## 1itaea2020003

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### EXECUTIVE SUMMARY — scope, approach, context
- Technical note updates and assesses the supervisory framework and practices for the Italian insurance sector since the last assessment in 2013.
- Part of the Italy 2019 FSAP; mission discussions in Rome from March 7 to 28, 2019.
- Focus areas: implementation of Solvency II, financial resilience of insurers, effectiveness of supervision, and previously identified weaknesses.
- Reference framework: IAIS ICPs (version issued October 2011, as revised as of November 2018).

### Key market facts and structure
- Fourth largest insurance market in Europe by premium volume in 2017.
- Insurance penetration: 8.34 percent (6.20 percent life; 2.14 percent non-life).
- Total assets (end-June 2018): EUR 910 billion, equivalent to 53 percent of GDP (banking sector ~215 percent of GDP).
- Number of direct insurers (end-June 2018): 100 direct insurers; 36 life; 52 non-life; 12 composite.
- Industry consolidation: insurers reduced from 162 in 2007 to 100 in 2018.
- Market concentration:
  - Life: top five groups hold 65 percent market share (by premium); top ten hold 80 percent.
  - Non-life: top five and top ten groups hold 67 percent and 85 percent, respectively.
- No reinsurer has operated in Italy since 2009.

### Solvency II implementation and impact
- Italy implemented Solvency II in full in 2016 and added minimum requirements in two areas (LACDT guidance and SFCR audit requirement).
- Industry aggregate solvency ratio changed from 229 percent (Solvency I–Dec 31, 2015) to 236 percent (Solvency II Day-One: Jan 1, 2016).
- Segment solvency ratio changes on adoption:
  - Life: 132 → 247 (Solvency Ratio %)
  - Non-life: 265 → 179
  - Composite: 347 → 239
- Internal models and specific parameters:
  - Fourteen insurers approved to use full or partial internal models (4 full; 10 partial). These 14 represent 69 percent of the industry SCR and 40 percent of industry technical provisions.
  - Eight solo non-life insurers authorized to use undertaking specific parameters (USP).
  - Remaining 79 solo insurers using the standard formula represent 27 percent of the industry SCR, and 57 percent of industry technical provisions.
- Long-term guarantees (LTG):
  - Volatility Adjustment (VA) is the only LTG measure used; 74 Italian insurers applied VA at end-2016.
  - VA improved the solvency ratio by 9 percentage points on average for Italian insurers at end-2016.
- Observed governance and product effects:
  - Greater transparency of group structures, higher governance quality, stronger risk management, and more responsible investment strategies.
  - Risk-based capital incentivized shift away from interest guarantees to capital-light products (e.g., unit-linked products).

### Areas for fine-tuning and harmonization (Solvency II)
- Need to fine-tune based on three years' experience: clarifications, streamlining, methodological revisions.
- Suggested refinements: guidelines on proportionality; recognition of policy limits in catastrophic risk charge; review of reporting requirements’ effectiveness and adequacy.
- Recommendation: IVASS to initiate discussions at EIOPA level on reporting, harmonization, and specific refinements.

### IVASS performance, independence, and resourcing
- Developments:
  - Adopted risk-based offsite and onsite supervision; Supervisory Handbook documented processes.
  - Active participation in supervisory colleges; group supervision practiced.
- Institutional issues:
  - Current legislation grants the Minister for Economic Development (MISE) power to approve withdrawal of authorization, winding-up, and to set fit-and-proper assessment criteria; recommendation to amend Code of Private Insurance to make IVASS the competent authority for these matters.
  - Statutory cap on permanent staff (355 / 400 referenced in different sections); IVASS should review staffing needs and propose amendment to Statute aligned with strategic plan.
- Supervisory powers and use:
  - IVASS may restrict dividends (Article 188) and require capital add-ons (used once in 2018); dividend restriction used twice in the last two years.

