## 1polea2019006 ## Source details **Canonical URL:** [1polea2019006](https://www.imf.org/-/media/files/publications/cr/2019/1polea2019006.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1polea2019006.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1polea2019006.pdf.json) --- ### EXECUTIVE SUMMARY — Scope, timing, and focus - Technical note updating assessment of regulation and supervision of the Polish insurance sector since the 2012 assessment; part of the Poland 2018 Financial Sector Assessment Program (FSAP). - Draws on discussions in Warsaw from January 8 to 20 and May 8 to 21, 2018. - Focus: key issues and developments, notably implementation of the EU Solvency II framework from January 1, 2016; does not present detailed IAIS ICPs compliance assessment. ### Market structure and key statistics - Sector composition: - 60 insurance companies and one specialist reinsurance company. - 27 life insurers and 34 non-life insurers; the specialist reinsurance company writes non-life business only. - Composite insurers are not permitted. - Market shares and participation: - PZU accounts for around one third of both life and non-life markets (2017, by GWP). - 11 mutual insurers, accounting for under 5 percent of GWP. - Foreign-owned companies account for around 50 percent of total GWP and total assets. - Cross-border presence (2016): branches/freedom to provide services equivalent to 8 percent of domestic market (down from 11.2 percent in 2014); reduced further in 2017. - Size and penetration (2016–2017): - Penetration rates in 2016: 0.99 percent life; 1.92 percent non-life. - European averages cited: 3.99 percent life; 2.73 percent non-life. - Total assets at end-2017: almost PLN 200 billion (~10 percent of GDP). - Table highlights (PFSA data, PAS basis, 2017): - Life: number of companies 27; GWP (PLN bns) 24.6; Total assets (PLN bns) 104.7. - Non-life: number of companies 34; GWP (PLN bns) 37.8; Total assets (PLN bns) 92.0. - Total number of companies: 61. - Distribution channels: - Agent channel (including bancassurance) >60 percent of GWP in both life and non-life. - Some 31,000 agents; about half act only for one insurer. - Direct sales: 30 percent of life insurance; 10 percent of non-life. ### Product mix, investment profile, and recent performance - Life insurance: - Unit-linked products account for almost half of life premiums; low levels of insurance cover. - Protection business and small endowment presence; annuity business minimal. - Group business ~ one third of total life GWP in 2017. - Only around 30 percent was single rather than recurring premium business. - Non-life insurance: - Motor insurance (including compulsory TPL) accounts for 63 percent of total non-life direct GWP at end-2017. - Property is second largest class. - Accident and health: around 13 percent of total insurance sector GWP; coverage mostly for accident. - Reinsurance: reinsurance GWP ~6 percent of non-life total; negligible in life. - Investments: - Life insurers’ investments: government bonds ~70 percent of total (excluding unit-linked assets). - Unit-linked investments ~80 percent investment funds (mainly equities and government and corporate bonds). - Non-life insurers: similar profile with significant equity and related undertakings. - Only a minority use derivative instruments; securities lending minimal. - Recent drivers/pressures (2015–2017): - Unit-linked sales fell sharply in 2016; picked up in 2017 but outstanding unit-linked business continued to fall. - Strong motor market competition; upward claim pressures for bodily injury and “pain and suffering”. - Regulatory changes, intensified supervision, enforcement, reduced investment returns, and increased taxation (tax of 0.44 percent of assets for institutions/groups with assets over PLN 2 billion from early 2016). ### Profitability and capitalization - Aggregate performance: - Life insurers: nearly 20 percent return on equity. - Non-life: improved from less than 10 percent ROE in 2015–16 to nearly 15 percent in 2017. - Solvency (Solvency II coverage of SCR): - Aggregate solvency capital ratio at end-2017: 256 percent (life 320 percent; non-life 227 percent). - Solvency ratios time series (aggregate coverage of minimum requirements): - End-2015: Life 274; Non-life 380; Total 328. - 2016 (January 1): Life 338; Non-life 222; Total 266. - End-2017: Life 320; Non-life 227; Total 256. - Capital quality: - 17 insurers had subordinated debt included in own funds at end-2017; such debt = 4.6 percent of own funds. ### Solvency II implementation and effects - Implementation: - Solvency II effective January 1, 2016; Act on insurance and reinsurance activity enacted September 2015. - Implementation strengthened regulation and supervision: risk-based capital, comprehensive group supervision, requirements on suitability of key persons, risk management, controls. - No significant exemptions or transitional arrangements applied in Poland; Solvency II changes appear well-embedded. - With limited LTG business, Poland did not need special LTG measures. - PFSA practices and additions: - PFSA requires quarterly reporting on SCR compliance (Solvency II requires quarterly only for MCR). - SFCR subject to audit requirement. - PFSA published guidance including 31 detailed recommendations on product management. - PFSA conservative on internal models; no insurer had a Polish-approved internal model for capital calculation as at May 2018. - Seven open PFSA discussions on internal models under EIOPA pre-application as at May 2018. - No insurer had applied for undertaking-specific parameters under the standard approach as at May 2018. - Observed impacts: - Technical provisions lower on Solvency II basis versus PAS (example end-September 2017: life technical provisions 30.2 percent lower; non-life 50.7 percent lower; total 37.7 percent lower). - Changes in business models: increased reinsurance in non-life; reductions in investment risk and greater diversification. - Recommendations: - PFSA should update and expand its 2015 publication on concerns with internal models and consider setting out a path to approval, including conditions to be satisfied. - Authorities should consider the possibility of wider use of IFRS by insurers in light of IFRS 17 (Responsible Authority: MoF — Priority: Low). ### PFSA governance, capacity, and supervisory framework - PFSA structure and staffing: - PFSA comprises eight members including full-time Chairman and two full-time Vice-Chairmen and representatives of MoF, Ministry of Economic Development, Minister of Labor and Social Policy, President of the NBP, and the President of the Republic of Poland. - PFSA Office staff around 950 in total; staff involved in insurance supervision increased from ~99 in 2011 to an estimated 106 at end-2017. - PFSA and employees lacked explicit legal protection and immunity for supervisory actions (amendment entering into force January 1, 2019 discussed elsewhere). - Independence, budget and remuneration: - PFSA responsible to the Prime Minister; budget approved by MoF and Parliament; operating expenses funded from fees levied from regulated companies. - Staff remuneration set by Prime Minister’s requirements and not aligned to private sector levels in practice. - PFSA must obtain government consent to its internal organization (note: Article 3 amendment effective January 1, 2019 enables PFSA to establish its budget independently—see FSSA). - Supervisory framework and practices: - Off-site review, Early Warning System, and comprehensive SREP (BION) inform risk-based supervisory planning and dividend restrictions. - On-site supervision: broad-scope inspections and more flexible supervisory visits. - PFSA engages actively in cross-border supervision; leads college where it is home state and participates as member elsewhere. - Areas for strengthening: - Address PFSA independence, resources, and legal protection (Government to review legislation and practice — Responsible Authority: MoF — Priority: High). - PFSA should review staffing numbers and skills requirements (Responsible Authority: PFSA — Priority: High). - Sharpening key messages to management in examination reports. - Consider enhanced supervisory model for larger insurers focusing on strategy, business model, risk culture, governance, controls, and management capacity. ### Supervision practices: SREP, reporting, on-site and off-site - SREP/BION: - Annual structured methodology; risks scored individually; four scoring categories: High, Medium High, Medium Low and Low. - Impact scored separately; product of impact and risk drives supervision intensity (four categories). - As at start-2018 only one insurer in High category. - SREP results not published but shared with management; dividend policy links to SREP scores and capital adequacy expectations (2018 expectations: 150 percent of SCR for non-life; 175 percent for life). - Reporting and EWS: - Internal reports evaluate extensive quarterly reported information at group and solo levels (PAS and solvency). - Monthly EWS estimates likely change in SCR coverage. - On-site inspections: - Scheduled up to 60 days; immediate feedback at closing meeting; detailed inspection report and separate recommendations and sanctions letters. - Typical annual activity: 12–15 inspections on insurers, ~10 supervisory visits, ~15 agent oversight inspections, similar number of broker inspections. - Each insurer has a 40 percent chance of a visit each year. - Conduct risk integration: - Conduct risk treated generally under operational risk (risk of loss to insurer rather than detriment to customers). - No dedicated overall score identifying net risk to customers; scope to develop conduct-specific reporting and assessment distinct from insurer-focused SREP. ### Conduct of business, intermediaries, and consumer protection - Intermediaries: - Agents: PFSA follows an indirect approach; insurer selection and control over agents covered via insurer supervision; PFSA undertakes special visits to insurers using agents. - Brokers: subject to direct PFSA supervision and specialist on-site inspections; brokers must submit regular reports; brokers not covered by SREP. - Agent channel dominant: >60 percent of GWP; ~31,000 agents. - Fit and proper: - PFSA approves chairman and risk management member of management board; all defined role-holders must be notified to PFSA. - PFSA may refuse approvals and can dismiss key function holders; issues considered in SREP. - Conduct incidents and regulatory responses: - OCCP actions on high surrender penalties led to agreements and partial refunds; MoF placed 4 percent cap on surrender penalties in new business. - PFSA investigations and penalties on unfair claims handling in motor insurance; PFSA published guidance. - FO (established 2015) addressed nearly 19,000 complaints in 2017; 75 percent related to insurance. - Gaps in consumer protection powers: - No authority can require insurers to pay redress or accept enforceable undertakings. - No binding dispute resolution by FO absent agreement of both parties; Conciliation Court binding only where both parties agree. - PFSA capacity and recommendations: - PFSA established Enforcement and Market Practices Department (early 2018) for complaint handling and cooperation with FO and OCCP. - PFSA should develop preventative supervisory approaches to conduct, improve reporting on products/customers/distribution, increase cooperation with OCCP and FO, and consider organizational changes to give conduct supervision adequate focus and resources. - Recommendation: review powers available to PFSA and OCCP for consumer protection, including powers to require redress and accept enforceable undertakings (Responsible Authority: PFSA, OCCP — Priority: Medium). ### Emergence of PZU Group as a financial conglomerate and conglomerate supervision - PZU Group summary: - Largest Polish insurance group; Polish government controlling interest 34 percent. - PZU SA is a non-life insurer with interests in life insurance, investment/pension fund management, healthcare services, banking entities, and Baltic/Ukraine insurance operations. - Group total assets increased from PLN 67 billion in 2014 to over PLN 300 billion at end-2017. - Parent company equity (PAS basis) increased from PLN 13.1 billion to PLN 13.9 billion; subordinated debt PLN 2.25 billion issued after Bank Pekao SA interest acquisition. - Group solvency ratio 247 percent at end-June 2017; group target 200 percent. Rating: A– from S&P. - Conglomerate supervision challenges and PFSA actions: - First Polish financial conglomerate (headed by an insurer) has emerged, posing supervisory challenges. - PFSA well-placed to supervise given sectoral coverage and Solvency II group supervision framework. - Key supervisory actions needed: - Complete application of comprehensive “supplementary supervision” requirements to PZU as soon as possible (PZU was exempted in 2017; PFSA decisions in November 2018 began addressing this). - Finalize and implement arrangements to strengthen internal coordination among sectoral supervisors of the group. - Plan for conglomerate-wide risk assessment and supervisory work; integrate recovery planning with group banks. - PFSA established a senior-level working group and has extended the college of supervisors to include bank supervisors where relevant. ### Financial stability, recovery, resolution, and policyholder protection - Systemic importance and macroprudential: - No formal framework yet to assess systemic importance of insurers; FSC-M is considering issues. - FSC-M provisionally identified non-life insurance (specifically PZU) as systemically significant in domestic context. - Recovery and resolution: - No insurance-specific resolution regime in Poland; authorities await and contribute to EU-level work. - Solvency II strengthens intervention framework but not resolution or recovery planning. - PFSA has initiated recovery planning with PZU and asked PZU to prepare a group-level “recovery action plan”. - Insolvency law and policyholder protection issues: - No explicit policyholder preference in law. - Article 477 of the Act on Bankruptcy: assets covering technical provisions for solvency purposes are treated as available for settlement of claims. - No requirement for clear identification or register of assets covering technical provisions to ensure practical availability in bankruptcy. - IGF coverage: - IGF compensates on insolvency for limited classes and is independent. - Motor and farmers TPL and compulsory farm building insurance: 100 percent up to the sum insured. - Life insurance and “other compulsory insurance resulting from separate acts or international agreements ratified by the Republic of Poland”: 50 percent of eligible receivables up to EUR 30,000. - In motor/farmers TPL: personal injury PLN equivalent of EUR 5 million per event; property EUR 1 million per event. - Compensation for life insurance and compulsory non-life financed ex post; writers of compulsory TPL pay levies for other IGF functions. - IGF assistance role limited to motor and farmers TPL for transfers where transferee meets solvency. - Concerns: - IGF well-prepared for compulsory lines but not for life insurance. - 50 percent cap with EUR 30,000 limit for life appears unhelpful for confidence objectives. - Recommendations: - PFSA should give high priority to recovery planning for PZU Group (Responsible Authority: PFSA — Priority: High). - Authorities should review insolvency approach in life insurance, IGF readiness, and robustness of policyholder protection arrangements given absence of explicit policyholder preference (Responsible Authority: MoF, PFSA, IGF — Priority: Medium). ### Key sectoral risks - Market and interest rate exposure: - Lower exposure to market risk and low rates versus many European countries due to limited guaranteed savings business. - Significant exposure to Polish government securities market-price developments. - Duration mismatch (PFSA estimate, December 31, 2016): Macaulay duration of assets ~5 years; liabilities ~11 years; average duration gap ~6 years. - Lapse risk: - Largest underwriting risk in life insurance; accounted for over 50 percent of total SCR at end-2017. - Non-life liability risk: - Risk from extensions in civil liability scope, claims inflation, uncertainty over pricing for pain and suffering payments. - Supreme Court judgments (including March 2018) extended insurer liability in certain cases; authorities addressing uncertainty via court judgment database, PFSA recommendations, stress tests, and Ministry of Justice clarifications. - Interconnectedness: - Main link to banks via ownership (notably PZU’s bank investments) and bancassurance. - No insurance company failures since 2000; five non-life companies had acute challenges but recovered; all were small (<2 percent market share each). ### Main recommendations (excerpted with responsibility and priority) - PFSA Independence and Resourcing: - Government to review legislation and practice to strengthen PFSA independence and extend legal protection provided for bank supervision to insurance supervision. — Responsible Authority: MoF — Priority: High. - PFSA to review staffing numbers and skills requirements. — Responsible Authority: PFSA — Priority: High. - Solvency II Implementation: - PFSA to update and expand its 2015 publication on internal models and consider a path to approval. — Responsible Authority: PFSA — Priority: Medium. - MoF to consider wider use of IFRS in light of IFRS 17. — Responsible Authority: MoF — Priority: Low. - Insurance Supervision: - PFSA to review supervisory approach for conduct reporting, home supervisor assessment for foreign-owned insurers, and sharpening messages to senior management. — Responsible Authority: PFSA — Priority: Medium. - PFSA to consider greater focus on strategy, business model, risk culture for larger insurers. — Responsible Authority: PFSA — Priority: Medium. - Supervision of Groups and Financial Conglomerates: - PFSA to apply supplementary supervision to PZU Group, strengthen internal coordination among sectoral supervisors, and plan conglomerate-wide risk assessment. — Responsible Authority: PFSA — Priority: High. - PFSA and MoF to consider improvements to extent and timeliness of public data on cross-border business. — Responsible Authority: PFSA, MoF — Priority: Medium. - Conduct of Business and Intermediary Regulation: - Authorities to review approach to conduct supervision and powers for consumer protection (including redress and enforceable undertakings). — Responsible Authority: PFSA, OCCP — Priority: Medium. - PFSA to consider organizational reforms to ensure close focus on conduct supervision. — Responsible Authority: PFSA — Priority: Medium. - Financial Stability and Macroprudential Supervision: - PFSA to prioritize recovery planning of the conglomerate group, integrating bank work. — Responsible Authority: PFSA — Priority: High. - Authorities to review insolvency approach: life insurance compensation, IGF readiness, and robustness of policyholder protection in liquidation. — Responsible Authority: MoF, PFSA, IGF — Priority: Medium. _This overlay is drawn exclusively from the IMF technical note prepared as part of the Poland 2018 Financial Sector Assessment Program (content unit 1polea2019006)._ ### EXECUTIVE SUMMARY ___________________________________________________________________________ 4 ### EXECUTIVE SUMMARY ### Scope, timing, and focus - This technical note is an update and assessment of regulation and supervision of the Polish insurance sector since the 2012 assessment; it is part of the Poland 2018 Financial Sector Assessment Program (FSAP) and draws on discussions in Warsaw from January 8 to 20 and May 8 to 21, 2018. - The note focuses on key issues and developments, notably the implementation of the EU Solvency II framework from January 1, 2016, and does not present a detailed IAIS Insurance Core Principles (ICPs) compliance assessment. ### Market structure and key statistics - The Polish insurance sector comprises 60 insurance companies and one specialist reinsurance company. - Company breakdown: 27 life insurers and 34 non-life insurers; the specialist reinsurance company writes non-life business only. - Composite insurers are not permitted; many groups offer both life and non-life business through separate companies, typically with a non-life company owning a life insurer. - The largest insurance group, PZU, which is state-controlled, accounts for around one third of both the life and non-life insurance markets (2017, by gross written premiums (GWP)). - There are 11 mutual insurers, accounting for under 5 percent of GWP. - Foreign participation: foreign-owned companies account for around 50 percent of total GWP and total assets. - Cross-border presence: insurers based in other EU countries operating via branches or freedom to provide services accounted in 2016 for GWP equivalent to 8 percent of the domestic market, down from 11.2 percent in 2014; further reduction occurred in 2017 following transfers of some foreign branches’ business to domestic companies. ### Implementation of 2012 recommendations and Solvency II - Most recommendations of the 2012 FSAP insurance assessment have been implemented. - Implementation of Solvency II (effective January 1, 2016) has significantly strengthened regulation and supervision by introducing: - risk-based capital standards; - comprehensive insurance group supervision; - new requirements on suitability of key persons, risk management, and controls. - Solvency II was implemented without significant increases in PFSA staff numbers. - Solvency II changes appear well-embedded, with no significant exemptions or transitional arrangements; implementation was thorough and proportionate. - With limited long-term guarantee business, Polish life insurers currently have no need for special LTG measures used in some EU countries. - Additional reporting requirements and audit of the key (published) Solvency and Financial Condition Report were added to Solvency II minimum requirements. - No insurer has had a model approved for calculation of capital requirements under Polish rules; several insurers have started discussions with the PFSA; some foreign-owned insurers have group-level models covering Polish business approved by the home supervisor. - The PFSA is viewed as relatively conservative on internal models but has adopted Solvency II standards with no additional quantitative requirements. - Recommendation: PFSA should update and expand its 2015 publication on concerns with the use of internal models and could consider setting out a path to approval, including conditions that would need to be satisfied. ### Supervision, institutions, and PFSA capacity - There remains a need to address PFSA independence, resources, and legal protection: - Review legislation and practice to strengthen PFSA independence regarding governance and financing, ability to determine internal organization and recruitment/remuneration arrangements, and extend to insurance supervision the legal protection provided for bank supervision (noting legislative change effective January 1, 2019 is discussed in the Financial Sector Stability Assessment). - PFSA should review staffing numbers and skills requirements to determine where additional resources will be needed to meet supervisory challenges. - The supervision framework is sound: - thorough off-site review and early response processes; - continued central role for broad-scope on-site examinations supplemented by a more flexible supervisory visit tool; - comprehensive Supervisory Review and Evaluation Process (SREP) that informs risk-based supervisory planning and dividend restrictions. - Areas for strengthening supervisory practice: - sharpen key messages to management, especially in examination reports; - consider an enhanced supervisory model for larger insurers focusing on strategy, business model, risk culture, governance, controls, and management capacity to ensure future compliance. - The PFSA engages actively in cross-border supervision: it leads the college of supervisors for the large group where it is home state and participates as a college member for most foreign groups. ### Emergence of a conglomerate and conglomerate supervision - The first Polish financial conglomerate (headed by an insurer) has emerged, posing supervisory challenges. - PFSA is well-placed to supervise the group because most elements are PFSA-supervised and it is subject to the Solvency II group supervision framework. - Key supervisory actions needed: - complete application of comprehensive “supplementary supervision” requirements to the PZU conglomerate as soon as possible (the group was exempted from these in 2017); - finalize and implement arrangements to strengthen internal coordination among sectoral supervisors of the group; - plan for conglomerate-wide risk assessment and supervisory work. - Initial decisions were taken by the PFSA in November 2018 to begin addressing these recommendations. - Supervisory colleges are well-established for the group and have triggered conglomerate-wide recovery planning. ### Conduct of business and intermediary supervision - Supervision of intermediaries has been strengthened in line with a 2012 recommendation; further improvements were scheduled to take effect in late 2018. - Recent instances of customer mistreatment (notably in unit-linked and motor insurance) have been met by a coordinated response by authorities. - Business conduct regulation has been strengthened and further developed by EU legislation (e.g., disclosures to customers). - There is scope for PFSA to develop stronger preventative supervisory approaches to business conduct: - need enhanced processes to identify and assess risks to customers (distinct from insurer-focused SREP); - increased cooperation with the Office of Competition and Consumer Protection (OCCP) and the Financial Ombudsman (FO); - consider internal organizational changes to give conduct supervision adequate focus and resources and to ensure conduct is not seen as subordinate to prudential work. - Recommendation: review powers available to PFSA and OCCP for consumer protection, including powers to require redress and to accept enforceable undertakings. ### Financial stability, macroprudential, recovery, and resolution - Market-wide risk monitoring is carried out, including annual stress testing; insurance sector issues are considered within the financial sector macroprudential supervisory framework. - PFSA has initiated recovery planning with the largest group; it is awaiting and contributing to EU-level developments on insurance recovery and resolution planning. - Policyholder protection: - Poland’s compensation scheme is comprehensive for compulsory lines but could be strengthened for life insurance. - In the absence of explicit policyholder preference in