## cr17338

## Source details

**Canonical URL:** [cr17338](https://www.imf.org/-/media/files/publications/cr/2017/cr17338.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/cr/2017/cr17338.pdf.md)
- [Structured JSON version](/-/media/files/publications/cr/2017/cr17338.pdf.json)

---

### Executive summary — scope and context
- Technical Note updates on the Spanish insurance sector and analyzes regulatory and supervisory regime as part of the 2017 Financial Sector Assessment Program (FSAP).
- Prepared by Stuart Wason (IMF Expert) and Apostolos Apostolou (IMF) based on discussions in Spain from March 3 to 17, 2017.
- References: Insurance Core Principles (ICPs) (IAIS, October 2011, revised October 2013) and results of the 2016 EIOPA stress testing.
- Focus areas:
  - life-insurance vulnerabilities from the continuing low interest rate environment;
  - preparations for Solvency II (took effect in full on January 1, 2016);
  - supervisory oversight architecture in Spain, with DGSFP as an important member.
- Selected ICPs analyzed: governance, solvency requirements, supervisory approach, cross-border cooperation (no new scoring of observance).

### Institutional and supervisory framework
- Structure:
  - Banco de España (BdE) — banking supervision.
  - Comisión Nacional del Mercado de Valores (CNMV) — securities.
  - Dirección General de Seguros y Fondos de Pensiones (DGSFP) — insurance and pensions.
- Key legislation and instruments:
  - Ley 20/2015 (LOSSEAR) and Real Decreto 1060/2015 (RDOSSEAR) transposing Solvency II level-one requirements.
  - Commission Delegated Regulation (EU) 2015/35 (amended by (EU) 2016/467) and Implementing Technical Standards/Regulatory Technical Standards.
  - Ley 26/2006 (LMSP) — Private Insurance Intermediation Law.
  - Ley 50/1980 — Insurance Contract Law.
- DGSFP status and funding:
  - DGSFP is a department within the Ministry of Economy, Industry and Competitiveness (MdE); supervision delegated to DGSFP.
  - DGSFP is organically dependent on MdE; no autonomy in setting its budget or hiring staff.
  - 2016 operating budget: €15.6 million; required 2017 reduction: €1 million.
  - DGSFP does not levy ongoing industry fees; registration fees and administrative fines are passed to the Treasury.
  - 2015 registration fees collected: €.  6 million.

### Market structure, concentration, and group supervision
- Market size and penetration:
  - Sixth largest insurance market in Europe.
  - Gross premium income 2015: €55.3 billion (US$61.3 billion), a 3 percent increase from 2014.
  - Insurance density (premium per capita) 2015: US$1,322.
  - Insurance penetration 2015: 5.6 percent.
  - European comparator averages: density US$1,634; penetration 6.9 percent.
- Premium and GDP series (selected):
  - Gross Written Premium (GWP-€ Mill): 2011: 64,049; 2012: 60,822; 2013: 59,862; 2014: 59,603; 2015: 61,110.
  - GDP (€Mill): 2011: 1,073,413; 2012: 1,039,758; 2013: 1,025,634; 2014: 1,037,025; 2015: 1,075,639.
  - GWP / GDP (in %): 2011: 5.98; 2012: 5.85; 2013: 5.84; 2014: 5,75; 2015: 5,68.
  - Premium / Population: 2011: 1,368; 2012: 1,301; 2013: 1,287; 2014: 1,283; 2015: 1.,316.
- Market concentration and bancassurance:
  - Six of the top 10 insurers are domestic and owned by Spain’s banks.
  - Top five insurers by assets comprise 53 percent of assets of all insurers.
  - Top five life insurers commanded 59 percent of the life market (by assets) in 2015.
  - Top five non-life insurers commanded 24 percent of the non-life market (by premium) in 2015.
  - Bancassurance: bank-owned life insurers receive 70 percent of their new business from bancassurance (2015 distribution of new business premium for life: Bancassurance 69.97%; Agents 15.97%; Brokers 7.24%; Direct Sales 6.87%; Internet 0.02%; Others 0.22%).
- Group supervision:
  - DGSFP is member of supervisory colleges for 29 EU insurance groups; group-wide supervisor for 3 (MAPFRE, Catalana, Liberty).
  - MAPFRE identified as an IAIG.
  - DGSFP supervises 43 insurance groups operating only in Spain.
  - Four Spanish insurance groups classed as financial conglomerates by EU Joint Committee: BBVA, Banco Santander, Ibercaja, Criteria.

### Assets, investments, and concentration risks
- Industry assets (selected):
  - Total assets end-2015: €303.9 billion (28.2 percent of GDP).
  - Assets related to life insurance business accounted for 80 of total industry assets (textual percentage preserved as in source).
  - Composite insurers (59) accounted for 80 percent of total industry assets.
  - Top 10 insurers by assets accounted for 55 percent of total industry assets.
- Asset split (Table 8, € billions and % share where provided):
  - Life insurers: 2015: 29.1 (% Share of Total 9.6).
  - Non-life insurers: 2015: 25.7 (% Share of Total 8.5).
  - Composite insurers: 2015: 242.8 (79.9).
  - Reinsurers: 2015: 6.3 (2.0).
  - Total: 2015: 303.9 (100.0).
  - % of nominal GDP: 2015: 28.2.
- Investment profile (selected asset classes, end-2015, Composite and by line):
  - Government securities: Composite 113.60 € bn (46.8 percent); Life 13.03 € bn (44.9 percent); Non-Life 4.69 € bn (18.3 percent).
  - Corporate securities: Composite 51.69 € bn (21.3 percent); Life 6.78 € bn (23.3 percent); Non-Life 3.44 € bn (13.4 percent).
  - Equities: Composite 17.90 € bn (7.4 percent); Life 1.35 € bn (4.6 percent); Non-Life 4.36 € bn (17.0 percent).
  - Investments supporting unit-linked: Composite 11.37 € bn (4.7 percent); Life 3.01 € bn (10.4 percent).
  - Cash: Composite 20.03 € bn (8.2 percent); Life 0.94 € bn (3.2 percent); Non-Life 1.79 € bn (7.0 percent).
  - Other assets: Composite 9.11 € bn (3.7 percent); Life 3.00 € bn (10.3 percent); Non-Life 3.02 € bn (11.8 percent).
- Concentration and related-party exposures:
  - Holdings in government securities around 44 percent of invested assets (up from 23 percent in 2010).
  - Corporate securities around 21 percent of invested assets (down from 32 percent in 2010).
  - 46 percent of corporate securities held by composite insurers were issued by banks; comparable ratio for life and non-life insurers about 30 percent.
  - Total intra-group and related company receivables around five percent of investments supporting technical provisions.
  - At end-4Q2016 insurer assets sourced by banks: 86,186 million € (about 30 percent of all insurer assets).