### Macroprudential surveillance and stress testing
- MPAD (established 2013) tools: quarterly risk dashboard, quarterly assessment of vulnerabilities, monthly liquidity monitoring, ad hoc surveys, annual industry stress test, top-down and bottom-up stress testing, sensitivity analysis, ORSA and SFCR reviews.
- Top-down stress test results (reference date Sep 30, 2018):
  - Sample size 95 out of 97.
  - BTP-Bund spread (bps) tested: 267 | 399 | 450 | 495.
  - Volatility Adjustment: 13 | 74 | 85 | 95.
  - Result highlight: a number of insurers’ solvency ratios would fall below 100 percent under a severe shock involving an increase in Italian sovereign spreads to above 399 bps.
- EIOPA 2018 stress test (groups representing 74 percent of market included):
  - Scenario 1 — Yield curve up (YCU): 10Y swap +85 bps; 10Y BTP +205 bps; EU Financial BBB +301 bps; Italian equity -40%; Mass lapse +20%; Cost of claims +2.24%/year.
  - Scenario 2 — Yield curve down (YCD): 10Y swap -80 bps; 10Y BTP -20 bps; EU Financial BBB -36 bps; Italian equity -19%; Longevity rates +15%.
  - Scenario 3 — Natural catastrophe (nat cat): Aggregate insured loss EUR 48 billion.
  - Findings: Italian insurers more vulnerable to YCU due to sovereign bond exposure; liability duration short (seven years) and well-matched with asset duration, making them less affected by YCD.
- Recommendation: continue close monitoring of sovereign exposures and explore policy options to encourage diversification.

### Life insurance products, distribution, and low-rate environment
- Product trends:
  - Life business mainly single premium, savings products.
  - Traditional participating policies declined from 79 percent of total life premiums in 2014 to 66 percent in 2018.
  - ULPs increased from 21 percent to 31 percent between 2014 and 2018; ULPs sold stand-alone or as hybrid products.
  - Banking and postal distribution accounted for about 60 percent of total premiums collected in 2017.
- Liability and guarantee composition:
  - Average liability duration: seven years.
  - About 80 percent of life business sold as single premium policies.
  - About 35 percent of products enforce only guarantee return of capital; about 35 percent have interest rate guarantee between 1 percent to 2 percent.
- Product guarantee distribution (technical provisions relating to policies with interest guarantees in segregated funds):
  - 2015: Between 2% and 3%: 48% | Between 1% and 2%: 27% | Between 0 and 1%: 17% | Between 3% and 4%: 3% | Between 4% and 5%: 5% | More than or equal to 5%: 0%
  - 2017: Between 2% and 3%: 24% | Between 1% and 2%: 29% | Between 0 and 1%: 41% | Between 3% and 4%: 3% | Between 4% and 5%: 4% | More than or equal to 5%: 0%

### Market structure and selected statistics (selected figures)
- Number of insurers (total): 122 (2014), 114 (2015), 108 (2016), 100 (2017), 100 (June 2018).
- Life insurers number and GWP (EUR mns):
  - Number: 47 (2014), 44 (2015), 41 (2016), 36 (2017), 36 (June 2018).
  - Life GWP (EUR mns): 110,517 (2014), 114,947 (2015), 102,685 (2016), 98,785 (2017), 53,595 (June 2018).
  - Life assets (EUR mns): n.a. (2014), n.a. (2015), 518,787 (2016), 544,001 (2017), 545,191 (June 2018).
- Non-life insurers number and GWP (EUR mns):
  - Number: 63 (2014), 58 (2015), 55 (2016), 52 (2017), 52 (June 2018).
  - Non-life GWP (EUR mns): 32,799 (2014), 32,006 (2015), 31,573 (2016), 31,910 (2017), 16,030 (June 2018).
  - Non-life assets (EUR mns): n.a. (2014), n.a. (2015), 20,028 (2016), 21,026 (2017), 21,451 (June 2018).
- Composite assets (EUR mns): n.a. (2014), n.a. (2015), 344,366 (2016), 355,811 (2017), 343,657 (June 2018).
- Total GWP (EUR mns): 143,316 (2014), 146,953 (2015), 134,258 (2016), 130,695 (2017), 69,625 (June 2018).
- Total assets (EUR mns): n.a. (2014), n.a. (2015), 883,181 (2016), 920,838 (2017), 910,299 (June 2018).

