Financial Sector Assessment Programme Indian Insurance Sector Compliance

Financial Sector Assessment Programme Indian Insurance Sector. Compliance with ICPs Dr. Mamta Suri Joint Director-F & A Insurance Regulatory And Development Authority Hyderabad, India

FSAP – Framework Macro-Prudential Analysis – Stress Testing – Scenario Analysis – Financial Soundness Indicators – Macro-Financial Linkage. Ø Financial Sector Structure e. g. efficiency, competitiveness, concentration, liquidity, access etc. Ø Assessment of the observance of best international standards, codes and practices. Ø Country Specific Stability Issues. Ø

Three Pillars of Assessment Ø Pillar I => Macro prudential Surveillance and Financial Stability Analysis Ø Pillar II => Legal and Institutional Infrastructure and Development Issues Ø Pillar III => Assessment and Status of Implementation of International Financial Standards and Codes

Pillar I Steps in Stability Assessment Compilation of a set of key indicators of - Financial Structure - Financial Soundness (Sector-Wise, Market-based, Performance-based) - State of Development Ø Coverage Banks, Insurance, Capital Markets and Non. Financial Sector Ø

Pillar II Institutional infrastructure Ø Ø Ø Regulatory Governance (Objectives of regulation, independence and resources, enforcement powers, and transparency of regulatory process) Prudential framework (Risk management, risk concentration, capital requirements, corporate governance, and internal controls) Regulatory Practices (Group-wide supervision, off-site monitoring and on-site inspection, reporting to supervisors, enforcement, and licensing & ownership) Financial Integrity and safety net (markets (integrity and financial crime), customer protection, information, disclosure, and transparency) Others (Licensing, Capital requirements, accountability requirements, and Risk management practices)

Pillar III International Financial Standards and Codes Standards are widely accepted good principles, practices or guidelines in a specified area Ø Called codes to reflect that they have a legal status or are accepted, signed or ratified by members of concerned multilateral agencies. Ø To be implemented, either in their entirety or in phases, considering the country-specific circumstances. Ø Flexibility an essential ingredient for the success of the initiative. Ø

IAIS – Insurance Sector Core Principles Ø Core Principles - Developed in year 2000 Ø Key Global standards for Prudential Regulation & Supervision Ø Act as diagnostic tools to assist in improving supervision globally. Ø Can act as roadmap for reform agenda.

Need for convergence ØGlobal Nature of insurance Markets ØPresence of conglomerates ØExpansion of cross border transactions ØGlobal Nature of Reinsurance Markets ØPresence of active off shore centres Thus, need for convergence of regulatory practices and norms. To ensure effectiveness of regulations and level playing field. Financial crisis highlights need for convergence

ICP Assessment Methodology Ø Based on set of essential & advanced criteria Ø Intended at making a comprehensive precise and objective assessment. Ø Essential Criteria – components intrinsic to implementation of core principles Ø Advanced criteria – improve essential criteria and enhance supervisory regime

Observance Status 1. Observed When stipulations exists and practiced by the insurers 2. Largely Observed Gaps have been identified and steps are being taken to fill in the gaps 3. Partly Observed Compliance observed in case of few of the requirements of the criteria and absence of compliance in case of certain requirements 4. Not Observed No stipulations exists, no initiation of process of filling the gaps on date 5. Not Applicable Stipulations prohibit the requirements indicated in the criteria ab initio 6. Observance Not Tested Stipulations exists but there were no instances to observe compliance 7. Observance in alternative manner Though not stipulated by the legislation/Supervisor, criteria is complied with in an alternative manner

Core Principles – 28 principles Grouped into 7 categories: I Conditions for Effective Insurance Supervision II The Supervisory System III The Supervised Entity IV On-going Supervision V Prudential Requirements VI Markets and Consumers VII Anti-money Laundering, Combating Financing of Terrorism (AML/CFT)

I Conditions for Effective Insurance Supervision (Elements of environment where supervision can be most effective) Ø ICP 1 Condition for Effective Insurance Supervision - Broad requirements in the financial policy and financial markets infrastructure to support effective supervision.

