Financial Sector Assessment
Programme
Indian Insurance SectorCompliance with ICPs
Dr. Mamta Suri
Joint Director-F & A
Insurance Regulatory And Development Authority
Hyderabad, India
FSAP – Framework
Macro-Prudential Analysis – Stress Testing –
Scenario Analysis – Financial Soundness
Indicators – Macro-Financial Linkage.
 Financial Sector Structure e.g. efficiency,
competitiveness, concentration, liquidity,
access etc.
 Assessment of the observance of best
international standards, codes and practices.
 Country Specific Stability Issues.

Three Pillars of Assessment
 Pillar
I => Macro prudential
Surveillance and Financial Stability
Analysis
 Pillar II => Legal and Institutional
Infrastructure and Development Issues
 Pillar III => Assessment and Status of
Implementation of International
Financial Standards and Codes
Pillar I
Steps in Stability Assessment

Compilation of a set of key indicators of
- Financial Structure
- Financial Soundness (Sector-Wise,
Market-based, Performance-based)
- State of Development
 Coverage
Banks, Insurance, Capital Markets and NonFinancial Sector
Pillar II
Institutional infrastructure





Regulatory Governance
(Objectives of regulation, independence and resources, enforcement
powers, and transparency of regulatory process)
Prudential framework
(Risk management, risk concentration, capital requirements,
corporate governance, and internal controls)
Regulatory Practices
(Group-wide supervision, off-site monitoring and on-site inspection,
reporting to supervisors, enforcement, and licensing & ownership)
Financial Integrity and safety net
(markets (integrity and financial crime), customer protection,
information, disclosure, and transparency)
Others
(Licensing, Capital requirements, accountability requirements, and
Risk management practices)
Pillar III
International Financial Standards
and Codes

Standards are widely accepted good
principles, practices or guidelines in a
specified area
 Called codes to reflect that they have a legal
status or are accepted, signed or ratified by
members of concerned multilateral agencies.
 To be implemented, either in their entirety or
in phases, considering the country-specific
circumstances.
 Flexibility an essential ingredient for the
success of the initiative.
IAIS – Insurance Sector
Core Principles
 Core
Principles - Developed in year
2000
 Key Global standards for Prudential
Regulation & Supervision
 Act as diagnostic tools to assist in
improving supervision globally.
 Can act as roadmap for reform agenda.
Need for convergence
Global
Nature of insurance Markets
Presence of conglomerates
Expansion of cross border transactions
Global Nature of Reinsurance Markets
Presence of active off shore centres
Thus, need for convergence of regulatory
practices and norms.
To ensure effectiveness of regulations and
level playing field.
Financial
crisis
highlights
need
for
convergence
ICP Assessment Methodology
 Based
on set of essential & advanced
criteria
 Intended at making a comprehensive
precise and objective assessment.
 Essential Criteria – components intrinsic to
implementation of core principles
 Advanced criteria – improve essential
criteria and enhance supervisory regime
Observance Status
1.
Observed
When stipulations exists and practiced by the insurers
2.
Largely Observed
Gaps have been identified and steps are being taken to
fill in the gaps
3.
Partly Observed
Compliance observed in case of few of the
requirements of the criteria and absence of compliance
in case of certain requirements
4.
Not Observed
No stipulations exists, no initiation of process of filling
the gaps on date
5.
Not Applicable
Stipulations prohibit the requirements indicated in the
criteria ab initio
6.
Observance Not
Tested
Stipulations exists but there were no instances to
observe compliance
7.
Observance in
alternative manner
Though not stipulated by the legislation/Supervisor,
criteria is complied with in an alternative manner
Core Principles – 28 principles
Grouped into 7 categories:
I
Conditions for Effective Insurance
Supervision
II The Supervisory System
III The Supervised Entity
IV On-going Supervision
V Prudential Requirements
VI Markets and Consumers
VII Anti-money Laundering, Combating Financing of
Terrorism (AML/CFT)
I
Conditions for Effective Insurance Supervision
(Elements of environment where supervision can be most effective)

ICP 1 Condition for Effective Insurance
Supervision
- Broad
requirements in the financial
policy and financial markets
infrastructure to support effective
supervision.
II The Supervisory System
(Mandates and responsibilities of the Supervisor)
ICP 2 Supervisory Objectives – Clarity in Law
 ICP 3 Supervisory Authority – Adequate
powers, resources and legal protection
 ICP 4 Supervisory Process – Transparency and
accountability
 ICP 5 Supervisory Cooperation and Information
Sharing – Within the insurance sector and
across financial services (domestic and
international)