### Investment portfolios and concentration risks
- Aggregate general account assets: 46 percent invested in government bonds.
  - 39 percent invested in Italian government bonds (BTP), nearly twice the 24 percent EU average.
- By insurer type (general account):
  - Life insurers: 50 percent of assets in BTPs.
  - Non-life insurers: 28 percent in BTPs.
  - Composite insurers: 25 percent in BTPs.
- Equity holdings:
  - Non-life insurers: 6.5 percent equities.
  - Composite insurers: 25 percent equities.
- Separate account assets: over 80 percent invested in mutual funds (2018).
- Supervisory action: top-down stress tests (latest as of September 30, 2018) and increased supervisory attention since May 2018; insurers have been de-risking but exposure likely to remain high in medium term.

### Profitability, interconnectedness, ownership, and distribution
- Insurance sector returned to profitability in 2012; life and non-life sectors have seen stable profits in past four years.
- Interconnectedness with banks is limited:
  - Bank deposits are a small share of insurers’ assets.
  - Excluding ULPs, less than 8 percent of insurers’ assets invested in other financial institutions; 41 percent of that relates to Italian banks.
- Ownership links: 10 domestic and 9 foreign banks have shareholdings in 31 insurers (holding <10 percent in 10 cases).
- Distribution: banks (including post offices) accounted for 60 percent of life product distribution; direct distribution including internet accounts for about 5 percent of total premium; about three quarters of non-life products distributed through agents.

### Onsite inspections, frequency and coverage
- Over past three years, inspections covered about 80 percent of the insurance market by premium, but 56 percent by number of undertakings.
- Average duration of an inspection:
  - Insurer: 40 to 44 days (shorter for follow-up).
  - Intermediary: 10 days.
- Table 5 summary (Onsite Inspections Conducted):
  - 2018: Life Insurers 12 (Market Share* 21.6 %); Non-Life Insurers 13 (Market Share* 40.9 %); Intermediaries (Number) 18.
  - 2017: Life Insurers 10 (Market Share* 44.2 %); Non-Life Insurers 9 (Market Share* 34.9 %); Intermediaries (Number) 19.
  - 2016: Life Insurers 6 (Market Share* 14.5 %); Non-Life Insurers 6 (Market Share* 2.9 %); Intermediaries (Number) 12.
  - Total: Life Insurers 28 (80.3); Non-Life Insurers 28 (78.7); Intermediaries 49.
- Recommendation: consider a minimum inspection frequency to address coverage gaps and consumer protection ethos.

### Group supervision and cross-border cooperation
- IVASS participates in 22 supervisory colleges and acts as group supervisor in six colleges; as host supervisor in 16 colleges.
- Group supervision scope includes all risks and related entities; exclusions of non-EEA entities possible case-by-case (no exclusions so far).
- IVASS maintains a register of ultimate parent undertakings on its website (29 insurance groups currently registered).
- Information sharing: signatory to IAIS MMoU; MoUs and confidentiality agreements in place for non-EEA authorities.
- Overall assessment: arrangements for group supervision and cross-border cooperation are adequate.

### Insurance conduct of business, intermediaries, and consumer protection
- Key market conduct risks: timeliness of paying claims (MTPL significant), tied-in sales, complex products and suitability.
- MTPL fines in 2017: EUR 6.2 million (EUR 7.9 million in 2016); 76 percent of ordinances related to MTPL in 2017 (48 percent of number of fines).
- IDD (effective October 2018) strengthened conduct standards: knowledge and competence, POG, IPID for non-life, IBIP disclosure, remuneration disclosure.
- Intermediaries:
  - Over 225,000 registered individual and corporate agents, brokers and other intermediaries.
  - Eligibility: minimum professional qualifications, criminal record checks, not in undischarged bankruptcy.
  - IVASS developing market conduct indicators and exploring direct detection methods (e.g., mystery shopping) though legal obstacles exist.
- Division with CONSOB on IBIPs:
  - IVASS competent for distribution through insurers, agents, brokers; CONSOB for distribution through banks and post office.
  - Recommendation: finalize and communicate division of responsibilities with CONSOB and harmonize differences between MiFID II and IDD.
- Consumer complaints and arbitration:
  - Consumer Protection Directorate handles 20,000 complaints per year.
  - New insurance arbitration function to be established within IVASS with dedicated resources by 2020.
  - Recommendation: re-evaluate involvement in complaint handling given new arbitration mandate as part of manpower review.

