How are groups supervised if at all?
Insurance & Reinsurance (3rd edition)
Insurers and reinsurers must be incorporated in the form of corporations. In relation to group companies, the Brazilian Law of Corporations prohibits mutual shareholding and any kind of advantage to companies of the same group. Specifically with respect to reinsurance, the Law authorizes the insurance regulator to establish limits and to monitor intergroup transactions, in line with regulations that established maximum percentage limits for such assignments.
CBIRC issued the Notice of China Insurance Regulatory Commission on Issuing the Measures for the Administration of Insurance Group Companies (For Trial Implementation, currently effective) in March 2010. An insurance group company must have investors controlling a total of more than 50% stake in two or more insurance companies, at least one of which has been engaged in the insurance business for more than six years and has been profitable for the latest three consecutive years, with net assets of no less than RMB1 billion yuan and total assets of no less than RMB10 billion yuan.
An insurance conglomerate shall focus its business on equity investment and management and use its own funds to make outward investments in equities and establish relevant subsidiaries. It may invest in insurance institution such as insurance companies, insurance asset management companies, insurance agencies, insurance brokerage companies, public insurance evaluating institutions. It could also invest in non-insurance institutions such as commercial banks.
Under the EU Solvency II Directive, groups are subject to supplementary supervision in addition to the solo supervision of individual insurance companies. The EU Solvency II Directive sets out the circumstances in which group supervision is triggered. Group su-pervision is triggered if one insurance entity is headquartered in Denmark or else-where in the EU.
In the event of group supervision, the participating insurance companies are required to calculate a group solvency capital requirement. The group's own funds must be transferable and fungible across the group. All related companies and all risks within the group must be included in the group solvency calculation.
In addition, group-wide governance, reporting and intra-group transaction and risk concentration monitoring shall apply.
Groups and conglomerates are supervised in accordance with ISA 64 et seq (insurance groups) and ISA 72 et seq (conglomerates of insurance).
Group supervision becomes necessary when a group operates on an international scale and has a complex structure. Conglomerate supervision is used if the group also plays a key role in the financial services sector; this applies in particular to banks and securities dealers.
Two or more companies are deemed an insurance group in accordance with ISA 64 if at least one of the companies is an insurance company, the “ensemble” of companies predominantly conducts insurance business and if the companies form an economic unit.
FINMA can bring such an insurance group under its supervision if the group is effectively managed from Switzerland. The same applies if the group is managed from abroad, provided that it is not subject to equivalent group supervision in the respective country, ISA 65.
Group supervision applies in addition to the individual supervision of the insurance company, ISA 66. Senior management must fulfil the same “fit and proper” criteria as the senior management of an insurance company (see question 13 below). Group supervision focusses on in particular on 3 main areas (see ISO 191 et seq for details):
- Organisation, group structure and internal processes.
- Risk management on a group level.
- Consolidated solvency on a group level (group SST).
A conglomerate of insurance companies (ISA 72 et seq ISA) is an insurance group (according to the criteria set out in ISA 64ISA) in which at least one of the group companies is a bank or a securities trader. The principles that apply for the supervision of conglomerates of insurance companies are equivalent to those that apply to insurance groups (see e.g. ISO 204). FINMA has set out further details on group supervision in its Circular RS 2016/04.
The Financial Holding Companies Act of Korea (“FHCA”) regulates financial holding companies (“FHC(s)”) whose primary business is to control companies engaged in financial services businesses and other companies that are closely related to the operation of financial services businesses including insurers.
The FHCA covers matters from formation and operations as a FHC including its sound management including but not limited to asset requirements, restriction on FHC ownership, required approval for establishment of subsidiaries, and supervision through audits. The transfer of risks and excessive expansion of control and protection of rights and interests of financial services consumers and other relevant third parties are also regulated by the FHCA to ensure competitiveness in the financial services industries and the sound development of the national economy.
Yes, the economic groups are monitored. Among the attributions of the SBS is to establish the existence of economic groups and exercise consolidated supervision of them. To carry out this supervision, the SBS may request the information that it deems relevant on all the companies that make up the economic group.
One of the most important aspects related to the supervision of economic groups is the application of limits to investments carried out by related natural and/or legal person which cannot exceed twenty percent (20%) of the technical reserves, the minimum solvency capital and the guarantee fund of the insurance company. This limit is halved when the issuer or issuers belong to the same conglomerate of which the insurance and/or reinsurance company is part of.