bankruptcy law, further work is needed to ensure that assets covering technical provisions would be available in practice for settlement of claims in life and non-life insurance. ### Selected findings and areas for development (summary) - Strengths: - Solvency II implementation has materially strengthened prudential regulation and group supervision. - Supervisory framework is robust, with a strong SREP and effective on-site and off-site tools. - Active cross-border engagement and established supervisory college arrangements. - Areas for development: - PFSA governance, independence, legal protection, resourcing, and staffing. - Clarification of PFSA expectations on internal model approvals and communication with industry. - Completion and implementation of supplementary supervision and conglomerate coordination for PZU and similar groups. - Enhanced focus and coordination on conduct of business supervision, cooperation with consumer protection agencies, and strengthening consumer redress powers. - Review of policyholder protection and insolvency arrangements for insurance. ### Main recommendations (excerpted, with responsible authority and priority) - PFSA Independence and Resourcing - "As was also recommended in the 2012 FSAP assessment, the Government should review legislation and practice to strengthen the independence of the PFSA in relation to its governance and financing arrangements, its ability to determine its internal organization and its recruitment and remuneration arrangements; it should also extend to insurance supervision the legal protection provided for bank supervision. Such a review should also consider giving the PFSA formal status in the determination of regulatory needs and priorities (see also the Financial Sector Stability Assessment, including its discussion of the impact of legislative change effective January 1, 2019)." — Responsible Authority: MoF — Priority: High - "The PFSA should review its staffing numbers and skills requirements to determine where it will need additional resources to meet the challenges of supervising a developing insurance sector and to implement the recommendations of this FSAP." — Responsible Authority: PFSA — Priority: High - Solvency II Implementation - "The PFSA should update and expand its 2015 publication on its concerns with the use of internal models; it could consider setting out a path to approval, including conditions that would need to be satisfied." — Responsible Authority: PFSA — Priority: Medium - "In the light of the recent issuance of IFRS 17 (Insurance Contracts), the authorities should give consideration to the possibility of wider use of IFRS by insurers for statutory financial reporting, taking into account the outcome of the EU IFRS adoption process and experience of other countries." — Responsible Authority: MoF — Priority: Low - Insurance Supervision - "The PFSA should review aspects of its supervisory approach, in particular whether there is adequate reporting by insurers to support risk assessment of conduct of business, the need for more assessment of the home supervisor in the case of foreign-owned insurers and the scope for sharpening messages to senior management." — Responsible Authority: PFSA — Priority: Medium - "The PFSA should consider whether, at least in relation to larger insurers, their supervisory approach would be strengthened by greater focus—including in discussion with insurers—on strategy, business model, risk culture, etc., and on the capacity of management to ensure compliance with regulatory requirements in the future." — Responsible Authority: PFSA — Priority: Medium - Supervision of Groups and Financial Conglomerates - "The PFSA should complete the application of its comprehensive 'supplementary supervision' requirements to the PZU conglomerate as soon as possible (taking into account decisions made on supplementary supervision in November 2018); should finalize and implement arrangements to strengthen internal coordination amongst the sectoral supervisors of the group; and should plan for conglomerate-wide risk assessment and supervisory work." — Responsible Authority: PFSA — Priority: High - "The PFSA and other authorities as appropriate should consider the scope for improvements to the extent and timeliness of publicly available data on cross-border business into Poland by insurers based elsewhere in the EU." — Responsible Authority: PFSA, MoF — Priority: Medium - Conduct of Business and Intermediary Regulation - "The authorities should review: the overall approach to insurance conduct of business supervision across the relevant agencies ... and the powers available to the PFSA and OCCP for consumer protection work, which could be strengthened by the addition of powers to require redress and to accept enforceable undertakings." — Responsible Authority: PFSA, OCCP — Priority: Medium - "In the light of such reviews, the PFSA should consider reform to its organization and supervisory processes, as necessary to ensure even closer focus on conduct supervision; for example, they should review whether to organize and staff conduct supervisory work separately from prudential supervision (but with close coordination)." — Responsible Authority: PFSA — Priority: Medium - Financial Stability and Macroprudential Supervision - "The PFSA should give high priority to recovery planning of the conglomerate group, in line with initiatives already taken, integrating work undertaken on the group banks." — Responsible Authority: PFSA — Priority: High - "The authorities should review the approach to insolvencies: in life insurance, the level of compensation, the readiness of the compensation scheme to intervene, and the availability of its assistance function; and for all insurance, the robustness of policyholder protection arrangements in a liquidation." — Responsible Authority: MoF, PFSA, IGF — Priority: Medium _This executive summary is drawn from the IMF technical note prepared as part of the Poland 2018 Financial Sector Assessment Program._ ### 7. Product range is limited compared with many European markets: ### 7. Product range is limited compared with many European markets: ### Product mix and market structure - Life insurance: - Unit-linked investment products, typically linked to dedicated investment funds managed by the insurer or within its group and with low levels of insurance cover, account for almost half of life insurance premiums. - The remainder is protection business (term life insurance) with a small amount of endowment policies. - Life insurance is not used extensively for retirement saving, and annuity business is minimal. - Group business accounted for around one third of total life insurance GWP in 2017, although the mix varies greatly by insurer. - Only around 30 percent was single rather than recurring premium business. - Non-life insurance: - Dominated by motor insurance (including compulsory third-party liability insurance (TPL)), which accounts for 63 percent of total non-life direct GWP (TPL insurance is also compulsory for farmers) at end-2017. - Property is the second largest class of non-life insurance. - Accident and health insurance: - May be written by both life and non-life companies (but by life companies only where incidental to life insurance) and accounts for around 13 percent of total insurance sector GWP. - Coverage is mostly for accident (healthcare provision is substantially state-based in Poland). - Credit insurance: - Limited to well-established products such as insurance of trade receivables, performance bonds, surety business, etc. - Reinsurance: - Written by a number of insurers in addition to the one specialist company, but total reinsurance GWP are around 6 percent of the non-life total and negligible in life insurance. - Some business reported as reinsurance is economically co-insurance (to spread larger corporate risks among multiple Polish insurers). - Most reinsurance cover obtained by Polish insurers is from international reinsurers, including intra-group reinsurers for some Polish subsidiaries of European groups. ### Geographic scope of business - Risks written by insurers in Poland are almost entirely domestic. - Insurers write only limited international business (the one specialist reinsurance company is an exception) and have not opened branches or provided cross-border services in other EU countries on a significant scale. - PZU Group operations in Latvia, Lithuania, Estonia (as a branch of the Lithuanian entity), and Ukraine have significant local market share, but their total premium income, almost all in non-life insurance, accounted for only around 7 percent of the PZU Group’s total premium income in 2016. ### Investment profile - Life insurers’ investments are dominated by government bonds (around 70 percent of the total, excluding assets held for unit-linked business) and interests in investment funds. - Securities lending is minimal (only significant amounts have to be reported to the PFSA and few insurers make reports). - Investments related to unit-linked business are around 80 percent investment funds, the underlying assets being mostly equities and government and corporate bonds. - Non-life insurers have a similar investment profile, but their assets also include significant equity and other interests in related undertakings. - Only a minority of insurers use a relatively small range of derivative instruments (particularly interest rate swaps). ### Distribution channels - Agent channel (including bancassurance) accounts for over 60 percent of GWP in both life and non-life insurance. - There are some 31,000 agents (including banks); about half act only for one insurer and the rest act for more than one in at least one line of business (“multi-agents”). - Brokers operate almost entirely in the wholesale market for non-life insurance and are required to act on behalf of the customer and to offer advice based on a reliable analysis of a sufficient number of offers. - Direct sales account for 30 percent of life insurance, but only 10 percent in non-life insurance. ### Penetration, size and recent development - Penetration rates in 2016 (premiums as a percentage of GDP): 0.99 percent for life and 1.92 percent for non-life. - European averages cited: 3.99 percent life and 2.73 percent non-life. - Poland’s rates are in line with countries in Central and Eastern Europe. - Total assets of the sector at end-2017 were almost PLN 200 billion, equivalent to around 10 percent of GDP (compared with around 80 percent of GDP for the banking sector). - Table 2 (PFSA data, national accounting standards basis) highlights: - Life: number of companies 27 in 2017; GWP (PLN bns) 24.6 in 2017; Total assets (PLN bns) 104.7 in 2017. - Non-life: number of companies 34 in 2017; GWP (PLN bns) 37.8 in 2017; Total assets (PLN bns) 92.0 in 2017. - Total number of companies: 61 in 2017. - Note: The one specialist reinsurance company is included in the non-life data. The data do not include business of branches or business carried out on a cross-border basis from other EU countries. ### Recent performance drivers and pressures (2015–2017) - Life insurance pressures: - Customer perception of unit-linked insurance deteriorated after volatile investment returns and adverse publicity from regulatory actions addressing high surrender charges. - Sales of new unit-linked policies fell sharply in 2016; picked up in 2017, but total outstanding unit-linked business continued to fall as policyholders surrendered policies under more limited charges. - Non-life insurance pressures: - Strong competition in the motor insurance market, reportedly partly from foreign insurers accessing the market on a cross-border basis. - Upward pressures on claims for bodily injury and for “pain and suffering” following changes to Article 446 of the Civil Code in 2008 and subsequent court rulings, including a Supreme Court ruling in 2010 requiring payment where death occurred prior to 2008. - Insurers increased premium levels sharply in the second half of 2016, partly due to regulatory focus on premium adequacy. - Sector-wide cost drivers: - Major regulatory changes including the implementation of Solvency II and other EU directives and domestic consumer protection initiatives. - More intensive supervisory work by the PFSA, including recommendations on claims settlement practices of motor insurers and supervisory assessments of compliance. - Enforcement action by the PFSA and the OCCP. - Reduced returns on investment portfolios due to market developments. - Increased taxation: a tax of 0.44 percent of the assets of all financial institutions/groups with assets of over PLN 2 billion was imposed from early 2016. ### Profitability and capitalization - Insurers in aggregate have recorded overall positive results, more so in life insurance (nearly 20 percent return on equity). - Non-life profitability improved from less than 10 percent return on equity in 2015–16 to nearly 15 percent in 2017, reflecting mainly increased premium prices. - Aggregate solvency capital ratio for the sector (coverage of the Solvency II solvency capital requirement with eligible own funds) was 256 percent at end-2017 (life 320 percent and non-life 227 percent). - Five Polish insurers included in the 2016 EIOPA European insurance stress tests showed relatively low exposures to the scenarios, including the “double hit.” ### PZU Group (summary) - PZU SA Group (Powszechny Zakład Ubezpieczeń) is the