ICP 18 to 23
Presented in
One day Workshop on Financial
Sector Assessment Program
N. Srinivasa Rao & S. P. Chakraborty
Hyderabad, 29th December, 2010
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ICP – 18 to 23
Agenda
• Principles
• Essential Criteria for assessment
• Observance of principles/current practice
2
ICP – 18
Risk Assessment & Management
Principle:
The ‘Supervisory Authority’ requires insurers
to recognize the range of risks that they
face and to assess and manage them
effectively
3
ICP – 18
Risk Assessment & Management
Essential Criteria for assessment
• Comprehensive risk management policies
• Appropriateness of such policies
• Monitoring and control system
• Review and analysis of impact of external
environment
• Larger
insurers
establish
a
risk
management function and
a risk
management committee.
4
ICP – 18
Risk Assessment & Management
Observance of principles
• Appointed Actuary’s Annual Report
Provides a framework for prudent risk
management system
Experience Analysis
Projection of future financial condition
Asset Liability management
5
ICP – 18
Risk Assessment & Management
Observance of principles
• Economic Capital
Mandatory for all life insurers to submit the
report
Provide guidance as to various risk
assessment and quantification
6
ICP – 18
Risk Assessment & Management
Observance of principles
• Financial Condition Report for Non-life
Companies
Analysis of business
Demonstration of adequacy of premiums
and reserves
Risk management – Not comprehensive
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ICP – 18
Risk Assessment & Management
Observance of principles
• Quarterly solvency reporting; If situation
warrants, on monthly basis
• Financial Condition Report for life companies
• Submission of re-insurance programme
• Actuarial Review Committee
• Peer Review system
• Risk Management Committee as per corporate
governance guidance
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ICP – 19
Insurance Activity
• Principle
Since insurance is a risk taking activity, the
supervisory authority requires insurers to
evaluate and manage risks that they
underwrite, in particular through reinsurance and to have the tools to establish
an adequate level of premiums.
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ICP – 19 -Insurance Activity
Essential Criteria for assessment
• Strategic underwriting and pricing policies
• Evaluation of underwriting risks and
adequacy of premium rates; Expense
management.
• Ability of the Authority to review the
method and basis of premium rate
computation
10
ICP – 19 -Insurance Activity
Essential Criteria for assessment
• Check on adequacy of reinsurance arrangement
and ensure that the claims held by insurers on
their reinsurers are recoverable. This includes
that:
 The reinsurance coverage is appropriate to the
level of capital of the insurer and the profile of
the underwritten risks
 Reinsurers protection
• Appropriateness of risk transfer instruments
11
ICP – 19 -Insurance Activity
Observance of principles
• Appointed Actuary System
 Part and parcel of the entire system covering
insurance activity and risk management
 Key responsibilities:
 Actuarial advice to management on important
issues
 Ensure solvency at all times
 Certification
 Whistle blowing
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ICP – 19 -Insurance Activity
Observance of principles
‘File & Use’ procedure
 Product design – suitability for target market
 Terms & conditions including exclusions, surrender,
foreclosure etc.
 Underwriting policy
 Pricing & Reserving– Methodology and Basis
 Profitability
 Scenario & Sensitivity testing
 Risk of mis-selling – Benefit Illustration
 The insurers review the premium rates on periodic
basis depending on their actual experience thru’ ‘F&U’
procedure
13
ICP – 19 -Insurance Activity
Observance of principles
• Non-Life
 ‘File & Use’ procedure
 Required to review rates on regular basis
 Any change in the UW policy to be approved by
the BOD.
 Authority reviews the methodology and basis
used by the insurers to set premium rates.
• Appointed Actuary’s certificate on rates are fair
and terms & conditions offered are workable and
sound.
