Reports on Observance of Standards and Codes

Ireland and the IMF

I.  Banking Supervision
II.  Insurance Supervision
III.  Payment Systems
IV.  Securities Supervision
V.  Transparency of Monetary and Financial Policies

SURVEY
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REPORT ON THE OBSERVANCE OF STANDARDS AND CODES (ROSC)
Ireland

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II.  Insurance Supervision

Prepared by a staff team of the International Monetary Fund, on the basis of information provided by the Irish authorities.

Review of IAIS Insurance Supervisory Principles

February 20, 2001

Contents

Executive Summary

  1. Introduction
  2. Review of IAIS Insurance Supervisory Principles
    1. Organization of a Supervisory Body
    2. Licensing and Changes in Control
    3. Corporate Governance
    4. Internal Controls
    5. Prudential Rules
    6. Market Conduct
    7. Monitoring, Inspection and Sanctions
    8. Cross-Border Operations
    9. Supervisory Coordination and Cooperation and Confidentiality
  3. Staff Commentary

Text Table

Table 1. Ireland: Observance of IAIS Insurance Supervisory Principles—Summary Assessment

 

Executive Summary

This report provides an assessment of Ireland’s observance of Insurance Supervisory Principles issued by IAIS. The assessment was undertaken as part of a Financial Sector Assessment Project (FSAP) by an MAE team and a group of peer assessors in the context of the 2000 Article IV consultations with Ireland. The conclusions of this report are based on an initial self assessment of the authorities, supplemented by additional discussions between the team and the authorities.

Ireland observes the basic or necessary criteria underlying the IAIS Core Principles, but it may need to consider more stringent requirements to address the risks that could be inherent in a rapidly growing and increasingly complex insurance sector. The insurance regulator in Ireland is the DETE under the Minister of State for Science, Technology and Commerce. The prudential supervision function is carried out by a unit within the Insurance and Company Law Division of the Ministry. Ireland is strong in areas affecting statutory technical reserves, solvency, and asset management. Ireland’s system of prudential supervision reflects the traditional Anglo/Dutch approach that focuses on solvency rather than market control. It also benefits from the clear EU protocols on exchange of information, confidentiality and licensing. Ireland is becoming a center for the development and management of insurance products for both retail markets and corporate customers in the rest of the EU, largely reflecting the successful creation of the IFSC.

 

I.  Introduction

1.    In connection with the 2000 Article IV consultations, Ireland participated in the Financial Sector Assessment Project (FSAP).1 The assessment of Ireland’s financial system included an assessment of the individual components of the sector, as well as a review of systemic stability, including of potential vulnerabilities that could arise from the interlinkages among different financial sector participants.

2.    The attached document reviews Ireland’s compliance with the International Association of Insurance Supervisory principles (IAIS principles). This assessment is based on the most recent (February 2000) draft of the principles, which focus on prudential supervision, but also address market conduct and cross border issues. Using this broader set of principles provides guidance concerning the necessary criteria to ensure substantial compliance, and indicates which supplementary criteria may need to be applied in deep and more complex markets.2

3.    Ireland has a significant domestic insurance sector and is rapidly becoming a center for the development and management of insurance products for both retail markets and corporate customers in the rest of the EU, largely reflecting the successful creation of the International Financial Services Center (IFSC). At the end of 1998, foreign business amounted to 30 percent of non-life and 29 percent of life insurance sourced in Ireland. Products and services involved include third party management of insurers (and captives in particular), custodial services, product development, specialized direct insurance under the EU “passport provisions” 3and reinsurance.
 

II.  Review of IAIS Insurance Supervisory Principles

A.  Organization of a Supervisory Body

Core Principle 1

4.    The insurance supervisor in Ireland is the Minister for Enterprise, Trade and Employment who is selected from the governing party or coalition. The operational responsibilities of the supervisor are carried out by two sections within the Insurance and Company Law Division of the DETE, which are largely staffed by career civil service officers.     

5.    The Insurance Solvency Section is responsible for prudential matters and administers a legal and regulatory system based largely on the EU insurance directives. There is no significant legal enhancement of the EU requirements; however, an informal monitoring system has been in operation, backed up by extremely strong reserve powers of intervention and formal “whistle blowing” responsibilities for actuaries (in the case of life insurance) and auditors.

6.    The applications of sanctions are affected by prevalence of the Irish Constitution, which provides for guaranteed access to the courts.

B.  Licensing and Changes in Control

Core Principles 2–3

7.    The insurance supervisor (that is the Minister), grants licenses for direct insurance companies subject to satisfactory proof regarding the nature of the business to be undertaken, reinsurance support, the components of the minimum guarantee fund and availability of working capital during the establishment stage. In addition, a three-year business plan must be submitted including forecast balance sheets and the availability of resources to cover policyholder liabilities and solvency margin. The insurer also needs to demonstrate that it possesses the required minimum guarantee fund.

