to the other involved supervisors;• preparation and discussion of group-wide supervisory
analysis;• performing a group-wide supervisory assessment, including
assessing group capital management, risk and solvency, risk
concentration, intragroup transactions and group governance;• coordination of information sharing procedures amongst other
involved supervisors;• decision making on group-wide issues in consultation withother involved supervisors, where relevant;• implementation and coordination of decisions on group-wideissues including preventive and corrective measures andsanctions; and• identification of gaps in supervision.
25.2.3

The group-wide supervisor should take the initiative in coordinating theroles and responsibilities of, and facilitating communication between, theother involved supervisors. In carrying out its agreed functions, thegroup-wide supervisor should strive to act with the consensus of theother involved supervisors.

Information sharing and key contact point function

25.3

25.2.4

The group-wide supervisor should request information from other
involved supervisors needed to fulfil its role.

25.2.5

The group-wide supervisor should make relevant information available
to the other involved supervisors on a proactive basis and in a timely
manner.

25.2.6

The group-wide supervisor functions as a key contact point for all other
involved supervisors.

As an other involved supervisor, the supervisor understands:• the structure and operations of the group insofar as it concerns
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• the way that operations of insurance legal entities of the groupin its jurisdiction may affect the rest of the group.
Responsibilities
25.3.1

Responsibilities of other involved supervisors should include:• actively participating in the group supervision process, suchas that facilitated by a supervisory college;• informing the group-wide supervisor and, if necessary, other
involved supervisors, of material findings affecting theirinsurance legal entity that could affect entities in otherjurisdictions;• sharing all relevant information with the group-wide supervisor
to assist with supervision at the group-wide level anddiscussing findings and concerns at the group level with thegroup-wide supervisor;• analysing information
supervisor;

received

from

the

group-wide• cooperating in the analysis and decision making as well as
implementation and enforcement;• assisting the group-wide supervisor in carrying out thesupervisory process at the group level; and• identifying gaps in supervision.
Information sharing
25.3.2Other involved supervisors should provide the group-wide supervisor
with relevant information, regarding insurance legal entities within theinsurance group, including:• any granting and withdrawal of a licence;• location of significant business;• developments in the legal structure of the insurance group;• changes in business model;• changes to the Board or Senior Management;• changes in the systems of risk management and internal
controls;• significant developments or material changes in the business
operations;• significant developments in the financial position andregulatory capital adequacy;• significant investments in group legal entities;• significant financial links;• the transfer of risks to and from non-regulated legal entities;

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• operational risk as well as conduct risk, including mis-sellingclaims and fraud;• potential high-risk factors for contagion; and• events which may endanger the viability of the insurancegroup or major legal entities belonging to the insurance group.
25.3.3

25.4

25.5

Other involved supervisors should request information in relation to thegroup for a timely assessment of an insurance legal entity located in its
jurisdiction.

The group-wide supervisor discusses and agrees with other involved
supervisors to establish suitable coordination arrangements for crossborder insurance groups operating in its jurisdiction.
25.4.1

Coordination arrangements, including supervisory colleges, aremechanisms to foster cooperation and coordination between involved
supervisors with regard to the supervision of insurance groups, as wellas to promote common understanding, communication and informationexchange.

25.4.2

The group-wide supervisor should initiate discussions with other involved
supervisors about suitable coordination arrangements. Involved
supervisors should seek a consensus on the most appropriate form of
coordination arrangements.

The group-wide supervisor sets out the coordination arrangements in a
written coordination agreement and puts such arrangements in place.
25.5.1The scope of coordination arrangements will vary and should reflect thecircumstances of the particular insurance group and involved
supervisors.

25.5.2A written coordination agreement should cover activities including:• information flows between involved supervisors;• communication with the head of the group;• convening periodic meetings of involved supervisors;• the conduct of a comprehensive assessment of the group,
including the objectives and process used for such anassessment; and• supervisory cooperation during a crisis.