### Profitability, solvency, and regulatory coverage
- Profitability and key financials (2015):
  - Gross premium: Composite 38.2 € billions; Life Only 3.7 € billions; Non-Life Only 15.0 € billions; Total 56.9 € billions.
  - Net premium: Composite 36.2 € billions; Life Only 3.6 € billions; Non-Life Only 12.9 € billions; Total 52.6 € billions.
  - Assets: Composite 242.8 € billions; Life Only 29.1 € billions; Non-Life Only 25.7 € billions; Total 297.5 € billions.
  - Liabilities: Composite 213.9 € billions; Life Only 26.0 € billions; Non-Life Only 16.9 € billions; Total 256.8 € billions.
  - Excess of assets over liabilities: Composite 28.9 € billions; Life Only 3.0 € billions; Non-Life Only 8.7 € billions; Total 40.7 € billions.
  - P&L: Composite 2.33 € billions; Life Only 0.27 € billions; Non-Life Only 0.89 € billions; Total 3.49 € billions.
  - ROE (in %): Composite 9.63 percent; Life Only 11.72 percent; Non-Life Only 11.29 percent; Total 10.16 percent.
- Solvency (comparative Solvency I and SII figures):
  - Under Solvency I average solvency margins:
    - Life sector: around 200 percent above required capital.
    - Non-life sector: around 350 percent above required capital.
  - Table 11 (Available capital resources over requirements, € million):
    - Available capital over MCR:
      - Life: 632 (2014 SI), 634 (2015 SI), 530.8 (2015 SII).
      - Non-life: 1075 (2014 SI), 1060 (2015 SI), 552.2 (2015 SII).
    - Available capital over SCR:
      - Life: 223.8 (2014 SI), 221.3 (2015 SI), 203.3 (2015 SII).
      - Non-life: 402.3 (2014 SI), 403.3 (2015 SI), 223.6 (2015 SII).
  - EIOPA QIS5 / Solvency II (end-2015) results:
    - Baseline SCR for Spain with buffering: 192 percent.
    - Baseline SCR for Spain without buffering: 110 percent.
    - As of end-2015, only one small insurer in process of liquidation had an SCR ratio below 100 percent.

### EIOPA 2016 stress tests and interest rate risk
- Participation: 17 Spanish insurance undertakings representing 82 percent market share.
- Two stress scenarios:
  - Low for long (LY).
  - Double hit (DH) — included increased credit spreads and asset shocks.
- Key stress-test outcomes:
  - DH scenario had a more severe impact than LY on excess of assets over liabilities.
  - Use of buffering adjustments (LTG measures) significantly reduced adverse impact of DH and, to a lesser extent, LY.
  - Spanish liabilities Macaulay duration: 10.1.
  - AoL (assets over liabilities) ratio for Spain:
    - Baseline: 111 percent.
    - DH scenario (with buffering): fell by just over 2 percent from baseline.
    - LY scenario (with buffering): fell by less than 1 percent from baseline.
    - DH scenario (excluding buffering): AoL ratio worsened to about 90 percent.
- Insurer-level conclusions:
  - Better asset/liability cash flow matching reduces sensitivity to interest rate risk.
  - Insurers using the Matching Adjustment (MA) often apply it only for a portion of their business.
  - Direction of SCR volatility under stress depends on the mismatch position (assets longer or shorter than liabilities).
  - Most insurers would benefit from improved asset/liability cash flow matching.

### Long-Term Guarantee (LTG) Measures under Solvency II
- Transitional measure for technical provisions:
  - Insurer can spread the increase in capital (S II over S I) over 16 years upon application.
- Matching adjustment (MA):
  - Subject to strict conditions and monitoring; yield adjustment for matched asset/liability portfolio portion.
  - Fifteen Spanish life insurers use the MA.
  - The only other EU country to use the MA is the UK.
- Volatility adjustment (VA):
  - Can be used by any insurer without supervisory approval for blocks not subject to the MA.
  - Adjusts for spread above risk free rates to partially acknowledge higher discount assumptions for technical provisions.

### Insurance Compensation Consortium (CCS) and policyholder protection
- No statutory insurance guarantee schemes (IGS) for life or non-life insurance in Spain.
- CCS functions and features:
  - Provides a form of policyholder protection scheme (PPS) and plays an important role in insurer insolvencies.
  - Can acquire insurance contract creditors’ balances at creditors’ option without waiting for Creditors’ Meeting at a percentage higher than likely in ordinary liquidation.
  - After being entrusted to liquidate an insolvent insurer, CCS has nine months to hold the CCS Board meeting to decide on purchase of insurance contract credits and protection percentage; CCS then sends offers to policyholders and retains them until creditors meeting.
  - Winding up funding sources include:
    - Ex-ante compulsory tax levied on non-life policyholders of 1.5 per thousands of premiums (except Export Credits Policies).
    - Return on investments.
    - Recoveries from the Winding-Up Plan.
  - CCS end-2015 reserve fund: €9.5 billion (of which €1.9 is for winding up activities).
  - CCS staff strength: 312.
  - CCS Board of Directors: 14 members; chaired by the Director General of the DGSFP.
  - CCS functions: (i) permanent insurance functions; (ii) other insurance functions as required; (iii) non-insurance functions—winding-up of insurers.
- Recommendation: DGSFP and relevant authorities should consider whether life insurance policyholders should be afforded specific coverage guarantees in the event of insolvency; CCS, non-life insurers and authorities should study optimal size of catastrophic risk buffer including possible corridor limits.

### Pensions — market and risks
- Private pension plan market (At December 31, 2015):
  - Defined Benefit: Number of plans 12; Assets 0.5 € billions.
  - Defined Contribution: Number of plans 2,390; Assets 77.1 € billions.
  - HYBRID: Number of plans 455; Assets 26.4 € billions.
  - TOTAL: Number of plans 2,857; Assets 104.0 € billions.
- Pension fund asset allocation (3T 2016):
  - Debt securities: 57.41 percent (of which Spanish sovereign 27.02 percent; other sovereign 11.71 percent; private 18.68 percent).
  - UCITS: 17.80 percent.
  - Equity securities: 11.40 percent.
  - Deposits: 12.67 percent.
- Main pension-sector challenges:
  - (i) Low interest rates — impacts defined benefit sponsor support and defined contribution retirement adequacy.
  - (ii) Need for access to new investments for long-term guarantee, security, liquidity and diversification.
  - (iii) Longevity — need to provide for continued improvements.
  - (iv) Technological — need to respond to new technologies in financial markets.
- Supervisory notes:
  - All private pension plans supervised by DGSFP.
  - Majority are Defined Contribution — low risk of plan insolvency for most plans.

### Supervisory effectiveness, processes, and capability gaps
- Progress since 2012:
  - 2012 FSAP: high degree of compliance with 16 of the 2011 IAIS ICPs; 10 others needed improvement.
  - Significant progress made; Solvency II implementation addressed many recommendations.
  - Government intends to create an independent insurance supervisor.
- Supervisory tools and processes:
  - Off-site supervision uses financial data filings, Solvency II returns, and DGSFP’s supervisory Risk Assessment Framework (RAF).
  - Inspections Department screens database to identify risk indicators.
  - Tools include Excel-based database, data warehouse, web portals for supervisory colleges, and risk mapping tool.
  - Risk mapping currently two-dimension (impact and risk); recommendation to evolve to more sophisticated scoring capturing asset, technical provision, profit and SCR trends.
- On-site inspections and corrective measures:
  - On-site supervision with protocols; Corrective Measures Department enforces ordered actions.
  - Communication protocols in place with CCS for insurer dissolution scenarios.
- Market conduct and complaints:
  - Complaints Department staff: 22.
  - Complaints handled: 2013: 12,457; 2014: 11,026; 2015: 10,396.
  - Market conduct supervision within two departments totaling about 17 staff; recommendation to consider combining market conduct activities into one Directorate.
- Staffing and resources:
  - DGSFP staff total at time of FSAP: 193 persons.
  - Understaffed, turnover issues, difficulty hiring due to budget and private sector competition.
  - Departments needing additional staff: group supervision; review of judgement-based technical material (ORSA, technical provisions, control functions); participation in IAIS and EIOPA committees.
- Cultural and methodological observations:
  - Supervisory culture perceived as reactive or compliance-focused.
  - With Solvency II, need for keener review of market-consistent valuation, judgement-based methods, actuarial assumptions, ORSA and governance.
  - DGSFP staff tend to focus on SCR/MCR metrics rather than underlying risks, strategies, distribution, product design, investments, matching and risk management.
  - Recommendation: shift supervisory focus toward qualitative as well as quantitative review and greater engagement with insurer boards and technical experts.

