International Association Of Insurance Supervisors Research Articles

CDS Spreads, Systemic Risk and Global Systemically Important Insurers Designations

After the recent court case overturning the Financial Stability Oversight Council (FSOC)’s systemic importance designation of MetLife, the public raises awareness about the robustness of the identification methodology for global systemically important insurers (G-SIIs). As the G-SII identification framework proposed by the International Association of Insurance Supervisors (IAIS) lacks empirical support and relies heavily on historical accounting data, we examine how systemic risk measures constructed from credit default swaps (CDS) data, which are market-consistent and forward-looking, can supplement the IAIS’ identification framework. Using a dataset of insurers’ CDS spreads between 2011 and 2015, we construct three different kinds of systemic risk measures (i.e., MESCDS, networks of CDS spreads and absorption ratio) and assess the G-SII designation results announced by the Financial Stability Board (FSB). We find that: 1) the systemic risk of designated G-SIIs is, on average, higher than other insurers, suggesting that the IAIS’ G-SII identification methodology is, in general, sound and effective; 2) reinsurers should fall within the IAIS’ G-SII assessment exercise, as some of them generate more systemic risk than the designated G-SIIs; and 3) given the non-negligible litigation risk from the designated G-SIIs, the regulators should consider supplementing their G-SII identification methodology with CDS-based systemic risk measures to substantiate their designation decisions in court.

Characteristic features of the operation of the insurance market of Ukraine in the conditions of martial law

The purpose of the article is to analyze the current state of the insurance market of Ukraine and highlight the peculiarities of its functioning. The relevance of the research is driven by the changes in the structure and functioning mechanisms of this market, associated with the introduction of a new model of its regulation.
 The article defines the essence of the insurance market and its main functions. The current state of the insurance market of Ukraine was reviewed, the main indicators of its development were analyzed with the determination of the reasons for their changes for the period 2019­2022. The most significant trends in the market of insurance services were characterized, among which the follo wing are highlighted: a decrease in the volume of gross insurance premiums; reduction of the number of insurers; increase in the level of insurance payments; decrease in the insurance penetration rate.
 Market problems were identified, the main ones being the low solvency and liquidity of insurers; imperfection of insurers’ business models; lack of market transparency andproblems in corporate governance; lack of a mechanism for guaranteeing insurance payments under long-term life insurance contracts; low demand for insurance services due to distrust in the opaque insurance market and low solvency of the population.
 The peculiarities of the insurance market of Ukraine related to the change of the regulator and the beginning of reform are characterized. The main elements of the new insurance market regulation model, built on the principles of the International Association of Insurance Supervisors (IAIS) and the provisions of the European Union directives, are reviewed.
 The basic norms of the new Law of Ukraine “On Insurance”, which will come into effect on January 1, 2024, have been considered. It was concluded that the preparation of the law took into account numerous proposals of scientists to increase the efficiency of the functioning of the insurance market. It was emphasized that the introduction of a new model of regulation and supervision of the insurance market and improvement of the legislative support for reforms will allow solving a number of existing problems in domestic insurance.

United Kingdom: Financial Sector Assessment Program-Detailed Assessment of Observance of Insurance Core Principles Issued by the International Association of Insurance Supervisors

The regulatory framework for insurance supervision in the United Kingdom is sophisticated and the authorities are leaders in supervisory techniques. Observance with the Insurance Core Principles (ICPs) is very high compared to peers with 17 ICPs observed and only 6 out of 24 ICPs determined to be largely observed and 1 partly observed.

