ICP 13 and Assessing Observance Conor Donaldson Member of the Secretariat May 2015

Outline ICP 13: Reinsurance and Other Forms of Risk Transfer Assessing Observance: methodology and approaches Assessing observance of ICP 13

ICP 13: Reinsurance and other forms of risk transfer

Reinsurance Essentially “insurance for insurance companies” Reinsurance fulfils the following functions for an insurance undertaking Reducing insurance risks in the risk portfolio of the insurer Permanently transferring technical risks to the reinsurer Increasing the homogeneity of an insurance portfolio making it easier for insurance companies to manage their overall risk portfolios Reducing the volatility of the financial results of the insurance company Avoiding the need for the insurance company to hold its own capital to cover the whole of the risks it has insured Supplying capital for financing purposes, which is particularly important for newly created insurance companies so that they can get their activities started and expand further Additional service: R/i often supplies important knowledge to the direct insurers, particularly on risk and product development, Catastrophe scenarios, SII …

Reinsurance and Supervision Assessing reinsurance contracts creates unique supervisory challenges Specialist knowledge of reinsurance required Supervisor to assess, for example: What risks are the insurer is transferring? What are the exclusions? What are the key clauses of the reinsurance contract? Financial soundness of the reinsurer: can the reinsurer pay the claim? Is there systemic risk creation? Concentration risk created? ICP 13 establishes a broad framework for supervisory assessment – not for supervision of reinsurers

ICP 13: Reinsurance and Other Forms of Risk Transfer The supervisor sets standards for the use of reinsurance and other forms of risk transfer, ensuring that insurers adequately control and transparently report their risk transfer programmes. The supervisor takes into account the nature of reinsurance business when supervising reinsurers based in its jurisdiction.

ICP 13: Standards The Supervisor requires cedants to have reinsurance and risk transfer strategies appropriate to the nature, scale and complexity of their business, and which are part of their wider underwriting and risk and capital management strategies. Cedants must also have systems and procedures for ensuring that such strategies are implemented and complied with, and have in place appropriate systems and controls over their risk transfer transactions. The Supervisor requires that cedants are transparent in their reinsurance arrangements and the associated risks, allowing the supervisor to understand the economic impact of reinsurance and other forms of risk transfer arrangements in place. The Supervisor takes into account the nature of supervision of reinsurers and other counterparties, including any supervisory recognition arrangements in place.

ICP 13: Standards (2) The Supervisor requires that parties to reinsurance contracts promptly document the principal economic and coverage terms and conditions agreed upon by the parties and finalize the formal reinsurance contract in a timely fashion. The Supervisor assesses whether cedants control their liquidity position to take account of the structure of risk transfer contracts and likely payment patterns arising from these. Where risk transfer to the capital markets is permitted, supervisors are able to understand the structure and operation of such arrangements and to assess issues which may arise.

ICP 13 General Considerations: This ICP focuses on the supervision of reinsurance and other risk transfer arrangements and not the supervision of reinsurers, which is covered by the ICPs more generally Insurers are expected to have reinsurance and risk transfer strategies as part of their risk management framework that are appropriate to the nature, scale and complexity of their business Systems and controls should be put in place to ensure that such strategies are implemented and complied with. For example, limits could be set on the exposure towards any one reinsurer, which might vary with its credit rating Reinsurance arrangements must be transparent so that supervisors can assess and challenge them, for example, whether or not there is true risk transfer

ASSESSING observance: Methodology and approaches

Background on Assessments Considerations for any assessment Jurisdictions are assessed “solely on the laws, regulations and other supervisory requirements and practices that are in place at the time” ICP Observance determined bottoms up – looking at each standard For a standard to be considered observed, the supervisor has the legal authority to perform its tasks and that it exercises this authority to a satisfactory standard In other words, Observance generally requires: 1) Adequate legislation 2) Policies and procedures that demonstrate you undertake the task necessary to achieve the objective 3) Evidence in supervisory practice that you have recently undertaken the task. If anything is any part of this is not deemed sufficient by the assessor, then observance is not possible

Assessing against the objective Essential Components Questions Framework Do I have the power to achieve the objective of the standard? Is the power have the force of legislation? Is it fully and clearly elaborated? Policies and Procedures Do I have the policies and procedures that put the power in practice in support of the objective? Supervisory Practice Do I undertake the activity to achieve the objective?