### Main recommendations (prioritized/high-level)
- Asset/liability matching:
  - High priority: More supervisory focus on insurers to improve asset/liability cash flow matching regardless of MA use.
  - Insurers should review Board approved policies dealing with asset/liability matching.
- Skills and supervisory approach:
  - High priority: Shift focus towards qualitative review of key methods and assumptions; develop skills in governance and risk management; engage on ORSA.
  - Medium priority: Cultivate a more proactive, principles-based, forceful supervisory culture.
- Bank-owned insurers and group supervision:
  - Medium priority: Monitor inter-sector exposures and bank–insurance linkages; increase joint engagement with banking supervisors; require top-five insurers to prepare recovery and resolution plans.
  - Further develop group-level supervision capabilities to ask tough management-level questions for complex structures.
- Independence and resourcing:
  - High priority: Establish independent DGSFP with legal foundation, mandate, ability to set budget, hire staff and fund operations via industry fees while remaining accountable.
  - Develop plan to retain and attract sufficient resources.
- Macroprudential and systemic role:
  - Medium priority: DGSFP should contribute to macroprudential surveillance and systemic risk identification alongside other supervisors.
  - Improve sustained cross-sectoral cooperation in supervising bank-owned life and composite insurers and financial conglomerates.
- Policyholder protection and CCS:
  - Medium/consideration: Evaluate whether life policyholders should be afforded specific coverage guarantees in insolvency by an industry-funded entity separate from DGSFP.
  - Study optimal size of catastrophic risk buffer for CCS including corridor limits.
- Supervisory tools and processes:
  - Enhance risk map tool and off-site analytics to capture credit, market, insurance, product and mitigator risks.
  - Apply proportionate verification of technical provisions and capital requirements under Solvency II.
  - Require and verify improved asset–liability cash flow matching across insurers.
  - Advance preparation and follow-up on ORSA and recovery planning.

### Specific supervisory actions recommended
- Establish legal independence, mandate and budget funding for DGSFP enabling industry-fee funding.
- Require top-five insurers to prepare recovery and resolution plans.
- Increase DGSFP participation in cross-sectoral groups, financial conglomerate supervision and macroprudential surveillance.
- Enhance oversight of group-level risks, related-party exposures and bank–insurance linkages; increase joint engagement with banking supervisors.
- Require improved asset–liability cash flow matching and proportionate verification of technical provisions and capital requirements.
- Develop DGSFP skills in governance, risk management, qualitative review, and ORSA engagement under Solvency II.
- Investigate connections between low interest rates, heavy insurer investment in government bonds and regulatory requirements related to SCR and MA to determine net benefits to policyholders and Spain’s economy.
- Consider consolidating market conduct activities into a single Directorate.

*International Monetary Fund — Spain Technical Note (Executive Summary) from the IMF FSAP team*

### EXECUTIVE SUMMARY __________________________________________________________________________ 6

### EXECUTIVE SUMMARY

### Introduction and background
- This Technical Note (TN) updates on the Spanish insurance sector and analyzes key aspects of the regulatory and supervisory regime as part of the 2017 Financial Sector Assessment Program (FSAP).
- The TN was prepared by Stuart Wason (IMF Expert) and Apostolos Apostolou (IMF), drawing on discussions in Spain from March 3 to 17, 2017, and refers to the Insurance Core Principles (ICPs) (IAIS, October 2011, revised October 2013) and the results of the 2016 EIOPA stress testing.
- The TN focuses on recent sector developments and key vulnerabilities, including:
  - life-insurance vulnerabilities associated with the continuing low interest rate environment;
  - preparations of authorities and industry for Solvency II requirements (took effect in full on January 1, 2016);
  - supervisory oversight architecture in Spain, with DGSFP as an important member.
- The TN analyzes selected ICPs (governance, solvency requirements, supervisory approach, cross-border cooperation) that were identified in the 2012 Detailed Assessment as most in need of improvement; no new scoring of observance is given.

### Institutional and market setting — supervisory structure and legal framework
- Spanish financial markets are supervised by three separate sectoral supervisors: Banco de España (BdE) for banking, Comisión Nacional del Mercado de Valores (CNMV) for securities, and Dirección General de Seguros y Fondos de Pensiones (DGSFP) for insurance and pensions.
- Key insurance legislation and implementing instruments include:
  - Ley 20/2015, de 14 de julio, de ordenación, supervisión y solvencia de las entidades aseguradoras y reaseguradoras (LOSSEAR) and Real Decreto 1060/2015, de 20 de noviembre, de ordenación, supervisión y solvencia de las entidades aseguradoras y reaseguradoras (RDOSSEAR) transposing the Solvency II Directive level-one requirements.
  - Commission Delegated Regulation (EU) 2015/35 of 10 October 2014 (amended by Commission Delegated Regulation (EU) 2016/467 of 30 September 2015) and various Implementing Technical Standards and Regulatory Technical Standards directly applicable.
  - Private Insurance Intermediation Law (Ley 26/2006, de 17 de julio, de mediación de seguros y reaseguros privados LMSP).
  - Insurance Contract Law, Ley 50/1980, de 8 de octubre, de Contrato de Seguro.
- Ministry of Economy, Industry and Competitiveness (MdE) is empowered by LOSSEAR to supervise insurance activities, with supervision delegated to DGSFP (a department within MdE). DGSFP supervises private insurance; social insurance plans are not subject to DGSFP supervision.
- DGSFP has issued Resolutions declaring compliance with different sets of EIOPA Guidelines.

### Main findings — market structure, concentration, and group supervision
- Market size and savings:
  - Spanish insurance market is the sixth largest in Europe, but rate of growth and penetration (premiums per capita) remain modest.
  - Combined with the small size of Spain’s private pension plan market, the rate of saving in Spain via insurance and pensions is lower than for many other EU countries.
  - Authorities (DGSFP and relevant government) should consider potential benefits of encouraging increased private savings directed toward insurance and pension sectors.
- Market concentration and bancassurance:
  - Six of the top 10 insurers in the country are domestic and are owned by Spain’s banks.
  - The top five insurers by assets comprise 53 percent of the assets of all insurers.
  - Bank-owned life insurers in Spain receive 70 percent of their new business in the form of bancassurance, primarily sourced from parent bank customers.
  - Recommendation: DGSFP should routinely examine inter-sector exposures, ask its five largest insurers to develop recovery and resolution plans, and jointly engage with banking supervisors on cross-sectoral issues during supervisory colleges for bank-owned life insurers.
- Complexity and group supervision:
  - DGSFP is a member of supervisory colleges for 29 EU insurance groups; for three of them, DGSFP is the group-wide supervisor (one of these is an IAIG).
  - DGSFP also supervises 43 insurance groups operating only in Spain; many large ones are bank-owned.
  - Four of these are classed as financial conglomerates by the three EU supervisory authorities (the coordinator of these four financial conglomerates is the ECB and the DGSFP is designated as a relevant competent authority).
  - While DGSFP has shown leadership in identification and organization of supervisory colleges, it should further develop skills in supervising at the group level and at the insurance legal entity level.
- Investments, asset/liability management and stress tests:
  - Spanish insurers invest conservatively, largely in fixed income securities, mostly government bonds.
  - Many life insurers pay considerable attention to matching asset and liability cash flows.
  - In the 2016 EIOPA stress testing, Spain’s life insurers demonstrated resilience to a continued low interest rate environment compared to other EU countries.
  - Stress test results revealed the need for better matching of assets and liabilities by all insurers, including those applying for the Solvency II Matching Adjustment (MA).
  - Recommendation: DGSFP should direct all insurers to improve matching of asset and liability cash flows regardless of MA use.
- Supervisory culture and focus:
  - Staff view DGSFP's supervisory culture as appearing reactive or compliance focused—a possible outcome of Solvency II implementation complexity.
  - Solvency II’s market-consistent valuation and judgement-based methods require keener review and greater engagement with insurer management and technical experts.
  - Recommendation: Shift supervisory focus toward qualitative as well as quantitative review of key methods and assumptions used by insurers, including proportionate verification of technical provisions and capital requirements; develop skills in governance and risk management.
- Overall assessment of DGSFP:
  - The TN states that, despite recommendations, DGSFP is an effective insurance and pensions supervisor; DGSFP staff have demonstrated capabilities during FSAP discussions with stakeholders.