25.6

The supervisor discusses and agrees with involved supervisors whether toestablish a supervisory college for cross-border insurance groups
operating in its jurisdiction, and if so, how to structure and operate thesupervisory college.
Establishing a supervisory college
25.6.1

The group-wide supervisor, in cooperation and coordination with other
involved supervisors, should consider establishing a supervisory college
where, for instance:

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• the nature, scale and complexity of the cross-border activities
or intra-group transactions are significant and associated risks
are high;• group activities or their cessation could have an impact on theoverall stability of the insurance markets in which the insurer
operates; and• the insurance group has significant market share in more than
one jurisdiction (see Application Paper on Supervisory
Colleges).
Structure and membership of a supervisory college
25.6.2

The group-wide supervisor, in cooperation and coordination with the
involved supervisors, should carefully consider the structure of thesupervisory college (for example, inclusive, tiered, or regional).

25.6.3

A supervisory college is typically comprised of representatives of eachof the supervisors responsible for the day-to-day supervision of theinsurance legal entities, including material or relevant branches, which
are part of the group and, as appropriate, any supervisors of othermaterial non-insurance entities.

25.6.4

Clear criteria should be established for defining the basis of membershipin the supervisory college. Issues which should be considered inestablishing these criteria include:• the relative size and materiality of the insurance legal entity
relative to the insurance group as a whole;• the relative size or materiality of the insurance legal entity
relative to its local market;• the level of risk in a particular insurance legal entity.

25.6.5The structure of and membership in the supervisory college should be
reviewed on a regular basis to reflect changing circumstances in theinsurance group.

Coordination agreement for a supervisory college
25.6.6

The purpose of a supervisory college coordination agreement is toestablish a framework for the operations of a supervisory college. The
agreement is not legally binding and does not create enforceable
obligations from one supervisor to another. However, jurisdictions may
be subject to an obligation to establish such an agreement.

25.6.7

While recognising the need to allow for flexibility in the operation of asupervisory college, matters covered by the coordination agreement
generally should include:• membership of the supervisory college – including theapproach to participation of members in the college;• the process for appointing a supervisor to chair the college(typically, but not necessarily, the group-wide supervisor);

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• roles and functions of the supervisory college and of themembers of the supervisory college, including expectations of
the chair;• frequency and locations of meetings (meetings should takeplace by telephone conference call or other means where an
in-person meeting is not practical); and• scope of the activities of the supervisory college, including
ongoing information exchange.
25.6.8

Members of a supervisory college who are not signatories to the IAIS
MMoU should enter into a similar long-term agreement covering
information exchange and confidentiality, which could be included in thecollege coordination agreement.

Functions and activities of a supervisory college
25.6.9The group-wide supervisor, in cooperation and coordination with theother involved supervisors, should establish the appropriate ongoing
functions of the supervisory college and clearly allocate those functions
among the involved supervisors to avoid unnecessary duplication ofsupervisory tasks and to ensure no gaps exist in the supervision of thegroup.

25.6.10 In establishing the functions of a supervisory college, the key activities
which should be considered include:• providing access for involved supervisors to information andknowledge about the group and the environment in which it
operates through information sharing;• assessing group-wide risk exposures, financial position andregulatory capital adequacy and the group-wide corporate
governance framework, including risk management, internal
control and intra-group relationships such as intra-grouptransactions and exposures;• understanding the material operations, solvency and liquidity
needs of the material legal entities within the group;• coordinating supervisory activities such as joint off-sitemonitoring or on-site inspections or review of one or more
entities within the group or of a particular aspect of the group’sfunctions such as internal audit, actuarial, risk management orcompliance;• coordinating appropriate actions to ensure that the group andrelevant entities within the group mitigate identified risks;• forming special focus teams to evaluate areas of particularconcern or importance to the involved supervisors, or to bring
together the requisite expertise to examine an aspect of thegroup’s operations;• providing a forum for involved supervisors to interact with theinsurer’s group-wide Senior Management in order to, forexample, inform Senior Management of an identified issue atPublicIAIS ICPs and ComFrame – November 2019

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an insurance legal entity that affects the whole insurancegroup; and• regularly assessing the effectiveness of the supervisory
college in fulfilling its agreed role and functions. The
assessment should be organised by the group-wide
supervisor and take into account input from the other involved
supervisors and, as appropriate, legal entities.
25.6.11 Aside from group-wide issues, supervisory colleges may also focus on
issues specific to insurance legal entities within the insurance group.
CF 9.24
CF 9.25f

CF 25.6.aF

The group-wide supervisor establishes a supervisory college for the IAIG,
which meets at least annually.