II The Supervisory System (Mandates and responsibilities of the Supervisor) ICP 2 Supervisory Objectives – Clarity in Law Ø ICP 3 Supervisory Authority – Adequate powers, resources and legal protection Ø ICP 4 Supervisory Process – Transparency and accountability Ø ICP 5 Supervisory Cooperation and Information Sharing – Within the insurance sector and across financial services (domestic and international) Ø

III. The Supervisory Entity (Form and governance of insurers) ICP 6 Licensing – requirements for licensing be clear, objective and public Ø ICP 7 Suitability of Persons – Ongoing assessment of fitness and proprietary Ø ICP 8 Changes in Control and Portfolio Transfer – Supervisory approval for changes, in mergers and in portfolio transfers Ø ICP 9 Corporate Governance – Management of business on basis of standards, & role of board and senior management Ø ICP 10 Internal Control – Systems, audit & reporting Ø

IV. On-going Supervision (Actual practice of the supervisor) Ø Ø Ø Ø ICP 11 Market Analysis – Macro prudential surveillance ICP 12 Reporting to Supervisor and Off site monitoring – Comprehensive monitoring (solo & group) on an on-going basis ICP 13 On site inspection – Powers for the insurers & outsourced companies, clarity of scope ICP 14 Preventive & corrective measures – Adequate, timely, graduated spectrum of remedial measures ICP 15 Enforcement – based on clear objective criteria ICP 16 Winding up – Procedures for insolvency & priority with respect to policyholders ICP 17 – Group wide supervision – Insurance group or conglomerate

V. Ø Ø Ø Prudential Requirements (Financial and risk management processes) ICP 18 Risk Assessment & Management –Systems and their reviewing by supervisor ICP 19 Insurance Activity – Evaluation of risks ICP 20 Liabilities – adequacy of provisioning ICP 21 Investments – Standards on investment policy, Asset mix, valuation, risk management and ALM ICP 22 Derivatives & other similar commitments – restriction on use and disclosures ICP 23 Capital adequacy & Solvency – To cover claims, expenses and unexpected losses

VI. Markets and Consumers (Distribution, consumer protection, Disclosure and fraud ICP 24 Intermediaries – Licensing and business requirements Ø ICP 25 Consumer Protection – providing information before and during a contract Ø ICP 26 Information, Disclosure and Transparency toward the Market – adequacy of disclosure Ø ICP 27 Fraud – measures to prevent, detect and remedy Ø

VII. Anti-money Laundering, Combating the financing of Terrorism Ø ICP 28 Anti-money Laundering and Combating the Financing of Terrorism (AML/CFT) – Measures to deter, detect and report in line with FATF standards

Position of observance - Insurance Core Principles Group I Conditions for Supervision Effective No. of Principles Insurance Observed 1 Largely Observed Partly Observed 1 II The Supervisory System 4 0 4 III The Supervised Entity 5 1 2 2 IV On-going Supervision 7 3 4 V Prudential Requirements 6 2 1 3 VI Markets and Consumers 4 2 1 1 VII AML, Combating and Financing of Terrorism 1 Total 28 1 5 13 10

ICP 1: Largely observed Conditions for effective insurance supervision: (Elements of environment where supervision can be most effective) Insurance supervision relies upon na policy, institutional and legal framework for financial sector supervision na well developed and effective financial market infrastructure nefficient financial markets. Status: n. Strong legislative, regulatory and institutional framework n. Well developed and effective constitutional &legal framework, including financial Professional bodies facilitates oversight of the financial sector - Accounting, Auditing and Actuarial – Although gaps identified in terms of adequacy of Actuarial professionals Gaps: n Move towards global standards in accounting and audit issues – timeframe for adoption of IFRS laid down. These are being addressed n Amendments required to legislative framework - Proposals for amendments to the Insurance Act, 1938 and the LIC Act, 1956 forwarded to Central Government

ICP -1 Crit. Contents a The government establishes and publicly discloses a policy statement aimed at financial stability, effective financial sector supervision b Publicly disclosed, institutional and legal framework exists for financial sector issues Financial Market infrastructure c There is a reliable, effective, efficient and fair legal and court system d Accounting, actuarial and auditing standards are comprehensive, documented, transparent and consistent with international standards. These experts are competent and experienced, comply with technical and ethical standards Professional bodies set and enforce technical and ethical standards e f g Basic economic, financial and social statistics are available to the supervisor, the industry and the public. Advanced criteria h Laws and regulations are updated, as necessary, to reflect current best practices and industry conditions. Efficient Financial Markets i Well-functioning money and securities markets exist to support the availability of both long term and short term investment opportunities.