### Liquidity monitoring and MPAD surveys
- Frequency of liquidity monitoring increased from quarterly to monthly since August 2018.
- IVASS re-activated monthly collection of cash flow data (lapsess/claims vs premiums).
- MPAD quarterly survey collects items not part of regular Solvency II reporting, changes in investment strategy, use of liquidity swaps, changes in business mix, entity-level risks, focus on life multi-class products; includes ad hoc topics (cyber security, climate change, crypto assets).
- MPAD stress testing assumptions: no shocks to SCR; no fiscal effects post-stress; technical provisions revalued with VA but not recalculated for discretionary benefits.

### Climate change monitoring
- EIOPA: 13 percent of European insurers’ assets exposed to climate-related risks.
- IVASS: Italian market exposure substantially lower at 2 percent of total industry assets.
- IVASS qualitative survey findings: exposure varies by line of business; risk mitigation mainly through reinsurance; limited use of capital markets (one cat bond); larger entities more advanced in ESG integration.

### Main recommendations (selected and timing)
- IVASS independence and resources:
  - Amend Code of Private Insurance to confer IVASS authority on removal of authorization, winding-up, extraordinary administration; and establishment of fit-and-proper criteria. Responsible: IVASS / MISE. Timing: ST.
  - Review adequacy of IVASS human resources and propose amendment to IVASS Statute. Responsible: IVASS / MISE. Timing: ST.
- Solvency II implementation:
  - Initiate discussion at EIOPA on reporting effectiveness, harmonization, and refinements (proportionality, policy limits recognition). Responsible: IVASS / EIOPA. Timing: I.
- Supervision:
  - Consider setting minimum inspection frequency. Responsible: IVASS. Timing: I.
  - Expand direct detection of market misconduct (e.g., mystery shopping). Responsible: IVASS. Timing: C.
  - Develop indicators for quality of business sold (lapse rate by number of policies; lapse rate by policy year). Responsible: IVASS. Timing: I / C.
  - Clarify division of responsibilities with CONSOB on IBIPs and harmonize MiFID II and IDD rules. Responsible: IVASS / CONSOB. Timing: I.
  - Review IVASS role in complaint handling given new arbitration mandate. Responsible: IVASS. Timing: I.
- Macroprudential surveillance:
  - Closely monitor insurers’ exposures to the sovereign and explore policy options to encourage further diversification. Responsible: IVASS. Timing: C.
  - Improve quarterly risk dashboard by including key indicators of quality of business sold developed by market conduct supervisors. Responsible: IVASS. Timing: I.

*Source: EXECUTIVE SUMMARY and chapter extracts from "1itaea2020003 - Technical Note for Italy, IMF."*

### EXECUTIVE SUMMARY __________________________________________________________________________ 6

### EXECUTIVE SUMMARY

### Scope, approach, and context
- This technical note (TN) updates and assesses the supervisory framework and practices for the Italian insurance sector since the last assessment in 2013.  
- The TN is part of the Italy 2019 FSAP and draws on discussions in Rome from March 7 to 28, 2019.  
- Focus areas: implementation of Solvency II, financial resilience of insurers, effectiveness of supervision, and previously identified weaknesses.  
- References: IAIS ICPs (version issued October 2011, as revised as of November 2018).

### Key market facts and structure
- The Italian insurance market was the fourth largest in Europe by insurance premium volume in 2017.  
- Insurance penetration (premiums as percentage of GDP) was 8.34 percent (6.20 percent life; 2.14 percent non-life).  
- Total assets (end-June 2018): EUR 910 billion, equivalent to 53 percent of GDP (banking sector ~215 percent of GDP).  
- Number of direct insurers (end-June 2018): 100 direct insurers; 36 life; 52 non-life; 12 composite.  
- No reinsurer has operated in Italy since 2009.  
- Industry consolidation: insurers reduced from 162 in 2007 to 100 in 2018.  
- Market concentration: top five groups hold 65 percent life market share (by premium); top ten hold 80 percent. In non-life, top five and top ten groups hold 67 percent and 85 percent, respectively.

### Implementation and impact of Solvency II
- Italy implemented Solvency II in full in 2016 and added minimum requirements in two areas.  
- Solvency ratio improved slightly on Day-One of Solvency II for the industry as a whole, reflecting prior conservatism in Solvency I life business requirements.  
- Internal models: 14 insurers approved to use either full or partial internal models.  
- Governance and risk management improvements attributed to Solvency II:
  - More transparent group structures.  
  - Higher quality in governance.  
  - Greater awareness of risk management processes.  
  - More responsible investment strategy.  
- Product mix effects: risk-based capital incentivized life insurers to move away from interest guarantees toward capital-light products (e.g., unit-linked products).  
- Industry feedback: benefits acknowledged despite considerable effort and cost.

