Reports on Observance of Standards and Codes
1. The description that follows examines financial policy transparency in the area of insurance supervision in Bulgaria. The first section covers the broad principles underlying the IMF’s Code of Good Practices on Transparency in Monetary and Financial Policies (available on the IMF web site at http://www.imf.org/external/np/mae/mft/code/index.htm). The Code identifies desirable transparency practices for insurance supervisors in their conduct of insurance supervision. Following the Code, this chapter reviews: clarity of the roles, responsibilities, and objectives of the agencies implementing regulation and supervision of the insurance industry; the processes for formulating and reporting policies for them; public availability of information on such policies; and the accountability and assurances of integrity by the insurance regulators. The second section provides a summary of the authorities’ views on the extent to which domestic practices are consistent with existing international standards.
2. Transparency by the National Insurance Council (NIC) and the Insurance Surveillance Directorate (ISD), particularly in clarifying their objectives, should contribute to policy effectiveness by enabling financial market participants to assess better the context of insurance supervision, thereby reducing uncertainty in the decision making of market participants. Moreover, by enabling market participants and the general public to understand and evaluate insurance supervision policies, transparency is likely to be conducive to good policymaking. This can help to promote financial as well as systemic stability. Transparent descriptions of the policy formulation process provide the public with an understanding of the rules of the game. The release of adequate information to the public on the activities of insurance supervisors provides an additional mechanism for enhancing the credibility of their actions. There may also be circumstances when public accountability of decisions by supervisors can reduce the potential for moral hazard.
Clarity of roles, responsibilities, and objectives
3. The institutional framework is defined in the Insurance Business Act (IBA) and in the implementing regulations. The objectives of the NIC and ISD, as defined in the IBA and the implementing regulations, are to promote “financial stability, market and systemic stability, competitive and fair markets, client asset protection, and enforcement of laws and regulations.” Moreover, the “ISD supervises the activities of insurers in conformance with the law and advises the NIC on granting and terminating licenses, merging, consolidating, dividing, or transferring portfolios of insurance companies; initiates insolvency procedures; takes prudential measures against undercapitalized and illiquid insurers; appoints conservators and keeps a register of licenses granted; and approves or disapproves rehabilitation plans.” These objectives have been revealed in the legislation, written reports to the legislature and other public bodies, public appearances before the legislature, the Annual reports, press releases to the media, and publication in the Official Gazette.
4. The ISD’s and NIC’s relationships with the MOF and COM are specified in the Act. The NIC comprises the Minister of Finance, who acts as Chairperson; three other ministers; the Director of the ISD; a representative of the Insurers’ Association; and an academic expert in insurance. The NIC, which is not a politically independent body, has the power to grant and revoke licenses to conduct insurance business in Bulgaria and to authorize merger or to initiate insolvency proceedings. The relationship between the NIC and the ISD is not clearly specified in the law. The ISD is a juristic person within the MOF, and its Director is appointed and dismissed by the Prime Minister (PM) on the recommendation of the NIC, and its budget is controlled by the MOF. Procedures for appointment to the ISD and the terms of the office are defined in the IBA and the ordinance. Only one ground for removal is laid out in the IBA (releasing confidential data), while other grounds (premeditated crime or prolonged incapacity) are specified in the Regulation on the Structure and Operation of the Insurance Supervision Directorate. There are no legal protections for officials and staff in the conduct of their official duties.
5. The relationships of these institutions with BNB, the MOF, and the Ministry of Justice and Legal Euro Integration are specified in regulation and have been publicly disclosed in the State Gazette. The ISD maintains a department for international cooperation and officials have stated that they maintain close cooperation with the MOF and the BNB, and particularly its banking supervision department. Such cooperation is essential as insurance companies are permitted under Bulgarian law to own up to 99 percent of the shares of commercial banks and, while banks cannot own insurance companies outright, they can own shares in insurance companies. In addition, the agency officials report that they maintain close contact with international supervisory bodies.
Open process for formulating and reporting policies
6. The ISD’s operating procedures are specified in law and regulation and have been reported in public appearances before the legislature, the State Gazette, and press releases. The regulations for financial reporting by financial institutions to the ISD have been publicly disclosed in the IBA, where insurers are required to report annual balance sheets to the ISD within four months of the end of the reporting period. Insurers also are required to release their annual reports in at least two national newspapers. The Act requires insurers to obtain audits of their accounts by at least 2 certified public accountants and mandates that these independent auditors report material breaches of regulations to the ISD. The Act also specifies the documents that must be submitted in order to obtain a license. The ISD in turn is required to disclose the terms of fees that it charges to financial institutions and the public. The IBA specifies the types of fees that the ISD may charge, and regulations provide greater detail. The schedule of charges has been approved by the COM and published in the State Gazette.
7. While not specified in the IBA law or the regulations reviewed by the staff, ISD officials report that they utilize written reports to and public appearances before Parliament, the Annual Report, State Gazette and press releases to disclose information on changes in regulations immediately after a decision is made.2
Public availability of information on policies
8. Under the IBA, the ISD reports only to the NIC and MOF. However, Directorate officials state that they will soon issue the first annual report that will describe its activities and the condition of the insurance markets. In addition, the monthly newspaper, The Insurer, carries such information. Moreover, ISD officials make written reports to, and public appearances before, the legislature, and provide press releases. To conduct its publication program, the ISD maintains a Publications Department. The publications are provided free of charge. The ISD submits its budget to the MOF monthly and to the legislature in writing.