### Main recommendations (Table 1 — Main Recommendations)
- Assess risk profile of insurer
  - Matching: More supervisory focus on insurers to improve their asset/liability cash flow matching regardless of their use of the Solvency II “matching Adjustment.” — High
  - Bank-owned insurers: Monitor linkages/ cross investments; greater contact with bank supervisors. — Medium
  - Groups: More supervisory focus on the head of group monitoring interlinkages, related parties’ investments and risk management at group level; — Medium
- Review adequacy of insurance supervision
  - Culture: More proactive less reactive; more principles based; more forceful and directive. — Medium
  - Skills: Shift supervisory focus towards qualitative as well as quantitative review of the key methods and assumptions used by the insurer including the proportionate verification of technical provisions and capital requirements. The DGSFP should also develop its skills in areas now quite relevant in the Solvency II framework such as governance and risk management. — High
  - Engagement: With insurers on their plans for risk and capital management and forward looking capital requirements (ORSA) under Solvency II. — High
  - Recovery and resolution plans: Establish these with top 5 insurers. — Medium
- Assess the effectiveness of the DGSFP
  - Independence: Plans should include legal foundation, mandate and budget funding. — High
  - Macroprudential role: Contribute to cross-sector development and monitoring. — Medium
  - Systemic risks: Contribute to cross-sector identification and monitoring. — Medium
  - Cooperation: Increase cross-sector supervisory cooperation and collaboration in Spain. — High

### Specific supervisory actions recommended
- Establish independence of DGSFP with legal foundation, mandate and budget funding so it can fund programs via fees levied on the industry while remaining accountable to stakeholders.
- Require top-five insurers to prepare recovery and resolution plans.
- Increase DGSFP participation in cross-sectoral groups and financial conglomerate supervision and contribute to macroprudential surveillance and systemic risk monitoring.
- Enhance supervisory oversight of group-level risks, related-party exposures and bank–insurance linkages; increase joint engagement with banking supervisors for bank-owned insurers.
- Require and verify improved asset–liability cash flow matching across insurers; apply proportionate verification of technical provisions and capital requirements under Solvency II.
- Develop DGSFP skills in governance, risk management, qualitative review, and ORSA engagement under Solvency II.

*Spain — Technical Note (Executive Summary) from the IMF FSAP team*

### 11.   DGSFP is a department within the MdE funded by the State budget. This implies that it

### cr17338 - 11.   DGSFP is a department within the MdE funded by the State budget. This implies that it

### Governance, organizational dependence, and budgetary constraints
- DGSFP is a department within the MdE and is organically dependent on the MdE; it does not have autonomy in setting its budget.
- DGSFP does not have autonomy in hiring the human resources needed to perform its tasks.
- As part of government wide cost reductions, the DGSFP was required to reduce its 2017 operating budget by €1 million from its 2016 level of €15.6 million.
- The 2016–2017 budget cut significantly affects DGSFP’s ability to perform its supervisory mandate.
- DGSFP does not levy ongoing fees on industry participants, except a one-time registration fee on intermediaries; fees and administrative fines collected are passed over to the Treasury.
- In 2015, registration fees of €.  6 million were collected.  
- Recommendation from 2012 FSAP (reproduced in the text): Without additional budgetary resources, the DGSFP should review the scope of its work.

### Supervisory cooperation and Memoranda of Understanding (MoU)
- DGSFP has signed MoUs with BdE, CNMV, and SEPBLAC (Spain’s Financial Intelligence Unit (FIU) and AML/CFT Supervisory Authority).
- There is a specific MoU among BdE, CNMV, and DGSFP regarding financial education.
- Since 2012, DGSFP also signed MoUs with:
  - Bermuda (2016).
  - ASSAL, Association of Latin American Insurance Supervisors (2016); countries in the ASSAL MoU: Colombia, México, Costa Rica, Puerto Rico, Guatemala, El Salvador, Chile, Uruguay and Spain.
- Prior to 2012, Spain signed MoUs with Uruguay (2010), El Salvador (2008), México (2006) and Switzerland (2006).

### FSAP 2012 assessment and subsequent progress
- The 2012 FSAP reported:
  - High degree of compliance with 16 of the 2011 version of the IAIS ICPs; 10 others needed improvement.
  - Despite lack of independence in regulatory structure, no evidence suggested DGSFP failed to act independently in carrying out duties; however budgetary dependency limited expansion of resources, especially for group-wide supervision.
  - DGSFP is solely dependent on the State budget.
  - Supervision is hampered by lack of resources, especially for on-site supervision.
  - Requirements on insurer disclosures should be strengthened.
  - Shortcomings in suitability of persons, corporate governance, risk management and internal control will be addressed when Solvency II is implemented.
- Significant progress has been made on these recommendations since 2012; Solvency II implementation has required DGSFP to address these issues and many FSAP recommendations are reflected in the current supervisory approach.

### Insurance Guarantee Schemes (IGS) and Insurance Compensation Consortium (CCS)
- There are no statutory insurance guarantee schemes (IGS) for life or non-life insurance in Spain.
- The DGSFP and relevant authorities should consider whether policyholders, especially life insurance policyholders, should be afforded specific coverage guarantees in the event of insolvency.
- The Insurance Compensation Consortium (Consorcio de Compensación de Seguros — CCS):
  - Plays an important role in insurer insolvencies; provides a form of policyholder protection scheme (PPS) for all policyholders, beneficiaries and affected third parties.
  - Can acquire insurance contract creditors’ balances at the creditors’ option without waiting for the Creditors’ Meeting, at a percentage higher than likely in ordinary liquidation.
  - After being entrusted to liquidate an insolvent insurer, CCS has nine months to hold the CCS Board meeting to decide on purchase of insurance contract credits and to determine the level (percentage) of protection of policyholders. CCS then sends offers to policyholders and retains them until the creditors meeting.
  - Winding up activities of the CCS are funded by:
    - Ex-ante and compulsory tax levied on non-life policyholders (except Export Credits Policies) of 1.5 per thousands of premiums;
    - Return on investments;
    - Recoveries from the Winding-Up Plan (CCS gains rights of original owners after acquisition of insurance credits).
  - CCS is a public institution but not part of the government; at end-2015 CCS had a reserve fund of €9.5 billion (of which €1.9 is for winding up activities) and a staff strength of 312.
  - CCS senior management is entrusted to its Board of Directors, presided over by whoever holds the position of Director General of the DGSFP; the Board has 14 members with equal representation of the Private Insurance Market and the Central Administration.
  - CCS has three main functions: (i) permanent insurance functions (extraordinary risks, compulsory motor for unaccepted/uninsured private vehicles and official vehicles, multi-peril crop insurance via AGROSEGURO); (ii) other insurance functions—as required by public interest and market circumstances; (iii) non-insurance functions—winding-up of insurers.

