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IAIS Insurance Core Curriculum ICP 16: Winding up and exit from the Market

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A quick pass to see what we will concentrate on today ... Commence wind-up. Recapitalise and sell. Full tool kit implies that triggers can be problematic. ... – PowerPoint PPT presentation

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Title: IAIS Insurance Core Curriculum ICP 16: Winding up and exit from the Market


1
IAIS Insurance Core CurriculumICP 16 Winding up
and exit from the Market
  • Craig Thorburn
  • Senior Insurance Specialist, The World Bank
  • Policy Advisory Consultant, CGAP
  • cthorburn_at_worldbank.org
  • 1 202 473 4932 or 1 202 470 6012
  • Skype craig_thorburn

2
Agenda
  • Pre-test
  • Introduction
  • Identifying Weak Companies
  • A Sound Supervisory Process
  • Using Supervisory Powers
  • Putting Principles into Practice
  • Policyholder Protection Schemes

3
Pre-Test
  • A quick pass to see what we will concentrate on
    today

4
Winding-up a company refers to
5
Winding-up an insurance company could be
initiated by ...
6
In winding-up a company voluntarily, it is
important that the following parties be actively
involved in the process
7
When an insurer is forced to be wound-up,
preferential treatment is given to
8
The goal of winding-up a company is to
9
It is important that the winding-up process be
set out in the law so that the
10
If the board of directors appeals a decision by
the supervisor to wind-up the company, it is a
sign that the
11
Introduction
12
Market Exit
  • May be voluntary
  • Sell the company to another owner
  • Transfer the insurance obligations and operations
    to another insurer and close the company
  • Cease new business and run-off the outstanding
    obligations
  • Hire a liquidator / appoint an administrator to
    run-off the business
  • Or involuntary
  • External party initiates action that relieves
    owners (and possibly senior management) of
    control of the company
  • Insurance supervisor
  • Other creditors
  • Sometimes through court processes

13
ICP 16
  • The legal and regulatory framework defines a
    range of options for the orderly exit of insurers
    from the marketplace. It defines insolvency and
    establishes the criteria and procedures for
    dealing with insolvency. In the event of
    winding-up proceedings, the legal framework gives
    priority to the protection of policyholders.

14
Three essential criteria
  • (A) Legal framework determines point where it is
    no longer permissible to continue in business.
  • Explanatory note discusses point where insurer is
    no longer financially viable or insolvent so
    not just Assets lt Liabilities
  • (B) Procedures for insolvency and winding up are
    clearly set forth in the law.
  • (C) High legal priority is given to the
    protection of policyholders and other
    beneficiaries. This priority ensures that, as far
    as practical, disruption to the provision of
    benefits to policyholders is limited.
  • Explanatory note recognises priorities to
    employee entitlements, taxation authorities, and
    relevance of policyholder protection schemes as
    an option.

15
Identifying Weak Companies
16
Why do companies fail?
  • Asset problems
  • Poor investments
  • Non performing assets
  • Mismatched assets and liabilities
  • Inadequate liquidity
  • Special asset problems
  • Related parties (performance and or valuation)
  • Goodwill and intangibles and Future Income Tax
    Benefits go from a maybe to a definitely not
  • Creditors not making payments in a timely manner
  • Reinsurance that does not perform as expected
  • ANY OTHER ASSET PROBLEMS?

17
  • Liability problems
  • Poor underwriting selection and mispricing of
    insurance risks
  • Aggressive market underpricing
  • Unrealistic provisioning
  • Adverse claims experience
  • Other financial issues
  • Adverse expense levels
  • Uncontrolled or excessive growth
  • All leading to inadequate capital levels

18
  • Non financial issues
  • Non compliance with legislative requirements
  • Market conduct scandals
  • Loss of reputation
  • Inadequate business planning
  • Inadequate management controls and practices
  • Lack of understanding of market conditions
  • Delays in claim settlement
  • Fraud

19
It all comes back to governance
  • Inadequate or breakdown in governance
  • Ineffective (or worse) boards
  • Dominant (or worse) controllers
  • Dominant (or worse) CEO
  • Ineffective systems or internal controls
  • Incompetent (or worse) management
  • Incompetent, inconsistent, or absent strategy and
    business plan
  • Especially for life insurance, ships that have no
    direction can drift onto shoals