Solvency II provides for the supervision of groups of insurance companies. Group supervision applies to groups that have at least one insurance company operating within the European Union.
Groups are supervised by a single group supervisor, who is appointed in accordance with Article 247 of the Solvency II Directive. If the parent company is situated outside of the European Union, the ACPR will verify whether the group supervisor applies a control equivalent to that of the EU. Otherwise, the ACPR will oversee the group supervision on the EU parent company.
Group supervision is comparable to the supervision imposed upon single entities, in that it requires steps to be taken and systems to be implemented at group level in relation to capital requirements, risk concentration, intra-group transactions and governance.
Solvency II introduced important new provisions to strengthen the supervision of insurance groups. The regulations on group supervision can be found in the VAG, in particular in Part 5 (Sections 245 et seq.). Accordingly, insurance undertakings which are part of a group are, in addition to individual supervision, subject to certain group supervision provisions.
The Commissioner of Insurance issued circulars protecting the interests of group Insureds (mainly in Life and Health Branches of Insurance). Group Insurers must provide the policy wording to each member of the Group. The Group Insurance terms and prices are subject to strict supervision.
Insurance groups in Australia include any insurer with controlled entities and those insurers which are the subsidiary of an authorised non-operating holding company (NOHC). APRA supervises insurance groups by granting them authorisation to conduct a business of insurance similar to the authorisation process required for individual insurers. APRA has the ability to control the insurance group and to exercise enforcement powers over individual insurers. Where APRA does not have oversight over the subsidiaries of an insurer or NOHC, it can exercise oversight by directing the parent entity to take specified actions.
IVASS carries out supervision of financial conglomerates and prudential control over national and cross-border insurance groups along with other EU authorities. As matter of fact, the new regulatory framework introduced by the Solvency II enhance the efficiency and effectiveness of supervision over cross-border groups, reinforce the cooperation among the supervisory authorities of various countries, the exchange of information, the planning and coordination of operational activities.
An Insurance Holding Company and an insurance company's major shareholders (i.e., shareholders holding 20% or more of the insurance company’s voting rights) are required to obtain approval from, and the large holders of the insurance voting rights (i.e., holders holding 5% or more of the insurance company’s voting rights) are required to make notification to, the FSA supervising such regulations.
The scope of business that subsidiaries of insurance companies may engage is restricted and is stipulated by law. Provided, however, that an insurance holding company’s subsidiary may, with the approval of the FSA, engage in any business that is not prescribed by law.
The arm’s length rule applies to inter-group transactions of an insurance company.
Supervision of the FSA for an insurance company group is based on laws and regulations as well as the Guidelines and the Financial Conglomerate Supervision Guidelines.
The rules set out in the Solvency II Directive for the supervision of insurance and reinsurance undertakings taken individually continue to apply at the level of a group in order to ensure that own funds are appropriately distributed within the group and are available to protect policyholders and beneficiaries as needed. Insurance and reinsurance undertakings within a group should have sufficient own funds to cover their solvency capital requirements.
Group supervision applies in any case at the level of the ultimate parent undertaking that has its head office in the EU. The KNF (similar to other EU regulators in their jurisdictions) may also apply group supervision at a limited number of lower levels, where it deems it necessary.
The consolidated SCR for a group should take into account the global diversification of risks that exist across all the insurance and reinsurance undertakings in that group in order to properly reflect the risk exposures of that group.
Insurance and reinsurance undertakings belonging to a group may apply for approval of the internal model to be used for the solvency calculation at both group and individual levels.
The supervision is in charge of the Commission for the Financial Market, entity that fulfils its function exercising the faculties conferred by articles 3 of DFL 251 and 5 of Law 21,000. As we have pointed out, in Chile we are in a period of transition from a supervisory system based on rules to a supervisory system based on risks. The foregoing in the case of insurers.
In the case of intermediaries and adjusters, the supervisory system follows similar criteria, today with an emphasis on market behaviour.
Group life insurance is defined in the LCS (Article 202) as the insurance in which the insurance company is liable for the death or the length of the life of a specific person based on the belonging to a particular group or company, in exchange of a periodic premium. One of its particularities is that it does not request any medical requirement or exam from the insured to be covered.
In Mexico, group life insurance is regulated by the Rules for the Group Life Insurance and Health and Accident Collective Insurance (“Rules for Group Life Insurance”).
The Rules for Group Life Insurance define “group” as a group of people that belong to a same company or that share a common, lawful, prior and independent interest or bond. The individuals that are part of the insured group may contribute to the payment of the premium subject to the terms established in the policy.