II The Supervisory System (Mandates and responsibilities of the Supervisor) ICPs involved: 2 - 5

ICP 2: Largely observed Supervisory objectives: The principal objectives of insurance supervision are clearly defined Status: n. Objective of supervision clearly laid down n. Dual role of Development and Regulation n. Supervisor vested with the powers to discharge supervisory responsibilities Gaps: n Dual role has come in for some comment n Some of the powers still rest with the Government of India. n The regulatory position with respect to the exempted insurers is not clear. n State-owned insurers continue to be governed by certain provisions of the specific legislations

ICP 2 Crit. Contents Compliance a. Legislation or regulation clearly defines the objectives of insurance supervision. Insurance Regulatory and Development Authority Act, 1999. The Insurance Act, 1938 and the Regulations framed there under lay down the regulatory framework for supervision b. Key objectives of supervision promote the maintenance of efficient, fair, safe and stable insurance markets for the benefit and protection of policyholders. Key objective is enshrined in the mission statement which is To protect policyholders interest To regulate, promote and ensure the orderly growth of insurance and reinsurance business. c. Where there are multiple objectives, Supervisor discloses and explains how each objective will be applied Objective of the supervisor are cohesive and not mutually exclusive. d. Supervisor gives reasons for and explains any deviations from its objectives. There are no instances of deviations from the stated objectives. e. Correction in law/Regulation initiated where objectives are contradictory There are no contradictions in the objectives of the supervisor

ICP 3: Largely observed The supervisory authority: nhas adequate powers, legal protection and financial resources to exercise its functions and powers; nis operationally independent and accountable in the exercise of its functions and powers; nhires, trains and maintains sufficient staff with high professional standards; and ntreats confidential information appropriately. (19 ECs and 2 ACs) Status: n. Supervisor independent agency reporting to Parliament through the Union Ministry of Finance. n. Powers vest with Authority to discharge its role n. Free from political interference n. The funds requirements met from fees levied. n. Process of consultation with stakeholders in framing policies/regulations n. Transparent processes. n. Disclosure of performance Gaps: n Adequacy of powers to be addressed through legislative amendments n Certain powers rest with the Government.

ICP 3 Contd… Crit. a Contents Legislation identifies the authority responsible for supervision b Legislation gives power to issue and enforce rules by administrative means c Legislation grants powers for effective discharge of responsibilities. Independence and Accountability d e f Governance structure of supervisor defined Internal governance procedures in place Explicit procedures on appointment and dismissal of the governing body in place Institutional relationships between the supervisor, executive and the judiciary- clearly defined Compliance Duties, powers and functions of IRDA are laid down in the IRDA Act, 1999. Section 14(2) of the IRDA Act, and Sections 34 and 114 A of the Insurance Act deal with the powers vested in the Authority. Supervisor vested with powers to enforce observance of the law and the regulations framed there under. Structure of IRDA clearly defined in the IRDA Act, 1999 Procedures on appointment of the governing body are in place The institutional relationship between IRDA, the Central Government and the Judiciary are clearly defined. Circumstances when the Central Government would have overriding powers - laid down in the Act.

ICP 3 Contd… Crit. g h Contents Supervisor and its staff free from undue political, governmental and industry interference Supervisor financed in a way that there is no undermining its independence Compliance IRDA and its staff are free from political, government or industry interference. They are public servants and are protected under law for acts in good faith No reliance on the government grants for funding Requirements met from “Fees” received from the insurers/ intermediaries. i Supervisor has discretion to IRDA adopts its annual budget depending on allocate its resources requirements. j Supervisor has transparent processes and procedures for making decisions. Consultation process adopted in framing various policies/ regulations. k All material changes to the legislation and supervisory practices are normally subject to prior consultations with market participants. Every proposal for change in regulation/ new regulation is preceded by consultation process.