8.    Reinsurance businesses are legally required to register with the registrar of companies but not with the supervisor. They are also required to submit annual accounts according to EU insurance requirements. This is not in line with the approach taken in many leading industrial countries and a number of developing countries, however it is consistent with the approach in some EU and EEA countries. In practice, the registrar advises the supervisor if an application is sought by a reinsurer, before proceeding.

9.    The Minister has sweeping powers to request information at any time and to act according to the nature of this information and has an obligation to ensure continuing compliance with regulatory requirements. In addition, changes in qualifying holdings must be notified to the Minister as must holdings reaching certain trigger points. Companies must report annually on qualifying holdings and the Minister can ask for such information at any time. If the Minister has concerns about a change in qualifying holdings he may apply to the Court for an order to take appropriate remedial action.

C.  Corporate Governance

Core Principle 4

10.   There is a comprehensive protocol within the EU for communication between supervisors and on the spot verification when EU insurers are seeking to operate branches; in broad terms there is a level of mutual reliance. Individual states within the EU deal with non-EU insurance branches operating within their borders and have certain minimum requirements regarding asset holdings in the member states and security deposits in addition to the normal start up requirements of an EU insurer.

D.  Internal Controls

Core Principle 5

11.    The Irish supervisor is most concerned with measures of technical solvency and there has been little issued in the way of guidelines for the internal management of insurers, aside from a requirement to advise the Minister of material transactions with related parties. Reliance lies largely on the professions under “whistle-blowing” requirements and relevant commercial law. The supervisor has issued comprehensive guidelines on statutory returns and requirements for life insurers and is about to for general insurers: these cover some matters relevant to internal controls.

E.  Prudential Rules

Core Principles 6–10

12.    Comprehensive rules regarding investment limits, matching by currency and valuation of investments covering technical provisions exist under the EU insurance regulatory regime and these appear to meet the criteria listed. Prudential standards are currently under review and there is some possibility that allocation requirements will be extended to assets covering solvency, although there are already rules as to which types of assets are eligible for this purpose.

13.    The EU has comprehensive rules for the establishment and reporting of liabilities under both prudential framework and accounting statutory instruments. The approach to technical reserves is to build in safety margins implicitly through assumptions rather than to show a best estimate with a separate provision for expected deviations (unexpected deviations are normally dealt with in the solvency rules), which is more consistent with transparency. In particular, the life insurance rules state that “all contingent and prospective liabilities shall be taken into account but not liabilities in respect of share capital.”

14.    The EU has a well-developed approach to insurer solvency, and this has been subject to ongoing review. It is not as demanding as the North American risk-based capital approach but has the advantage of clarity and, combined with the asset allocation rules, has worked well in a multi-jurisdictional environment with varying levels of professional resources. In practice, the Irish supervisor requires insurers operating out of Ireland to maintain free assets of at least 150 percent of the minimum EU solvency requirement and will intervene if he becomes aware that they have fallen below this level.

15.    The EU rules on derivatives are relatively comprehensive. Analysis of derivative use must be included in the annual statutory returns. Derivative instruments may be used to cover technical reserves (but not solvency margins) subject to the following conditions: (1) the instrument must be listed or, if over-the-counter, must be with an approved credit institution and capable of being closed out readily; (2) the instrument must be for the purpose of efficient portfolio management or reduction in investment risks; (3) the instrument must be held in connection with assets, which are themselves admissible under the asset valuation rules in the regulations; and (4) the instrument must be covered by the insurance company, as far as can reasonably be foreseen, having assets at the settlement date to fulfill its obligations under the instrument.

16.    The Insurance Act, 1989, provides that a pure reinsurance company may not carry on reinsurance business from or at a place of business or an establishment in the State unless it has notified the Minister in such form as the Minister may prescribe that it carries on the business of reinsurance, and files with the register of companies its accounts in such form as the Minister may specify. The form of accounts to be submitted by undertakings carrying on reinsurance business is specified by EU Directives as codified under Irish law.

17.    For direct insurers the supervisor examines reinsurance arrangements at the time an insurer is licensed, and the Minister has power to intervene at any time, including requiring that higher net reserves are held, if he believes that reinsurance arrangements are inadequate. Defined maxima apply to levels of reinsurance, regardless of any reinsurance in excess of this maximum, for reserving purposes. Insurance companies are expected to take responsibility for determining the security of their reinsurers and in the case of non-life insurance nonperforming debtors’ provisions apply in respect to reinsurance intermediaries.