The insurance companies that offer group life insurance must have the written consent from each member of the group, prior to their incorporation to the group and extending insurance coverage.
Such contract must consider at least what is the amount insured, or the manner in which such amount shall be determined and whom are the beneficiaries, when it is non-revocable.
As a special benefit for life group insurance granted as part of the benefit employment package, the Rules for the Group Life Insurance provide a benefit for the employee in case it terminates the labour relationship with the employer. In this case, the insurance company, only on one occasion, shall provide coverage to the employee leaving the company, without requesting any medical requirement, in any of the life insurance products that the insurance company offers, with the exception of term life insurance and subject to the limitations of age set forth by the insurance company and compliance of the requirements set forth by the Rules for the Group Life Insurance.
Under Solvency II groups are subject to supplementary supervision in addition to the solo supervision of individual insurance companies in order to protect policyholders against risks that might be present within a group but not necessarily apparent where only the individual insurance company is considered. The Solvency II Directive sets out the circumstances in which group supervision is triggered. Only one insurance entity within a corporate group need be headquartered in the UK (or elsewhere in the European Union) for group supervision to be applied.
Where a European headquartered Solvency II group is identified, it must hold eligible own funds equal to or in excess of a group SCR. Group own funds must be transferable and fungible across the group. The group capital requirement can be calculated using either a standard formula or an internal model (similar to individual entity capital requirements). The recognition of individual company own funds (in excess of any applicable solo capital requirement) at the group level depends on their availability and transferability between group entities. In addition, group-wide governance, reporting and intra-group transaction and risk concentration monitoring shall apply.
Where a group is headquartered outside the EU, Solvency II group supervision may still apply, either to a sub-group or to the worldwide group, depending, for example, on whether a finding of equivalence has been made in relation to relevant third country jurisdictions.
In practice insurers are not regulated on a group-wide level. The regulator (for example, the IA), will have regard to the particular activities of the entity in determining its regulatory requirements (for example, capital and solvency requirements). Further, if activities are outsourced to third-party providers then they too may come within the regulatory purview of the applicable regulator.
Group supervision is regulated under the 2016 Law and implements the “one roof” approach of Solvency II.
Where a group is made up of several EEA (re)insurers, the group is supervised by a single group supervisor, while the subsidiaries remain subject to national prudential supervision.
Where the ultimate parent undertaking is situated outside the EU, the NBB will check whether the group supervisor applies supervision equivalent to that required within the EU and, if not, will extend the solvency capital requirements to the non-EEA parent undertaking.
Group supervision is complex and comparable to the supervision required for single entities, in that it requires group-level steps and systems in relation to capital requirements, risk concentration, intra-group transactions and governance.
Most states’ regulation and supervision is focused on the individual insurance or underwriting companies that make up an insurance group or holding company rather than on the group or holding company. As for those groups or holding companies that own non-insurance company affiliates, states have, after the financial crisis in 2008, adopted NAIC model rules which establish walls between insurers and non-insurer affiliates to protect policyholders from insolvency risks relating to the non-insurer affiliates. That supervisory framework allows regulators to assess the potential impact of a group’s activities on the ability of its insurance members to pay claims.
The Insurance Law provides for a single presence policy, such that a party can only be a controlling shareholder of one life insurance company, one general insurance company, one reinsurance company, one sharia life insurance company, one sharia general insurance company and one sharia reinsurance company.
Financial institutions of various types, including banks, insurance companies, securities companies, pension funds and financing companies that belong to a group of companies are referred to as Financial Conglomerates. For the purpose of supervising Financial Conglomerates, OJK implements specific, comprehensive regulations on good corporate governance that must be observed by Financial Conglomerates.
To avoid conflict of interest, ordinarily, two entities of the same group are not permitted to undertake the same line of insurance business. Furthermore, usually only one entity in a group will be granted a license/certificate of registration to act as an insurance intermediary.
The IRDAI does not currently regulate the group entities of insurers or insurance intermediaries. However, the IRDAI has recently issued the “Exposure Draft on Insurance Regulatory and Development Authority of India (Conflict of Interest) Guidelines, 2019” (Conflict of Interest Exposure Draft) in order to address conflicts of interest arising out of appointment of common directors between insurance companies, insurance company and insurance intermediaries and common promoters of general insurers and health insurers. In this regard, the Conflict of Interest Exposure Draft propose that where conflict of interest arises due to common directors between an insurer and an insurance intermediary within the same group, the Board of Directors of the insurer/insurance intermediary shall formulate a conflict policy. Further, it is proposed that common whole time directors and independent directors between an insurance company and an insurance intermediary, shall not allowed between entities which are not part of the same group.
