Group and Commercial Insurer Supervision Presenter: Gerald Gakundi Assistant Director of Insurance Supervision Note: In this presentation, “insurer” includes “reinsurer”
Agenda • Scope of Supervision • Objectives of Supervision • Comprehensive Knowledge of Insurers • On-site Reviews • Internal Audit Role • Summary 2
Scope of Supervision • All insurers and groups for which the Authority is the Group Supervisor are subject to supervision. • While the principle approach and some supervisory tools are similar for all, the Authority has segmented its market into commercial enterprises and captives/SPIs (Limited Purpose Insurers) to allow for tailored and proportional supervision. – Captives in this context are entities where the majority of the business comprises risks where the ultimate policyholder is related or otherwise affiliated with the captive as opposed to commercial enterprises where ultimate policyholders are unrelated. 3
Scope of Supervision – cont. • The scope of this presentation primarily relates in a proportional manner to the supervision of commercial enterprises (Classes 3A, 3B, 4, C, D, and E), and groups for which the Authority is Group Supervisor, but does not include insurers in run-off for which other measures apply. • For the purposes of group supervision, the scope of a group includes the ultimate parent and all of its subsidiaries (significant influence and controlled), including regulated and unregulated. 4
Objectives of Supervision • Subsection 2(1) of the Insurance Act 1978 states: – “The Authority shall have the functions and powers conferred on it by this Act and the duty generally to supervise persons carrying on insurance business … for the purpose of protecting the interests of clients and potential clients of such persons.” • Accordingly, the primary objective of supervision is policyholder protection. 5
Objectives of Supervision – cont. • To achieve the primary objective of supervision (policyholder protection) the Authority has: – Formulated (and kept under review for enhancement) primary and secondary legislation, Code of Conduct and Group Rules • Aligned to international regulatory and supervisory standards (IAIS) – Assess compliance with legislation and Code which cover minimum standards in relation to governance, risk management and capital adequacy – Assess financial market indicators and macro trends for early warning and likely impact on insurers/groups (forward looking) 6
Objectives of Supervision – cont. • To achieve the primary objective (cont.) – Where the primary objective is threatened, appropriate preventive/remedial action is taken using tools in the remedial and enforcement toolkit provided for under legislation – Legal entity framework forms the foundation of the group supervision framework 7
Comprehensive knowledge of the Insurer • To identify where the primary objective (policyholder protection) is potentially under threat, as a prerequisite, the comprehensive knowledge a supervisor requires on each Insurer/Group includes: – Legal entity/group strategy – Risk appetite – Governance (including processes for conflict management) and risk management – Risk exposure and supporting capital – Fungible capital resources and liquidity management – Products and activities of all entities, including unregulated entities – Significant developments/future plans (e.g. acquisition/product line expansion, etc.) – Market niche trends and outlook (e.g. pricing cycle, entry barriers, capacity and level of competition, interest rates, market volatility, share price, CDS spread, bond price, rating agencies, etc.) – Regulatory and other key developments in local markets (e.g. compliance, proposed new laws, etc.) 8
Comprehensive knowledge of the Insurer – cont. • To obtain comprehensive knowledge and develop an appropriate supervisory plan, the Authority utilizes the following information sources in its supervisory toolkit; – Prudential filing assessments and forward-looking earnings simulations – Daily internal dissemination of top insurance industry news (market and insurer/group specific). Weekly scans of group websites and other media – On-site reviews (Group or Legal Entity) – Supervisory colleges Prudential filing assessments (annually/quarterly) • Risk-based approach is taken for prudential filing assessments to decide how to assign supervisory resources (both amount and focus) 9
On-site Reviews • On-site frequency is determined by a number of factors; • Risk assessment rating • Factors determining whether on-sites for a given insurer/group are more frequent than the baseline, include – Supervisory knowledge gap arising from material developments/changes – Prudential filings (e.g. potential issues identified) – Trends in financial market indicators , earnings calls or street news – Follow up on issues from prior on-sites – Information gathered from the supervisory college • On-site type (Level 1 or Level 2) are determined by information obtained from prior on-sites and other tools in the supervisory toolkit (e.g. prudential filings, simulated distribution of earnings, environmental scans, street news, supervisory colleges, etc.) 10
On-site Reviews – cont. Scope of On-site • The Authority communicates the on-site’s general focus areas to the insurer as part of the onsite review notification • While the scope for a first on-site could be wide, most on-sites are focused on specific areas or risks • The Insurer can also generally have an idea of the areas of focus from the information requests, which are tailored to the upcoming engagement • There is always potential for the scope to widen depending on material developments at the Insurer before or during the on-site and/or on-site findings 11
On-site Reviews – cont. On-site Review Process • Identification of Key Focus Areas • Internal planning meetings and discussions with other regulators • Notification to Companies Planning • Agreement on timeline and personnel involved • Meetings and Discussions with Management • Inspection/Review of Documents and Walkthroughs Execution • Communication of Findings and Recommendations • Obtaining and Incorporating Management Comments • Reassessment of Focus Areas Rating and Supervisory Outlook Conclusion 12
Internal Audit Role Reliance on the work of Internal Audit • Can reduce the extent of work performed while making our on-sites more effective Key Considerations: • Good governance structure • Proportionality of INEDs relative to company size • Appropriate level of skills of Internal Audit team • Internal Audit Plan • Nature and scope of work performed and conclusions 13
Internal Audit Role – cont. Key on-site areas where reliance on internal audit could be helpful: • Review of Compliance with the Code of Conduct and the Group Rules • Review of Groups/Insurers Implementation of regulatory changes • Assessment of levels of Group’s/Insurer’s governance structure including the number of INEDs • Head Office and Outsourcing Considerations • Internal Capital Model Approval Reviews 14
Internal Audit Role – cont. Key on-site areas where reliance on internal audit could be helpful (cont’) Review of unaudited BSCR filing information including, but not limited to: • Bermuda Catastrophe Risk Return • CISSA capital and documentation • Gross and Net Probable Maximum Loss (“PML”) calculations and Cat exposure management • Eligible Capital considerations • Operational Risks assessments • Economic Balance Sheet (“EBS”) Technical Provisions • Allocation of investments to BSCR Rating Categories • Allocation of premium and reserves to statutory lines of business 15
Summary • Primary objective of supervision is policyholder protection • A range of supervisory tools exist to facilitate obtaining the information on an Insurer/Group • Supervisory tools provide a feedback loop to update the Insurer/Group’s Supervisory Plan • While supervisory plans including on-sites are set annually for each Insurer/Group, flexibility exists throughout the year to respond to major events such as catastrophe or other events • Scope of on-site could widen before or during the on-site review process due to developments at the Insurer/Group or on-site findings • Enforcement and remedial tools are available where necessary • Participation of Insurer/Group’s internal audit team can play a key role on on-site review. 16
Questions Gerald Gakundi Assistant Director Insurance Supervision Bermuda Monetary Authority (441)278-0322 ggakundi@bma.bm 17
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