### Market size, structure and performance (selected statistics)
- Spain insurance sector highlights:
  - Sixth largest in Europe, with gross premium income of €55.3 billion (US$61.3 billion) in 2015, a 3 percent increase from 2014.
  - Insurance density (premium per capita): US$1,322 in 2015.
  - Insurance penetration (premium as percentage of GDP): 5.6 percent in 2015.
  - European comparators (averages): Insurance density US$1,634; penetration 6.9 percent.
- Table 2 selected values:
  - Gross Written Premium (GWP-€ Mill): 2011: 64,049; 2012: 60,822; 2013: 59,862; 2014: 59,603; 2015: 61,110.
  - GDP (€Mill): 2011: 1,073,413; 2012: 1,039,758; 2013: 1,025,634; 2014: 1,037,025; 2015: 1,075,639.
  - GWP / GDP (in %): 2011: 5.98; 2012: 5.85; 2013: 5.84; 2014: 5,75; 2015: 5,68.
  - Premium / Population: 2011: 1,368; 2012: 1,301; 2013: 1,287; 2014: 1,283; 2015: 1.,316.
  - GWP— life (€Mill): 2011: 30,229; 2012: 27,173; 2013: 26,385; 2014: 25,859; 2015: 26,409.
  - GWP—life / GDP (in %): 2011: 2.82; 2012: 2.61; 2013: 2.57; 2014: 2.49; 2015: 2.46.
  - GWP—life / Population: 2011: 645; 2012: 581; 2013: 567; 2014: 557; 2015: 569.
  - GWP—non-life (€Mill): 2011: 33,820; 2012: 33,649; 2013: 33,476; 2014: 33,744; 2015: 34,700.
  - GWP—non-life / GDP (in %): 2011: 3.16; 2012: 3.24; 2013: 3.26; 2014: 3.25; 2015: 3.23.
  - GWP—non-life / Population: 2011: 723; 2012: 720; 2013: 720; 2014: 726; 2015: 748.
- Number of licensed insurers (Table 3, selected):
  - Life insurance: 2012: 97; 2013: 95; 2014: 91; 2015: 86 (At end-2015 this number includes 59 composite insurers).
  - Non-life insurance: 2012: 171; 2013: 167; 2014: 159; 2015: 150.
  - Reinsurance: 2012: 2; 2013: 2; 2014: 3; 2015: 3 (the three Spanish non-life reinsurers: GCO Reaseguros; MAPFRE RE; Nacional de Reaseguros).
  - Total domestic insurers: 2012: 270; 2013: 264; 2014: 253; 2015: 239.
  - Foreign branches in Spain: 2012: 81; 2013: 77; 2014: 75; 2015: 79.
- Market concentration (2015):
  - Top five life insurers commanded 59 percent of the life market (by assets).
  - Top five non-life insurers commanded 24 percent of the non-life market (by premium).
  - Top five composite insurers commanded 52 percent of the composite market (by assets).
- Group supervision:
  - DGSFP is member of supervisory colleges for 29 EU insurance groups; for 3 of them DGSFP is the group-wide supervisor (MAPFRE, Catalana, Liberty).
  - MAPFRE is identified as an IAIG.
  - DGSFP supervises 43 insurance groups which operate only in Spain.
  - Four Spanish insurance groups are classed as financial conglomerates by the Joint Committee of the European Supervisory Authorities: BBVA, Banco Santander, Ibercaja, Criteria.

### Intermediaries and distribution channels
- Number of licensed intermediaries (Table 4):
  - TOTAL: 31/12/2011: 86,999; 31/12/2012: 88,296; 31/12/2013: 86,294; 31/12/2014: 87,851; 31/12/2015: 83,781.
  - Tied agent: 31/12/2011: 86,757; 31/12/2012: 88,038; 31/12/2013: 86,042; 31/12/2014: 87,605; 31/12/2015: 83,506.
  - Multi tied agent: 31/12/2011: 163; 31/12/2012: 186; 31/12/2013: 199; 31/12/2014: 205; 31/12/2015: 223.
  - Bancassurance: 31/12/2011: 79; 31/12/2012: 72; 31/12/2013: 53; 31/12/2014: 41; 31/12/2015: 52.
  - Brokers: 31/12/2011: 3,023; 31/12/2012: 3,014; 31/12/2013: 3,038; 31/12/2014: 3,078; 31/12/2015: 3,152.
- Distribution of new business premium in 2015 (Table 5):
  - Life: Agents 15.97%; Brokers 7.24%; Bancassurance 69.97%; Direct Sales 6.87%; Internet 0.02%; Others 0.22%.
  - Non-Life: Agents 31.13%; Brokers 35.30%; Bancassurance 18.97%; Direct Sales 7.13%; Internet 2.52%; Others 4.96%.
- Bancassurance was the main distribution channel of life insurance products with a market share of 70 percent of new business premium (or 66 percent of total premium) in 2015.
- Non-life policies were mainly sold through agents and brokers (66 percent by new business premium) in recent years; bancassurance has been gaining market share in non-life distribution.

### Product mix and premium trends
- Insurance premium written has been relatively stable over the past three years.
- In 2015:
  - Non-participating life product premiums increased noticeably while participating and annuities decreased.
  - Major non-life products by share: Motor 28 percent; Property 34 percent; A&H 24 percent.
- Table 7 (selected lines, gross new premium written in € millions):
  - Life Insurance (total): 2013: 25,873; 2014: 25,237; 2015: 25,725.
    - Participating: 2013: 6,910; 2014: 7,459; 2015: 5,603.
    - Non-Particip.: 2013: 4,208; 2014: 4,691; 2015: 7,283.
    - Term: 2013: 3,196; 2014: 3,355; 2015: 3,486.
    - Annuities: 2013: 7,946; 2014: 6,406; 2015: 5,881.
    - Unit-Linked: 2013: 3,062; 2014: 2,816; 2015: 2,721.
  - Non-Life Insurance (total): 2013: 33,476; 2014: 33,743; 2015: 34,700.
    - Motor: 2013: 9,610; 2014: 9,445; 2015: 9,695.
    - Property: 2013: 11,614; 2014: 11,525; 2015: 11,968.
    - A&H: 2013: 7,884; 2014: 8,225; 2015: 8,448.
    - Liabilities: 2013: 1,073; 2014: 1,009; 2015: 1,011.

### Reinsurance and CCS role in catastrophe coverage
- Reinsurance market in Spain is relatively modest.
  - Three reinsurers operate in Spain as companies (all three Spanish) and one EU reinsurer operates in Spain on a branch basis.
  - Relatively modest volumes ceded to reinsurers; CCS participation in catastrophic insurance reduces ceded volumes.
- CCS provides capacity to the multi-peril crop insurance sector through a reinsurance arrangement with AGROSEGURO; CCS has a 10 percent participation in the co-insurance arrangement for Multi-Peril Crop Insurance (SAC).

### Industry assets, investment profile, and concentration risks
- Assets held by insurers at end-2015 totaled €303.9 billion, or 28.2 percent of GDP.
- Assets related to life insurance business accounted for 80 of total industry assets (note: textual percentage missing a percent sign in original; preserved wording).
- The 59 composite insurers accounted for 80 percent of total industry assets.
- Top 10 insurers in asset size (all composites) accounted for 55 percent of total industry assets.
- Table 8 (Assets held by insurers, in € billions):
  - Life insurers: 2011: 29.0; 2012: 27.3; 2013: 27.9; 2014: 29.3; 2015: 29.1 (% Share of Total 9.6).
  - Non-life insurers: 2011: 24.9; 2012: 25.4; 2013: 25.8; 2014: 26.6; 2015: 25.7 (% Share of Total 8.5).
  - Composite insurers: 2011: 196.1; 2012: 205.2; 2013: 221.2; 2014: 246.0; 2015: 242.8 (79.9).
  - Reinsurers: 2011: 5.2; 2012: 5.4; 2013: 5.4; 2014: 6.0; 2015: 6.3 (2.0).
  - Total: 2011: 255.2; 2012: 263.4; 2013: 280.3; 2014: 307.8; 2015: 303.9 (100.0).
  - % of nominal GDP: 2011: 23.8; 2012: 25.3; 2013: 27.3; 2014: 29.7; 2015: 28.2.
- Composite insurer split (in € billions):
  - Life component: 2011: 169.4; 2012: 179.1; 2013: 194.8; 2014: 219.1; 2015: 214.6.
  - Non-life component: 2011: 26.7; 2012: 26.1; 2013: 26.4; 2014: 26.9; 2015: 28.2.
  - Composite totals: 2011: 196.1; 2012: 205.2; 2013: 221.2; 2014: 246.0; 2015: 242.8.
- Investment profile:
  - Predominantly fixed income instruments.
  - Holdings in government securities (largely Spanish) are around 44 percent of invested assets (up from 23 percent in 2010).
  - Corporate securities are around 21 percent of invested assets (down from 32 percent in 2010).
  - Forty-six percent of the corporate securities held by composite insurers were issued by banks; comparable ratio for life and non-life insurers about 30 percent.
- Credit risk concentration around sovereign debt and corporate debt.
- Related party and intra-group exposures:
  - Total intra-group and related company receivables are around five percent of the investments supporting the technical provisions.
  - Some insurers use deposits placed with their parent banks to provide the capital guarantee under the unit-linked business; intra-group exposure may be higher than Table 9 indicates.
  - Solvency II affects these linkages as risk concentration against one counterparty leads to higher capital requirements.