In addition, there are some restrictions, where the IRDAI has discretion (in some cases) to determine the scope of a group:
· An Indian corporate group can have an insurer and an insurance broker in the same group, subject to certain conditions being fulfilled.
· Insurance brokers and corporate agents may be permitted in the same group, subject to the merits of the application and with no conflict of interest.
· Web aggregators and telemarketers cannot be related parties (under Accounting Standard 18 and/or the Companies Act 2013) of an insurer.
· On his or her appointment, surveyors are required to inform interested parties regarding any conflict of interest that may prejudicially affect the interested parties.
· There is no express restriction on insurers and third party administrators (TPAs) operating in the same group.
· Insurers and insurance agents/insurance intermediaries are not permitted to have directors in common without the prior approval of the IRDAI.
· Per the IRDAI (Outsourcing of Activities by Indian Insurers) Regulations 2017, group entities of insurers or insurance intermediaries registered with the IRDAI shall ordinarily not be engaged for outsourcing any of the activities of an insurer.
There are no specific group control or supervision provisions under the law. Each insurance company is independently and separately supervised by the OIC and subject to the regulatory requirements applicable to its own operations and activities (for example, the requirements to maintain capital funds and liquid assets as discussed in question 11). Nonetheless, an insurance company which is a branch office of a foreign insurance company is required to submit an annual report of the foreign company to the OIC. The OIC is also empowered to request the submission of any reports, documents, or clarification in relation to the group which are deemed to relate to the operation of insurance business by the Thai company.
The supervision of insurance groups is set out in Chapter 9 of the VAG (Articles 195 to 240). In particular, these rules relate to the supervision of a group’s solvency, its cluster risk and intragroup transactions as well as its governance system. Groups have already been supervised under previous versions of the VAG, but group supervision has received further attention under the revised Act, especially as regards group solvency requirements.
An individual group’s solvency requirements are calculated in accordance with Articles 202 to 214 VAG. In general, the calculation has to be consolidation-based. A calculation based on the deduction and aggregation method requires prior approval by the group supervisor respectively the FMA. Solvency calculations have to be carried out at least once a year.
Minimum capital requirements, on the other hand, are dealt with individually and not at group level.
Pursuant to Article 220 VAG, a significant risk concentration at group level has to be notified to the FMA. The FMA also, on a case-by-case basis, specifies the respective thresholds as to which risk concentrations are considered significant and require notification.
With regards to a group’s governance system, Article 222 VAG stipulates that the implementation of risk management, internal control and reporting systems shall be carried out consistently throughout all of a group’s companies, so as to ensure effective supervision at the group level.
The Solvency II group supervision requirements will apply to any Irish authorised (re)insurer which is a member of a group. The supervision provisions are complex as supervision is required of the group’s solvency, governance and reporting obligations. The level of group supervision by the Central Bank will depend on the location of the ultimate insurance parent. Solvency II provides for the application of a tailored-approach by the local regulator in respect of group supervision.
Where a group is made up of several EEA insurers, one EEA regulator will act as the group supervisor, and the local regulators will be responsible for supervision of the individual entity operating in their respective jurisdiction.
If the ultimate insurance parent is located outside the EEA, the Central Bank is required to ensure appropriate supervision of the worldwide group. This may be done by extending the solvency capital requirements imposed on EEA insurers and reinsurers to non-EEA entities. Alternatively, the Central Bank can adopt “other methods” which ensure appropriate group supervision. Where a third-country has been recognised as having an equivalent prudential supervisory regime to that imposed under Solvency II, the Central Bank may rely on the supervision of the worldwide group by the relevant third-country regulator.
The EU Solvency II Directive sets out specific regulations for groups, and has been implemented in Norwegian law through the Norwegian Act on Financial Institutions and Undertakings of 2015 and the Norwegian Solvency II-regulation of 2016. The Solvency II-regulation sets out the circumstances in which group supervision is triggered. Insurance groups are subject to supplementary supervision in addition to the regular supervision of insurance companies. Insurance groups are subject to specific requirements with regard to consolidation of solvency, reporting of risk on a group level to the NFSA, risk assessment and internal audit, market reporting and disclosure of group structure.