20
When a company fails
  • Assets may exceed liabilities but the company
    could still not be viable
  • But when normal operations stop
  • Some assets loose value
  • Reinsurers may be more likely to dispute
    obligations
  • Future Tax Benefits may be loose value
  • Goodwill may disappear
  • Assets expected to be sold at discounts due to
    known financial distress
  • Asset mix may have to be realigned given reduced
    cash flow to ensure liquidity, reducing expected
    returns.
  • Some liabilities increase in value
  • Claims come in faster
  • Valuation assumptions may have to be made more
    conservative

21
Rocks not turned over
  • Claim payment delays
  • Cash flow underwriting
  • Preferential payments to related parties
  • Lenders having imposed heavy obligations /
    collateral
  • Claim provisions understated through poor or
    deliberate file management
  • Margins in asset values realised to support
    profits
  • Improper use of reinsurance to dress up accounts
  • What appeared to be legitimate business
    transactions uncovered as inappropriate

22
Delay creates its own problems
  • So orderly exit should start before company
    position reaches real peril
  • Unwarranted optimism, delay, and supervisory
    forbearance generally do not work in the best
    interests of policyholders
  • Supervisory inaction can destabilize the whole
    market through market reputation and efforts of
    well managed companies to compete with those with
    poor practices.
  • Risk or systemic crisis
  • Orderly markets require participants to know what
    is expected of them. Expectations are reinforced
    through transparent and effective implementation
    of supervisory processes

23
Less tangible tests
  • The cufflinks are worth more than the company
  • Board room art or foyer fountains are inversely
    proportional to policyholder interests
  • The bigger the office the further to fall
  • Long standing companies eventually run out of
    luck
  • Not invented here is no good
  • The captain of the ship is good at hosting
    cocktail parties.
  • Brown envelopes are not letter bombs

24
Voluntary Market Exit
  • Companies may wish to exit for many valid
    reasons, for example
  • Business is not meeting expectations for growth
    and profit
  • Company is having difficulties in other markets
    and needs to realise the asset
  • Management strategy to focus on other markets or
    business lines
  • Supervisory control of exit is important as
    remaining policy obligations still have to be
    protected
  • Clear processes and roadmap will ensure that
    those wishing to exit do not linger and neglect
    the insurer.
  • Change of ownership approvals
  • Demutualisation (where relevant)
  • Transfer of obligations
  • Taxation and similar issues may also need
    attention

25
Exercise / Discussion 1
26
What improvements do we need?
  • The CAIR Executive is meeting later this week to
    discuss various matters including future work. We
    also will want to consider what we cover in the
    next workshop and training events.
  • When we reflect on what happened with CLICO, and
    where we are now, did we all have the capacity
    and knowledge to identify the weaknesses and form
    a view of the concerns? What do we need to put in
    place for the future?
  • What was the fundamental cause of the failure?
  • What scorpions emerged under the rocks when they
    were turned over?

27
A Sound Supervisory Process
28
Objectives
  • Robust process
  • Aimed to detect problems as far as possible
  • At the earliest practical point of time
  • Increasingly Risk Based approaches adopted not
    solely focused on compliance
  • Uniformly applied, (generally) transparent,
    objective, credible
  • Improves chances that management will support and
    accept outcomes and commit to taking improvement
    measures
  • Supporting defence of decisions if disputed
  • So process that is structured and documented
  • Defining and managing the process of dealing with
    weak or troubled companies is an important aspect
    of supervision

29
Process overlays powers
Review and Analyse
Assess and determine action
Implement intervention
Financial Reports
Taking control
On Site Inspection
Imposing Directions
Limiting Business
Sanctioning Individuals
Replacing Officers
Changing owners
Requiring capital
Winding-up
Note Illustrative list of powers
30
Assessment process
  • Analysis of financial and non financial
    information
  • Company and market wide
  • Qualitative and quantitative information
  • Adequate capital
  • Current and prospective view
  • Ultimate concern equals view of the supervisory
    authority that the company is not viable to be
    sufficiently able to operate the practical
    business affairs and is unlikely to retain,
    regain or maintain financial strength, thus
    potentially placing its policyholders at
    unreasonably higher risk of loss. (text p9)
  • Action should be consistent with the severity of
    the problem and the manner in which similar
    problems have been handled with other companies.
    (text p5)

