Insurance Regulators in Various Countries
Insurance Industry
Authors
The NAIC, USA
The National Association of Insurance Commissioners (NAIC) is the organization of insurance regulators from the 50 states, the District of Columbia and the five U.S. territories. The NAIC provides a forum for the development of uniform policy when uniformity is appropriate.
A state regulator's primary responsibility is to protect the interests of insurance consumers, and the NAIC helps regulators fulfill that obligation. That assistance is related to the regulators' shared objectives of financial and market conduct regulation.
State insurance regulators created the NAIC in 1871 to address the need to coordinate regulation of multistate insurers. The first major step in that process was the development of uniform financial reporting by insurance companies. Since then, new legislative concepts, new levels of expertise in data collection and delivery, and a commitment to even greater technological capability have moved the NAIC forward into its role as a multidimensional, regulatory support organization.
Financial Services Authority (FSA), UK
The Financial Services Authority (FSA) is an independent non-governmental body, given statutory powers by the Financial Services and Markets Act 2000. It is a company limited by guarantee and financed by the financial services industry. The Treasury appoints the FSA Board, which currently consists of a Chairman, a Chief Executive Officer, three Managing Directors, and 9 non-executive directors (including a lead non-executive member, the Deputy Chairman). This Board sets their overall policy, but day-to-day decisions and management of the staff are the responsibility of the Executive.
FSA follows a risk based approach to regulation called ARROW, which stands for the Advanced, Risk-Responsive, Operating frameWork. It is more commonly associated (outside the FSA) with the risk-assessment work which is carried out in firms. FSA uses ARROW to determine the risks a firm poses to the four statutory objectives:
- Maintaining market confidence
- Consumer protection
- Promoting public awareness
- Reducing the incidence of financial crime
Their approach to risk management is the same for any risk faced. FSA assesses impact (the ‘regulatory footprint’ or how important the firm (issue) is to the FSA) and probability (the likelihood that the risk will occur (or crystallise)).
In their firm assessment work, impact acts as a filter and determines – to quite a significant effect - the overall intensity of the risk assessment work and supervision. Under ARROW, they use four basic approaches to firm risk assessment work and the impact of a firm largely determines which approach is used.
The method used to calculate impact varies according to the firm’s sector, so that they make use of the most appropriate method of determining the regulatory footprint. So, for so-called ‘flow-business’ they use a measure relating to transaction volumes, whereas for a stock business a balance sheet figure is used.
After determining the impact of a firm, they assess the probability of that firm causing to fail FSA to meet their statutory objectives.
The approach based on the impact of the firm
To assess probability a high-level schematic of a firm is used which groups the assessment under ten headings. These headings capture the essential components of a firm that are of interest to FSA. This covers the inherent risks a firm chooses to take when determining its business model and how it controls those risks, both in a direct way and through the secondary controls it puts in place. When making assessment, FSA uses a simple four-point scale to rate each of the ten risk groups:
- High
- Medium High
- Medium Low
- Low
This model then aggregates risk in two directions: horizontally and vertically. Taking the vertical first, risk is summarised under three categories and is taken to be the average of the assessment of risk groups.
The on-site visit
A key part of the ARROW assessment work is the on-site visit. At this stage in the process, the firm would have been given a notice that FSA will be carrying out a risk assessment. FSA would also have sent them a request for information such as Board minutes, key management information and strategy documents. This type of information helps them to plan on-site visits and, in particular, decide whom to interview. These interviews help them to fill in any information gaps or follow up on any issues that may have emerged during the assessment work.
Post-visit
Once on-site visit is completed, the FSA’s team completes their evaluation of the firm. This includes an assessment of probability (against the model described earlier in this guide) and the design of a Risk Mitigation Programme (RMP) for the firm.
Financial Supervisory Agency (FSA), Japan
The FSA is responsible for ensuring stability of Japan’s financial system, protection of depositors, insurance policyholders and securities investors, and smooth finance through such measures as planning and policymaking concerning the financial system, inspection and supervision of private sector financial institutions, and surveillance of securities transactions. The FSA thereby plays extremely important roles for the sound development of the national economy.
FSA comprises of:
- Planning and Co-ordination Bureau
- Inspection Bureau
- Supervisory Bureau
- Securities and Exchange Surveillance Commission
- Certified Public Accountants and Auditing Oversight Board
The Inspection Manual by FSA has the following salient points
- Categorization of Risk
- Focus on Compliance
- Process Oriented inspection
- Framework and process of control: policy, procedure, manual, organization, staffing etc
- Implementation of the framework
- Results and performance of the implementation: losses, increase in risks, frauds, damages etc
- Inspector’s Review
- Whether top management understands the existence and nature of risks?
- Whether top management allocates necessary resources to mitigate risks?
- Whether top management puts effective internal controls in place?
- Effective communication between offsite and onsite inspection teams
China Insurance Regulatory Commission (CIRC), China
- CIRC objectives include:
- Measures to boost the Industry
- Measures to Strengthen Risk Prevention (Inspection)
- Risk Prevention
- Considers Risk prevention as a project of systemic engineering
- 5 Lines of defense against Risk
- Internal Control – …as the basis
- Supervision of solvency adequacy - …as the core
- Onsite inspection - …as the front line
- Fund management - …as a key link
- Insurance security fund - …as a protective screen
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