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Basic Principles of Insurance Supervision

Duties and Operation of a Supervisory

Authority

under Coordinated European Legislation

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1. Principles and Objectives of Supervision

1.1 Reasons in favour of insurance supervision

• the social importance of insurance to both the private and commercial policyholders

• the special features of the insurance product

• the confidence requirement of the insurance industry

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1. Principles and Objectives of Supervision

1.2 Main objectives of supervision in accordance with EC legislation

"to ensure that the undertaking's business continues to comply with the laws, regulations and administrative provisions with which the undertaking must comply... and to prevent or remedy any irregularities prejudicial to the interests of the assured persons“

(article 23 (3) (b) of the first life directive as amended by article 10 of the third life directive and article 19 (3) (b) of the first

non-life directive as amended by article 11 of the third non-life directive)

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1. Principles and Objectives of Supervision

1.3 Explaining its main objectives

• adequate premiums and sufficient provisions

• sufficient free assets to cover unexpected losses

• Reinsurance cover

• balance sheets and profit and loss accounts are established on the basis of uniform principles and correctly reflect the financial standing of the undertaking

• detailed information about the object and conditions of the contract in order to judge the product offered

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1. Principles and Objectives of Supervision

Insurance supervision extends to

•the insurance undertakings

•the products offered

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2. Extent of supervision - drawing the line

•principle of home country control

•cooperation regarding control and observance of the national rules of the host country

•no harmonised reinsurance supervision rules in the EU,

But!!!

•proposal for a directive on reinsurance by EU-COM

•establishing supervision of reinsurers in home country

• compulsory social security systems are not subject to supervision

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3. Stages of Supervision

Two stages

• authorization of an insurance undertaking

• on-going supervision of its operations

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3. Stages of Supervision

3.1 Authorization and authorization requirements

•certain legal form

• It may only carry on insurance business and business directly related

•Specialization

•adequate own capital funds

•Submission of an operating plan

-the type of risks to be covered

-the principles of reinsurance policy

-composition of the minimum guarantee funds

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3. Stages of Supervision

-anticipated set-up costs and costs for establishing a sales organization

-the volume of business to be expected in the first three years

-how the solvency margin and the other liabilities are to be covered

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3. Stages of Supervision

•proof of a reliable (honorable) management

•natural or legal persons with qualifying holdings

•licence must be granted when the legal requirements are met – no economics needs test !!

•licence is valid in all EU member states and countries of the European Economic Area

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3. Stages of Supervision

3.2 On-going supervision

•collecting and evaluating information

•Verification of business documents

•intervention and restoration of orderly conditions in case of irregularities

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3. Stages of Supervision

Means available to detect irregularities

•extension of business to other classes of insurance

•request of business records

•Periodic reporting about their investments

•internal accounting

•adequate administrative and accounting procedures and internal control mechanisms

•On-site inspections

•policyholder complaints

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3. Stages of Supervision

instruments for taking action

“all adequate measures necessary to avoid or do away with abuses which endanger the interests of the insured”

• special powers which differ from one state to the other

• authorized representative (Sonderbeauftragter)

• Withdrawal of authorization

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3. Stages of Supervision

3.3 Liquidation

•implementation of the Winding-up Directive

•mutual recognition of reorganisation measures

•winding-up proceedings in the EU member states

•guarantee assets (Sicherungsvermögen)

•list of assets

•Recognition of insolvency proceedings

•commencement, conduct and closure of winding-up proceedings -home country

•Germany: only the supervisory authority is entitled to institute bankruptcy proceedings

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4. Organization of the Insurance Supervisory

Authority

4.1 Organization of supervisory activities

organized differently in the individual EU member states

•“Single” authority

•Integrated supervisor (UK, Sweden, Denmark, Norway, Austria, Ireland and Germany)

• department inside a ministry performing all supervisory functions

• department inside a ministry responsible for the authorization of insurance undertakings

• subordinate authority in charge of on-going supervision

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4. Organization of the Insurance Supervisory

Authority

4.2 Operation of supervisory authorities

•Cooperation with other competent bodies (auditors for example)

•qualified jurists, graduates of economic sciences and mathematicians (actuaries)

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5. Financing Supervision

•costs of supervision are borne either wholly or almost wholly by the insurance industry

•no uniform rules

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Thank you for your attention!

Peter Baier

Federal Financial Supervisory Authority (BaFin)

Graurheindorfer Strasse 108

53117 Bonn / Germany

Tel: 0049-228-4108-3967

Fax: 0049-228-4108-7399

Email: Peter.Baier@bafin.de