CF 25.6.a.1

If a supervisory college does not already exist, one should be formed
and its first meeting should take place in a timely manner after theidentification of the IAIG.

CF 25.6.a.2

Priorities for the initial supervisory college meeting should include, atleast:• confirming the group-wide supervisor and the structure of
the supervisory college;• describing the scope of group-wide supervision including,where applicable, an explanation from the group-wide
supervisor of its decision to exclude an entity from thescope of group supervision; and• discussing proposed coordination agreements.

CF 25.6.a.3

When an in-person meeting is not practicable, the meeting should takeplace by teleconference or other means.

CF 25.6.a.4

The group-wide supervisor should ensure that the IAIG’s supervisory
college discusses the most relevant elements of the group-wide
supervisory process and the supervisory plan. The agenda set by thegroup-wide supervisor should provide for discussion of at least the
IAIG’s:• group-wide corporate governance framework;• enterprise risk management;• main risks and intra-group transactions;• financial position; and• regulatory capital adequacy
supervisory requirements.

CF 25.6.a.5

CF 25.6.bandcompliancewith

When deciding on the topics to be covered in the IAIG’s supervisory
college meetings, the group-wide supervisor should cooperate andcoordinate with involved supervisors to ensure that matters pertinent
at a legal entity level are appropriately raised.

The members of the IAIG’s supervisory college communicate andexchange information on an ongoing basis.

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CF 25.6.c

The members of the IAIG’s supervisory college discuss and assess asummary of the reference ICS prepared by the group-wide supervisor, as
well as a summary of any additional reporting related to the ICS that has
been reported at the option of the group-wide supervisor.

CF 25.6.c.1

The assessment of the reference ICS and, if applicable, any additional
reporting should include:• a comparison with existing group capital standards or
calculations that are in development;• the extent to which material risks of the IAIG are captured;• the appropriateness and practicality of the calculations
required; and• any difficulties in implementing the measure by the IAIG.

CF 25.6.c.2

The purpose of the supervisory college discussing and assessing thesummary of the reference ICS, and of any additional reporting, is tohelp refine the ICS.

Supervisory cooperation in planning for crisis management
25.7

The group-wide supervisor coordinates crisis management preparations
with other involved supervisors and relevant authorities.
Objectives of crisis preparation planning
25.7.1

The main objectives of supervisory crisis management planning shouldbe:• to protect policyholders; and• to contribute to domestic or international financial stability to
avoid a potential adverse impact on the real economy.

25.7.2

In planning for crisis management the group-wide supervisor and other
involved supervisors should seek to:• promote private sector solutions such as portfolio transfers
and run-offs;• minimise the need to use public support to protect
policyholders;• minimise disruptions to the efficient operation of theinsurance sector across jurisdictions; and• achieve an orderly supervisory response.

Process for crisis management planning
25.7.3

Supervisory actions in planning for crisis management should seek tosecure early communication between involved supervisors and relevant
authorities in order to maximise time for coordination and cooperation.

25.7.4

The group-wide supervisor should meet regularly with the other involved
supervisors and relevant authorities to share and evaluate information
relating to the insurance group and to analyse and assess specific issues(including whether there are systemic implications). These meetings may

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be held in conjunction with the supervisory college meetings or
separately if no supervisory college is in place.
25.7.5

Supervisors should remain aware of potential contagion channels,
conflicts of interest and possible barriers to coordinated action in a crisis
situation within a specific cross-border insurance group (such as legallyrequired transparency rules in the case of publicly listed companies orparticular legislative requirements across jurisdictions).