31
  • Identifying a potentially weak company is always
    a challenge for the supervisory authority because
    this task most frequently involves investigating
    and drawing conclusions that are at odds with the
    conclusions that management and the board reached
    when looking at the same evidence. (text p5)
  • Determining if a company is or is not viable
    involves judgment (text p6)

32
Focus on adequate capital
  • Minimum capital requirements
  • Defined liability and assets
  • Formulaic determined minimum capital
  • Companies should have a buffer consistent with
    risk and to avoid falling below regulatory
    minimum
  • Higher risk implies need for higher buffer
  • Having capital is based on a reason
  • What is the company policy for buffer capital?
  • How is this determined?
  • How is this monitored?
  • When is it breached?
  • Short order restoration when breached
  • Orderly markets prefer capital to be restored as
    the first option

33
But
  • Failure of companies is not restricted to failure
    to meet capital tests. Forced market exit is the
    last possible action against a company no matter
    how it got into that position (text p11)

34
Early Warning Systems
  • Range of risk and indicators
  • Detect declining trends before minimum capital
    levels breached
  • Detect other concerns before company is no longer
    viable
  • Combination of outcomes toward graded position
  • Normal Routine supervision process
  • Concern Company to resolve issues
  • More concern Time bound urgency
  • Immediate restoration required Short time urgency
  • Forced exit External control of resolution
  • Publication of process enhances supervisory
    standing

35
Using Supervisory Powers
36
Range of options for intervention
  • On site inspection
  • Normal processes apply
  • Also do targeted inspections
  • As a normal process
  • to validate and confirm specific concerns
  • to gather evidence / documents etc.

37
Request / require / mandate (1)
  • Specific to address issues (examples)
  • Remove and replace an officer that is not fit and
    proper
  • Make particular improvements to processes and
    systems
  • Deal with particular assets in a particular way
  • Adopt a different assumption for valuation
    purposes
  • Reinsure
  • Change ownership
  • Restructure / demutualise

38
Request / require / mandate (2)
  • Specific to enable issues to be addressed
    (examples)
  • Align capital to risk / Increase capital / reduce
    risk
  • Increase provisions
  • General
  • Develop sound business strategy
  • Address concerns
  • Re-establish viable performance
  • Improve customer relations
  • Make more frequent reports to the supervisor

39
  • Sanction the company
  • Sanction individuals
  • Fines
  • Removal from position
  • Removal from industry
  • Criminal actions (usually referred to other
    authorities)

40
Broad Powers that can be useful
  • Direct the company at any time and on any issue
  • Hire a consultant to investigate at the cost of
    the company
  • Instruct the external auditor to prepare a
    special purpose or expanded audit
  • Force the sale of the company, or a line of
    business
  • Instruct the company to cease writing one or more
    lines of business
  • Change the company pricing
  • Change the company liability or asset valuations
  • Increase capital
  • Sell

41
Moral Suasion versus Legal Powers
  • Moral Suasion Does it work? Can it be relied on?
  • Example of when it works
  • AMP and GIO Capital Issue
  • HIH CEO
  • Macquarie Life Reporting Issue
  • Jawboning on DII profitability
  • Strengthening the case
  • Industry best practice research
  • Risk of name and shame / requirements to report
    against practices / targeted inspections /
    questionnaires signed by senior officers or
    boards
  • Y2K and suppliers - reinsurers
  • Fit and proper management and boards do what they
    are told
  • Escalation to chairman, independent directors,
    board level
  • Power to turn request into requirements at short
    notice

42
Most severe is to force market exit
  • Legally may be one or more of winding-up, refusal
    to renew a license, withdrawal of a license,
    apply to court for wind-up
  • Powers required to
  • Take control of company
  • Replace management
  • Convince another company to take over the ailing
    insurer
  • Place company into run-off
  • Commence wind-up
  • Recapitalise and sell
  • Full tool kit implies that triggers can be
    problematic.
  • For example, only take supervisory control of
    insurer if insolvent.

43
Exercise / Discussion 2
44
What improvements do we need?
  • The CAIR Executive is meeting later this week to
    discuss various matters including future work. We
    also will want to consider what we cover in the
    next workshop and training events.
  • When you consider your supervisory system
  • Do you think that you have all the processes
    fully working to identify weak insurers?
  • Do you think you have all the regulatory support
    to these processes to make them credible to the
    market?
  • Do you have the resources required to make and
    manage assessments, review and intervention?
  • Do you know if each of your insurers has a
    capital policy?
  • Do you feel you have the full armory of
    intervention powers?
  • Can you use moral suasion effectively? If not,
    what are the limitations?