Трансформація світової галузі страхування під впливом пандемії СOVID-19

This article examines the transformation of the global insurance industry under the influence of the COVID-19 pandemic. The author examines the roles of regulators, governments, consumers of insurance services, insurance, and reinsurance companies in responding to the new challenge. The COVID-19 pandemic was an unexpected factor for the global insurance industry, and as because of the global crisis caused by the SARS-CoV-2 coronavirus, there was a need to assess the transformation of processes in it. Accordingly, the materials of experts of international insurance associations were analyzed, in particular: International Association of Insurance Supervisors (IAIS), The International Credit Insurance and Surety Association (ICISA), European Federation of Insurance Intermediaries (BIPAR), International Association for the Study of Insurance Economics (IASIE) and others. The division of insurance market participants into two classes has been substantiated. In one class, there are consumers of insurance services and the insurance market regulators. In another class, there are insurance associations, insurance, and reinsurance companies. Based on the studies and reports of international insurance associations, the author revealed conflict escalation between insurance, reinsurance companies, governments (US, EU, China), and insurance market regulators due to the requirements of compliance with the principle of expediency and transparency in control and supervision, increased demands for reserves and quality assets, changes in the assessment of solvency, constant changes in regulations and requirements for additional information. From the considered impact of the COVID-19 pandemic given the existing regulatory documents Solvency II and IFRS-17, the problem of ambiguous formations in the regulatory acts in the paragraphs “Terms of the insurance contract” and “Exclusion of the insurance contract”– interpretation of the word: “material damage” and the difference in the words: “epidemic” and “pandemic”. Paper identifies the problems of these ambiguous formations in the normative-legal interpretation of the world regulatory bodies, the postulate of Solvency II and the lawsuits that caused these formations. The comparative analysis of the consequences of the COVID-19 pandemic was performed using the S&P 500 and S&P Insurance Select Industry indices. There was a shock due to the pandemic and the forecasted expectations of investors, who negatively assessed the insurance industry, and as a result, the price of the insurance industry index lost the connection of identical fluctuations with the S&P 500 and the price of the index fell relative to the S&P 500 index. The forecast has been developed to increase the demand for insurance, which will grow from the momentum of the world economy. After a reduction of 3,7% in 2020, the world economy is growing by 5,8% in 2021, which is significantly higher than the average of 3,0% over the previous decade. The paper illustrates the difference between economic growth in developing and developed countries. The author compares the recovery of the insurance industry after the shock of the COVID-19 pandemic and the global financial crisis in 2008: the insurance industry of the COVID-19 crisis is 14,35% growth and by the end of 2021 should exceed pre-crisis figures, the total amount of global insurance premiums accrued in 2021, will be 11,46% higher than the pre-crisis level of 2019. Conclusions and recommendations on the transformation processes that have arisen under the influence of the pandemic on the insurance industry has been substantiated.

The financial impact of the implementation of Solvency II on the Mexican insurance sector

This paper examines the effects of the regulatory changes implemented in the Mexican insurance sector in adjustment to the international regulations of Solvency II imposed by the International Association of Insurance Supervisors. The effect of regulatory changes on the risk and performance levels of foreign entities was analysed and compared with their domestic counterparts. Using a difference-in-difference estimator, significant evidence that foreign insurance companies enhanced their default risk after complying with the law was found. The findings showed that the stability levels of domestic entities were negatively affected. No effect on the performance level for both types of entities was found. This study provides evidence that foreign entities were already prepared for the change in regulation, as opposed to domestic ones, due to their association with their foreign holdings.

Italy

This technical note (TN) provides an update and an assessment of the supervisory framework and practices for the Italian insurance sector since the last assessment concluded in 2013. The mission conducted a target review focusing on the implementation of Solvency II, the financial resilience of insurers, the effectiveness of supervision, and previously identified weaknesses without a full assessment of Italy’s observance with the International Association of Insurance Supervisors (IAIS) Insurance Core Principles (ICPs). Implementation of the European Union (EU) Solvency II Directive in 2016 has significantly strengthened regulation and supervision since the last FSAP, introducing risk-based capital standards, comprehensive insurance group supervision and new requirements on governance, risk management and controls. The supervision of intermediaries has also been strengthened in line with the EU Insurance Distribution Directive in 2018.

Comparative Law and the Enhancement of Financial Regulation

Since the ravage of the devastating global financial crisis in 2008, the legal academia has increasingly focused on the interrelationship between law, financial stability and economic development. It is evident that the overwhelming majority of research in this aspect is concerned with curbing derivative transactions and enhancing collective actions among States by making multilateral agreements. Few discussions have been carried out to scrutinize the domestic regulatory structures of leading commercial jurisdictions and further examine the potential possessed by informal international law to reinforce the efficacy of these regulatory structures. By comparing and contrasting the financial regulatory structures in Hong Kong, Mainland China, the UK and the US, and the core principles of the BIS (Bank of International Settlements), the IOSCO (International Organization of Securities Commissions) and the IAIS (International Association of Insurance Supervisors), this article attempts to fill in the research gap to some extent.