largest Polish insurance group; the Polish government has a controlling interest of 34 percent. - PZU SA is a non-life insurance company and holds investments across life insurance, investment fund and pension fund management, healthcare services, banking entities in Poland, and insurance businesses in the Baltics and Ukraine. - Since 2015, PZU increased interests in Polish banking: - Alior Bank—25.2 percent acquired in 2015 (29.6 percent with inclusion of indirect holdings). - Bank Pekao SA—a 20 percent holding acquired in June 2017 (amounting to a 32.8 percent stake held jointly with PFR). - Group total assets increased from PLN 67 billion in 2014 to over PLN 300 billion at end-2017. - Parent company equity (national accounting standards basis) increased from PLN 13.1 billion to PLN 13.9 billion in the same period; subordinated debt of PLN 2.25 billion was issued soon after the Bank Pekao SA interest acquisition. - Group solvency ratio was 247 percent at end-June 2017; group target is 200 percent. PZU has an A– rating from Standard & Poor’s. - PZU published a revised strategy in January 2018 aiming to increase cross-selling of financial products within the group. ### Key sectoral risks - Market and interest rate exposure: - Much lower exposure to market risk and to low interest rates than many other European countries because Polish life insurers have not written significant traditional savings business with high guarantees and unit-linked business is almost entirely without guarantees. - There is significant exposure to interest rates through the bond portfolio and particular exposure to market-price developments of Polish government securities. - The mismatch between average duration of assets and liabilities is lower than elsewhere in Europe (PFSA estimate at December 31, 2016: Macaulay durations of assets about 5 years and of liabilities about 11 years; average duration gap about 6 years). - Longevity and mortality risk: - Low volume of retirement savings business leads to limited exposure to longevity risk. - Mortality risk is significant but partially mitigated by diversified portfolios. - Lapse risk: - The largest risk in life insurance, accounting for most underwriting risk and over 50 percent of total solvency capital requirements (SCR) at end-2017, is related to lapses of insurance policies. - Non-life liability risk: - A key risk is further extensions in the scope of civil liability, with claims inflation and uncertainty over pricing, particularly regarding pain and suffering payments to relatives. - A Supreme Court judgment in March 2018 extended insurers’ liability to include compensation for relatives of a beneficiary suffering persistent vegetative state. - Authorities are working to address uncertainty via a database of court judgments, PFSA recommendations on claims settlement, stress tests, and Ministry of Justice clarifications to the Civil Code. ### Financial stability and interconnectedness - No insurance company failures since 2000; several failures in the 1990s during market development. Five non-life companies faced acute challenges in recent years but recovered; all were small (none had market share more than 2 percent). - Main source of interconnectedness with banks is ownership links (notably PZU’s bank investments) and bancassurance. - Bank deposits are a negligible and reducing share of insurers’ assets due to lower interest rates and higher capital charges under Solvency II. ### Regulatory and supervisory framework - The Polish Financial Supervision Authority (PFSA) is the principal supervisory agency for the insurance sector, responsible for prudential supervision and conduct of business, licensing and supervising insurance brokers, and indirect supervision of agents via supervision of insurance companies. - PFSA structure: - Comprises eight members including a full-time Chairman and two full-time Vice-Chairmen and representatives of MoF, Ministry of Economic Development, Minister of Labor and Social Policy, President of the NBP, and the President of the Republic of Poland. - Supported by the PFSA Office with around 950 staff in total. - PFSA and its employees do not enjoy explicit legal protection and immunity from suit for actions taken in the course of supervisory work on insurance companies or intermediaries. - Ministry of Finance (MoF) leads on insurance regulation and prepares legislation; MoF has ten staff working on insurance sector policy issues and closely cooperates with PFSA. - Other bodies with conduct responsibilities: - Office of Competition and Consumer Protection (OCCP): enforcement powers for marketing and unfair contract terms; may issue opinions for court consideration. - Financial Ombudsman (FO): handles complaints against insurance companies and can impose financial penalties, submit opinions to courts, and petition the Supreme Court. *Source: IMF staff summary of chapter titled "7. Product range is limited compared with many European markets" from the referenced PDF.* ### 23. Insurance work is carried out by various departments of the PFSA, reflecting in part a ### 23. Insurance work is carried out by various departments of the PFSA, reflecting in part a ### Organization and supervisory functions - The PFSA divides insurance work between off-site and on-site supervisory work while aiming to balance insurance-specific focus with PFSA-wide functional areas. - Separate functions exist for: - licensing (the licensing department also covers supervision of intermediaries), - off-site supervision, - risk management, and - inspection. - PFSA-wide Legal and Enforcement and Market Practices Departments cover legal and enforcement work and surveillance and certain activities in relation to conduct risks. - Unlike banking supervision, there is no dedicated insurance regulation function; responsibilities for regulatory policy, including cooperation with the MoF, are shared amongst departments. - Total staff involved in insurance supervision, including in PFSA-wide functions such as Legal, have increased from around 99 in 2011 to an estimated 106 at end-2017. ### Governance, budget and staff remuneration - The PFSA is responsible to the Prime Minister and its budget is approved by the MoF and Parliament. - The PFSA’s operating expenses are determined by government and funded from the budget, although expenditure is financed in full from fees levied from the regulated companies rather than from general taxation. - Staff remuneration follows requirements set out by the Prime Minister rather than the PFSA; remuneration should take account of market salary levels, but in practice is not aligned to private sector levels. - The PFSA must obtain consent from government to its internal organization. - Note on legislative change: Article 3 of the Act of 21 July 2006 on Financial Market Supervision. On January 1, 2019 an amendment to the Act entered into force enabling the PFSA to establish its budget independently. See the FSSA. ### Insurance Guarantee Fund (IGF) — scope and financing - The Insurance Guarantee Fund (IGF) provides compensation on insurer insolvency for limited classes of business and is an independent agency. - On insolvency, the IGF satisfies claims: - for compulsory motor and farmers TPL insurance and compulsory insurance of farm buildings: 100 percent up to the sum insured; and - for life insurance and “other compulsory insurance resulting from separate acts or international agreements ratified by the Republic of Poland:” 50 percent of eligible receivables up to EUR 30,000. - In the case of motor and farmers TPL, up to the minimum amount of the guarantee sum—i.e., in the case of personal injury the PLN equivalent of EUR 5 million per event and, in the case of damage to property, EUR 1 million per event—whatever the number of victims; both individuals and legal entities are covered under the IGF’s protection. - Compensation for life insurance and compulsory non-life insurance in case of insolvency is financed on an ex post basis; writers of compulsory TPL also pay levies to fund other IGF functions. - IGF has an assistance role: to enable continuation of protection in case of risk of insolvency, it can make a loan to another insurer interested in taking over a portfolio; however, it can do so only for motor and farmers TPL insurance and only where the transferee insurer would comply with solvency requirements after the transfer. - IGF also provides compensation in case of liability for personal injury or damage incurred by uninsured drivers or farmers and in case of liability for personal injury or damage (where there is also severe personal injury) by unidentified drivers. ### Arrangements for inter-authority cooperation and financial stability oversight - The Financial Stability Committee (FSC), established in 2008, coordinates actions related to financial stability and (since 2015) macroprudential supervision, meeting as FSC-Macroprudential (FSC-M). - FSC-M members: President of NBP (Chairman), Minister of Finance, Chairman of the PFSA, and President of the Management Board of the Bank Guarantee Fund. - The NBP provides support for the FSC; the NBP has no direct responsibilities for the insurance sector but monitors and assesses potential stability risks related to insurance in its half-yearly Financial Stability Review and in reports to the FSC. ### EU engagement, legislative instruments and supervisory guidance - Much of the insurance regulatory framework derives from EU legislation, including Solvency II and the Insurance Distribution Directive (IDD) to be implemented in October 2018. - EIOPA issues technical standards and guidelines on many issues, including supervisory approach and colleges of supervisors; EU legislation and EIOPA material also increasingly cover business conduct. - Major EU and domestic instruments and PFSA measures (up to May 2018) include: - Solvency II Directive 2013 (Act on Insurance and Reinsurance Activity 2015), - Insurance Distribution Directive 2016 (Act on insurance distribution 2017), effective October 1, 2018, - PRIIPs Regulation (direct effect, from January 1, 2018), - GDPR (direct effect, from May 25, 2018), - Act on insurance and reinsurance activity 2015, - Act on complaints handling procedures by financial service providers and Financial Ombudsman 2015, - Act on insurance distribution 2017 (to take effect 1 October 2018), - PFSA Principles of Corporate Governance for Supervised Institutions 2014, - Guidelines on the Management of Information Technology and ICT Environment Security 2014, - Guidelines on Motor Vehicle Insurance Claims Settlement 2014, - Guidelines on flood risk management in the insurance sector 2014, - Recommendation U on good practices in the field of bancassurance 2014 (addressed to banks), - Guidelines on reinsurance/retrocession 2014, - Guidelines on insurance distribution 2014, - Guidelines on the process for technical provisions 2015, - Recommendations regarding the process of determining and paying compensation for non-pecuniary damage from contracts of third-party insurance of vehicle owner 2016 *, - Recommendation regarding the product management system 2016 *, - Recommendations on assessing product adequacy 2016 *. - (* issued under Article 365 of the Act on insurance and reinsurance activity 2015.) ### Implementation and impact of Solvency II in Poland - Solvency II has changed capital adequacy, valuation of assets and liabilities, investment regulation, group supervision, and requirements on suitability of key persons, risk management and internal controls. - The main EU requirements were enacted in 2014 (taking effect on 1 January 2016); the Act on insurance and reinsurance activity was enacted in September 2015. - Observations on implementation (as of May 2018): - With some continuing exceptions being addressed, the quality and timeliness of reporting is adequate. - Although initially unclear whether all insurers would meet new minimum solvency requirements, and one failed to do so initially, all are compliant (as at May 2018). - Given the nature of life products, no insurer needed long-term guarantees measures. - Only one insurer benefits from the exemption from certain requirements available to smaller mutual insurers. - The PFSA has not granted exemptions to individual insurers on either the scope or frequency of reporting requirements. - Regarding proportionality, the PFSA has not objected to smaller insurers meeting requirements on key functions by having the same person hold more than one function (except internal audit). - PFSA added to Solvency II minimum requirements in some areas: - Insurers are required to report compliance with the SCR quarterly rather than annually (Solvency II requires quarterly reporting only on MCR compliance). - The Solvency and Financial Condition Report (SFCR) is subject to an audit requirement. - The PFSA published guidance and recommendations, including 31 detailed recommendations on insurers’ approach to product management and guidance on reporting requirements. - Dividend restrictions and supervisory expectations: - The PFSA sets expectations each year on levels of coverage expected if insurers are to pay dividends; these are treated by insurers as effective minimums. - For 2018, these expectations are 150 percent of SCR for non-life insurers and 175 percent for life. - The PFSA has not required any insurer or insurance group to hold additional resources as a capital add-on to date. - On