III.
The Supervisory Entity
(Form and governance of insurers)





ICP 6 Licensing – requirements for licensing be
clear, objective and public
ICP 7 Suitability of Persons – Ongoing
assessment of fitness and proprietary
ICP 8 Changes in Control and Portfolio Transfer
– Supervisory approval for changes, in mergers
and in portfolio transfers
ICP 9 Corporate Governance – Management of
business on basis of standards, & role of board
and senior management
ICP 10 Internal Control – Systems, audit &
reporting
IV. On-going Supervision
(Actual practice of the supervisor)







ICP 11 Market Analysis – Macro prudential surveillance
ICP 12 Reporting to Supervisor and Off site monitoring –
Comprehensive monitoring (solo & group) on an on-going
basis
ICP 13 On site inspection – Powers for the insurers &
outsourced companies, clarity of scope
ICP 14 Preventive & corrective measures – Adequate,
timely, graduated spectrum of remedial measures
ICP 15 Enforcement – based on clear objective criteria
ICP 16 Winding up – Procedures for insolvency & priority
with respect to policyholders
ICP 17 – Group wide supervision – Insurance group or
conglomerate
V.






Prudential Requirements
(Financial and risk management processes)
ICP 18 Risk Assessment & Management –Systems
and their reviewing by supervisor
ICP 19 Insurance Activity – Evaluation of risks
ICP 20 Liabilities – adequacy of provisioning
ICP 21 Investments – Standards on investment
policy, Asset mix, valuation, risk management and
ALM
ICP 22 Derivatives & other similar commitments –
restriction on use and disclosures
ICP 23 Capital adequacy & Solvency – To cover
claims, expenses and unexpected losses
VI.
Markets and Consumers
(Distribution, consumer protection, Disclosure
and fraud
ICP 24 Intermediaries – Licensing and business
requirements
 ICP 25 Consumer Protection – providing
information before and during a contract
 ICP 26 Information, Disclosure and Transparency
toward the Market – adequacy of disclosure
 ICP 27 Fraud – measures to prevent, detect and
remedy

VII.
Anti-money Laundering, Combating the
financing of Terrorism
 ICP
28 Anti-money Laundering and
Combating the Financing of Terrorism
(AML/CFT) – Measures to deter, detect
and report in line with FATF standards
Position of observance - Insurance Core Principles
Group
No. of
Principles
I Conditions for Effective Insurance Supervision
1
II
4
0
4
III The Supervised Entity
5
1
2
2
IV On-going Supervision
7
3
4
V Prudential Requirements
6
2
1
3
VI Markets and Consumers
4
2
1
1
VII AML, Combating and Financing of
Terrorism
1
Total
28
The Supervisory System
Observed
Largely
Observed
Partly
Observed
1
1
5
13
10
ICP 1: Largely observed
Conditions for effective insurance supervision:
(Elements of environment where supervision can be most effective)
Insurance supervision relies upon
a policy, institutional and legal framework for financial sector supervision
a well developed and effective financial market infrastructure
efficient financial markets.
Status:
Strong legislative, regulatory and institutional framework
Well developed and effective constitutional &legal framework, including financial Professional bodies
facilitates oversight of the financial sector - Accounting, Auditing and Actuarial – Although gaps
identified in terms of adequacy of Actuarial professionals
Gaps:

Move towards global standards in accounting and audit issues – timeframe for adoption of IFRS
laid down. These are being addressed

Amendments required to legislative framework - Proposals for amendments to the Insurance
Act, 1938 and the LIC Act, 1956 forwarded to Central Government
ICP -1
Crit.
Contents
a
The government establishes and publicly discloses a policy statement aimed at
financial stability, effective financial sector supervision
b
Publicly disclosed, institutional and legal framework exists for financial sector
issues
Financial Market infrastructure
c
There is a reliable, effective, efficient and fair legal and court system
d
Accounting, actuarial and auditing standards are comprehensive, documented,
transparent and consistent with international standards.
These experts are competent and experienced, comply with technical and ethical
standards
Professional bodies set and enforce technical and ethical standards
e
f
g
Basic economic, financial and social statistics are available to the supervisor, the
industry and the public.
Advanced criteria
h
Laws and regulations are updated, as necessary, to reflect current best practices
and industry conditions.
Efficient Financial Markets
i
Well-functioning money and securities markets exist to support the availability of
both long term and short term investment opportunities.
II The Supervisory System
(Mandates and responsibilities of the Supervisor)
ICPs involved: 2- 5
ICP 2: Largely observed
Supervisory objectives:
The principal objectives of insurance supervision are
clearly defined
Status:
Objective
of supervision clearly laid down
Dual role of Development and Regulation
Supervisor vested with the powers to discharge supervisory responsibilities
Gaps:

Dual role has come in for some comment

Some of the powers still rest with the Government of India.