F.  Market Conduct

Core Principle 11

18.    The Insurance Act, 1989, specifies that “Where the Minister considers it necessary in the public interest and following consultation with the insurance industry and consumer representatives, he may by order prescribe codes of conduct to be observed by undertakings in their dealings with proposers of policies of insurance and policyholders renewing policies of insurance in respect of duty of disclosure and warranties.”

G.  Monitoring, Inspection and Sanctions

Core Principles 12–14

19.    The Minister is required to “…take all appropriate measures in order to be satisfied that an insurance undertaking is complying or has the ability to continue to comply with its obligations under the Insurance Acts and Regulations and applicable administrative provisions…”.

20.    Ireland allows other EU supervisors to inspect branches in Ireland and provides relevant information regarding Irish insurers and reciprocity usually applies.

21.    The regulatory ladder for life insurers consists of a series of actions that may be taken if the company is unlikely to meet liabilities or has insufficient solvency, has failed to comply with the Insurance Acts, has inadequate reinsurance arrangements, defaults on the initial approval conditions (including forecasts), or would not satisfy current entry requirements. Actions available include directing the company to refrain from taking on new business for some or all types of contracts; limit premium income; refrain from certain types of investment; realize certain assets within a defined period; retain sufficient assets in Ireland to cover technical reserves; or take such other actions as are specified.

22.    If a company based in another EU state is involved, the supervisor is required to notify the home supervisor. If a company fails to comply with a direction the Minister can apply to the Courts for a suspension or revocation of the company's authorization.

23.    The non-life insurance regulatory ladder is similar to the life approach, however it is more directly concerned with the safekeeping of assets within Ireland and restoration of a sound financial position. Revocation of authority may be sought by the Minister if the company continues to fail to meet the requirements of the Act and regulations.

H.  Cross-Border Operations

Core Principle 15

24.    Ireland supervises domestically based direct insurers and the local branches of non-EU international insurers (but not of international reinsurers). Branches of insurers based in EU countries are assumed to be supervised by their home regulator/supervisor and there is an elaborate concordat for on site inspection of branches in other EU countries. It is not clear that Ireland is in a position to actively supervise offshore branches of Irish-based insurers in practice given the very limited resources of the supervisor.

I.  Supervisory Coordination and Cooperation and Confidentiality

Core Principles 16–17

25.    As a general rule, information obtained by the supervisor is subject to secrecy rules. Information obtained from other financial sector regulators in Ireland or within other EU states is subject to particularly stringent controls and may not be released without the “express consent of the competent authorities which disclosed the information or of the Member State in which on-the-spot verification was carried out.” There are conditions in which domestic information obtained by the supervisor may be shared including court orders in criminal, civil or commercial proceedings (except that potential acquirers may not be identified in the case of wind-ups). Confidential information may only be used to monitor the conduct of the business (reserves, solvency, administrative and accounting procedures and internal control mechanisms), to impose sanctions or in court proceedings.

Table 1. Ireland: Observance of IAIS Insurance Supervisory Principles—Summary Assessment

Category Principle Observance Comments

Organization of a supervisory body

1

Observed

The location of the supervisor within a Ministry means that it is not a fully independent entity.

Licensing and changes in control

2–3

Observed

 

Corporate governance

4

Observed at level of necessary criteria.

There appears to be no specific corporate governance regime for insurers although by law directors have responsibility for statutory instrument requirements. Despite this, the accounting statutory instrument specifically provides directors with an escape clause in the event of negligent misstatement of published accounts.

Internal controls

5

Observed at level of necessary criteria.

There is no formal program in place and limited capacity in practice to direct and monitor the internal control systems of insurers.

Prudential rules

6–10

Observed although at level of necessary criteria for Reinsurance Principle.

Long tail compensation class liabilities should be actuarially monitored under the regulations given the major role of these lines under Ireland’s common law approach. Minimum capital of IR£ 0.5 billion is low by international standards, although it accommodates the important “captive” insurance segment. Reinsurers operating from Ireland are not subject to ongoing supervision, although the supervisor does control entry.

Market conduct

11

Observed subject to passage of impending legislation.

The Insurance Bill, 1999 satisfies most market conduct criteria and transfers responsibility for insurance intermediaries to the CBI. An internal report recommends that all market conduct supervision should be subsequently transferred to a stand alone Single Regulatory Authority.

Monitoring, inspection and sanctions

12–14

Observed at necessary level.

Statutory reporting is only required annually, which does not breach the relevant criteria but is less than best practice in most industrial countries with a large number of operators. There are no standards for the setting of life and long tail non-life technical reserves for financial reporting purposes, although most of the larger firms do use U.K. actuarial standards. Financial condition reports for life insurers are not mandatory. There are limited resources to carry out a formal inspection program. Ireland has been dependent on annual returns, the whistle-blowing responsibilities of the actuary and auditor, informal information flows and strong solvency to identify and contain risk.

