How is the solvency of insurers (and reinsurers where relevant) supervised?
Insurance & Reinsurance
Insurers and reinsurers regulated by the Central Bank are required to meet the capital and solvency requirements set out under Pillar 1 of Solvency II, as transposed by the 2015 Regulations.
To comply with the enhanced regulatory reporting requirements in respect of solvency introduced by the Solvency II regime, Irish authorised insurers and reinsurers are required to submit the following information to the Central Bank:
- a solvency and financial condition report;
- detailed annual and quarterly reports supplementing information contained in the solvency and financial condition report;
- a regular supervisory report, at least every three years, containing specific information regarding the business and performance of the insurer, its system of governance, risk profile, capital management and information relating to its valuation of assets, technical provisions and other liabilities for solvency purposes;
- an annual own-risk and solvency assessment supervisory report, setting out the results of the own risk and solvency assessment performed by the life insurer; and
- other reports required by the Central Bank.
In supervising the solvency of an undertaking, the Central Bank may also require an insurer to provide it with a certificate of the value of the assets representing the technical provisions on the closing date on which the accounts and balance sheets of the insurer were provided to the Central Bank.
UK insurers are subject to the European Solvency II regime (introduced on 1 January 2016). Solvency II is a risk-based capital regime, similar in concept to Basel II, based on three ‘pillars’. Pillar 1 is a market consistent calculation of insurance liabilities and risk-based calculation of capital. Pillar 2 is a supervisory review process. Pillar 3 imposes reporting and transparency requirements. Solvency II requires firms to hold both a Minimum Capital Requirement (MCR) and a Solvency Capital Requirement (SCR). Breach of the MCR is designed, unless remedied quickly, to lead to a loss of the insurer’s authorisation. Breach of the SCR results in supervisory intervention designed to restore the SCR level of capital.
In the UK the PRA has responsibility for ensuring that firms comply with Solvency II.
In addition to the insurers’ own supervision and their self-reporting-obligations, the FSA supervises insurers’ and reinsurers’ solvency through risk assessments based on the state of the financial markets and the financial system as a whole, as well as continuous risk assessments of individual insurance companies. The monitoring of individual companies focuses on governance and risk management, capital situation, products and behaviour toward customers, and is based both on the information that companies are obligated to report to the FSA themselves, as well as carrying out their own investigations by reviewing random sample groups and following up tips about irregularities.
German insurers are subject to the European Solvency II regime (effective since 1 January 2016). Solvency II is a risk-based capital regime, similar in concept to Basel II, based on three ‘pillars’. Pillar 1 is a market consistent calculation of insurance liabilities and risk-based calculation of capital. Pillar 2 focuses on the system of governance to be established by an insurance undertaking. Pillar 3 imposes reporting and transparency requirements. Solvency II requires firms to hold both a Minimum Capital Requirement (MCR) and a Solvency Capital Requirement (SCR). Breach of the MCR is designed, unless remedied quickly, to lead to a loss of the insurer’s authorisation. Breach of the SCR results in supervisory intervention designed to restore the SCR level of capital.
In Germany, BaFin has responsibility for ensuring that insurers and reinsurers comply with Solvency II.
The regulatory framework for dealing with distressed or insolvent insurance or reinsurance companies is found in chapter 20 of the Financial Institutions Act. These regulations determine certain obligations for the board of directors and the CEO if the insurer enters into financial difficulties. If the directors and/or CEO become aware of such difficulties, they each have a personal responsibility to notify the FSAN, which may initiate further investigation based on this information. The FSAN can also initiate investigations without a notice, if it has reason to believe that the company's financial position is weak or threatened.
If this is the case, the FSAN consults the insurance company to determine the necessary measures to rectify the situation, if possible. The FSAN supervises the implementation of such measures and may order the company to wind-up its business if the management does not act accordingly. If the insurance company becomes insolvent, and the FSAN considers that the company cannot secure a financial basis for satisfactory operation, the Ministry of Finance must be informed immediately. This information to the Ministry shall include an assessment from the FSAN as to whether the institution should be placed under public administration.
The Ministry can then order the initiation of a public administration, which is announced at the earliest possible opportunity. An administration board is then appointed to draw up possible arrangements enabling continued operations of the institution's activities on a sufficient financial basis. This may imply that the insurer merges with, or transfers its activities to, another institution. If a restructuring scheme is not accomplishable, the administration board must prepare to wind-up the institution. As a rule, liquidation proceedings must be initiated if another arrangement is not in place within a year after the public administration was begun. On 17 February 2017 the Ministry of Finance put the Norwegian life insurer Silver Pensjonsforsikring AS under public administration as Silver did not comply with the capital requirements under Solvency II.