### Areas for fine-tuning and harmonization
- Need to fine-tune Solvency II requirements based on three years of implementation experience. Suggested areas:
  - Clarifications, streamlining, or methodological revisions in certain areas.  
  - Improve harmonization to create level playing fields across borders.  
  - Specific refinements proposed (examples cited): guidelines on proportionality; recognition of policy limits in catastrophic risk charge; review of reporting requirements’ effectiveness and adequacy.

### Supervision—IVASS performance and needs
- IVASS developments:
  - Adopted a risk-based approach to offsite and onsite supervision.  
  - Documented processes in a Supervisory Handbook.  
  - Active participation in supervisory colleges for group supervision.  
- Areas for enhancement:
  - Onsite inspection coverage has improved; consider incorporating a minimum inspection frequency to ensure comprehensive coverage.  
  - Market conduct supervision: develop direct detection methods (e.g., mystery shopping) beyond indirect statistical detection and complaints handling.  
  - Market conduct indicators: calculate lapse rate by number of policies and analyze lapse rate by policy year to detect possible “churning” by intermediaries.  
  - Finalize discussion with CONSOB on division of responsibilities relating to insurance-based investment products (IBIPs) and communicate outcomes to market (IDD is already in effect).  
  - Review IVASS role in complaint handling given new responsibility for insurance arbitration.
- Institutional independence and resourcing issues:
  - Current legislation grants the Minister for Economic Development the power to approve certain supervisory actions and to set fit-and-proper assessment criteria; legislative amendment is needed to make IVASS the competent authority for these matters.  
  - IVASS staff establishment is capped by 2012 legislation; given increased activities, IVASS should review staffing needs aligned with its strategic plan.

### Macroprudential surveillance and stress testing
- IVASS macroprudential surveillance:
  - Uses macro trend analysis, monitoring, stress testing, sensitivity analysis, and analyses of insurers’ ORSA and SFCR reports.  
  - Surveillance results reported internally to IVASS management and contribute to the Financial Stability Report prepared by the central bank. Selected results communicated externally via Letters to the Market and annual report.  
- EIOPA 2018 stress test observations:
  - For the 12 Italian entities in the EU-wide stress test scope, 39 percent of assets were invested in Government bonds (mostly Italian) versus Europe average of 24 percent—indicating greater sovereign exposure.  
  - Note: For the Italian insurance sector as a whole, investments in government bonds constitute 48 percentage of total assets.  
  - Liabilities duration is shorter at seven years and well-matched with asset duration, making Italian insurers less affected by lower interest rates.  
  - Sector vulnerability: more susceptible to the “yield curve up” scenario due to sovereign bond exposure and lapse risk in life business.  
  - EIOPA stress test results suggest the Italian insurers included in the test are sufficiently capitalized.  
  - IVASS sensitivity analysis indicates that solvency ratios of a number of insurers (on solo basis) would fall below the 100 percent threshold under a more severe shock involving an increase in Italian sovereign spreads to above 399 bps.