25.7.6

Effective crisis management should ensure that preparations for andmanagement of a cross-border crisis – including policy measures, crisis
response decisions and matters of external communication – arecoordinated, timely and consistent. Supervisors and other relevant
authorities (eg ministries of finance, central banks, other financial sector
supervisors and policyholder protection schemes) should exchange
information to facilitate effective crisis management.

25.7.7

The group-wide supervisor should share with the other involved
supervisors and relevant authorities information relevant to crisis
management, including:• group structure (focusing on legal, financial and operational
intragroup dependencies, which may not be always available
to the other authorities);• inter-linkages between the insurance group and the financial
system in each jurisdiction where it operates; and• potential impediments to a coordinated solution to a crisis.

25.7.8CF 9.26
CF 9.27

A supervisory college should plan in advance the process forcooperation and coordination during crisis situations in order to benefit
from well-established information and cooperation channels andprocedures should a crisis occur. The channels for communication withthe head of the group, as well as other parts of the group, should beclearly established in case a crisis emerges. The group-wide supervisor
should establish close communication channels with the group Board
and Senior Management as well as Significant Owners.
jd

CF 25.7.a

The group-wide supervisor establishes a crisis management group for
the IAIG with the objective of enhancing preparedness for, and facilitating
the recovery and resolution of, the IAIG.

CF 25.7.a.1

A crisis management group may be established under a different
name so long as it fulfils the objectives of a crisis management groupfor the IAIG (IAIG CMG).

CF 25.7.a.2

There should be clear conditions as to the membership of the IAIG
CMG. Membership of the IAIG CMG should include:• the group-wide supervisor;• the other relevant involved supervisors; and• to the extent possible, relevant resolution authorities.

CF 25.7.a.3

The supervisory college may qualify as an IAIG CMG if:

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• the supervisory college’s coordination arrangements
address recovery and resolution; and• membership includes those authorities which would
otherwise be members of the IAIG CMG.
CF 25.7.a.4

The IAIG CMG should keep under active review the:• progress in coordination and information sharing within the
IAIG CMG and with host resolution authorities that are notrepresented in the IAIG CMG;
• processes for recovery planning and resolution planning(where required) for the IAIG; and• resolvability of the IAIG.

CF 25.7.b

The group-wide supervisor puts in place a written coordinationagreement between the members of the IAIG CMG.

CF 25.7.b.1

The coordination agreement should describe, at least:• roles and responsibilities of the respective members of the
IAIG CMG; and• the process for coordination and cooperation, including
information sharing, among members of the IAIG CMG.

CF 25.7.b.2

The coordination agreement may take the form of a memorandum of
understanding.

Supervisory cooperation during a crisis
25.8

The supervisor:• Informs the involved supervisors as soon as it becomes awareof a crisis;• cooperates and coordinates with the involved supervisors andrelevant authorities to analyse and assess the crisis situationand its implications to reach a common understanding of thesituation; and• identifies coordinated, timely and effective solutions to a crisis
situation.
25.8.1

The group-wide supervisor should coordinate the gathering and analysis
of information, as well as coordinate supervisory activities to respond tothe crisis.

25.8.2

Such analysis should include:• implications for policyholder protection in each relevant
jurisdiction;• whether the crisis is of systemic relevance and, if so, theidentification of possible sources of systemic risk; and• processes through which involved supervisors and relevant
authorities can respond in a coordinated way.

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25.8.3

25.9

Such cooperation and coordination takes account of the impact of thecrisis on policyholders, financial systems and real economies of all
relevant jurisdictions, drawing on information, arrangements and crisis
management plans developed beforehand.

The group-wide supervisor coordinates with other involved supervisors
and relevant authorities on public communication and communication with
the insurance group during the crisis.
25.9.1

The group-wide supervisor and other involved supervisors, wherepracticable, share their plans for public communication among
themselves and with other authorities to ensure that communication ishandled in a coordinated and timely way.

25.9.2

The group-wide supervisor considers when, and to what extent, tocommunicate with the insurance group and the insurance legal entities
that are part of the group, through their respective insurance legal entity
supervisors.

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