The new LISF sets forth a new solvency regime different from the scheme established in the former LGISMS. The new regime incorporates a similar mechanism to that under Pillar I of Solvency II (quantitative requirements), which in general terms may be considered as a ‘tailored suit’, allowing each insurance company to design an internal actuarial model to calculate its solvency capital required and implement internal controls to detect any change or variation to such requirement. Notwithstanding the self-regulation right granted by the LISF, the implementation of the internal actuarial model is subject to the prior approval of the CNSF.
The LISF also establishes the obligation of insurance companies to develop an internal policy for monitoring its solvency, operations and investments, in accordance with its risk profile. This new system allows each insurance company to select and accept those risks, according to their particular situation.
Moreover, the LISF sets forth the obligation of the insurance companies to carry out stress tests on a regular basis to evaluate their capital adequacy. The results of such tests shall be reviewed by the board of directors of each insurance company.
The board of directors together with the company’s top tier officers are responsible for approving and implementing the guidelines required for the calculation and adequacy of the capital solvency requirement and implements the necessary measures to maintain such capital adequacy, including the provision of funds in case there is a capital deficiency.
The CNSF has the authority to settle regulations defining the form in which the insurance companies will report and provide evidence of compliance with the solvency capital requirements mentioned above, as well as the procedure to provide the CNSF the information regarding the particular technical characteristics of the internal calculation model adopted by the insurance company.
The LISF adjusted the insurance and bonding legal framework by adopting surveillance procedures similar to those established in the Securities Marker Law and in the Banking Law, redefining the roles of the SHCP and the CNSF. In this regard, the LISF grants specific authority on a ‘macro’ level to the SHCP with respect to the design and operation of the insurance and bonding system, while the CNSF has the authority on all aspects related to the licensing and authorization procedures to insurance companies, going from their incorporation and operation to the revocation of their license and liquidation. Within this redistribution of capacities, the authority of the CNSF is broadened to grant such entity authority to issue general regulations aiming to regulate the insurance companies, which originally resided within the SHCP.
The new structure intends to standardize the legal framework of insurance and bonding companies to that of other financial entities and regulators, which, in our opinion, creates an imbalance among the traditional authorities given to the SHCP as Ministry of State and regulator of financial activities, and the attributions now granted to the CNSF under the LSIF, which, from being a technical and surveillance authority becomes a much more robust regulator of the insurance and bonding sectors, with new authorities while maintaining its supervisory role.
IA Regulations No. 25 and 26 of 2014 (the “Prudential Regulations”) establish rules to be followed by insurance companies in order to ensure their solvency.
The Prudential Regulations can be divided into several primary areas of concern, which are capital adequacy, policyholder fund requirements, reporting requirements, and data keeping. From a strategic viewpoint, the focus of these rules collectively represents a move towards establishing a risk based approach, wherein insurers are required to maintain certain levels of capital in specified, diversified investment categories, as well as maintaining accurate and consistent data keeping and reporting protocols.
The provisions dealing with capital adequacy contain three modules: Solvency, Asset Liability Management, and Technical Provisions. Insurers now are strictly limited in what investments they make on a percentage basis. These limits broadly include the following: 30% in real estate, 30% in equities of UAE companies, 20% in equities in non-UAE companies, 100% in UAE government instruments, 80% in highly rated foreign government instruments, 30% in various classes of secured loans, 1% in derivatives or complex financial instruments, and 10% in other investments. Additionally, there are sub-limits set forth which constrict the amount that may be invested with any one particular sub-class within each investment class. Notably, the regulations require a minimum of 5% be invested in cash deposits with a UAE bank.
All insurers are required to establish detailed investment strategies conforming to a view fulfilling of insurance and capital adequacy obligations, as are impacted by key risks, including market, credit, and liquidity risks. Each insurer’s Board of Directors is charged with establishing, implementing, and monitoring their company investment strategies and regulatory systems. Additionally, every insurer is now required to conduct a stress test as to all of its investments on an annual basis.