*Source: IMF staff summary of cr17338.*

### 27.   Despite the stagnation of premium income, insurers remain profitable. For the non-life

### 27.   Despite the stagnation of premium income, insurers remain profitable. For the non-life

### Investments of Insurance Assets (As at end of 2015)
- Total assets (Composite): 242.80 € bn (100.0 percent)
- Life: 29.05 € bn (100.0 percent)
- Non-Life: 25.67 € bn (100.0 percent)
- Selected asset classes (values and % of total):
  - Government securities: Life 13.03 € bn (44.9 percent); Non-Life 4.69 € bn (18.3 percent); Composite 113.60 € bn (46.8 percent)
  - Corporate securities: Life 6.78 € bn (23.3 percent); Non-Life 3.44 € bn (13.4 percent); Composite 51.69 € bn (21.3 percent)
  - Equities: Life 1.35 € bn (4.6 percent); Non-Life 4.36 € bn (17.0 percent); Composite 17.90 € bn (7.4 percent)
  - Investments supporting unit-linked: Life 3.01 € bn (10.4 percent); Composite 11.37 € bn (4.7 percent)
  - Cash: Life 0.94 € bn (3.2 percent); Non-Life 1.79 € bn (7.0 percent); Composite 20.03 € bn (8.2 percent)
  - Other assets: Life 3.00 € bn (10.3 percent); Non-Life 3.02 € bn (11.8 percent); Composite 9.11 € bn (3.7 percent)
- Source of data: DGSFP

### Profitability and Key Financials (2015)
- Gross premium: Composite 38.2 € billions; Life Only 3.7 € billions; Non-Life Only 15.0 € billions; Total 56.9 € billions
- Net premium: Composite 36.2 € billions; Life Only 3.6 € billions; Non-Life Only 12.9 € billions; Total 52.6 € billions
- Assets: Composite 242.8 € billions; Life Only 29.1 € billions; Non-Life Only 25.7 € billions; Total 297.5 € billions
- Liabilities: Composite 213.9 € billions; Life Only 26.0 € billions; Non-Life Only 16.9 € billions; Total 256.8 € billions
- Excess of assets over liabilities: Composite 28.9 € billions; Life Only 3.0 € billions; Non-Life Only 8.7 € billions; Total 40.7 € billions
- P&L: Composite 2.33 € billions; Life Only 0.27 € billions; Non-Life Only 0.89 € billions; Total 3.49 € billions
- ROE (in %): Composite 9.63 percent; Life Only 11.72 percent; Non-Life Only 11.29 percent; Total 10.16 percent
- Source of data: DGSFP

### Solvency Position and Regulatory Coverage
- Under Solvency I average solvency margins:
  - Life sector: around 200 percent above required capital
  - Non-life sector: around 350 percent above required capital
- Table 11 (Available capital resources over requirements, in € million):
  - Available capital over minimum capital requirement (MCR):
    - Life: 632 (2014 SI), 634 (2015 SI), 530.8 (2015 SII)
    - Non-life: 1075 (2014 SI), 1060 (2015 SI), 552.2 (2015 SII)
  - Available capital over prescribed capital requirement (SCR):
    - Life: 223.8 (2014 SI), 221.3 (2015 SI), 203.3 (2015 SII)
    - Non-life: 402.3 (2014 SI), 403.3 (2015 SI), 223.6 (2015 SII)
- EIOPA QIS5 / Solvency II (end-2015) results:
  - Baseline SCR for Spain with buffering: 192 percent
  - Baseline SCR for Spain without buffering: 110 percent
  - As of end-2015, only one small insurer in the process of liquidation had an SCR ratio below 100 percent
- Source of data: DGSFP

### EIOPA 2016 Stress Tests and Interest Rate Risk
- Participation: 17 Spanish insurance undertakings representing 82 percent market share
- Two stress scenarios:
  - Low for long (LY)
  - Double hit (DH) — included increased credit spreads and asset shocks
- Key stress-test observations:
  - DH scenario had a more severe impact than LY on excess of assets over liabilities
  - Use of buffering adjustments (LTG measures) significantly reduced the adverse impact of DH and, to a lesser extent, LY
  - Spanish liabilities Macaulay duration: 10.1
  - AoL (assets over liabilities) ratio for Spain:
    - Baseline: 111 percent
    - DH scenario (with buffering): fell by just over 2 percent from baseline
    - LY scenario (with buffering): fell by less than 1 percent from baseline
    - DH scenario (excluding buffering): AoL ratio worsened to about 90 percent
- Conclusions from insurer-level review:
  - Insurers with better asset/liability cash flow matching are less sensitive to interest rate risk
  - Insurers using the Matching Adjustment (MA) often apply it only for a portion of their business
  - Direction of SCR volatility under stress relates to the nature of the mismatch position (assets longer or shorter than liabilities)
  - Most insurers would benefit from improved asset/liability cash flow matching
- Supervisory actions recommended/undertaken:
  - ORSA follow-up
  - Regular engagement with insurer management on risk and capital management
  - Advance preparation of recovery plans

### Solvency II Long Term Guarantee (LTG) Measures (used by Spain’s insurers)
- Transitional measure:
  - Upon application, insurer can spread the increase in capital (S II over S I) over 16 years
- Matching adjustment (MA):
  - Upon application and subject to strict conditions and monitoring, insurer can make a yield adjustment for matched asset/liability portfolio portion
  - Fifteen Spanish life insurers use the MA
  - The only other EU country to use the MA is the UK
- Volatility adjustment (VA):
  - Can be used by any insurer without supervisory approval for blocks not subject to the MA
  - Adjusts for spread above risk free rates to partially acknowledge higher discount assumptions for technical provisions

### Supervisory Recommendations on Interest Rate Risk
- The DGSFP should apply more supervisory focus on insurers to improve asset/liability cash flow matching regardless of their use of the Solvency II “Matching Adjustment.”
- Insurers should be asked to review their Board approved policies dealing with asset/liability matching.
- Management of exposure to interest rate movements through asset/liability cash flow matching is a fundamental insurance risk management principle to be applied to the extent practical.