internal/own models and undertaking-specific parameters: - No insurer is yet using a model to calculate solvency under Polish requirements, at solo or group level. - The PFSA had seven open discussions as at May 2018 regarding internal models under the EIOPA pre-application process. - No insurer has applied for use of undertaking-specific parameters in the calculation of its SCR under the standard approach. ### Findings related to prior (2012) recommendations and ICP3 issues - The 2012 assessment found a high level of observance of the ICPs; most were observed or largely observed, with ICP 3 (powers, resources and independence of the supervisory authority) rated partly observed. - Since 2012: - Most recommended changes in regulation and supervisory practice have been implemented; less progress on ICP 3 issues. - Solvency II implementation and upgrades to intermediary supervision addressed many 2012 recommendations. - Mixed progress on ICP3: governance and financing arrangements had not changed at the time of the detailed assessment; PFSA remains exposed to risk of undue political influence and constrained in recruiting/retaining staff. - On January 1, 2019 an amendment to the Act on Financial Supervision enters into force enabling the PFSA to govern its budget and exempting PFSA employees, but not the Chairman and Vice-Chairman, from the remuneration requirements set by the Prime Minister. - The PFSA continues to lack general rule-making powers; under the 2015 Act it may make generally-applicable recommendations (Article 365) on a comply-or-explain basis and must publish where an insurer declines to comply and management’s explanation. - The PFSA retains a power (Article 361 of the 2015 Act) to impose enforceable recommendations on an individual insurer; this has been used mainly in on-site examination enforcement. - No change in legal protection for the agency or its staff from legal action resulting from actions (or inactions) taken in the course of insurance sector supervision. - Staff numbers have increased somewhat but not as much as might be needed to meet Solvency II implementation demands; the PFSA is finding it hard to recruit staff with Solvency II expertise and relies more on graduate recruitment and training. - Recommendations related to powers to require the transfer of portfolios and insolvency/winding-up processes have not been addressed; issues around insolvency processes remain to be addressed in the absence of recent tested failures. ### Key recommendations - It is recommended that: - the Government of Poland review relevant legislation and practice to strengthen the independence of the PFSA in relation to its governance and financing arrangements, its ability to determine its internal organization and its recruitment and remuneration arrangements; and that it also extend to insurance supervision the legal protection provided in law for bank supervision; such a review should also consider giving the PFSA formal status in the determination of regulatory needs and priorities (see also the Financial Sector Stability Assessment); - the PFSA review its staffing numbers and skills requirements, as it has done in respect of other areas of its responsibilities, to determine where it may need additional or different resources to meet the challenges of a developing insurance sector and to implement effectively the recommendations of this FSAP. *Source: IMF — Republic of Poland financial sector assessment (excerpt).* ### Box 3. Solvency II and the Insurance Core Principles (ICPs) ### Box 3. Solvency II and the Insurance Core Principles (ICPs) ### Solvency II relevance to ICPs - ICP 9 (Supervision): Solvency II greatly extends the range of reported financial information available to the PFSA for supervisory purposes; it has also required the PFSA to extend its supervisory toolkit with a more flexible approach to on-site supervisory work. - ICP 14 (Valuation): valuation of assets and liabilities for solvency purposes must now be undertaken on a consistent, whole balance sheet and (reflecting the generally market consistent approach of Solvency II) economic basis; no insurer needed the transitional and other arrangements designed in particular to dampen the impact of a market consistent approach on long-term guarantee business*. - ICP 15 (Investments): a “prudent person approach” is now required rather than detailed limits on types of investments; detailed reporting of actual portfolios is required and, while there has not been migration to higher risk investments, the PFSA has challenged insurers on particular investments and is working with EIOPA on issues with the interpretation of the scope of permitted derivatives. - ICP 19 (Enterprise-Wide Risk Management): Solvency II has introduced new risk management standards and a requirement on insurers to develop Own Risk and Solvency Assessments (ORSA). - ICP 17 (Capital adequacy): the approach is now substantially based on the impact of stress (by each risk category), with new requirements for operational risk capital, solvency control levels (SCR and MCR) and the application of solvency requirements at group level. - ICP 20 (Disclosure): there is now a requirement for annual publication by all insurers of a Solvency and Financial Condition Report covering specified information with an audit opinion. - ICP 23 (Group supervision) and 25 (Supervisory cooperation): Solvency II establishes an extensive regime for insurance group supervision and strengthens prior arrangements for supervisory colleges. - Governance and controls (ICPs 5, 7 and 8): insurers must now have control functions (risk, actuarial, compliance, internal audit) headed by fit and proper persons, with appropriate oversight by management and supervisory boards; role holders must be notified to PFSA, and chair and risk management member of the management board are subject to prior PFSA approval. *Without special measures for such business, many EU life insurers had been expected not to meet Solvency II requirements. Adjustments were developed, some temporary, as well as measures on equity risk. Poland is one of only eight EU countries not making use of any of these measures (See: EIOPA Report on long-term guarantees measures and measures on equity risk, 2017). ### Internal models, PFSA stance, and ORSA - PFSA engagement with models: - The PFSA provided early feedback to potential model applicants and fed back (at a high level) to the insurance sector on reservations over insurers' ability to meet Solvency II requirements on the use of models in the Polish context, citing concerns about adequacy of available data and reliance on expert judgment and proprietary models (e.g., catastrophe risk). - As at end-2017, four groups had internal models approved for group SCR including Polish business, and one other group planned to apply mid-2018. - So far, no foreign group had applied to extend a group model approval to meet local Polish requirements. - PFSA has not been a decision-maker in the four approvals to date but has been kept informed and given opportunity to provide input; in one planned mid-2018 application PFSA was being closely consulted though not part of decision-making. - PFSA approach and potential costs: - PFSA is open in principle to internal models, participates in EIOPA expert work, and maintains a small team of staff with expertise integrated with on-site inspection. - Potential downsides of PFSA’s prudent approach: - May be disadvantaged by not working closely with insurers to address concerns and using approval process to incentivize improved risk measurement and management. - Lacking active engagement, PFSA may not retain all expertise in risk measurement and management practices beneficial for supervision and future approvals. - Lack of involvement in group decision-taking may weaken PFSA’s role in Solvency II’s group supervision and cross-border cooperation. - For insurers, PFSA’s perceived conservatism may have resulted in extra cost (e.g., maintaining parallel systems for local and group requirements); development and maintenance of models also incur costs and internal models do not always yield solvency capital savings. - Recommendations on internal models: - PFSA should update and expand its 2015 publication on concerns with internal models; it could consider setting out a path to approval, including conditions that would need to be satisfied. - ORSA supervision: - Insurers are required to develop an ORSA (Article 63 of the Act on Insurance and Reinsurance Activity 2015). - PFSA reviews ORSAs; results have been mixed with over-reliance on regulatory requirements rather than insurers’ own view of risk and solvency. - PFSA has been providing targeted feedback to insurers with significant ORSA shortcomings and planned to extend the process to all insurers; PFSA planned general feedback in a letter to all insurers and is advised to consider publication of such material. ### Impact on insurers, capital and business models - General impact: - Implementation appears generally positive: costs were high but improvements in risk measurement and management were appreciated; risk governance standards raised, including requirements on control functions. - Publication in mid-2017 of insurers’ SFCRs, including solvency numbers on the new basis, did not attract significant press or stakeholder discussion. - Solvency coverage ratios (aggregate percentage coverage of minimum requirements): - Table 3: Poland: Solvency Ratios Before and After Solvency II Implementation (percentage coverage of minimum requirements, in aggregate) — Source: Polish Financial Supervisory Agency. - End-2015: Life insurers 274; Non-life 380; Total 328 - 2016 (January 1): Life insurers 338; Non-life 222; Total 266 - End-2017: Life insurers 320; Non-life 227; Total 256 - Observations: - Impact differed between life and non-life: for life insurers, lower technical provisions were key driver of increased aggregate coverage ratios; in non-life, higher capital requirements offset lower technical provisions leading to reduced coverage ratios. - Aggregate data hide differences among individual companies; for mutual companies, solvency coverage ratios declined significantly as they became subject to same regime as corporate insurers. - Changes in business model and risk techniques: - Increased reinsurance in non-life insurance and reductions in investment risk, including greater diversification into assets such as bank deposits. - Capital quality: 17 insurers had subordinated debt included in their own funds in the calculation of capital adequacy as at the end of 2017; total share of such debt in own funds was only 4.6 percent and common equity continued to account for most own funds. - PAS vs Solvency II measures: - For statutory reporting, insurers use Polish Accounting Standards (PAS) at company level; IFRS used only at group level. - PFSA monitors insurers’ financial information on a PAS as well as a Solvency II basis. - PAS numbers differ significantly from Solvency II measures, which generally result in lower technical provisions. - Example (as at end-September 2017): life technical provisions were 30.2 percent lower on a Solvency II basis, nonlife 50.7 percent lower and the total 37.7 percent lower. Capital requirements are substantially higher on a Solvency II basis. - Differences and amounts are disclosed in SFCRs, aiding stakeholder interpretation; no evidence yet of confusion due to differing approaches. - IFRS adoption considerations: - IFRS 17 issued May 2017, takes effect in January 2021 (with restated 2020 accounts); its use in Poland is subject to adoption at EU level. - IFRS 17 shares with Solvency II a prospective approach to valuation of insurance liabilities and, together with IFRS 9, would narrow divergence between regulatory and statutory reporting. - Experience of implementing Solvency II and SFCR audit requirement arguably equips Polish insurers well for wider use of IFRS. - Concerns: - Transitional costs could be disproportionately high, especially for smaller insurers. - Wide-ranging tax implications and need to explain impact of reduced technical provisions to stakeholders. - Recommendation: - In light of issuance of IFRS 17, authorities should give consideration to costs and benefits of wider use of IFRS by insurers in Poland, taking into account outcome of EU adoption process and experience of other countries. ### PFSA supervisory framework and practices - Structure and process: - PFSA has separate processes and staff for reviewing/responding to insurers’ regular reports (off-site work) and for inspections; now undertakes supervisory visits (shorter focused on-site work) in addition to full inspections. - Off-site supervisory approach includes regular thorough analysis, reporting upwards within PFSA, and supervisory action geared in part to triggers aimed at promoting early intervention. - Off-site reporting and Early Warning System (EWS): - Key output: internal report evaluating extensive quarterly reported information at group and solo levels, including financial information on a PAS basis and solvency. - Monthly reporting (EWS) is less detailed, covers individual insurers only, and PFSA estimates likely change in SCR coverage based on changes in key financial information since most recent quarterly report. - Reports are produced per set templates and deadlines with identified supervisory actions for higher risk issues, some based on