Trigger points for supervisory intervention and protective

Trigger points for supervisory intervention and protective measures for policyholders and financial stability

Seminar on Promoting Sound Insurers and Dealing with Those under Stress

Panama City, Panama, 24-26 May 2016

Gunilla Löfvendahl

Senior Financial Sector Specialist

2

Agenda

Scope and objective of supervision

Insurers in trouble and troubled supervisors

Early identification and correction of problems

Supervisory enforcement, recovery and resolution

Winding-up, creditor hierarchy and policyholder protection

s

chemes

3

Scope and objective of supervision

Protect the interests of the policyholders

Detect insurance related risks through the supervision

of insurance entities and

groups

Firm-specific supervisory measures aimed at mitigating or otherwise addressing these risks and their effects

Protect the financial stability

Detect emerging risks and other risks that are emanating from a wider perspective than the group, which can have an impact on the group and its entities, which could have an impact on the economy

System-wide measures (many may be outside the scope of insurance supervision)

Time dimension – what actions are available and are fit for when?

4

Insurers getting into trouble – typical situations*

Poor risk management and governance

Failure to identify and manage risks arising from other entities in the group – group risk, large exposures

Lack of autonomy for companies belonging to a group

Dominant leaders and lack of independence and control

Inappropriate experience and skills of board members

Heard behaviour and wrong

incentives

through remuneration

Bad risk and corporate culture

Under-pricing and provisioning

Investment returns lower than provisioning or pricing assumptions

Impact of external events (

eg

changes in mortality)

Impact of catastrophic losses and other risk concentrations

Reputational damage (also caused by other companies in the group), resulting in further problems

* HIH (2001), European failures (2002), GFC (2008)

5

Supervisory failings in seeing the problems

Weak risk rating process and insufficient analysis and on-sites to review institutions

Assumption that large and complex groups are always well-managed and controlled

Inadequate solvency requirements on entity and group level

Lack of resources and skills to understand:

adequacy of liabilities

risk management practices

correlations and interactions of risks

reinsurance

arrangements

Lack of group-wide supervision and cooperation with other supervisors

Lack of

macroprudential

oversight and capturing of emerging risks

Lack of supervisory tools, especially intervention powers, or the will to use them

6

Group related issues

Increasing complexity of international groups

Risk management, corporate governance and internal control (coordinated, lack of independence/knowledge)

Non-regulated entities – how to deal with those, especially if in other jurisdictions?

Insolvency of one legal entity causing problems in other group entities

Inter-connectedness through intra-group transaction (reinsurance, loans, guarantees

etc

) – strength/contagion – pay attention in run off (not misused to the disadvantage of other entities)

Reputational risk spreading to other companies in the group

Differences in different countries:

Measurement of assets and liabilities

Regulatory capital requirements

Intervention processes/triggers and powers

Levels of defined insolvency/limit when it is no longer permissible to continue business

Bankruptcy proceedings and competing liquidators (and creditors)

Priorities given to policyholders or protection schemes

Ring-fencing – may prevent the free flow of capital from one entity/country to another (freezing of assets)

Take appropriate action before the non-viability stage

C

oordination and cooperation arrangements

E

ffective supervisory colleges

M

anagement of intra-group connectivity

7

Solvency and intervention levels

ICP 17 Capital adequacy: minimum solvency control/intervention levels

Prescribed capital level (

PCR)* -

p

roactive

interventions on

other grounds than capital

inadequacy

Minimum Capital Requirement (MCR) –

considerably deteriorated situation

(assets

still higher than liabilities

) requiring strong

reactive

supervisory

action if

corrective

action has not already been

taken

Reactive

requirement of additional capital or reduction of risk when levels have been breached (react before the MCR level is reached)

Proactive

capital add-ons

w

here risks are not reflected in the standardised capital requirement

Higher Loss Absorbency (HLA) for G-SIIs, reflecting the greater risk that they pose to the global financial system (non-traditional insurance and interconnectedness)

Supervisors need to have the power to take enforcement actions before it’s too late to do something about the problems

* No connection for the moment to the BCR or the ICS

8

From viability to non-viability

Recovery: Action of insurer/group to remedy the problemsResolution: Action of authority to deal with serious problems in an insurer/group that imperil the viability of the insurer/group

9

ICP 10 Preventive and corrective measures

Legal and operational capacity to act timely

Decision-making lines structured so that supervisory action can be taken immediately

In which situations?

V

ulnerability in the insurer’s ability to protect policyholders

Preventing a breach of legislation

Non-compliance or unsound practices

Require insurer to develop an acceptable plan for prevention and correction of problems

Ensure that the measures are taken

10

Early prevention and detection tools/measures

Activities subject to prior approval (acquisitions, portfolio transfers, new lines of business

etc

)

Continual fit and proper requirements – also removal of unsuitable key persons

Sound corporate governance, internal control and risk management

Sound strategy

Prospective reporting and analysis

Increased supervisory activity or reporting

Independent reviews of auditors and actuaries

Business plan and strategy for new business

De-risking or additional capital - recovery

plan

Stress testing of and by the insurers

Macro stress testing of insurance market by the supervisor

Cooperation and exchange of information with other involved supervisors

Informal contacts with management

Public disclosure/transparency

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ICP 11 Enforcement

Formal directions to take (or desist) actions - failure to comply should have serious consequences (combine with fines and punitive actions)

Should at a minimum include

Restrictions on business activities

Measures to reinforce the financial position of the insurer

Consequences when failing to provide information in a timely fashion, withhold information or provide information that is intended to mislead

Powerful supervisory tools that should be used in a fair and equal manner

Not sufficient to have powers delegated under legislation (powerful tools are only powerful if used) – will to act

Issues related to groups?