The Truncated Commercialization of Microinsurance and the Limits of Neoliberalism

ABSTRACTMicroinsurance — defined as low‐cost insurance products targeting low‐income populations — exemplifies key themes in contemporary neoliberalism, and has figured prominently in neoliberalism's turn to discourses such as ‘risk management’ and ‘financial inclusion’. The development of commercial markets for microinsurance, however, has in practice been highly variable and often very limited. This article considers the implications of this process of ‘truncated commercialization’. It draws on a Polanyian analytical framework that emphasizes the contradictory regulatory dynamics involved in the commodification of labour. The article applies this approach by tracing multiscalar efforts to promote microinsurance, examining the emergence of the concept in the efforts of the International Labour Organization to promote social security for informal workers in the 1980s and 1990s, looking at the adoption of explicitly commercializing imperatives in the work of the International Association of Insurance Supervisors in the 2000s, and, finally, considering a case study of South Africa. The truncated commercialization of microinsurance, it is argued, provides a useful lens through which to see the practical impossibility of neoliberal development strategies.

The Contribution of Trans-Governmental Networks of Regulators: To International Regulatory Co-Operation

This study takes stock of the membership, governance structure, operational mode and regulatory power of trans-governmental networks of regulators (TGNs). It contributes to a greater OECD project aimed at building greater understanding of the benefits and pitfalls of various approaches to international regulatory co-operation (IRC) as identified in OECD (2013), International Regulatory Co-operation: Addressing Global Challenges.In order to fill the knowledge gap, this study provides a working definition of TGNs, maps existing cases, and analyses their key features. It relies on information gathered for this study on 144 TGNs. It analyses the substantive fields in which TGNs operate as well as differences in membership and other structural features. It discusses the range of regulatory activities in which TGNs engage and analyses the advantages and the disadvantages of TGNs as mechanisms for IRC, based on a review of the large and growing scholarly literature. It provides a new database on the topic, as well short case studies of three significant but structurally dissimilar TGNs: the Asian Harmonization Working Party (AHWP) on medical devices, the International Association of Insurance Supervisors (IAIS), and the International Council for Harmonisation of Technical Requirements for Pharmaceuticals for Human Use (ICH).

DEVELOPING THE METHODOLOGY FOR IDENTIFYING A SYSTEMICALLY IMPORTANT INSURERS IN UKRAINE

Introduction. The lack of a legislative approach to the identification of a national systemically important insurers requires appropriate scientific research. Purpose. Developing a methodology for identifying national systemically important insurance companies, based on the experience of the International Association of Insurance Supervisors (IAIS). Results.This article researched the foreign practice of determining the category of “systemically important financial institution” and the reasons for its allocation. The idea was to consider a list of criteria for the identification of Global Systemically Important Insurers, based on the experience of the IAIS. The research proved the necessity of identifying systemically important insurers in Ukraine. The author developed the methodology for identifying systemically important insurers at the national level, which is based on indicators of three categories: size, interconnectedness, non-insurance activities. The methodology identified the systemically important insurers in the Ukrainian market that are representatives of foreign insurance groups and insurance companies with national capital. Conclusion. The presence of systemically important companies in the market requires supervision by the regulator for their activities. The first step in regulating the activities of systemically important insurers is to increase control over their compliance with the law, especially as regards the transparency of reporting and disclosure of information about insurer's services for clients.

Use of Supervisory Standards in the Financial Sector Assessment Program—Understandings with Standard Setting Bodies

This paper informs the Executive Board of the staff-level understandings reached with global Standard Setting Bodies (SSBs) on the use of the three financial sector supervisory standards in FSAPs: the Basel Committee’s Core Principles for Effective Banking Supervision (BCP), set by the Basel Committee on Banking Supervision (BCBS); the Insurance Core Principles (ICP), set by the International Association of Insurance Supervisors (IAIS); and the Objectives and Principles of Securities Regulation (Principles), set by the International Organization of Securities Commissions (IOSCO). As graded assessments of compliance with supervisory standards are voluntary, FSAPs have adopted a flexible approach to the use of supervisory standards. A standard is either assessed in full, resulting in grades, or used as the basis for a deeper analysis of selected elements of the oversight framework in a focused review, without grades. The SSBs and Fund staff have reached understandings on a refinement of the existing flexible approach, with sets of “base principles” serving as the starting points for focused reviews.