The regulatory position with respect to the exempted insurers is not clear.

State-owned insurers continue to be governed by certain provisions of the specific
legislations
ICP 2
Crit.
Contents
Compliance
a.
Legislation or regulation clearly
defines the objectives of insurance
supervision.
Insurance Regulatory and Development Authority Act, 1999.
The Insurance Act, 1938 and the Regulations framed there
under lay down the regulatory framework for supervision
b.
Key objectives of supervision
promote the maintenance of
efficient, fair, safe and stable
insurance markets for the benefit
and protection of policyholders.
Key objective is enshrined in the mission statement which is
 To protect policyholders interest
 To regulate, promote and ensure the orderly growth of
insurance and reinsurance business.
c.
Where there are multiple
objectives, Supervisor discloses
and explains how each objective
will be applied
Objective of the supervisor are cohesive and not mutually
exclusive.
d.
Supervisor gives reasons for and
explains any deviations from its
objectives.
There are no instances of deviations from the stated
objectives.
e.
Correction in law/Regulation
initiated where objectives are
contradictory
There are no contradictions in the objectives of the
supervisor
ICP 3: Largely observed
The supervisory authority:
has adequate powers, legal protection and financial resources to exercise its functions and
powers;
is operationally independent and accountable in the exercise of its functions and powers;
hires, trains and maintains sufficient staff with high professional standards; and
treats confidential information appropriately. (19 ECs and 2 ACs)
Status:
Supervisor independent agency reporting to Parliament through the Union Ministry of
Finance.
Powers vest with Authority to discharge its role
Free from political interference
The funds requirements met from fees levied.
Process of consultation with stakeholders in framing policies/regulations
Transparent processes.
Disclosure of performance
Gaps:

Adequacy of powers to be addressed through legislative amendments

Certain powers rest with the Government.
ICP 3 Contd…
Crit.
Contents
Compliance
a
Legislation identifies the authority Duties, powers and functions of IRDA are laid down
responsible for supervision
in the IRDA Act, 1999.
b
Section 14(2) of the IRDA Act, and Sections 34 and
114A of the Insurance Act deal with the powers
vested in the Authority.
Supervisor vested with powers to enforce
observance of the law and the regulations framed
there under.
Legislation gives power to issue
and enforce rules by
administrative means
c
Legislation grants powers for
effective discharge of
responsibilities.
Independence and Accountability
d
e
f

Governance structure of
supervisor defined
 Internal governance
procedures in place
Explicit procedures on
appointment and dismissal of the
governing body in place
Institutional relationships
between the supervisor,
executive and the judiciaryclearly defined
Structure of IRDA clearly defined in the IRDA Act,
1999
Procedures on appointment of the governing body
are in place


The institutional relationship between IRDA, the
Central Government and the Judiciary are
clearly defined.
Circumstances when the Central Government
would have overriding powers - laid down in the
Act.
ICP 3 Contd…
Crit.
g
Contents
Compliance
Supervisor and its staff free from undue political,
governmental and
industry interference
Supervisor financed in a
way that there is no
undermining its
independence
IRDA and its staff are free from political, government
or industry interference. They are public servants and
are protected under law for acts in good faith
i
Supervisor has discretion
to allocate its resources
IRDA adopts its annual budget depending on
requirements.
j
Supervisor has
transparent processes
and procedures for
making decisions.
All material changes to
the legislation and
supervisory practices are
normally subject to prior
consultations with market
participants.
Consultation process adopted in framing various
policies/ regulations.
h
k