### Bank-Owned Insurers and Interconnectedness
- Ownership and distribution:
  - 6 of the top 10 insurers by asset size are owned by Spanish banks or savings institutions
  - Top three insurers by asset size are directly owned by the biggest banks in Spain
  - For bank-connected insurers, 70 percent of traditional life new business is sold through bancassurance
- At end of 4Q2016 insurer assets sourced by banks: 86,186 million € (about 30 percent of all insurer assets)
- Possible supervisory risks from bank ownership:
  - High counterparty risk charges in the SCR due to the rating of the parent
  - Reliance on bancassurance as primary new business source—complicates recovery and resolution planning
  - Cross-sector spillover of risks to insurers from banks—regular collaborative supervision is key
- Empirical interconnection findings:
  - Insurers have substantial exposures to banks, but banks have limited exposures to insurers
  - Insurance companies’ deposits with parent banks are relatively small compared to overall bank liabilities
  - Repo transactions between banks and insurance companies appear to be limited
- Supervisory practice note:
  - DGSFP has demonstrated ability to lead supervisory colleges and to organize electronic dissemination via a secure web portal
  - Given complexity and number of groups, lead supervision at both entity and head-of-group level requires further enhancement and integration of leading supervisory practices

### Pensions
- Private pension plan market size (At December 31, 2015):
  - Defined Benefit: Number of plans 12; Assets 0.5 € billions
  - Defined Contribution: Number of plans 2,390; Assets 77.1 € billions
  - HYBRID: Number of plans 455; Assets 26.4 € billions
  - TOTAL: Number of plans 2,857; Assets 104.0 € billions
- Asset allocation (selected observations, distribution of main asset classes of pension funds):
  - Debt securities: 57.41 percent (3T 2016)
    - of which Spanish sovereign: 27.02 percent (3T 2016)
    - of which other sovereign: 11.71 percent (3T 2016)
    - of which private: 18.68 percent (3T 2016)
  - UCITS: 17.80 percent (3T 2016)
  - Equity securities: 11.40 percent (3T 2016)
  - Deposits: 12.67 percent (3T 2016)
- Supervisory and structural notes:
  - All private pension plans in Spain are supervised by the DGSFP
  - Majority of plans are Defined Contribution—no risk of plan insolvency due to benefit guarantees; individual members bear investment and longevity risk
  - Both banks and insurers are active in managing pension funds
  - Debt and other fixed income securities are the main asset classes for pension funds; 57.4 percent in debt securities with 27 percent Spanish sovereign debt

### Main Findings — Insurer Key Risks and Vulnerabilities
- Primary risk: Interest rate risk, particularly for life insurers due to interest rate guarantees in traditional life and annuity products
- Asset/liability matching reduces sensitivity to interest movements; many insurers in Spain face mismatches (liability duration exceeds asset duration)
- EIOPA stress tests highlight vulnerability to low-for-long and double-hit scenarios; long liability duration (Macaulay duration 10.1) exacerbates sensitivity
- Use of LTG measures materially buffers solvency positions but excluding buffering reveals more severe impacts (AoL about 90 percent under DH scenario excluding buffering)
- Supervisory focus recommended on asset/liability cash flow matching, board policies, and proactive supervisory measures (ORSA, recovery planning, engagement with management)

*International Monetary Fund — SPAIN*

### 45.   The most important challenges facing the DGSFP with respect to pensions are as

### 45.   The most important challenges facing the DGSFP with respect to pensions are as follows:

### Pension-sector challenges
- (i) Low interest rates.
  - Low interest rates could give rise in the case of defined benefit pension schemes to the need of the application of sponsor support.
  - Low interest rates could give rise in the case of defined contribution pension schemes to an insufficient total amount for the retirement.
- (ii) New investments.
  - The need for pension funds to have access to new investments suitable to ensure a long-term guarantee, security, liquidity and diversification.
- (iii) Longevity.
  - The need for pension benefits to adequately provide for continued improvements in longevity.
- (iv) Technological.
  - The need to respond to new technologies in the financial markets.
- Additional observations:
  - As most pension funds and plans are defined contribution rather than defined benefit plans the exposure of the DGSFP to plan insolvency is quite low (i.e., plan insolvency is restricted to those few remaining defined benefit plans).
  - In recent years, the contribution rates to private and corporate pensions have slowed.

### Linkages between pension plans and other segments of the financial system in Spain
- Ownership and management structures:
  - Most pure management entities (without being life insurance companies) are owned by credit entities, insurance companies and management entities of UCITS or investment entities. This ownership achieves more than 50 percent of the capital of each pure management entity.
  - Life insurance companies can be management entities of pension funds. On December 31, 2015, of a total of 82 authorized management entities, 47 were life insurance companies (57.3 percent) that manage 33 percent of the total assets of pension funds.
- Distribution and custody:
  - Marketing of individual pension schemes can be made by credit entities, life insurance companies and management entities of UCITS, investment serviced enterprises and insurance intermediaries.
  - Depositary entities have to adopt the form of credit entities with a registered office or branch in Spain.
- Investment analysis:
  - Analysis and selection of investments are usually made by specialized entities that take part in bank or insurance, management entities of UCITS and investment services groups.

### Effectiveness of Insurance Supervision — progress and Solvency II impact
- Progress since 2012:
  - The DGSFP has made very good progress in addressing the 2012 recommendations.
  - The government intends on creating an independent insurance supervisor.
- Solvency II adoption and effects:
  - The introduction of Solvency II is now law and has fundamentally modernized insurance supervision across the EU.
  - Adoption of Solvency II (effective January 1, 2016) has improved assessments of compliance for a large number of ICPs due to reforms in governance, control functions, risk management, valuation, ORSA, capital adequacy, etc.
  - Enactment of new laws is necessary but not sufficient; DGSFP must be ready with systems, staffing and training to fully implement Solvency II.
- Entities outside Solvency II:
  - Three types of entities according to article 101 of LOSSEAR and transitory disposition 4 of LOSSEAR (collectively called the Special Solvency Regime or RES) may remain subject to the simpler pre-Solvency II regime. Currently there are 48 of these fairly small entities remaining.
  - Criteria include gross earned premiums ≤€5 million.

### Supervisory processes, tools, and practices
- Off-site supervision and database:
  - Supervisory process begins “off-site” with a scanning of the financial data filed by insurers with the DGSFP (financial statements accounting and Solvency II, balance sheet items, profit and loss, investments, technical provisions, SCR, Own funds and DGSFP’s supervisory Risk Assessment Framework (RAF)).
  - The Inspections Department screens the database to identify indicators of risk (off-site inspection).
  - DGSFP is encouraged to further develop the database tool to explore new queries to identify risks and risk trends (e.g., drop in SCR, drop in profits, change in asset mix etc.).
- Risk mapping:
  - Supervisory risk mapping rates each entity on two equally weighted dimensions—impact (using premiums, technical provisions and assets) and risk (examined through solvency and results).
  - Recommendation: evolve the two-dimensional risk map into a more sophisticated scoring mechanism including different types of asset risk, technical provision risk, trends in profits and SCR.
- On-site inspection and corrective measures:
  - More intensive supervision includes on-site supervision with well defined and transparent protocols (ordering, conducting inspection, preparation of reports, insurer feedback, communication of actions).
  - Corrective Measures Department ensures ordered actions are taken; number of insurers subject to review by Corrective Measures peaked in 2013–2014 and has declined to moderate levels.
  - DGSFP has communication protocols with the CCS to ensure policyholders remain protected if an insurer nears dissolution.
- Group supervision and international engagement:
  - Group supervision is a significant aspect; Inspection and International Relations areas have demonstrated ability to supervise groups and assume group-wide leadership as appropriate.
  - DGSFP group supervision expertise was affirmed by other country supervisors interviewed during the FSAP.
- Software and supervisory tools:
  - Tools developed include an Excel-based database of financial data, a data warehouse of supervisory guides and tools, web portals for supervisory colleges and the risk mapping tool.
  - Tools allow immediate comparisons of an insurer against peer groups and support risk-based supervision.