Cross-border operations

15

Observed

 

Supervisory coordination and cooperation, and confidentiality

16–17

Observed

 

III.  Staff Commentary

26.    Ireland observes the basic or necessary criteria underlying the IAIS Core Principles, but it may need to consider more stringent requirements to cover the risks inherent in a rapidly growing and increasingly complex insurance sector. However, Ireland’s system of prudential supervision reflects the traditional Anglo/Dutch approach that focuses on solvency rather than market control. Ireland is strong in areas affecting statutory technical reserves, solvency, and asset management. It also benefits from the clear EU protocols on exchange of information, confidentiality and licensing. Ireland is becoming a center for the development and management of insurance products for both retail markets and corporate customers in the rest of the EU, largely reflecting the successful creation of the IFSC.

27.    The principle-by-principles assessment found:

  • Regarding the organization of the supervisory body, the location of the supervisor within a Ministry means that it is not a fully independent entity; however, the civil service rules in Ireland provide for necessary protections and accountabilities in practice. In addition, an internal report has recommended that insurance prudential supervision be handled by an independent single financial sector regulator.

  • On licensing and changes in control, companies wishing to underwrite insurance in the domestic insurance market must be licensed. The insurance supervisor reviews changes in the control of companies that are licensed in the jurisdiction.

  • As to corporate governance, there appears to be no specific corporate governance regime for insurers although directors are responsible for the implementation of the various EU directive requirements. However, the accounting statutory instrument specifically provides directors with an escape clause in the event of negligent misstatement of published accounts.

  • On internal controls, there is no formal program and limited capacity to direct and monitor the internal control systems of insurers.

  • Concerning prudential rules, there is some question as to whether the reinsurance principle would be observed at the level of additional criteria under the latest draft of the Core Principles Methodology. Non-life compensation class liabilities, which are actuarially monitored in some similarly developed markets, are still subject to case-based reserving methodologies. Minimum capital of IR£0.5 million is low by international standards, although it accommodates the prevailing “captive” insurance sector. Reinsurers operating from Ireland are not supervised, although the supervisor does effectively control entry.

  • As to market conduct, subject to passage of the Insurance Bill, 1999, Ireland will observe the principle.

  • On monitoring, inspection, and sanctions, the principles are observed at the level of necessary criteria. However, statutory reporting is only required annually, which does not breach the relevant standard but is below best practice in most countries with a large number of operators. There are no standards for the setting of life and long tail non-life technical reserves for financial reporting purposes, although most of the larger firms do use U.K. actuarial standards. There are limited resources to carry out a formal inspection program. Ireland has been dependent on annual returns, the whistle-blowing responsibilities of the actuary and auditor, informal information flows and strong solvency to identify and contain risk. A number of countries at Ireland’s level of development require that the appointed actuary prepare an annual financial condition report for the board of directors and the supervisor, at least for life insurers.

  • With respect to cross-border operations, no relevant foreign insurance establishments escape supervision. There is consultation between host and home supervisors. Foreign insurers providing insurance cover on a cross-border service basis are subject to effective supervision.

  • On supervisory coordination and cooperation, and confidentiality, the supervisor is able to enter into an agreement or understanding with any other supervisor both in other jurisdictions and in other sections of the industry.

28.    Overall, Ireland is, hence, in substantial compliance with the Insurance Supervisory Principles at the level of necessary criteria, not least because it has the benefit of a capable and committed, although under-resourced supervisory group. The major possible exception to this is the area of reinsurance where the Principle is still subject to clarification, but where there is a developing policy stance that at least some supervisory oversight should occur. In terms of the supplementary criteria, the main issues (other than reinsurance) are those identified in the self-assessment, governance and internal controls, and issues arising from resource constraints such as frequency of on-site inspections, monitoring of foreign operations of Irish insurers and market conduct monitoring. In addition, the current sanctions system, which very much reflects Irish sensibilities and legal practice, may need to become more formal and transparent. Most of these issues had already been identified and reforms proposed at the time of the mission.


1 The assessment was undertaken by the International Monetary Fund in connection with a Financial Sector Assessment Project (FSAP) mission. The team was led by Tomás J. T. Baliño and, for insurance supervision, included Anne-Marie Gulde, Angeliki Kourelis, and Armando Morales (all MAE), Rodney Lester (World Bank), Natalia Koliadina (EU1), and other EU1 staff.

2 This draft varies from the published (1997) principles in a number of ways, including the addition of three new principles ( Organization, Market Conduct and Concordat). In addition, a methodology for the use of the Core Principles in assessments is currently being developed.

3 The “passport provision” refers to the ability of enterprises to sell products and services within the EU without having to go through formal registration or approval processes other than in their home countries.

 

I. Banking Supervision        Ireland ROSC         III. Payment Systems

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