IMPROVEMENT OF STRESS TESTING OF INSURANCE COMPANIES IN VIEW OF EUROPEAN REQUIREMENTS

The paper has identified the essence of the stress testing of the insurance company according to results of the morphological analysis. There was developed the classification of methods of stress testing for insurers used in national and international practice. Main risks of insurance companies’ activities were analyzed. The authors identified, that the main risks of insurance companies are insurance, market, credit and operational. Examples of stress scenarios for the main types of risks of insurance companies were presented. The authors identified the main requirements of the Directive of EU Solvency II, the Standards and Principles of the International Association of Insurance Supervisors in stress testing of insurers. There were developed recommendations to the adaptation of European requirements in stress testing of insurance companies on the insurance market of Ukraine. The economic–mathematical model of stress testing of the insurance risk impact on the activities of the insurance company was developed.

Developments in Financial Sector Legislation, Regulation and Infrastructure: Implications for Accession Countries

Financial sector legislation and regulation is an area of crucial importance for the acquis process. Various regulatory frameworks, standards and institutions are involved. These include the Core Principles for Effective Banking Supervision, formulated by the Basel Committee for Banking Supervision, the Objectives and Principles of Securities Regulation, formulated by the International Organization of Securities Commissions (IOSCO), and standards being developed by the Committee on Payment and Settlement Systems (CPSS), the International Association of Insurance Supervisors (IAIS), and the International Accounting Standards Committee (IASC). The infrastructure of the financial system is widely considered as a “blood” system of the economy. This paper will focus on the developments in financial sector legislation, regulation and infrastructure in accession countries.

Insurance, Banking and Financial Supervision in the Kingdom of Saudi Arabia (KSA) – A Survey

Insurance, banking and financial supervision in Saudi Arabia is under the responsibility of the Central Bank of Saudi Arabia (which has the function of issuing the national currency, supervising banks, managing foreign exchange reserves, ensuring price and exchange rate stability, the soundness of the financial system and operating a number of cross-bank electronic financial systems) and the Capital Markets Authority of Saudi Arabia (who is regulating capital markets/the Saudi Stock Exchange by setting rules and making sure they are followed). The CMA is a government organization applying full financial, legal, and administrative independence, and has direct links with the Prime Minister. The most important laws regulating the financial sector are the Capital Markets Law (CML) and Cooperative Insurance Law (CIL), which aim to achieve compliance with the International Organization of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS) principles. Another important law is the Capital Market Law (Royal Decree No. (M/30) dated 2/6/1424H), which formally brought into existence the Capital Market Authority (CMA) and the Banking Control Law (BCL).

The Assessment and Supervision of China’s Systemically Important Insurers

On July 19, 2013, the International Association of Insurance Supervisors (IAIS) announced the first list of Global Systemically Important Insurers (G-SII). Ping An Group, a China’s insurance company, is the only insurer coming from the Asian-Pacific region. The entrance of Ping An brought wide attention and research on the problem of systemically importance in China. This research is studying the systemic importance of 9 insurance groups in China. Basing on the financial data of the 9 insurance groups, this paper calculates the weight using the Entropy Method, and ranks the 9 insurance groups by using the Index Method. Meanwhile, this paper comes up with some proposals for the assessment and supervision of China’s Systemically Important Insurers to promote the stable development of the insurance industry and the whole financial system.

How is risk management contributing to financial stability? The perspective of a European-GSII

By giving an overview of the progress made on risk-based capital frameworks over the last decade, notably in Europe through Solvency II, this paper sheds light on the operational consequences it has had on the insurance sector in Europe. This notably consists of improving the entire risk management framework, starting with pure calculation enhancement (as part of pillar 1), the use of the risk appetite framework and the implementation of the own risk and solvency assessment process. Having described the main features of the regulatory requirements put forward by the Financial Stability Board and the International Association of Insurance Supervisors for globally systemic insurers (G-SIIs) and the requirements, this paper explains the role of the Solvency II framework with regard to the recent designation of a list of G-SIIs. In conclusion, as economic capital modelling (including Solvency II) and the documentation part of the systemic risk management framework have already led to a strong reinforcement of insurance groups, there is no evidence that new regulation on the capital front is needed to protect the financial system, especially one targeted only at the largest institutions which already benefit from advanced risk management frameworks (such as the higher loss absorption capacity).

