session 4 preventive and corrective measures regional training seminar iais-assal san salvador, el...
TRANSCRIPT
Session 4Preventive and Corrective Measures
Regional Training Seminar IAIS-ASSAL
San Salvador, El Salvador, 22-25 November 2010
Takao Miyamoto, IAIS Secretariat
Agenda
2
1. Fundamental Activities– Legal & Operational Capacities
– Ongoing Supervision
2. Methods of Applications– Manuals
– Ladder of Intervention
– Timeliness
3. Examples
4. Other Considerations– IMF Paper
Rationale
3
Conservative approach– Based on extensive and
restrictive regulation
– Protect policyholders from loss but higher costs
– Stifle innovation
Permissive approach– Foster entrepreneurial
behavior
– Excessive risk taking
– Increase failures
– Affordable products
Importance of timely & effective preventive & corrective actions
Importance of timely & effective preventive & corrective actions
Strike a balance…
Fundamental Elements
4
• Legal authorities– Monitor & understand developments in insurers and
industry– Exercise preventive & corrective measures
• Operational capacities– Budget & human resources– Skilled staff – recruitment, constant skill development– Remunerations…?– Mix of long-term career supervisors & experienced mid-
career industry professionals…?
Specific Functions
5
• Obtain well-designed periodical & supplementary supervisory filings – Without timely, accurate, meaningful information, no well-
considered supervisory decisions– Financial information – sufficient to calculate all standard
early warning ratios and solvency positions– Non-financial information (e.g. reinsurance arrangement,
shareholders and related parties, off-balance sheet)– Impose more frequent & detailed reporting– Revise content of reporting
• Carry out onsite inspections– “Eyes and ears” of supervisory agency
Specific Functions
6
• Inspect business plans– Assess risk inherent in plans for coming years– Assess ability to deal with issues that have been raised– Provide insight into depth of management
• Other measures– Impose solvency requirement– Order improvement actions– Impose sanctions & penalties for noncompliance – Withdraw license
Agenda
7
1. Fundamental Activities– Legal & Operational Capacities
– Ongoing Supervision
2. Methods of Applications– Manuals
– Ladder of Intervention
– Timeliness
3. Examples
4. Other Considerations– IMF Paper
Manuals
8
• Develop comprehensive policy & procedural manuals for use of all staff members– Help to ensure transparent, consistent & effective
application of available supervisory mechanisms– Provide understanding of all key supervisory measures &
powers, including criteria for application how & when they would normally invoked
– Set out all key policies so that staff members are fully aware of them and understand importance
• Make (key concepts) available to public– Foster mutual understanding
Ladder of Intervention
9
• “Action plan”– Consider various scenarios in advance – Develop appropriate strategies for supervisory actions in
different situations
• Early prevention is less costly– Can be triggered by high-risk situations that have not yet
given rise to actual situation of noncompliance– Should include reasonable numbers of stages
• Ultimate corrective measures • Make (key concepts) available to public
– Important planning document for insurers– Remove uncertainty & encourage self-governance– Fend off political pressure
Timeliness
10
• Potential time lag– Persons responsible realise symptoms & problems– Communicate to appropriate level– Supervisors receive information by insurers or through
onsite inspections– Examine within supervisory authority & make decision– Insurer’s management formulates & implements actions– Actions take effect
• Timely measures are essential– Situations can change rapidly– Formulate & implement plans within time frame appropriate
to the situation– Set framework for follow-up
Relationship with Industry
11
• Best results can be achieved when supervisors and insurers’ managers share common principles
• Credibility & respect from industry– Constructive & knowledgeable comments of supervisors– Timely & suitable actions in professional & transparent
manner
• Less & less necessary to draw on formal authority• Rather, moral suasion can work well
– Reduce “getting around laws”
Agenda
12
1. Fundamental Activities– Legal & Operational Capacities
– Ongoing Supervision
2. Methods of Applications– Manuals
– Ladder of Intervention
– Timeliness
3. Examples
4. Other Considerations– IMF Paper
Prompt Corrective Action
13
Class Solvency Margin
Action / Order
1 Less than 200%
– Formulation & implementation of management plan
2 Less than 100%
– Formulation & implementation of plan to improve solvency
– Prohibition & restriction on dividend to shareholders and/or policyholders
– Revision of method, including coefficients, to calculate insurance premiums for new contracts
– Prohibition & restriction on bonuses to directors & senior management
– Restriction on other operating expenses
Prompt Corrective Action
14
2 Less than 100%
– Prohibition & restriction on certain asset management methods
– Curtailment of business at certain existing offices
– Abolition of certain offices except head & main offices
– Curtailment of business activities of subsidiaries
– Disposal of stock of subsidiaries & others
– Reduction & new undertakings of auxiliary business
– Other measures deemed necessary
3 Less than 0 %
– Suspension of whole or part of business
Early Warning System
15
Prompt Corrective Action
Measures to improve Credit Risk Management
Measures to improve Market Risk Management
Measures to improveLiquidity Risk Management
Measures to strengthen Profitability
•In-depth interview for cause & improvement•Request for report•Business improvement order
From standpoint of solvency
From standpoint of liquidity
Early Warning System
Administrative Actions
16
First Step: identify appropriate measures to take• Seriousness & maliciousness of conduct
– Extent of damage to public interests– Extent of damage to customers’ interests– Maliciousness of conduct– Length & frequency of conduct– Existence of intention– Organised involvement– Concealment of conduct– Involvement with antisocial forces
Administrative Actions
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• Appropriateness of governance & internal control– Recognition & initiatives of board of directors– Establishment & work of internal audit– Effectiveness of compliance & risk management structures– Recognition & education of staff
• Mitigating factors– Whether insurers make efforts in voluntary fashion prior to
administrative responses
Second step: determine actions• Additional considerations
– Whether voluntary efforts is appropriate– Whether intensive efforts & focus is necessary– Whether it is appropriate to allow to continue business
operations
Agenda
18
1. Fundamental Activities– Legal & Operational Capacities
– Ongoing Supervision
2. Methods of Applications– Manuals
– Ladder of Intervention
– Timeliness
3. Examples
4. Other Considerations– IMF Paper
Food for Thought
19
The Making of Good Supervision:
Learning to Say “No” (IMF, 2010)
Ability to act– Legal authority
– Adequate resources
– Clear strategy
– Robust internal organisation
– Effective working relationship with other agencies
Will to act– Clear & unambiguous mandate
– Operational independence
– Accountability
– Skilled staff
– Healthy relationship with industry
– Effective partnership with boards
Citation from IMF Paper
20
• “…we identify two pillars that support good supervision: the ability to act and the will to act. The will to act has been prominently featured in discussions of the supervisory response to crisis, present and past…”
• “…the “ability” to supervise … must be complemented by the “will” to act. Supervisors must be willing and empowered to take timely and effective action, to intrude on decision-making, to question common wisdom, and to take unpopular decisions. Developing this “will to act” is a more difficult task…”
Citation from IMF Paper
21
• “Very simply, there must be a willingness to take action and fulfill the supervisory role. On its face, this seems like an easily obtained consensus; however, supervisors find themselves under almost constant criticism for getting in the way of innovation and for being stodgy and “antimarket.”
• “Supervisors are expected to stand out from the rest of society and not be affected by the collective myopia and consequent underestimation of risks associated with the good times…”
• “…the relationship between supervisors and the financial industry is a unique blend of familiarity (supervisors are in constant dialogue with the industry) and authority (the right and responsibility) to say no.”