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ICP – 19 -Insurance Activity
Observance of principles
• The Authority reviews the reinsurance
programme of general insurers with
particular reference to the re-insurance
treaty slips and XOL cover note and
analyze the data submitted thereon
• Appropriate provision for IBNR on Reinsurance accepted portfolio on actuarial
basis
15
ICP – 20 -Liabilities
• Principle
The supervisory Authority requires insurers to
comply with standards for establishing
adequate technical provisions and other
liabilities, making allowance for re-insurance
recoverable. The supervisory Authority has both
the authority and the ability to assess the
adequacy of the technical provisions and to
require that these provisions be increased, if
necessary.
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ICP – 20 -Liabilities
Essential Criteria for assessment
• Legal provisions are in place to establish
adequate technical provisions and other
liabilities based on sound accounting and
actuarial principles.
• Prescribes/agrees to
standards
for
establishing such provisions.
• Specific factors to consider when
developing such standards
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ICP – 20 -Liabilities
Essential Criteria for assessment
• Review of sufficiency of technical provisions (ICP 12 &
13 – Offsite and Onsite inspection)
• Provisions to increase technical provisions, if not
appropriate
• The Authority ensures that the standards stipulate
general limits for the valuation of the amounts
recoverable from the reinsurance arrangements, sound
accounting principles for booking of such amounts and
the credit for the technical provisions for amounts
recoverable under re-insurance arrangements.
• Requirements to carry out stress testing in case
technical provisions are increased.
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ICP – 20 -Liability
Observance of principles
• Section 13 & 15 of the Insurance Act, 1938, ARA
and ALSM Regulations
 Prescribes methodology and principles to be
used for setting assumptions
 Prudent - Best Estimate + MAD basis (Life)
 Provisions for ‘Global Reserves’
 Detailed guidelines on computation of IBNR and
IBNER provisions – Non Life
 Provisions for deficiency in premiums – Non-life
• Insurers may be required to increase the
provisions, if requires.
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ICP – 20 -Liability
Observance of principles
• Reinsurance
 Liability side – restrictions in computation of RSM
 Asset side – No credit for claims recoverable from reinsurers due for over 90 days for demonstration of
solvency.
 Amounts recoverable from reinsurers are disclosed in
the financial statements.
• The AAAR requires stress testing on prescribed basis
• stress testing framework is to be developed in non-life
companies
20
ICP – 23 –Capital Adequacy and
Solvency
Principles:
• Insurers to comply with the prescribed
solvency regime.
• The regime includes capital adequacy
requirements and requires suitable forms
of capital that enable the insurer to absorb
significant unforeseen losses
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ICP – 23 –Capital Adequacy and
Solvency
Principles:
• The solvency regime addresses valuation of
assets and liabilities, suitable form of capital and
capital adequacy requirements
• Effectiveness and security of the counterparty
with regard to risk transfer
• Solvency control levels are established
• Inflation of capital through double or multiple
gearing etc.
• Requirements placed upon an insurer operating
through a branch
22
ICP – 23 –Capital Adequacy and Solvency
Observance of principles
• The solvency regime – Two factor formula based
 The minimum solvency capital requirement is 150% of
the required solvency margin (current practice)
 The required capital is capable enough to absorb the
significant unforeseen losses
 IRDA closely monitors the solvency control level on
regular basis so that any corrective action can be taken
well in advance
 Sensitive to line of business and specific features such
as Par, Non-par, guarantee or without guarantee
 Not directly sensitive to specific risk profile of the insurer
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ICP – 23 –Capital Adequacy and Solvency
Observance of principles
• Principles of asset valuation are prescribed in the
regulations
• Insurers hold mismatching reserves, if needs
• Risk transfer is only in the form of re-insurance
arrangement
• Minimum credit rating for re-insurers.
• No
comprehensive
regulations
for
supervising
reinsurance business.
• Foreign insurers are not allowed to operate in India thru’
branch
• Form of Capital – Thru’ ordinary shares with single face
value
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ICP – 21 - Investments
• Principle
The supervisory authority requires insurers
to comply with standards on investment
activities.