ICP 3 Contd… Crit. Advanced criteria Contents Compliance l Representatives of the Supervisor publicly explain policy objectives, and report on their performance Operations of Supervisor detailed in annual report available in public domain m Subject to confidentiality considerations, information is provided publicly about problem or failed insurers, action taken Violations/non-compliances, problems faced by insurers, action taken thereon Published on IRDA’s website Powers: n Supervisor has powers to take immediate action where necessary. Adequate powers implied in legislation to take quick actions where necessary. Financial Resources o Supervisor has own budget to conduct effective supervision. able to attract and retain highly skilled staff, hire outside experts as necessary p Supervisor publishes audited financial statements on a regular basis. No constraints on financial resources Supervisor offers attractive pay package at par with the other regulators in the financial sector to attract and retain qualified staff. Annual Report of IRDA, with details of its operations is placed in public domain

ICP 3 Contd… Cr it. Contents Compliance Human Resource and Legal Protection The supervisory authority and its staff -observe the highest professional standards -have the appropriate levels of skills and experience have the necessary legal protection to protect them against law suits for actions taken in good faith r Supervisor has the authority to hire, contract or retain the services of external specialists Authority to hire external specialists is implicit in its general operational powers. s Where functions are outsourced, Supervisor assess their competence, monitor their performance, and ensure their independence q Conditions of service for officers and staff laid in Regulatory framework Employees in supervisor’s office governed by requirements of confidentiality. Staff of the Supervisor given the status of Public Servants and are protected from being sued for actions done in good faith There is no proposal at present to outsource any of the supervisory functions. The function of licensing of agents delegated to specified officers of insurers with appropriate safeguards in place Confidentiality t Supervisor maintains appropriate safeguards Information specific to an insurer are treated/kept for the protection of confidential information in confidential its possession. u External specialists hired by Supervisor are subject to the same confidentiality and code of conduct requirements as the staff of the Supervisory. External specialists hired by Supervisor are bound by proper agreements/contracts containing adequate safeguards on this aspect.

ICP 4: Largely observed Supervisory process The supervisory authority conducts its functions in a transparent and accountable manner. Status: n. Regulations in consultation with industry n. Transparent & consistent n. Decisions subject to judicial review n. Publicly available - hosted on website n. Quick decisions in emergent situations Gaps: n Due to legacy issues relaxations/additional time given to public sector insurers n Presence of Consultative Committee can lead to delays

ICP 4 Contd… Crit. a. b. c. d. Contents Compliance Supervisor adopts clear, transparent and consistent regulatory and supervisory processes. Supervisor applies all regulations and administrative procedures consistently and equitably based on risk profiles of insurers. Administrative decisions of the supervisor can be subject to substantive judicial review. Supervisor makes information on its role publicly available. Properly recorded decisions enable consistency and equitable treatment Guidelines issued in consultative process Rules, regulations, guidelines etc are available in the public domain Currently, Legislation does not provide for the same Role of the supervisor is prescribed in legislation is in public domain

ICP 4 Contd… Crit. Contents Compliance e. Structure of decision-making lines enable immediate action in case of an emergency situation f Process of appeal on supervisory No mechanism for appeal on the penalties decisions -specified and balanced imposed by IRDA currently to preserve independence and effectiveness g. Supervisor publishes a regular report – at least annually on its policy, objectives h. Supervisor publishes information Supervisor publishes the ‘Annual Report’ about financial situation and major with various details developments in the insurance industry. Decisions on major policy issues taken by the Board of the Authority. Board can meet at short notice Also Chairman is authorized to take emergent decisions Supervisor publishes the annual report on an annual basis.

ICP 5: Largely observed Supervisory cooperation and information sharing: The supervisory authority cooperates and shares information with other relevant supervisors subject to confidentiality requirements. Status: n. Sharing of information with counterparts – both domestic and foreign n. Interacts with other supervisors to draw upon their experiences n. Cooperation amongst regulators within the country n. Home supervisor not required to take specific supervisory action against foreign establishments Gaps: n n Absence of framework for sharing of information – hindrance to supervision. Addressed through: Guidelines for sharing of information - Confidentiality and reciprocity - Application for Mo. U with the IAIS