Determine that the insurer is complying with the measures once action has been taken or measures have been imposed

12

Enforcement or sanction tools/measures

Restrict business activities

Stop the writing of new business

Withhold approval for new activities or acquisitions

Restrict the transfer of assets

Directions to reinforce financial position

Require capital levels to be increased or measures that reduce or mitigate risks

Restrict disposal of insurer’s assets

Restrict/suspend dividend or other payments to shareholders

Remove board members and senior managers - bar individuals from acting in responsible capacities in the future

Compulsory portfolio transfer or conservatorship

Revoke the licence – require the company to wind up

Direct a company to stop unlicensed business

13

Resolution at group level (only G-SIIs?)

Avoid disorderly failure that would disrupt the global financial system and economy

Resolution authority with powers to restructure and resolve financial institutions in crisis

Make resolvability

assessment

(feasibility

of resolution strategies and their

credibility)

A

pproach depends on the cause and status of the

failure

(company still deemed to have value and remedies available,

eg

intra-group transactions, reinsurance, letters of credit?)

Appropriate

powers to

intervene at holding company level

terminate financial contracts and write down liabilities (“bail-in

”), including for insurance policies

transfer or sell assets and liabilities

ensure continuation of non-insurance operational business

significant

to the systemic

function (shared critical functions)

Temporary public financial support may be

needed

14

Cooperation and crisis management

Orderly resolution requires appropriate actions prior to the non-viability stage

Cooperate and coordinate crisis management and resolution actions across borders:

Group-wide supervisor and involvement of other relevant supervisors in a

college – determine if single or multiple

point of

entry

Sustained recovery and resolution planning

Cross-border Crisis Management Groups (CMGs) – home and key host supervisors, central banks, resolution authorities and finance ministries

Unclear issues:

who decides when and are there clear triggers (also qualitative)?

are

policyholders

consulted and can they withdraw from the contracts?

is

there a claims

priority?

is

it a transparent

process?

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Trigger points and supervisory action

ICS to correspond with the PCR – no MCR for the moment being

Supervisor

and

insurer

lose

control

Winding

-

up and exit

from the

market

Prevention

Correction

Recovery Sanctions

Resolution

Supervisory control increases; insurer management control reduces

Intervention

phase

Control over

insuranc

e

legal entity/

group

State of

insurance

legal entity/

group

Viable

Non

-

viable

P

CR

MCR

HLA

BCR

G

roup level?

(T)LAC?

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ICP 12 Winding-up and Exit from the Market

Procedure for dealing with winding-up and insolvency

Appoint administrator or liquidator to take over the roles and duties of board and senior management

Run-off with direct on

indirect supervisory involvement

(depending on if solvent or insolvent)

Liquidation in court procedure

Protect the rights and entitlements of policyholders/beneficiaries in the event of insolvency

Preferential rights

Protection scheme/guarantee fund

17

Creditor hierarchy and preferential rights

In the case of a bankruptcy, assets will not be sufficient to cover the claims of all creditors

Legislation could define the order of preference and should in that case give policyholders a preferential treatment (others with special ranking are usually tax authorities or similar governmental bodies, staff, and creditors with pledge or mortgage in company assets

The rights could identify a specific asset or sets of assets, or be related to all assets in general

Take special measures to protect the assets identified for policyholder purposes (e.g. assets corresponding to the technical provisio

ns)

18

Policyholder protection schemes (PPS)

Protecting policyholders in the event of winding-up

Considerations before establishing a PPS

Is there a need and who should the fund protect (life, non-life, compulsory

etc

)?

Size and concentration of the insurance market? Cross-border operations?

How will it be organised and governed (private or public, management and controls)? Cooperation between PPS and insurance supervisor (

eg

pre-warning)?

Which companies to involve (compulsory or optional membership, national or foreign)?

Basis of funding - ex-ante (fund) or ex-post (funding needs), fixed amount or risk profile - what to include (continuity of cover or compensation)?

How to handle claims – payment directly by PPS or indirectly through insurer/successor/liquidator?

Possible negative effects of PPS

Excessive risk-taking by insurers

Policyholders less vigilant in choosing and monitoring

Possibility for arbitrage (if not all insurers are members)

Market concentration and many insolvencies at the same time – insolvent PPS

Cost vs benefit (cost transferred to policyholders resulting in non-affordable products)

Not dealing with deeper weaknesses in the insurance industry or financial market, which are causing the insolvencies to happen

C

an negative effects be mitigated?