These
standards
include
requirements on investment policy, asset
mix, valuation, diversification, assetliability matching, and risk management
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ICP – 21 – Investments
Essential Criteria
• Requirements regarding the management of
investments are in place, either in the law or in
supervisory rules. These requirements address,
but may not be limited to, the following:
• the mixture and diversification by type
• limits or restrictions on the amount that may be
held in particular types of financial instruments,
property, and receivables
• the safekeeping of assets
• the appropriate matching of assets and liabilities
• the level of liquidity
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ICP – 21 – Investments
Essential Criteria
• Investments are valued according to a method
prescribed by or acceptable to the supervisory
authority.
• The supervisory authority requires insurers to
have in place an overall strategic investment
policy, approved and reviewed annually by the
board of directors
• The risk management systems must cover the
risks associated with investment activities that
might affect the coverage of technical provisions
and/or solvency margins (capital).
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ICP – 21 – Investments
Essential Criteria
• The supervisory authority checks that insurers have in
place adequate internal controls to ensure that assets
are managed in accordance with the overall investment
policy, as well as in compliance with legal, accounting,
and regulatory requirements.
• The supervisory authority requires that oversight of, and
clears management accountability for, an insurer’s
investment policies and procedures remain ultimately
with the board of directors, regardless of the extent to
which associated activities and functions are delegated
or outsourced
• Requirement of appropriate staff
• Requirement of rigorous audit procedure in place
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ICP – 21 – Investments
Essential Criteria
• The supervisory authority requires that insurers
have in place effective procedures for monitoring
and managing their asset/liability position to
ensure that their investment activities and asset
positions are appropriate to their liability and risk
profiles
• The supervisory authority requires that insurers
have in place contingency plans to mitigate the
effects of deteriorating conditions
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ICP – 21 – Investments
Observance of principles
• Investment Regulations
 Management of investments within the insurer.
 Lays down norms in terms of types of investment,
exposure limits to group companies and limits on
investment in any single industry sector
 Emphasize security of investments thru’ mandatory
investments in ‘Govt’ and other approved securities.
 Insurer to form an investment committee
 Investment policy is required to be approved by the BOD
and required to be reviewed on periodic basis
 The IRDA issued guidance on the requirements of the
entire investment function which should be covered in
the investment policy
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ICP – 21 – Investments
Observance of principles
• Valuation of investments are prescribed in the
regulation
• Insurance funds are required to be invested in
India only
• Various investment returns on periodic basis
(Quarterly and half yearly)
• Onsite inspection of investment activities
• Requirements to have a sound methodology for
asset liability management.
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ICP – 22 Derivatives and similar
commitments
• Principle
The supervisory authority requires insurers
to comply with standards on the use of
derivatives and similar commitments.
These standards address restrictions in
their use and disclosure requirements, as
well as internal controls and monitoring of
the related positions.
32
ICP – 22 Derivatives and similar
commitments
Essential Criteria
• Requirements regarding the use of derivatives
are in place, either in the law or in supervisory
rules. The requirements consider the risks in the
use of derivatives and similar commitments.
• Disclosure requirements for Derivatives and
similar commitments.
• Requirement
of
sufficient
expertise
to
understand the important issues related to the
use of derivatives, and that all individuals
conducting and monitoring derivatives activities
are suitably qualified and competent.
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ICP – 22 Derivatives and similar
commitments
Essential Criteria
• Requirement of an appropriate policy for
derivatives which should be reviewed
annually by BOD
• Comprehensive
‘Derivatives’
risk
management system
• Proper internal control for management of
derivatives activities
• Expertise to handle such activities
34
ICP – 22 Derivatives and similar
commitments
Observance of principles
• Very limited use of derivatives in India
• The regulations allow hedging of interest rate
risk. Fixed Income derivatives (Forward rate
agreements, Interest Rate swaps and exchange
traded interest rate futures) are allowed
• Insures are required to disclose risk
management policy in detail
• The investment policy including the internal
control system must be approved by the BOD of
the insurer
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Thank You
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