triggers (including SCR coverage). - Reports escalated and discussed at regular management meetings, including a weekly senior management meeting chaired by PFSA’s Vice-Chairman responsible for off-site insurance supervision. - Approach is extensively automated but supervisors are expected to make judgments on significance of developing risks. - Stress testing and cross-firm analysis: - PFSA’s Risk Monitoring Department carries out annual cross-firm SCR reviews (2017 review concerned mainly Loss Absorbing Capacity of deferred taxes, lapse risk and look-through approach to investments). - Manages stress tests, including at least one particularly severe scenario annually (e.g., 2017 non-life scenario: major catastrophe combined with reinsurer failure). - Stress test results and cross-firm analysis are taken into account in SREP and used to inform discussions with management and, where needed, require additional stress tests or capital plans. - On-site inspections: - Inspections scheduled for up to 60 days (maximum prescribed by law), cover quantitative issues (in-depth reserve reviews) and management and controls. - Immediate feedback at closing meeting and detailed inspection report identifying non-compliance and broader risk areas; recommendations letter and notification of sanctions sent separately. - Supervisory Review and Evaluation Process (SREP / BION): - Comprehensive risk assessment annually following a structured methodology reviewed and published by PFSA; methodology applies to all sectors supervised and is referred to as BION—Badanie i Ocena Nadzorcza. - Approach uses financial reporting ratios and information about management and controls; relies on detailed self-assessment questionnaire submitted by insurers. - Final SREP output is a scored assessment shared with insurers, with required actions identified. - Risks are scored individually and capital adequacy and governance scored; four scoring categories: High, Medium High, Medium Low and Low. - Impact is separately scored using the same four-point scale, measured initially by market share but subject to override for insurer-specific features. - Product of impact and risk assessment drives intensity of supervision (four categories from High to Low); guidelines on supervisory action exist for each category. - As at the start of 2018 there was only one insurer in the High category. - No peer groups are used for risk assessment purposes. - SREP assessments are not published but are shared with management; PFSA’s dividend policy links dividend payments to minimum SREP scores as well as to level of capital adequacy and performance. *Italic source attribution line.* ### 56. In relation to insurance intermediaries, there are separate approaches to agents and ### 1polea2019006 - 56. In relation to insurance intermediaries, there are separate approaches to agents and ### Insurance intermediaries: agents and brokers - PFSA approaches differ for agents and brokers: - Agents: PFSA follows an indirect approach to agent supervision (see Section E on changes from October 2018). Insurers’ selection of and controls over agents are covered in the insurer supervision framework, including SREP; for on-site supervision, the PFSA undertakes special visits to those insurers (the large majority) which use agents. - Brokers: brokers are subject to direct PFSA supervision and have specialist on-site inspections aimed at verifying compliance with regulatory requirements. Brokers must submit regular reports to the PFSA but are not covered by the SREP risk assessment framework. ### Fit and proper and assessment of key individuals - PFSA supervisory work includes assessment of whether key individuals are fit and proper; insurers have the main responsibility for assessing individuals. - PFSA approval and notification requirements: - The PFSA does not prior approve appointment of key persons generally, but it does approve the chairman and risk management member of the management board of insurers (i.e., the chief executive and chief risk officer). - All defined role-holders must be notified to the PFSA; the PFSA checks qualifications and assesses suitability for the particular role and may meet with appointees (example: meetings with many actuaries on introduction of Solvency II actuarial function headed by a fit and proper function holder). - Proposed chairs of the management board are invited to a meeting of the PFSA board to respond to questions before the approval decision is made. - The PFSA has in practice issued decisions to refuse approval to appoint an individual as a member of the management board. - The PFSA has a power to dismiss all key function holders, including members of the management board or supervisory board. - Issues with key persons are also considered in the SREP assessment. ### Supervisory coverage, frequency, SREP and conduct risk - Inspection activity and resourcing: - An annual inspection plan is prepared on risk-based principles, taking into account off-site findings (including the SREP assessment), stress tests, the insurer’s impact, etc. - 12–15 inspections are being carried out annually on insurers and around 10 supervisory visits. - Some 15 inspections related to agent oversight; and about the same number of broker inspections. - Each insurer has a 40 percent chance of a visit each year. - There is no minimum required frequency of inspections and no impact override to guarantee minimum on-site coverage for the largest insurers irrespective of risk assessment. - SREP and conduct risk: - SREP framework is structured around financial risks; conduct risk is generally considered under operational risk, defined as risk of loss to the insurer rather than detriment to customers. - There is no overall score identifying the extent of net risk to customers posed by an individual insurer based on inherent risks (products, customers, distribution channels) and processes, controls, governance. - PFSA supervisors do assess conduct risks in depth, drawing on information from other PFSA departments and using SREP to trigger detailed review. - Reporting and information gaps: - There are extensive data on complaints (to the insurer, to the FO and to the PFSA itself). - The detailed new reporting required under Solvency II gives some insights into conduct risks. - More specific reporting on insurers’ products, customers, choice of distribution channel, etc., should be considered. - Scoring, judgment and home supervision: - SREP contains many quantitative elements and a number of rules constraining scoring (example: overall operational risk score is constrained by the score for relations with customers); there is scope for adjustment of scores during development of SREP output, including internal discussions and challenge at decision-taking panels. - SREP covers assessment of the owner’s oversight of the Polish insurer, but there is no assessment of the home supervisor, taking into account EIOPA’s assessments of non-EU supervisors. - Communication to senior management: - Reports and recommendation letters from inspections list large numbers of issues, mostly relating to compliance with detailed requirements, without weighting or indication of the most important areas, especially regarding risks that the insurer may fail to comply with requirements in the future. ### Forward-looking supervision and focus on larger insurers - Observations from FSAP and insurers: - There is scope for PFSA to supplement its approach, especially to larger insurers, with additional forward-looking supervisory work on key risks. - Insurers indicated PFSA’s approach is thorough on compliance but could include more discussion of longer term risk, including strategy and business model. - Many supervisors increasingly assess strategy, business model and high-level governance, including risk culture and the culture of customer treatment, to judge the capacity of management to ensure future compliance. - Recommendation to PFSA (see Section C and 60): - Review aspects of the supervisory approach discussed above, in particular: - whether there is adequate reporting by insurers to support risk assessment of conduct of business; - the need for more assessment of the home supervisor in the case of foreign-owned insurers; - the scope for sharpening messages to senior management resulting from supervisory work. - Consider whether, at least for larger insurers, the supervisory approach could be strengthened by greater focus, including in discussion with insurers, on strategy, business model, risk culture etc. and on the capacity of management to ensure compliance with regulatory requirements in the future. ### Conglomerate and cross-border supervision: role and practices - PFSA role: - PFSA’s role relates to group and home supervision of the one major domestic financial conglomerate and significant responsibilities as a host supervisor of foreign-owned insurers. - PZU Group and financial conglomerates: - PZU Group is the only domestic insurer with operations outside Poland but not significant enough for PZU to qualify as an Internationally Active Insurance Group (IAIG) for IAIS group supervision. - PZU Group is the only financial conglomerate in Poland (as defined by EU law and the Joint Forum Principles of Financial Conglomerates). - Fourteen foreign-owned insurers are parts of European financial conglomerates (seven in total) for which the group supervisor is outside Poland. - Some insurers have a “mixed activity holding company” parent; reporting and monitoring of intra-group exposures and transactions apply as required by EU legislation (Poland has not given supervisors powers to obtain information directly from a mixed activity holding company). - Regulatory framework and application: - Relevant EU legislation implemented: the 2002 Directive on Financial Conglomerates (FICOD). - Polish implementing legislation and related MOF ordinances reflect the directive’s requirements on identification of financial conglomerates and application of “supplementary supervision” covering capital adequacy, significant intra-group transactions, risk concentration, conflicts of interest, risk management and internal controls at conglomerate level. - The legislation applies to conglomerates headed by a regulated entity or otherwise including regulated entities in Poland and provides for mixed financial holding companies. - The conglomerates regulatory framework will now be applied to PZU Group following its recent expansion; in 2017 PFSA had exempted PZU from supplementary supervision on materiality grounds, but following PZU’s expansion the PFSA acknowledged conditions for exemption no longer exist and started procedures to enforce supplementary supervision (administrative decisions to be processed in 2019). - Use of Solvency II and internal PFSA arrangements: - As an insurance group, PZU has been subject to Solvency II group solvency requirements; Solvency II implementing legislation recognizes the Solvency II Method 1 approach to group solvency of an insurance-led conglomerate as equivalent to the methodology in FICOD. - PZU Group reports on this basis in its quarterly published financial statements and SFCR. - The group has not been subject to requirements related to intra-group transactions or risk concentrations on a full conglomerate-wide basis. - PFSA has established a senior level working group to coordinate oversight of PZU Group with representatives of all relevant PFSA departments at director level, led by the director of Insurance Supervision Department; the working group meets quarterly. - PFSA has periodically extended the college of supervisors for PZU to include PFSA bank supervisors; the college has focused mainly on coordination of insurance sector supervision. - PFSA review of group supervision and options: - PFSA is reviewing supervision of the group and considering: - alternative resource organization approaches, including creating a dedicated team to cover all aspects of PZU Group’s business and stronger lead supervision arrangements with insurance supervisor taking the lead; PFSA staff were considering a hybrid: a small, dedicated team to carry out supplementary supervision and support coordination from within the Insurance Supervision Department; - supervisory outputs such as a conglomerate-wide risk assessment drawing on but more than the sum of separate sectoral SREP assessments; harmonization of SREP methodologies across sectors; and a supervisory strategy and plan for conglomerate-level issues and work programs. - Any changes in approach to larger insurance companies addressing earlier recommendations should be applied to PZU Group. - College of supervisors for PZU Group: - A college has been in place since 2011 with annual meetings and exchange of information and other activities between meetings. - Lithuanian, Latvian and Estonian supervisory authorities participate in meetings; the Ukrainian supervisor is invited but chooses not to participate (it contributes necessary information). - PFSA leads the group risk assessment and the work plan resulting from the risk assessment. - Group management are involved in college meetings and PFSA provides feedback to the group. - There has been limited joint supervisory work so far. - Host supervision of foreign-owned insurers: - PFSA participates actively as host supervisor in colleges for foreign-owned insurers: it is a member of the supervisory colleges for 16 insurance groups based outside Poland and attends most but not all college meetings, taking into account the scale of the Polish business. - Only one group is based outside the EU; PFSA attends both the EU college and the college led by the global group-wide supervisor (in the USA). ### State ownership: scale and implications (Box 4 summary) - At end-2017: - Eight banks with some degree of state interest, accounting for 40 percent of total deposit-taking institutions’ assets. - Eight non-life insurers (around 39 percent of total non-life GWP). - Three life insurers (37 percent of GWP). - Seven capital market firms. - The Warsaw Stock Exchange is state-controlled. - The state is controlling shareholder of the largest commercial bank (BKO BP, a 29.4 percent interest) and the largest insurance company and head of the only financial conglomerate (PZU, 34.2 percent). - Policy and developments: - Policy on state ownership changed in 2015 to limit further privatization of core state assets and focus on strategic management and maximizing value of core state assets (including PKO BP and PZU). - Ownership supervision reformed under 2016 legislation; oversight of state interests in major institutions transferred to the Prime Minister; new arrangements for making appointments to supervisory boards based on skills and expertise; 2016 law includes a bar on disposals of shares in the largest companies, including PKO BP and PZU. - State interest increased owing to PZU’s expansion, including acquisition of controlling interests in Polish banks and the acquisition of Pekao Bank SA from UniCredit Group, transferring control from foreign to domestic ownership. *Source: 1polea2019006 — Excerpt from IMF FSAP material on the Republic of Poland.