No reliance on the government grants for funding
Requirements met from “Fees” received from the
insurers/ intermediaries.
Every proposal for change in regulation/
regulation is preceded by consultation process.
new
ICP 3 Contd…
Crit.
Advanced criteria
Contents
Compliance
l
Representatives of the Supervisor
publicly explain policy objectives, and
report on their performance
Operations of Supervisor detailed in annual report
available in public domain
m
Subject to confidentiality
considerations, information is provided
publicly about problem or failed
insurers, action taken
Violations/non-compliances, problems faced by
insurers, action taken thereon Published on IRDA’s
website
Powers:
n
Supervisor has powers to take
immediate action where necessary.
Adequate powers implied in legislation to take quick
actions where necessary.
Financial Resources
o
Supervisor

 has own budget to conduct

effective supervision.
 able to attract and retain highly
skilled staff, hire outside experts as
necessary
p
Supervisor publishes audited financial
statements on a regular basis.
No constraints on financial resources
Supervisor offers attractive pay package at par
with the other regulators in the financial sector to
attract and retain qualified staff.
Annual Report of IRDA, with details of its operations
is placed in public domain
ICP 3 Contd…
Cr
it.
Contents
Compliance
Human Resource and Legal Protection
The supervisory authority and its staff
observe the highest professional
standards
have the appropriate levels of skills and
experience have the necessary legal
protection to protect them against law
suits for actions taken in good faith

r
Supervisor has the authority to hire, contract
or retain the services of external specialists
Authority to hire external specialists is implicit in its
general operational powers.
s
Where functions are outsourced, Supervisor
assess their competence, monitor their
performance, and ensure their independence

q



Conditions of service for officers and staff laid in
Regulatory framework
Employees in supervisor’s office governed by
requirements of confidentiality.
Staff of the Supervisor given the status of Public
Servants and are protected from being sued for
actions done in good faith
There is no proposal at present to outsource any of
the supervisory functions.
The function of licensing of agents delegated to
specified officers of insurers with appropriate
safeguards in place
Confidentiality
t
Supervisor maintains appropriate safeguards Information specific to an insurer are treated/kept
for the protection of confidential information in confidential
its possession.
u
External specialists hired by Supervisor are
subject to the same confidentiality and code
of conduct requirements as the staff of the
Supervisory.
External specialists hired by Supervisor are bound by
proper agreements/contracts containing adequate
safeguards on this aspect.
ICP 4: Largely observed
Supervisory process
The supervisory authority conducts its functions in a transparent and
accountable manner.
Status:
Regulations in consultation with industry
Transparent & consistent
Decisions subject to judicial review
Publicly available - hosted on website
Quick decisions in emergent situations
Gaps:

Due to legacy issues relaxations/additional time given to public
sector insurers

Presence of Consultative Committee can lead to delays
ICP 4 Contd…
Crit
.
a.
b.
c.
d.
Contents
Compliance
Supervisor adopts clear,
transparent and consistent
regulatory and supervisory
processes.

Supervisor applies all
regulations and
administrative procedures
consistently and equitably
based on risk profiles of
insurers.
Administrative decisions of
the supervisor can be
subject to substantive
judicial review.
Supervisor makes
information on its role
publicly available.
Properly recorded decisions enable
consistency and equitable treatment

Guidelines issued in consultative
process
Rules, regulations, guidelines etc are
available in the public domain
Currently, Legislation does not provide for
the same
Role of the supervisor is prescribed in
legislation is in public domain
ICP 4 Contd…
Crit.
Contents
Compliance
e.
Structure of decision-making lines 
enable immediate action in case
of an emergency situation

f
Process of appeal on supervisory No mechanism for appeal on the penalties
decisions -specified and balanced imposed by IRDA currently
to preserve independence and
effectiveness
g.
Supervisor publishes a regular
report – at least annually on its
policy, objectives
Supervisor publishes the annual report on an
annual basis.
h.
Supervisor publishes information
about financial situation and
major developments in the
insurance industry.
Supervisor publishes the ‘Annual Report’
with various details
Decisions on major policy issues taken
by the Board of the Authority. Board can
meet at short notice
Also Chairman is authorized to take
emergent decisions
ICP 5: Largely observed
Supervisory cooperation and information sharing:
The supervisory authority cooperates and shares information with other
relevant supervisors subject to confidentiality requirements.
Status:
Sharing
of information with counterparts – both domestic and foreign
Interacts with other supervisors to draw upon their experiences
Cooperation amongst regulators within the country
Home supervisor not required to take specific supervisory action against
foreign establishments
Gaps:


Absence of framework for sharing of information – hindrance to
supervision.
Addressed through: Guidelines for sharing of information
- Confidentiality and reciprocity
- Application for MoU with the IAIS