The reporting requirements set forth a high level of active managerial oversight and also require actuarial monitoring, with actuarial certification of the adequacy of the mathematical reserving practices required at least annually. The metrics to be identified in these reports are set forth in the Regulation with a high degree of specificity. Insurers must also maintain standardized accounting and data recording procedures, appoint internal and external auditors and a compliance officer, and file both quarterly and annual reports with the IA.
State insurance laws require that all domestic insurers undergo a financial solvency examination by the insurance department generally every three to five years, but as often as the regulator deems prudent. Furthermore, insurers are required to file quarterly and annual financial statements with their domestic state insurance regulators; annual statements must be certified by an independent public accountant. The financial statements are available through the NAIC to any other state regulator. Insurers are also subject to and annually must report their risk-based capital.
Risk-based capital measures an insurer’s capital requirements based on the kinds and amounts of risk included in an insurer’s assets and liabilities. Insurers with higher amounts of risk are required to hold higher amounts of capital. Risk-based capital calculations provide a tool to monitor financial solvency and set thresholds for regulatory actions ranging from requiring remediation plans to placing the insurer in delinquency proceedings.
In addition, insurance regulators regularly review transactions subject to pre-approval for their potential impact on solvency, including affiliate agreements, certain investments, purchases or sales, and extraordinary dividends. Some states authorize the insurance commissioner to demand any information from the insurer or any member of its holding company system that may affect the insurer’s solvency and to order the insurer to raise capital. An insurer’s failure to remedy a capital impairment may result in an order to cease writing new insurance contracts until the impairment has been fixed.
The FMA supervises the solvency of insurance and reinsurance undertakings in accordance with the VAG.
The new supervisory regime introduced with the implementation of the Solvency II Directive and the supplementary Commission Delegated Regulation (2015/35) obliges insurance and reinsurance undertakings to calculate their solvency capital requirements on the basis of a balance sheet that recognises assets and liabilities at market value. The assessment does not follow national rules but is carried out on the basis of international accounting standards. Taking market values as basis allows a better risk assessment and depiction of the actual economic situation of the insurance undertaking.
Undertakings are required to hold sufficient own funds to cover the solvency capital requirements as set out by the VAG and have to calculate the solvency capital requirements at least once a year and report the result to the FMA.
The standard formula for calculating the solvency capital requirements is laid out in Articles 177 to 181 VAG. It follows a modular approach, dividing the overall risk exposure into different sub-modules, for which a capital requirement is then determined individually.
Alternatively, undertakings can also use full and partial internal models to calculate the requirements after obtaining approval from the FMA (cf. Articles 182 to 192 VAG).
The solvency of insurance and reinsurance companies is supervised by the Insurance Regulator mainly upon their review of the financial information of insurance and reinsurance companies. As stated above, insurance and reinsurance companies must periodically submit information to the Insurance Regulator, among which is certain financial information that must be provided to the Insurance Regulator, e.g., a Uniformed Coded Statistic Form, the Formulario Estadístico Codificado Único [FECU], consolidated financial statements, etc.
Once received, this information is thoroughly reviewed by the Insurance Regulator and is later published to be made available to the public. The Insurance Regulator is entitled to request any additional information it deems necessary to evaluate a company’s compliance of all applicable insurance laws and regulations.
Insurers are also required to report any breach to the financial, debt, financial ratios, and reserve requirements set forth by law.
Notwithstanding the requirements above, insurance and reinsurance companies are required by the Insurance Act to meet capital requirements and certain financial ratios, all of which are further regulated by law and by regulations issued by the Insurance Regulator.
A company that intends to start insurance or reinsurance business in Switzerland has, during the licensing process, to provide evidence to FINMA that it meets the applicable solvency margin, Art 9 ISA. In addition, the company must establish (?) a so-called organisational fund to cover all costs in connection with the establishment, the set-up, or an extraordinary expansion of the business. The amount of the required organisational fund is normally 50 per cent of the amount of the required solvency margin, Art 10 ISO.
In the course of the ongoing business of the insurance company, an appointed actuary is responsible for the calculation of the solvency margin at any time, Art 24 ISA. FINMA supervises the adequacy of the solvency margin regularly through annual reports that have to be provided to FINMA, Art 25 ISA.
The Solvency margin of insurance companies is assessed in accordance with the Swiss Solvency Test (SST). Following SST, the solvency margin is determined by the risk exposure of the insurance company (target capital) and the creditable (to the solvency margin) own capital (risk bearing capital) of the company. Further details are set out in Art 21 et seq ISO and in the recent FINMA Circular RS 2017/3 (released on 7 December 2016).
