The insurance in EU on the threshold of the third millennium Supervision of the Insurance Industry from the Czech National Bank Perspective Zuzana Silberová Deputy Executive Director Financial Market Supervision Department Czech National Bank Bratislava, May 2011

2 Content 1.Role of the CNB in the supervision of the insurance market ; l essons from the financial crisis 2.Solvency II 3.Consumer protection

3 1. Role of the CNB in the supervision of the insurance market CNB - integrated supervisor since April 2006 CNB – integrated supervisor of the whole financial market banks, foreign bank branches, credit unions, insurance companies, pension funds, depositories, payment and electronic money institutions, investment firms, mutual funds, brokers and intermediaries before April 2006 Separated supervision - CNB, Czech Securities Commission, Office of State Inspection in the Insurance and Pension (Ministry of Finance), Office for Supervision of Credit Unions

4 1. Role of the CNB in the supervision of the insurance market Organisation (1) Functional model: Financial Market Regulation and Analyses Department Licensing and Enforcement Department Financial Market Supervision Department

5 1. Role of the CNB in the supervision of the insurance market Organisation (2) Functional model till February 2011: since March 2011: Financial Market Supervision Department Prudential Supervision Division Professional Care Supervision Division Prudential Inspection Division Professional Care Inspection Division Financial Market Supervision Department Credit Institutions Supervision Division Insurance Sector Supervision Division Capital Market Supervision Division Risk Management Control Division Proceedings Rules and Professional Care Control Division

6 1. Role of the CNB in the supervision of the insurance market Advantages of integrated supervisor Easy day-to-day communication + information-sharing synergies Easier communication with supervised entities, other supervisors Stronger position in the crisis situation Enables to monitor the whole financial market (financial stability perspective) Ability to analyze the impact of development in one sector to other sectors or to the whole economy Strong technical and professional support Unification of reporting formats for different sectors where suitable Unification of supervisory techniques for different sectors where suitable Faster development of supervisory methods, internal procedures etc.

7 1. Role of the CNB in the supervision of the insurance market Risk-based supervision - insurance On-site & Off-site risk based supervision RAS (=Risk Assessment System) a kind of internal rating involving detailed assessment of both quantitative and qualitative aspects of the company, exists for all supervised companies (banks, insurance companies, pension funds etc.), regularly updated, EWS (=Early Warning System) indicates potential risks - based on quantitative factors, 21 simple ratios, which are divided into 7 groups, bad final rating does not necessarily mean problems in the company but should attract our attention => detailed analysis, tailored for insurance companies

8 1. Role of the CNB in the supervision of the insurance market Major activities in the field of the supervision of insurance companies Regular/ ad hoc analyses (individual companies/ focused on particular topics – e.g. MTPL, credit insurance etc.), Regular information visits (annually), Extra/ ad hoc reporting – in crisis situations/ in case of need Regular stress testing (annually) of the largest insurance companies, On-site inspections, Solvency II discussion on preparedness of insurance companies to the new regulatory regime internal model pre-approval process

9 2. Solvency II - CNB view CNB supports Solvency II, but has: Timing issues Delay in negotiations of Omnibus II may cause problems on EU level (L3 measures) and on national level Technical issues „last minute“ substantial changes Harmonisation issues Possibly inconsistent transitional measures

10 2. Solvency II - Preparedness of the Czech market QIS5 Increased participation (67 % of undertakings covering more than 95% of the market) Sufficient capital levels Similar issues as on EU level: CAT risk (especially floods), EPIFPs, definition and application of contract boundaries Further work needed on Pillar 2 (ORSA) and Pillar 3 (reporting but also disclosure) Some small undertakings still may not be fully aware of what Solvency II brings

11 2. Solvency II - Implementation of the new regulation Common project of CNB, Czech Insurance Association, MoF and Czech Society of Actuaries Preparing the draft law Involvement in L2 negotiations Educational events On supervisory side the transition from regulation to supervision is needed Demands on staff experienced with internal models and Pillar 2 application

12 3. Consumer protection Current regulatory framework in the Czech Republic Insurance Act (No. 277/2009 Coll.) Insurance supervision shall be conducted by the Czech National Bank mainly in the interest of the policyholders, insured persons and beneficiaries… Insurance undertaking or reinsurance undertaking are obliged to act with professional care and to proceed prudently… Insurance Intermediaries Act (No. 38/2004 Coll.) Insurance intermediaries are obliged to carry on this activity with professional care and attention and to protect consumers’ interests Contents of the term “professional care” is not defined by the law – CNB decrees with supervisory benchmarks are issued

13 3. Consumer protection - Professional care supervision (1) Particularly based on received consumers’ complaints and their analysis on regular basis from supervisory perspective Risk based approach systemic shortages are identified and solved different supervisory tools are used (“soft” vs. “hard”) Supervision primarily focuses on following areas: proper providing of information to consumers about products, insurance contracts, insurance undertaking and insurance intermediary etc. clear structure of distribution channels proper settlement of a claim communication with clients (complaints handling) etc.

14 3. Consumer protection - Professional care supervision (2) New regulatory framework: CNB is involved in preparation of new regulation on European level - PRIPs regulation and revision of IMD CNB has been inspired by above mentioned new regulation - preparation of amendment of the Czech Insurance Intermediaries Act reflects main upcoming changes and our experience from off-site and on-site supervision

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