Principles-Based Regulations: A Model for Legal Reform in the Nigerian Insurance Industry

AbstractThe development of global standards has led to a convergence in domestic regulations in the financial services sectors. Principles-based regulations (PBRs) have become essential for effective regulatory efforts in insurance and other financial services because of their flexibility, support for regulatory efficiency and the development of a good compliance culture amongst the regulated. The legal framework of the Nigerian insurance industry mainly contains prescriptive and performance-based regimes that have become ineffective as regulatory strategies. This article recommends the adoption of PBRs from available models found in international standard setting organizations such as the International Association of Insurance Supervisors, other jurisdictions such as the UK's Prudential Regulation Authority and Financial Conduct Authority, together with international trade regimes such as the General Agreement on Trade in Services. It reviews aspects of Nigerian insurance industry regulations supporting PBRs and highlights laws not supportive of PBRs and therefore requiring reform.

How should insurers’ foreign branches be supervised?

In this era of globalisation, a number of insurers are operating on a worldwide basis. Globalisation brings new challenges to supervisors, as was observed during the financial crisis of 2007–2008, as well as a number of benefits. Insurers operate on a cross-border basis either by establishing subsidiaries or branches in other countries or offering insurance products without having physical offices outside their home country. Focusing on operations in the form of branches, this paper considers how foreign branches of insurers need to be regulated and supervised, and introduces a paper regarding the supervision of foreign branches, published by the International Association of Insurance Supervisors (IAIS) in October 2013. Foreign branches are regulated and supervised much like domestic insurers, including subsidiaries of foreign insurers. Nevertheless, some supervisors experience difficulties in supervising foreign branches. Branches are not a legal entity and therefore there is no board of directors at branch level. Additionally, a branch's assets backing insurance liabilities can be readily transferred to other countries. Considering such uniqueness of foreign branches, this paper also proposes some possible approaches to their supervision.

Solvency Assessment for Insurance Groups in the United States and Europe—A Comparison of Regulatory Frameworks

As a reaction to the increasing trend of insurers forming and participating in financial conglomerates and insurance groups, supervisory authorities are currently developing group-wide solvency regulations. The International Association of Insurance Supervisors (IAIS) recently published an issues paper that discusses the challenges to group supervision and defines criteria for a thorough group solvency framework. Based on these criteria, this article provides an overview and comparison of three important approaches—the U.S. solo-plus approach of the National Association of Insurance Commissioners, Switzerland’s group structure model and the Solvency II Directive on Group Solvency Assessment. The analysis reveals various deficits within the group regulation of the United States implying the need for future regulatory work. By contrast, the performance of the European frameworks with regard to the IAIS criteria is good. In particular, the Swiss framework can be seen as a prime example of an innovative and solid group solvency assessment.

Takāful standards and customer perceptions affecting takāful practices in Pakistan: a survey

PurposeThe purpose of this paper is to attempt to see the effectiveness of operational and transformational standards raised by joint working group of Islamic Financial Services Board (IFSB) and International Association of Insurance Supervisors (IAIS) as well as respondents' perceptions about Takāful (Islamic insurance) practices in Pakistan.Design/methodology/approachA total of two questionnaires were designed for this purpose: one for Takāful operators in Pakistan and other for insurance customers. For the first questionnaire, three Takāful operators were visited at Karachi. For the second questionnaire, a sample of 150 insurance customers was surveyed at Rawalpindi. Descriptive statistics and Chi‐square test was used to analyze the data.FindingsReporting standards and internal controls were found to have low level of observance among Takāful operators in Pakistan. The survey of insurance customers revealed that majority of the respondents (91 percent) are unaware of Takāful concept. Education was found to be the single important factor affecting income of the respondents, their perceptions and level of Takāful awareness.Research limitations/implicationsThe survey is conducted at one major city of the country based on convenient sampling technique and its results have been generalized for the entire country. However, actual results might differ when a sufficiently large sample is taken from all the main cities of the country.Practical implicationsThe study would help the policy makers to focus on strengthening regulatory framework for Takāful. It will also help Takāful operators in understanding public perceptions about Takāful and devising strategies to promote Takāful business to the vast population of Pakistan.Originality/valueThis is the first empirical research conducted on Takāful in Pakistan that analyzes the Takāful practices both from managerial perspective as well as from regulatory perspective.