The solvency supervision of insurance and reinsurance companies constituted in Peru is carried out through the use of two concepts: the Effective Equity and the Solvency Capital. The Effective Equity is obtained through a formula in which, among others, capital accounts are added and the amounts invested in subordinated bonds and in shares in insurance companies dedicated to other branches are deducted. The Solvency Capital is determined by the SBS based on the annual amount of the premiums, the average annual claim load or the minimum capital required for the specific type of company in the insurance system.
Using both concepts, the equity requirement for insurance and/or reinsurance companies is that these companies must have at all times an Effective Equity that cannot be less than the Solvency Equity.
Other specific requirements related to indebtedness and constitution of guarantee funds and reserves may be added to this equity requirement.
Finally, it should be noted that in the development of the supervision of the solvency of insurance companies, the SBS will review the information sent monthly, together with its financial statements, in relation to (i) the effective equity, (ii) the surplus or deficit of the effective equity, (iii) the effective equity destined to cover credit risk, (iv) information on solvency margin, and (v) information on debt limit.
The solvency of Insurers, Indian reinsurers, Branch Offices of Foreign Reinsurers and service companies representing Syndicates of Lloyd’s India is required to be calculated in accordance with the applicable regulations issued by the IRDAI. The respective entities are required to file a periodical statement of solvency with the IRDAI in accordance with the format prescribed under the applicable regulations.
Licensed insurers are required to maintain a separate insurance fund for each class of business they carry out. This applies to both Singapore policies as well as offshore policies. Life insurers must also maintain separate funds for investment-linked, participating and nonparticipating policies.
MAS adopts a risk-based regulatory capital framework for insurers. The capital which an insurer is required to hold is dependent on its risk exposures (i.e. Total Risk Requirements ('TRR')) for each insurance fund and in aggregate. TRR is calculated in three components: C1 – insurance risks; C2 – asset portfolio risks, such as market and credit risks; and C3 – asset concentration risks.
MAS conducts a review of its regulatory capital framework from time to time to re-calibrate the capital requirements to better reflect an insurer's activities and risk profile. MAS is currently reviewing its regulatory capital framework. Key revisions include the downward calibration of capital requirements for equity investment, credit spread, counterparty default and operational risks. The revised framework is also expected to establish a prescribed capital requirement and a minimum capital requirement at insurance fund and insurer level.
The solvency of insurers and local reinsurers is monitored by SUSEP. The supervision is based on very advanced legislation, where the concept of risk-based supervision is applied. This model is supported by three pillars: transparency of financial statements and accounting information, adequate corporate governance and sufficient capitalization.
Capital requirements of an Insurer are dealt with by the Control Law. In addition the Commissioner issues from time to time circulars regarding the capital requirements for an insurer. Currently Israeli Insurers must adopt Solvency II requirements.
The Commissioner reviews each company’s adherence to the capital requirements. If a company does not stand by the required capital requirements, it will not be allowed to distribute dividends, and may also have to decrease its level of operation.
The Supervision Act transposes the Solvency II Directive into Belgian insurance and reinsurance law and also takes into account the principle of proportionality as set out in the Solvency II Directive, meaning that the Belgian system of solvency supervision corresponds to the one in the Directive. The vast majority of the EIOPA guidelines have also been confirmed by the NBB and are transposed into Insurance Circular Letters or internal insurance procedures.
The ACPR is responsible for ensuring insurers and reinsurers comply with the solvency requirements (under Solvency I or II). Solvency II introduces a three pillar systems of prudential supervision:
- Pillar 1 is a set of rules for calculating technical provisions and solvency capital requirements through the Minimum Capital Requirement and the Solvency Capital Requirement;
- Pillar 2 is a process of supervisory review, which requires to carry out a self-assessment (Own Risk and Solvency Assessment – ORSA) of their capital needs based on a detailed review of the their risks and to put in place proper governance. The ORSA report is submitted to the ACPR for review;
- Pillar 3 imposes an enhanced degree of public disclosure to public and regulator.
The role of the ACPR has been strengthened under the Solvency II regime.
The solvency of insurers (and reinsurers) is primarily the responsibility of the regulators under whose jurisdiction the insurer has been incorporated or, where the insurer is operating in Canada as a Branch, the responsibility of OSFI, our federal regulator. Where OSFI is the principal regulator, the local jurisdictions, while retaining jurisdiction, will generally look to OSFI to supervise the solvency and governance of its companies.