2. Investments Institute of Insurance and Risk Management (IIRM) Hyderabad, India 15 November 2005 Arup Chatterjee – Advisor International Association of Insurance Supervisors Seminar on Regulatory Issues

3. Investments 2 Arup Chatterjee 14-16 Nov 2005 Why supervision of investments is important? sound and prudent management of investments –technical provisions –solvency margin –identify, measure, report and control main risks –need for liquidity –manage and match assets and liabilities in a number of currencies and different markets problem of concentration risk –limited availability of suitable domestic investment vehicles

4. Investments 3 Arup Chatterjee 14-16 Nov 2005 Role of supervisory authority Ensure standards are established for insurers –managing investment portfolios –inherent risks Authority and ability to –assess risks –potential impact on technical provisions and solvency Note: Detailed formulation of an insurer’s investment management policy and internal risk control methodology is the responsibility of the board of directors

5. Investments 4 Arup Chatterjee 14-16 Nov 2005 IAIS Principles, Standards and Guidance Insurance core principles and methodology, October 2003 Supervisory Standard on Derivatives, October 1998 Supervisory Standard On Asset, Management By Insurance Companies, December 1999 Standard On Disclosures Concerning Investment Risks And Performance For Insurers And Reinsurers, October 2005 Guidance Paper On Investment Risk Management, October 2004

6. Investments 5 Arup Chatterjee 14-16 Nov 2005 ICP 21 Investments The supervisory authority requires insurers to comply with standards on investment activities. These standards include requirements on investment policy asset mix valuation diversification asset-liability matching risk management

7. Investments 6 Arup Chatterjee 14-16 Nov 2005 Essential criteria 1.Requirements regarding the management of investments in place -- law or supervisory rules –mixture and diversification by type –limits or restrictions on the amount that may be held in particular types of financial instruments, property, and receivables –safekeeping of assets –appropriate matching of assets and liabilities –level of liquidity

8. Investments 7 Arup Chatterjee 14-16 Nov 2005 Essential criteria 2.Investments are valued according to a method prescribed by or acceptable to the supervisory authority 3.Overall strategic investment policy, approved and reviewed annually by the board of directors –risk profile of the insurer –determination of the strategic asset allocation long-term asset mix over the main investment categories –establishment of limits for the allocation of assets  geographical area markets, sectors counterparties currency

9. Investments 8 Arup Chatterjee 14-16 Nov 2005 Essential criteria –extent to which the holding of some types of assets is restricted or disallowed illiquid or volatile assets or derivatives –conditions under which the insurer can pledge or lend assets –overall policy on the use of financial derivatives and structured products that have the economic effect of derivatives clear accountability for all asset transactions and associated risks

10. Investments 9 Arup Chatterjee 14-16 Nov 2005 Essential criteria 4.Risk management systems must cover the risks associated with investment activities that might affect the coverage of technical provisions and/or solvency margins (capital) – main market risk –credit risk –liquidity risk –failure in safe keeping of assets (including the risk of inadequate custodial agreements)

11. Investments 10 Arup Chatterjee 14-16 Nov 2005 Essential criteria 5.Check that insurers have in place: –adequate internal controls to ensure assets are managed in accordance with the overall investment policy –compliance with legal, accounting, and regulatory requirements –investment procedures are documented and properly overseen. –Functions responsible for measuring, monitoring, settling and controlling asset transactions are separate from the front office functions (refer to ICP 10)

12. Investments 11 Arup Chatterjee 14-16 Nov 2005 Essential criteria 6.Oversight of, and clear management accountability for insurer’s investment policies and procedures with board of directors regardless of the extent to which associated activities and functions are delegated or outsourced 7.Key staff involved have the appropriate levels of skills, experience and integrity 8.Insurers have in place rigorous audit procedures that include full coverage of their investment activities: –timely identification of internal control weaknesses and operating system deficiencies –Internal audit independent of the function being reviewed

13. Investments 12 Arup Chatterjee 14-16 Nov 2005 Essential criteria 9.Insurers have in place effective procedures for monitoring and managing their asset/liability position to ensure that their investment activities and asset positions are appropriate to their liability and risk profiles 10.Insurers have in place contingency plans to mitigate the effects of deteriorating conditions

14. Investments 13 Arup Chatterjee 14-16 Nov 2005 Advanced criteria Insurers undertake regular stress testing for a range of market scenarios and changing investment and operating conditions in order to assess the appropriateness of asset allocation limits (refer to ICP 20 AC g and ICP 23 AC j) –assess the adequacy of capital resources in case technical provisions have to be increased –solvency regime provides for periodic, forward-looking analysis of an insurer’s ability to meet its obligations under various conditions

15. Investments 14 Arup Chatterjee 14-16 Nov 2005 www.iaisweb.org International Association of Insurance Supervisors Questions and Answers Arup.Chatterjee@bis.org