9. The ISD has an obligation to provide aggregate data that relate to its jurisdictional responsibilities. It fulfils this obligation monthly in the Insurer newspaper and annually in its Annual Report. It also reports in writing to, and via public appearance before, the legislature, in the State Gazette, and through press releases. The ISD maintains a register of licensed insurers. This register contains very detailed information and, consequently, is not published. However, a list of licensed insurers is kept and is available to anyone who requests it at the ISD’s office in Sofia, or will be sent in response to a request received by phone or fax. In addition, a list of licensed insurers has been published in local newspapers and in one German paper. In addition, this list will be published in the forthcoming Annual Report.
10. The texts of legislation and regulations are readily available to the public through the State Gazette and Annual Report. Applicable directives are published in the State Gazette. In addition, all guidelines are sent directly to licensed insurance companies. They are not published, but agency officials stated that they would be published in newspapers if the public showed an interest in them. Minutes of NIC meetings are maintained and relevant sections are sent to the insurers who are affected by the decisions that have been taken. In addition, summaries of the minutes are released to the media.
11. Guarantees and consumer protection arrangements are publicly available. A system of guarantees for holders of accident policies was promised in the IBA, and a Guarantee Fund was founded and made operational in 1997. In particular, the IBA states that “a Guarantee Fund shall be set up to pay third party accident insurance where the perpetrator cannot be found or is uninsured.” In addition, the ISD has, and has publicly disclosed, its consumer protection arrangements. Beyond the guarantee noted above, consumer protection arrangements are not provided. There are, however, provisions for insurers to appeal adverse decisions under the Administrative Procedures Act. In addition, agency officials stated that there are provisions for disagreements between policyholders and their insurer to be submitted to the ISD for adjudication.
12. The ISD sends its financial statements to the MOF and has not yet published them itself. However, the agency’s financial statements can be found in the section on the MOF in the Government’s financial statements. The ISD sends its financial statements to the National Audit Office and does not utilize the services of independent auditors. Accounting policies and qualifications to the accounts are disclosed.
Accountability and assurances of integrity
13. The modalities of the two agencies’ accountability have been publicly defined in legislation, which allows appeal under the Administrative Procedures Act against the NIC’s decisions, and requires the ISD to report to the MOF. The officials are not required to appear before a designated public authority. The insurance supervisor is responsible to the MOF, who would presumably take this responsibility. However, the Director of the ISD is available to appear before the legislature to explain the ISD’s objectives and performance and to exchange views on the condition of the financial system.
14. The ISD does not have the internal governance procedures and internal audit arrangements that are necessary to ensure the integrity of its operations. Moreover, there is no code of good conduct. However, the IBA forbids disclosing confidential information except in approved circumstances. Breaching this requirement could presumably be grounds for dismissal.
15. The ISD is making determined progress toward achieving transparency in insurance regulation in Bulgaria. Nevertheless, further improvements would be welcome:
16. ISD has been a member of the International Association of Insurance Supervisors (IAIS) since October 1998. Officials state that they have no fundamental disagreements with international best practices, and the NCI and ISD are becoming actively acquainted with the recommendations for best practices specified by the IAIS as well as by the OECD. Despite its relatively recent membership, experts from ISD are already participating in three subcommittees of the IAIS, on accounting standards and the insurance laws and by-law legislation within the Technical Committee of the IAIS.
17. Bulgaria is in the process of adopting IAIS standards, including through various amendments to the Insurance Act currently under consideration by the parliament. Existing laws are also being updated to comply with the European Union standards in this area, which are similar to the IAIS recommendations. These amendments will bring Bulgaria into almost complete compliance with the IAIS standards for insurance markets. In particular, the frequency and standards of supervision of the insurance industry, as well as the penalties and sanctions for non-compliance with supervision standards, will comply with the standards established by the IAIS in these areas. The only IAIS standard that is not included in the present revisions is the Supervisory Standard on Derivatives. This was judged unnecessary as Bulgaria does not yet have an active market on derivatives. The adoption of the IAIS model Memorandum of Understanding on Exchange of Information with Other Countries is part of the proposed new law on amending and supplementing the Insurance Act. Bulgaria has not conducted a self-assessment of its observance of the IAIS Insurance Supervisory Principles, mainly because it has no legal basis for doing so. Officials expect that these few differences between Bulgarian standards for insurance markets and international standards would remain as they reflect specific characteristics of the Bulgarian markets.
Enforcement of standards
18. In enforcing the Insurance Act, the ISD applies IAIS standards with regard to the frequency of supervision as well as penalties and sanctions. The ISD has the right to (i) impose measures to improve the financial status of inadequately capitalized insurers; (ii) oblige an insurer to increase his capital; (iii) recommend to insurers measures to redress violations of legal acts and by-laws in the insurance sector; and (iv) take decisions on other issues related to the supervision of the insurance industry.
1 Prepared by Mr. Kähkönen and Mr. Feyzioğlu (both European I Department) and a team from the Monetary and Exchange Affairs Department of the IMF led by Mr. Coats, in consultation with the Bulgarian authorities. In preparing this chapter, IMF staff held discussions with officials of the Insurance Supervision Directorate (who completed a transparency questionnaire), the State Insurance Institute, the National Accountancy Department of the Ministry of Finance, and representatives of accounting firms. IMF staff also consulted the Law on the Bulgarian National Bank; the Law on Banks; the Insurance Business Act, the Ordinance for the Establishment and Organization of the Insurance Supervision Directorate, the Ordinance for the Establishment of the National Insurance Council, the Regulation on the Allocation of Insurance Reserve, Decree No. 19 on the Enactment of an Ordinance Regulating the Procedures and Methods of Setting up an Insurance Reserve, and the Regulation for Determining the Own Resources, Solvency Margin, and Its Calculation by Insurers.
2 While the ISD does not have a web site, insurance legislation is made available on the government’s web site.
3 This section represents a summary of the authorities’ description of practices in this area. No attempt has been made to provide an independent assessment of observance of standards in this area.