* ### Box 4. State Ownership in the Polish Financial Sector: Recent Developments and ### Box 4. State Ownership in the Polish Financial Sector: Recent Developments and Implications ### State ownership: objectives, scope, and risks - State control exists alongside commercial operations (examples: PKO BP and PZU). - Example of state interest: the 100 percent-owned National Development Bank. - FSAP discussions found: - No evidence of the government using state control to direct or influence business other than normal ownership objectives (e.g., prescribing lending or investment targets). - No evidence that the state sought the payment of excessive dividends; dividend limitations are subject to supervisory limitations applying to all financial institutions. - Risks highlighted: - Political appointments to supervisory or management boards can compromise governance; new ownership supervision arrangements provide checks but have not eliminated political appointments. - Significant turnover in senior management has occurred in some state-owned institutions. ### Separation of ownership supervision, regulation, and supervision - Centralizing ownership supervision in the Prime Minister’s office supports clearer separation from regulatory roles, though the framework is still developing. - There are no special provisions in regulatory laws for state-owned institutions. - The lead government department for regulation (MOF) has no role in ownership supervision. - The PFSA enforces regulation and supervision in the same way for all institutions regardless of ownership. ### Mitigants: regulatory independence, market discipline, and PFSA actions - Overall assessment: risks from significant state ownership are largely mitigated at present but underline the need for independent regulation and supervision. - Evidence of PFSA’s independence and enforcement: - PFSA has resisted the appointment of a management board member. - PFSA has imposed financial penalties (including on the state of Poland itself). - PFSA has restricted dividend payments by state-controlled banks without interference. - Market discipline factors: - WSE-listed status of all large state-controlled institutions, including the WSE itself, contributes to corporate governance and transparency. - Institutions show apparent professionalism and strong performance in practice. - Continued needs: - PFSA should be appropriately independent of government and adequately resourced in line with international standards. ### Cross-border and group supervision for insurance - In 9 of these 16 groups, non-EU supervisors are members of the college. - PFSA uses equivalence assessments and college-specific confidentiality agreements to share confidential information; in no case is PFSA unable to share information. - PFSA engages with home supervisors for EU insurers operating as branches or cross-border; PFSA is not a college member for branches unless the branch accounts for a significant share of group business. - PFSA monitors cross-border motor TPL pricing issues using data submitted by all market participants to the compensation scheme IGF, which shares it with PFSA. - Data limitations: - Scope to improve available data on cross-border business; industry noted that cross-border share is low but information is available to the market only after a significant lag due to EU directive reporting lags. ### Insurance group supervision and Solvency II implementation - Solvency II implementation has greatly strengthened group regulation and supervision and provides a strong starting point for supervising the enlarged PZU financial conglomerate. - Effective conglomerate supervision requires balance between sectoral and group supervision and team-working across supervisory functions. - Recommendations: - PFSA should complete application of its comprehensive “supplementary supervision” requirements to the domestic financial conglomerate as soon as possible. - PFSA should finalize and implement arrangements to strengthen internal coordination among sectoral supervisors of the group and plan for conglomerate-wide risk assessment and supervisory work. - PFSA and other authorities should consider scope for improvements to the extent and timeliness of publicly available data on cross-border business into Poland by insurers based elsewhere in the EU. ### Insurance conduct of business and intermediary regulation: supervisory actions and powers - High-profile supervisory and enforcement actions in response to customer mistreatment: - OCCP identified high surrender penalties in life insurers’ unit-linked policies and cooperated with PFSA. - OCCP initially imposed one penalty on an insurer and reached agreements with 16 insurers to reduce exit fees in new sales of certain products. - In December 2016, 17 agreements were made between insurers and OCCP to reduce exit fees on a range of existing contracts and to provide partial refunds to certain older policyholders. - OCCP undertook not to bring action before the courts under unfair or abusive contract terms legislation. - MoF led legislative change placing a 4 percent cap on surrender penalties in new business. - PFSA investigated unfair claims handling by motor insurers, published feedback in 2014, and imposed financial penalties on 20 individual insurers. - Strengthened powers under recent legislation: - FO (established in 2015) offers: - A free “intervention” procedure to support complainants. - An alternative disputes resolution service (small charge). - Power to impose financial penalties where an insurer is found not to be handling complaints fairly. - FO addressed nearly 19,000 complaints in total in 2017; 75 percent related to insurance; FO submitted 493 opinions to the Court and 20 petitions to the Supreme Court; FO has not used its powers to levy fines on financial institutions to date. - On 1 January 2018, PFSA acquired new powers under the EU PRIIPs Regulation: - Power to prohibit or restrict marketing, distribution or sale of certain insurance-based investment products (but not to require prior approval of insurance products). - Increased sanctioning powers, including higher financial penalties. - New disclosure requirements, especially the requirement to produce a key information document before sale. - Gaps in powers compared with some other countries: - No authority can require insurers to pay redress to consumers who suffered mistreatment. - No authority can accept enforceable undertakings from financial service providers. - No provision for binding dispute resolution of complaints; the Conciliation Court (managed by PFSA) provides binding decisions only where both parties agree; case volumes are low. ### PFSA capacity, conduct risks, and resource implications - PFSA reforms and capacity: - Enforcement and Market Practices Department (established early 2018) responsibilities: - Handling complaints against insurers received by PFSA. - Analysing contracts, standard terms and conditions. - Cooperation with FO and OCCP. - PFSA could reduce reliance on direct consumer complaints, which is resource-intensive. - PFSA does not maintain a separate risk assessment process or work program on consumer protection issues nor a list of current key areas of concern. - PFSA participates in and responds to EIOPA consumer risk identification processes (e.g., Consumer Trends Report). - Greater efforts to direct complainants to FO would save supervisory resources but could reduce useful supervisory “signals.” - Remuneration and distribution risks: - Agent remuneration is mainly by commission, which has been high and contributed to high surrender penalties on unit-linked insurance. - As at May 2018, disclosure requirements for remuneration were limited; implementation of IDD in October 2018 requires disclosure to the customer of the basis of remuneration (but not the amount). - Insurers are required for savings-related policies linked to investment funds or indices to spread commission payments over five years, limiting early-surrender impacts. - New requirements on assessing consumer needs will also help. - Challenges from EU legislation (IDD and PRIIPs) and PFSA implications: - Need to integrate agent and broker supervision (separate registers, different training and competence approaches). - Broker regulation changes regarding requirement to advise on the whole market; differs in detail from current framework subject to court interpretation. - Need for policy framework to implement powers to prohibit or restrict marketing/distribution/sale of relevant products, considering EIOPA coordination. - Potential market-structure changes due to increased costs of some business models; additional resources for intermediary regulation likely required. - PFSA is reviewing implications; strong leadership and adequate resourcing are required to ensure conduct supervisory work is recognized and supported. ### Recommendations on conduct supervision and consumer protection - Review the overall approach to insurance conduct of business supervision across relevant agencies to ensure: - Responsibilities are well understood. - There is no subordination of financial to conduct supervisory objectives. - Coordination between agencies is adequate. - PFSA leads on, and is resourced further to develop, preventative supervisory work. - Review powers available to PFSA and OCCP for consumer protection work; consider strengthening by adding powers to: - Require redress. - Accept enforceable undertakings. - In light of such reviews, PFSA should consider reforming organization and supervisory processes to ensure closer focus on conduct supervision; examples: - Consider organizing and staffing conduct work separately from prudential supervision while maintaining close coordination. - Consider adding to SREP a specific conduct risk assessment process integrated at a high level with financial risk assessment. ### Financial stability, macroprudential regulation, and crisis preparedness (insurance) - Authorities consider insurance stability and macroprudential issues limited at present. - PFSA leads on insurance stability issues; NBP has overall responsibility for financial system stability. - NBP covers insurance in its Financial Stability Review and issues are discussed at FSC-M. - Combination of NBP analysis and PFSA supervisory work, including regular stress tests, provides frequent analysis of market-wide developments and stability risks. - Shared exposures and sector risks: - High shared exposure to the Polish government; otherwise common exposures are limited. - Interconnectedness with the banking sector is low, other than via growing ownership links. - Liquidity risks from some life insurance forms are limited due to product mix and high liquidity of investment portfolios. - Procyclicality of risk-based capital framework has limited issues; some requirements dampen effects (e.g., equity risk symmetric adjustment in SCR standard formula). - Exposures to financial implications of regulatory action due to conduct issues and legal uncertainty have been considered; cooperation mechanisms (regulators and MoF) have functioned well, though market participants noted a preference for earlier action in some cases. *Source: Box 4. State Ownership in the Polish Financial Sector: Recent Developments and Implications (concluded), IMF content unit 1polea2019006* ### 85. There is no formal framework yet for assessing the systemic importance of insurers, ### 1polea2019006 - 85. There is no formal framework yet for assessing the systemic importance of insurers, ### Assessment of systemic importance of insurers - There is no formal framework yet for assessing the systemic importance of insurers, although FSC-M is considering the issues. - Polish