45
Putting Principles into Practice
46
Underlying Principles
  • Clearly state the problem to be fixed
  • Ask the company to develop a strategy to resolve
    the problem
  • Set criteria for success (to identify that the
    problem has been resolved)
  • Set clear and realistic timeframes for plans,
    action and resolution
  • Monitor progress (set intermediate checkpoints)
  • Give credit to management when it works
  • Be sure that management owns the problem and not
    the supervisor
  • If actions are not successful, have an escalation
    option
  • Use the escalation option
  • (text p26)

47
Contingency Planning
  • Hope for it to work
  • But plan for it not to work
  • The company is under stress, and your actions
    increase this stress
  • Be prepared that they will not meet the goals
  • What will you do if they fail?
  • Monitor carefully along the way even if it
    seems to be overkill
  • HR needs to be mobilised at the supervisor
  • Legal issues need to be addressed
  • Communication wit key stakeholders (Who might
    they be?)
  • Get the steps planned clearly

48
Document
  • Document
  • Document
  • Document
  • Document
  • Document
  • Document
  • Document
  • document
  • Good practice anyway

49
Policyholder Protection Schemes
50
IAIS Statements
  • Policyholder protection schemes can be one way
    that a jurisdiction achieves priority and orderly
    exit protection for policyholders
  • Priority
  • Essential Criterion (c) This priority ensures
    that, as far as practical, disruption to the
    provision of benefits to policyholders is
    limited.
  • Wind up processes can disrupt provision of
    benefits
  • Normal liquidation processes freeze all actions
    until assets and liabilities are determined then
    payout claims based on
  • priorities and
  • proportion of funds available.
  • Can involve considerable delay as insurance
    liabilities are difficult to determine

51
Need to keep funds flowing
  • Transfer to an existing insurer in short time to
    restore normal functioning
  • May need to top up or guarantee any shortfall
  • State engagement
  • Protection Scheme

52
My view on Protection Schemes
  • Two types of scheme exist
  • The one you have
  • The one you do not know you have
  • Economists argue about
  • Moral Hazard
  • Risk based premiums

53
Principles
  • Establish the scheme in calm water if possible as
    it is less costly and better structured.
  • Recognise that
  • Insurance cannot be diversified as bank products
    can so the obligation on customers is not so
    feasible an excuse not to have a scheme
  • Compulsory classes tend to need something anyway
    for the uninsured or unidentified victims
  • Not all claimants benefit from buying insurance
    cheaply akin to bank deposits paying higher rates
    of return
  • If commercial bankruptcy laws apply, it takes
    ages to determine the insurance company
    liabilities
  • Have a special system for insurers or
  • You have to have a scheme to protect
    policyholders from the conventional bankruptcy
    implications
  • A scheme will help observe the ICP

54
  • When the scheme is well designed, it may support
    having resolution options available
  • For example, transfer of obligations when there
    is a small shortfall
  • When you have third party products, then this may
    mean you include the compulsory class issues and
    have some prefunding
  • Make sure that the scheme defines who is
    protected
  • Normally not all policyholders, but locals
    individuals and small business, sometimes not
    large commercial clients or inward reinsurance.
  • Old case where US policyholders were the main
    beneficiaries of a European failure brought this
    to a head.

55
  • To limit moral hazard, compensation should be
    partial and capped
  • Advance funding might be attractive to the sector
    in some ways, but adds practical complexity and
    might be more trouble than it is worth
  • When post funded through a levy, special
    consideration of long term life insurance, single
    premium investment products, and life annuities
    should be thought through
  • Post funded, at least in part, will need a banker
    identify this in advance
  • Risk based premiums work in theory and in the
    USA. Small markets present practical challenges.

56
Exercise / Discussion 3
57
What improvements do we need?
  • The CAIR Executive is meeting later this week to
    discuss various matters including future work. We
    also will want to consider what we cover in the
    next workshop and training events.
  • When you consider your supervisory system
  • Do you have arrangements in place now that would
    be relevant to ensure that policyholders are
    protected without disruption?
  • Do you think that future problems, wherever they
    come from, can be handled? If not, what are you
    concerned about?
  • What do you need to do now for most benefit to
    give you the comfort you need to protect
    policyholders?

58
End
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