Assessment Categories IAIS Assessment Categories How is the objective assessed? Do I have the legal framework? Do I have the policies and procedures to put the power into practice? Assessment Category Elaboration Observed All essential criteria observed Largely observed Only minor shortcomings exist Partly observed Despite progress, shortcomings sufficient to raise doubts Not observed No substantive progress Not applicable Not applicable due to structural/ legal/ institutional features or responsibility with other authorities

Some Types of Assessment FSAP / ROSC Two objectives: Surveillance and Sector Development Conducted by the IMF and World Bank; very robust and in-depth Significant review of FSAP programme currently underway; programme likely to change Self Assessments Beneficial, but lacks independence Conducted by jurisdiction Very flexible Can be conducted at any time on any subject Facilitated Assessments / IAIS Assessments Done with outside expert(s) Based on responses to fact based questionnaires / expert review IAIS programme completes on a thematic basis (grouping similar ICPs)

Self Assessment and Peer Review (SAPR) IAIS SAPR Objectives: Gives “independent” and “consistent” assessment of observance Is manageable from a resource perspective Provides insights for implementation partners Does not duplicate existing assessments Provides input into standard setting work – Feedback loop between assessment and standards development Assess only ICPs – Principles and Standards, not guidance Focusses on Supervision in line with ICPs

Assessing Observance of ICP 13

Assessing standards in ICP 13 13.1 The supervisor requires that cedants have reinsurance and risk transfer strategies appropriate to the nature, scale and complexity of their business, and which are part of their wider underwriting and risk and capital management strategies. The supervisor also requires that cedants have systems and procedures for ensuring that such strategies are implemented and complied with, and that cedants have in place appropriate systems and controls over their risk transfer transactions. 13.2 The supervisor requires that cedants are transparent in their reinsurance arrangements and the associated risks, allowing the supervisor to understand the economic impact of reinsurance and other forms of risk transfer arrangements in place.

13.1 How have the requirements related to the reinsurance and risk transfer strategies of cedants been established? To what extent do the reinsurance requirements in YOUR JURISDICTION address the need for a cedant’s reinsurance and risk transfer strategies to be appropriate and for the cedant to have systems, procedures, and controls to support implementation of such strategies? How does YOUR AUTHORITY review a cedant’s reinsurance and risk transfer strategies, systems, procedures, and controls? During the last three years, to what extent has YOUR AUTHORITY taken appropriate action to rectify the situation when there were supervisory concerns regarding a cedant’s reinsurance and risk transfer strategies, systems, procedures, or controls?

13.2 To what extent are cedants required to be transparent to YOUR AUTHORITY in their reinsurance arrangements and associated risks? To what extent does YOUR AUTHORITY use information provided by cedants regarding their reinsurance arrangements and associated risks to understand the economic impact of reinsurance and other forms of risk transfer arrangements in place?

Final Considerations Understanding how to look at reinsurance contracts in supervision is critically important for supervisors ICP 13 provides a framework Assessing whether you observe ICP 13 is not possible by looking at the standards and asking whether you do what is asked - must go deeper – what basis do you have the power? To what extent do you use the power to achieve the ICP objective? Have you resolved concerns where they arise? IAIS will conduct an assessment of ICP 13 in 2015

Questions?

Contact information Conor Donaldson Member of the Secretariat International Association of Insurance Supervisors Centralbahnplatz 2 c/o BIS P:+41 61 280 86 02 M:+41 76 350 86 02 SkypeID: conordonaldson