### Market conduct, complaints, and staffing
- Market conduct organization:
  - Market conduct activities occur partly within the Deputy Directorate for Regulatory Policy and partly within the Deputy Directorate for Insurance Market Ordering.
  - Complaints Department (within Regulatory Policy) consists of 22 staff.
- Complaints handled:
  - The Complaints Department handled 10,396 complaints in 2015, down from 11,026 in 2014, and 12,457 in 2013.
  - The large majority of complaints are due to insurers.
- Market conduct supervision:
  - Responsibility for supervising insurance intermediaries and market conduct of insurers, reinsurers and intermediaries rests with 2 departments totaling about 17 staff within the Insurance Market Ordering Deputy Directorate.
  - Recommendation: consider combining all market conduct activities into one Directorate.
- Staffing level:
  - At the time of the FSAP, DGSFP staff totaled 193 persons.

### Findings and recommendations on supervisory effectiveness
- Overall finding:
  - The FSAP finds the DGSFP to be an effective insurance supervisor, with many improvements to supervisory framework, processes, people and systems since the 2012 FSAP.
- Areas requiring continued focus under Solvency II:
  - Market-consistent measures create significant Own Funds volatility that needs proactive supervision.
  - Best estimate assumptions in technical provisions require much keener review of assumptions and greater engagement with the actuarial function.
  - TN contains several recommendations necessary for DGSFP to remain effective as it gains Solvency II experience.
- Advisory Board and stakeholder feedback:
  - DGSFP maintains an Advisory Board for Insurance and Pension Funds (chaired by the Director General) per Art. 18 Ley 20/2015; Art. 3 Real Decreto 1060/2015; Ley 40/2015 de Régimen Jurídico del Sector Público.
  - Recommendation: consider contracting a firm to conduct directed confidential interviews of key stakeholders to provide performance feedback.
- Independence and funding:
  - FSAP supports government’s announcement that the DGSFP will become an independent insurance supervisory authority.
  - As an independent authority it should have the authority to fund its programs on its own via fees levied on the industry while being accountable to government and industry.
- Macroprudential role and cross-sector cooperation:
  - As an independent supervisor, DGSFP should contribute to macroprudential surveillance and systemic risk work alongside other supervisors.
  - Recommendation: improve sustained levels of cross-sectoral collaboration in Spain for supervision of bank-owned life and composite insurers and financial conglomerates.
- Increasing private savings:
  - DGSFP and relevant authorities should consider potential benefits of encouraging an increased rate of private savings directed toward insurance and pension sectors; current rate of saving through insurance and private pension is lower compared to other EU countries.
- Policyholder protection and CCS:
  - Policyholder protection is indirectly provided through programs managed by the CCS, which has played an important role in winding-up insolvent insurers and realizing recovery percentages for policyholders.
  - Consideration: whether life insurance policyholders should be afforded specific coverage guarantees in the event of insolvency, provided by an entity separate from the DGSFP and funded by the industry, possibly similar in size to depositor guarantees.
  - The CCS plays a “back-stop” role for the non-life industry with ex-ante accumulation of fees to build a buffer against catastrophic risks.
  - Recommendation: CCS, non-life insurers and relevant authorities should study the optimal size of the catastrophic risk buffer including possible corridor limits for its growth.

*Source: cr17338 - 45.   The most important challenges facing the DGSFP with respect to pensions are as follows:*

### 65.   The on-going effectiveness of the DGSFP is dependent on its ability to attract and

### 65.   The on-going effectiveness of the DGSFP is dependent on its ability to attract and

### Staffing, resources, and capability gaps
- The DGSFP is currently understaffed, has suffered turnover and has found it difficult to hire additional staff either due to budget restrictions or competitive terms offered in the private markets.
- Current staff have demonstrated skills, teamwork and adequacy in insurance and pension supervision; retaining and enhancing these resources is an important requirement for ongoing effectiveness.
- Departments needing additional staff:
  - supervision of groups;
  - review of judgement based technical material (ORSA, technical provisions, control function adequacy, etc.);
  - participation in various IAIS and EIOPA committees.
- Inter-connectedness with the banks is important due to significant bank ownership of the largest insurers.

### Findings on supervisory approach and tools
- The detailed analysis of individual insurer results (even those using the MA) indicated noticeable sensitivity to the low for long EIOPA stress test.
- DGSFP staff tend to focus on risk as measured by an SCR or MCR not by the underlying risks and strategies and their development in the insurer (e.g., distribution, product design, investments, matching, risk management).
- The risk map tool should be enhanced as a risk indicator to capture more of an insurer’s key risks (e.g., credit, market, insurance, product, risk mitigators, etc.).
- With Solvency II implemented, supervisory focus should shift towards qualitative as well as quantitative review of key methods and assumptions used by insurers including proportionate verification of technical provisions and capital requirements.
- Greater engagement with insurer boards, senior management and key staff (CEO, CFO, CRO, actuarial function etc.) is important, especially given increased use of expert judgement in technical provisions, risk management, matching and governance.

### Key Recommendations
- Matching:
  - More supervisory focus on insurers to improve their asset/liability cash flow matching regardless of their use of the Solvency II “Matching Adjustment”.
  - Insurers should be asked to review their Board approved policies dealing with asset/liability matching.
- Bank-owned insurers:
  - Sustained levels of collaboration on supervised entities across cross-sectoral supervisors need to be improved.
  - DGSFP should monitor insurer cross-sector linkages and exposures individually and in aggregate on a routine basis.
- Groups:
  - Further develop skills in supervising at the group level as well as at the insurance legal entity level; ability to ask tough questions of management at the group level is required for complex international structures.
- Culture:
  - DGSFP should aim to be a more proactive and less reactive supervisor; more principles based than following a checklist; and more forceful and directive in its supervision.
- Skills:
  - Develop skills in areas relevant under Solvency II such as governance and risk management.
- Engagement:
  - Seek greater engagement with insurer boards, senior management and other key staff to better understand businesses and to enable firms to better understand supervisory priorities; this reduces frequency and severity of reactive supervisory work.
- Recovery and resolution plans:
  - Use powers to require significant insurers (say top five) and those subject to higher levels of risk, to develop recovery and resolution plans; the planning process clarifies key business strategies for insurer and supervisor.
- Independence:
  - Develop plans for an independent DGSFP including legal foundation, governance, mandate, ability to determine its work plan, set its budget, hire staff and fund its operations from industry fees.
- Resources:
  - Develop a plan to enable the DGSFP to retain and attract sufficient resources to accomplish its mandate; resources need a combination of supervisory skills as well as insurance industry experience.
- Macroprudential role:
  - DGSFP should have a duty to contribute to the work of Spain’s other financial sector supervisors on macroprudential surveillance; overall macroprudential policy will need coordination by a designated authority chosen by the government.
- Systemic risks:
  - DGSFP should have a duty to contribute to the work of Spain’s other financial sector supervisors on systemic risk identification and mitigation.
- Cooperation:
  - DGSFP should have sustained levels of cooperation and collaboration with the relevant cross-sectoral supervisors in Spain; appropriate protocols are in place but sustained cooperation with respect to supervised entities is not apparent.

### Other Recommendations
- Rate of savings:
  - DGSFP and relevant government authorities should consider the potential benefits for Spain of encouraging an increased rate of private savings directed toward the insurance and pension sectors.
- Policyholder protection:
  - DGSFP and relevant authorities should consider whether policyholders, especially life insurance policyholders should be afforded specific coverage guarantees in the event of insolvency.
  - CCS, non-life insurers and relevant authorities should study the optimal size of the catastrophic risk buffer including possible corridor limits for its growth.
- Impact of low interest rates:
  - DGSFP should investigate the possible connection between persistently low interest rates, the heavy investment by insurers in government bonds and various regulatory requirements related to the SCR and MA (for example).
  - The investigation should determine if these practices are of net benefit to policyholders and to Spain’s economy generally.
- Market conduct:
  - DGSFP should consider the benefits of combining all the activities for market conduct into one Directorate.

*International Monetary Fund*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17338.pdf_