insurers are not engaged in forms of insurance activity or related business that has been assessed internationally as giving rise to systemic risks, including complex savings business such as variable annuities or some forms of credit insurance. - There are limited issues related to substitutability (where an insurer dominates an economically significant line of business). - While the foreign-owned insurers in Poland include Global Systemically Important Insurers (G-SIIs), the only significant Polish group, PZU, is not formally regarded as a systemically important insurer (with associated specified additional requirements), in the domestic context. - PZU is subject to relatively intensive supervision, reflecting its size, and to the developing application of the financial conglomerates regulatory framework.53 ### FSC-M identification and supervisory implications - The FSC-M has provisionally identified non-life insurance as systemically significant; the FSC-M is empowered54 to identify all systemically important financial institutions (not only banks). - The non-life insurance sector (specifically PZU) has been judged as important in the financial system, mainly because of its interconnection with the banking sector. This assessment has not been made public and has no immediate consequences for action, although it is consistent with relatively intensive supervision of PZU. - Further work on the FSC-M approach is in hand. ### Resolution, recovery planning, and legal framework - There is no resolution regime for insurance in Poland; the authorities are waiting on (and contributing to) developing policy work at the EU level. - Limited international standards exist: the Financial Stability Board’s Key Attributes report (Annex 2 covers insurers) is applicable only to G-SIIs. - Solvency II implementation has strengthened the intervention framework in relation to solvency but does not provide for resolution work or even for recovery planning. - Polish insurers are subject to general company bankruptcy law, which provides for court-administered insolvency proceedings (on the application of the PFSA or the insurer itself) and appointment of a bankruptcy trustee or curator.55 - The IGF is the (limited scope) insurance guarantee scheme, with an assistance as well as compensation function. - EIOPA has issued an opinion56 supportive of the harmonization of recovery and resolution frameworks for EU insurers and is also working on resolution funding and insurance guarantee schemes. As at the time of the main FSAP work, there was no timetable for a response by the European Commission. ### Recovery planning actions and supervisory practice - It is appropriate for the PFSA nonetheless to address recovery planning. EIOPA’s opinion includes support for “pre-emptive recovery planning” (distinguished from the recovery plans required of insurers which fail to meet solvency capital requirements under Solvency II). - There are no explicit provisions on such pre-emptive plans in Polish insurance legislation, although provisions on ORSA and contingency planning require insurers to address risks of financial stress and its implications. EIOPA’s view is that pre-emptive recovery plans should be taken by a broad range of insurers.57 - Pending agreement and implementation of an EU approach, the PFSA is taking action in relation to the largest domestic group: the group (PZU) was asked, through the mechanism of the supervisory college, to prepare a “recovery action plan” at the group level. - The PFSA’s review of the plan should be integrated with similar work on the banks in the group, taking into account the structure of the group, which is headed by the non-life insurer. ### Insolvency law and policyholder protection issues - There is no explicit policyholder preference provision in law. Under Article 477 of the Act on Bankruptcy, in case of insolvency, the assets covering technical provisions for solvency purposes are treated as available for the settlement of claims (and certain costs). - There is no provision for the relevant assets to be clearly identified by the insurer at all times (and even checked periodically by auditors), in a register or by another appropriate mechanism, to ensure assets can in practice be readily used by a bankruptcy trustee to satisfy policyholder claims without risk of challenge from creditors. - The law has not been tested by a recent actual bankruptcy. Such work seems especially important given the limited scope of insurance guarantee scheme coverage. ### Insurance Guarantee Fund (IGF) coverage considerations - There is no international standard on insurance guarantee arrangements and many countries, including in the EU, provide no protection. - The IGF framework focuses, in relation to insolvency, on compensation for compulsory lines of business; the IGF is well-prepared to provide compensation in case of need for those lines, having extensive data and immediate access to finance as well as its assistance mechanism for TPL business transfers. - The same readiness is not true for life insurance or other compulsory insurance. - The limitation of compensation to 50 percent of benefits (with a Euro 30,000 cap) seems unhelpful in the context of the usual objectives of guarantee arrangements not only to compensate for actual loss but also to support market confidence in insurance. ### Contingency planning and supervisory colleges - All insurers are required to develop emergency plans and to reflect these in relevant systems, including risk management. - Cooperation on crisis preparedness is one of the issues covered by the EU arrangements for colleges of supervisors:58 the group supervisor is responsible for preparing an emergency plan as an annex to the coordination arrangements governing the operation of the college. - Such plans are aimed at: - facilitating the exchange of confidential information at short notice within the college (a list of contacts is also maintained by EIOPA); - ensuring access to current information such as group structure; and - committing supervisors to notify college members of any potentially serious financial disturbance at group level. ### Main recommendations - The PFSA should give high priority to recovery planning of the PZU Group, in line with initiatives already taken, integrating work undertaken on the banks in the group. - The authorities should review: - the current approach to life insurance insolvencies, including the level of compensation and readiness of IGF to intervene, including the possible availability of its assistance function for life insurance portfolio transfers; and - for all insurance, the robustness of policyholder protection arrangements in a liquidation, in the light of the continued absence of explicit policyholder preference and the lack of experience of the arrangements being tested; the possible need to action to ensure that assets covering technical provisions for solvency purposes are available in practice for the settlement of claims. *Source: Excerpt from IMF chapter 1polea2019006 - text provided in the content unit.* ### 19. Insurance ### 19. Insurance ### Risk management - LO: "It would be useful to elaborate more explicitly the PFSA's expectations of insurers regarding risk management in some respects so as to develop guidance at a more specific level of detail whilst providing for variation to take into account the nature, scale and complexity of insurers and insurance groups." - Findings: - "The regulatory framework for risk management has been extended in recent years, reflecting Solvency II and the PFSA’s response to market developments." - "The requirement for, and broad expectations of the risk management function are set out in the 2015 Act on insurance and reinsurance activity." - The PFSA has issued "Principles of Corporate Governance for supervised entities (2014)" and guidance such as "Guidelines on flood risk management in the insurance sector (2014)." - Other material includes "risk management expectations, including the 2016 Recommendations regarding the process of determining and paying compensation for non-pecuniary damage from contracts of third-party insurance of vehicle owners." - Recommendation: - Provide more explicit, specific guidance on PFSA expectations of insurers' risk management while retaining flexibility for the "nature, scale and complexity" of insurers and insurance groups. ### Liabilities (technical provisions / reserving) - LO: "It would be useful if some more publicly available guidance on provisioning was available to enhance consistency and transparency on reserving issues." - Findings: - "The regulatory requirements implementing the EU Solvency II Directive include provisions on the establishment of technical provisions, for life and non-life companies, particularly Articles 224–237 of the 2015 Act on insurance and reinsurance activity." - "The PFSA has supplemented these with its own Guidelines on the process for technical provisions (2015), published ahead of Solvency II implementation." - "The established requirements in law regarding technical provisions to be recognized for accounting purposes (which before 2016 also served as requirements for solvency purposes) have been retained and continue to be used for audited financial statements and additional reporting to the PFSA in parallel with Solvency II reporting." - "All this material is publicly available." - Recommendation: - Make additional publicly available guidance on provisioning/reserving to enhance consistency and transparency. ### Investments - LO: "Consistent with the broader system, the PFSA’s approach is principle-based and sensitive to the nature, scale and complexity of insurer risk profiles rather than overly prescriptive approach, although there are more detailed rules in many useful respects. To further enhance observance, the approach could benefit from some additional specificity and focus on the requirements of sound risk management in transparent guidance, and the reach of fitness and propriety rules to key investment officers especially those that may not be part of the management board, both being developments that are expected as Solvency II is implemented." - Findings: - "Solvency II implementation has led to an overhaul of investment regulation." - Article 276 of the 2015 Act: insurers’ investments must be managed in accordance with the "prudent person" principle ("that they invest in assets whose risks they can properly identify, measure, monitor, manage, control and report"). - "The PFSA is able to monitor compliance with this requirement through extensive reporting by insurers of their investment portfolios; and investment policy and practices are covered in both off-site and on-site supervision, including in the SREP process." - Recommendation: - Provide additional specificity and transparent guidance on sound risk management requirements and extend fitness and propriety rules to key investment officers outside the management board as Solvency II is implemented. ### Derivatives and similar commitments - LO: "This high level of observance can be further enhanced through more detailed transparent sector wide guidance on good practices addressing the specific risks associated with derivative use, possibly developed as part of or subsequent to the implementation of Solvency II." - Findings: - "Solvency II implementation resulted in changes to the approach to insurers’ derivatives business." - General Solvency II approach (Article 276 of the Act): limit use of derivatives (except in unit-linked and index-linked assets without guarantees) "to the purposes of reduction of risks and efficient portfolio management." - "The PFSA draws on EIOPA guidance to support an interpretation of the language of the Solvency II Directive/2015 Act on insurance and reinsurance activity." - "There is regular reporting to the PFSA of derivatives contracts and insurers’ policy and practices are evaluated in both off-site and on-site supervision, including in the SREP process." - "Only a minority of insurers use derivatives in practice." - Recommendation: - Develop more detailed, transparent sector-wide guidance on good practices for managing specific derivative risks, possibly aligned with Solvency II implementation. ### Capital adequacy and solvency - LO: "Observance of this principle will be enhanced with the full implementation of the Solvency II regime which will have the desired effect of making the capital requirements more sensitive to risk as is suggested by essential criterion (d). It is noted that the EU has stated that the current solvency regime as described in the directives is not fully observant of this ICP. The efforts of the PFSA on more risk-oriented approaches go some way in this direction but will reach a full culmination with the implementation of Solvency II." - Findings: - "Solvency II, a form of risk-based capital adequacy requirement for insurance companies, was implemented in full from the start of 2016, and all insurers are in compliance with the new minimum requirements." - "See Findings Section B." - Implication: - Full implementation of Solvency II has made capital requirements more risk-sensitive; continued alignment and supervisory practice will complete observance of the ICP. *Source: 1polea2019006 - 19. Insurance — https://www.imf.org/-/media/files/publications/cr/2019/1polea2019006.pdf* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1polea2019006.pdf_