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Early-warning Systems and Progressive Intervention Levels

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Early-warning Systems and Progressive Intervention Levels Regional Seminar on Risk-based Supervisory Practices and Regulatory Capital San Jos , Costa Rica, 6-8 ... – PowerPoint PPT presentation

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Title: Early-warning Systems and Progressive Intervention Levels


1
Early-warning Systems and Progressive
Intervention Levels
  • Regional Seminar on Risk-based Supervisory
    Practices and Regulatory Capital
  • San José, Costa Rica, 6-8 September 2011
  • Gunilla Löfvendahl Senior Financial Sector
    Specialist

2
Risks and effects
Internal risks (management and control)
External risks (inherent)
Inadequate or failed internal processes people or
systems
Inappropriate risk decisions
Financial outcome
Policyholder harm
Incorrect evaluation of financial outcomes
Risk appetite decisions
3
Risk assessment table to classify/prioritise
inherent risks
4
Solvency control levels
  • Solvency control levels are triggers for
    different degrees of supervisory intervention
  • Intervention should be at a sufficiently early
    stage so that there is realistic prospect for the
    situation to be rectified in a timely manner
  • Criteria used to set levels should be transparent
  • Should be at least two control levels
  • Prescribed capital level (PCR) intervention on
    other grounds than capital adequacy
  • Minimum capital level (MCR) strongest
    supervisory action if corrective action is not
    taken promptly

5
Setting the level of PCR and MCR
  • PCR
  • Insurer can absorb losses from adverse events
    over a defined period
  • Technical provisions remain covered at the end of
    the period
  • Need to consider whether insurer can access
    additional capital/other risk mitigation tools
  • Going-concern basis
  • MCR
  • Ultimate safety net for the protection of
    policyholders
  • Different from accounting concept of insolvency
    (assets gt liabilities)
  • Lower bound for PCR (can be calculated
    differently)
  • Gone-concern/winding-up basis

6
Quality of capital resources
  • Loss absorbency under going-concern (availability
    and permanency) main function
  • Loss absorbency under winding-up (subordination
    and priority)
  • The quality can be regulated in different ways
  • categorise into tiers (quality classes)
  • rank capital elements
  • The quality of corresponding assets is also
    important and can be regulated in different ways
  • investment incentives through risk-weighting
  • catalogue of admissible asset (risk-based)

7
Typical early-warning indicators
  • Low solvency margin relative to firms risks
  • Rapid growth, declining profitability
  • High expenses, low profitability
  • Sudden increase in technical reserves
  • Marked decrease in technical reserves
  • Significant divergence from budget and business
    plans
  • Concentrated investments, particularly in related
    entities
  • Timing of payments, in particular claims
  • Consumer or intermediary complaints
  • Large, irrational or inconsistent reinsurance
    arrangements
  • Crude underwriting strategy (pricing and risk
    selection)

8
Indicators (continued)
  • Excessive bonus or unusual remuneration and
    incentives
  • Change of business strategy
  • New sources and classes of business
  • Changes to or delays in implementing original
    business plan
  • Vulnerability to legal or fiscal changes
  • Mergers, acquisitions or other significant
    transactions that may put on pressure
  • Poor quality information or delays in producing
    the information
  • Failure to implement supervisory advice or
    requirements
  • Non-cooperation with supervisor

9
Preventive and corrective measures ICP 14 (new
10)
  • Have legal and operational capacity to bring
    about timely action
  • Make use of adequate preventive and corrective
    instruments that are suitable and necessary to
    achieve the objectives of insurance supervision
  • Have a progressive scale of actions and remedial
    measures
  • Have the capacity and standing to communicate
    with companies and require information

10
Preventive supervisory tools
  • Licensing procedure
  • Continual fit and proper requirements
  • Requirements of sound corporate governance,
    internal control and risk management
  • Periodic reporting requirements
  • Disclosure/transparency
  • Business plan and strategy for new business
  • Off- and on-site supervision
  • Informal contacts with management

11
Corrective supervisory measures
  • Require compliance with rules and rectification
    of breaches
  • Require correction of reporting errors
  • Impose plan of redress (acceptable steps and
    timetable)
  • Prescribe capital injection
  • Prescribe additional or other reinsurance
  • Prescribe portfolio transfer or merger
  • Require change of management

12
Enforcement or sanctionsICP 15 (new 11)
  • Formal directions to take (or desist) actions
  • Failure to comply should have serious
    consequences
  • Possibility to combine sanctions with fines
    against individuals and insurers
  • Sanctions are powerful supervisory tools that
    should be used in a fair and equal manner
  • It is not sufficient for supervisors to have
    powers delegated under legislation powerful
    tools are only powerful if used
  • Determine that the insurer is complying with the
    measures once action has been taken or measures
    have been imposed

13
Enforcement or sanction measures
  • Restrict business activities
  • Stop the writing of new business
  • Withhold approval for new activities or
    acquisitions
  • Direct the company to stop unsound practices
  • Direct a company to stop unlicensed business
  • Remove directors and managers - bar individuals
    from acting in responsible capacities in the
    future
  • Require capital levels to be increased
  • Restrict disposal of insurers assets
  • Restrict/suspend dividend or other payments to
    shareholders
  • Compulsory portfolio transfer or conservator ship
  • Revoke the licence require the company to
    wind-up
  • Combine with fines

14
Winding-up and exit from the marketICP 16 (new
12)
  • Determine when it is no longer permissible to
    continue business
  • Lay down procedure for dealing with winding-up
    and insolvency (define insolvency)
  • Protect the rights and entitlements of
    policyholders/beneficiaries in the event of
    insolvency
  • Protection/guarantee fund
  • Preferential rights

15
Appointing an administrator/liquidator
  • Take over the role and duties of the board and
    senior management
  • Before and/or after a winding-up
  • Before take over the control in order to protect
    the rights of the policyholders (usually no new
    business but still supervised)
  • After Protect the assets to satisfy the
    interests of all stakeholders (court process with
    little involvement of the supervisor)

16
Policyholder protection schemes
  • Pool of money (pre- or post-funding by the
    industry) to be used to meet the obligations of a
    failed company (predefined classes or lines of
    business)
  • Non-life claimants / Life claimants and
    policyholders
  • Payment during winding-up or/and after (whole or
    remaining part of the claim
  • Moral hazard risk
  • Lax supervisory treatment
  • Impudent industry behaviour
  • Less consumer due diligence
  • Supervisory decisions and enforcement actions
    should be taken irrespective of protection scheme

17
Discussion examples
  • Information sources (what, when and where)
  • Supervisory actions
  • Insufficient technical provisions
  • Low solvency margin
  • Risky investments (including risk-conscious)
  • Unsound market conduct and mis-selling
  • Other
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