### Main recommendations (selected and timing)
- IVASS independence and resources
  - Amend the Code of Private Insurance to confer IVASS authority on:
    - removal of authorization, winding-up of insurers and placing insurers under extraordinary administration; and
    - establishment of the fit-and-proper assessment criteria for qualified shareholders, senior management and key persons in control functions of insurers.  
    - Responsible: IVASS / MISE. Timing: ST
  - Review adequacy of IVASS human resources in light of its strategic plan and propose amendment to the IVASS Statute accordingly.  
    - Responsible: IVASS / MISE. Timing: ST
- Solvency II implementation
  - Initiate discussion at the EIOPA level on:
    - review of the effectiveness (usefulness and adequacy) of the reporting requirements, based on the implementation experience in the past three years;
    - further harmonization of Solvency II requirements for level playing field across borders;
    - refinements in certain areas, such as guidelines on proportionality, recognition of policy limits in catastrophic risk charge, etc.  
    - Responsible: IVASS / EIOPA. Timing: I
- Supervision
  - Consider setting a minimum frequency of inspection for broader coverage. (Responsible: IVASS. Timing: I)
  - Expand direct detection of market misconduct beyond statistical and complaints-based methods. (Responsible: IVASS. Timing: C)
  - Develop indicators for quality of business sold, e.g.:
    - Lapse rate measured by number of policies lapsed as a proxy for suitability of policies sold.
    - Analysis of lapse rate by policy year to detect “churning” by intermediaries.  
    - Responsible: IVASS. Timing: I / C
  - Clarify division of responsibilities with CONSOB on IBIPs and harmonize differences between MiFID II and IDD rules. (Responsible: IVASS / CONSOB. Timing: I)
  - Review IVASS involvement in complaint handling given new mandate in insurance arbitration. (Responsible: IVASS. Timing: I)
- Macroprudential surveillance
  - Closely monitor insurers’ exposures to the sovereign and explore policy options to encourage further diversification. (Responsible: IVASS. Timing: C)
  - Improve quarterly risk dashboard by including key indicators of the quality of business sold, developed by market conduct supervisors. (Responsible: IVASS. Timing: I)

*Timing legend: C = continuous; I (immediate) = within one year; ST = Short Term (within 1–2 years); MT = Medium Term (within 3–5 years).*

*Source: EXECUTIVE SUMMARY, "1itaea2020003 - EXECUTIVE SUMMARY" (Technical Note for Italy, IMF).*

### 8.   Life insurance products are trending towards less capital-intensive ULP or hybrid

### 8.   Life insurance products are trending towards less capital-intensive ULP or hybrid products; distribution is predominantly through bancassurance

### Life insurance product trends and distribution
- Life insurance business is mainly single premium, savings products.
- Sales of traditional participating policies declined from 79 percent of total life insurance premiums in 2014 to 66 percent in 2018.
- Sales of ULPs increased from 21 percent to 31 percent between 2014 and 2018.
- ULPs may be sold on a stand-alone basis or as hybrid products (bundled policies combining elements of capital-guarantee of traditional policies with direct investment participation of ULPs).
- Banking and postal office distribution (bancassurance channel) accounted for about 60 percent of total premiums collected in 2017.

### Market structure and key statistics (selected)
- Number of insurers (total): 122 (2014), 114 (2015), 108 (2016), 100 (2017), 100 (June 2018).
- Life insurers: number 47 (2014), 44 (2015), 41 (2016), 36 (2017), 36 (June 2018).
  - Life GWP (EUR mns): 110,517 (2014), 114,947 (2015), 102,685 (2016), 98,785 (2017), 53,595 (June 2018).
  - Life assets (EUR mns): n.a. (2014), n.a. (2015), 518,787 (2016), 544,001 (2017), 545,191 (June 2018).
- Non-life insurers: number 63 (2014), 58 (2015), 55 (2016), 52 (2017), 52 (June 2018).
  - Non-life GWP (EUR mns): 32,799 (2014), 32,006 (2015), 31,573 (2016), 31,910 (2017), 16,030 (June 2018).
  - Non-life assets (EUR mns): n.a. (2014), n.a. (2015), 20,028 (2016), 21,026 (2017), 21,451 (June 2018).
- Composite insurers: number 12 (2014–June 2018).
  - Composite assets (EUR mns): n.a. (2014), n.a. (2015), 344,366 (2016), 355,811 (2017), 343,657 (June 2018).
- Total GWP (EUR mns): 143,316 (2014), 146,953 (2015), 134,258 (2016), 130,695 (2017), 69,625 (June 2018).
- Total assets (EUR mns): n.a. (2014), n.a. (2015), 883,181 (2016), 920,838 (2017), 910,299 (June 2018).
- Note: Asset figures include both general account (traditional business) and separate account (unit linked business) on Solvency II basis.

### Impact of the prolonged low interest rate environment
- The low interest rate environment has less impact on Italian life insurers than elsewhere because:
  - About 80 percent of life insurance business is sold as single premium policies which have short policy terms; average liability duration is seven years.
  - Insurers have reduced minimum guaranteed returns and shifted towards less capital-intensive products where risk is fully or partially borne by policyholders.
- Product guarantee composition:
  - About 35 percent of products enforce only guarantee return of capital (no guarantee on investment return).
  - About 35 percent have an interest rate guarantee between 1 percent to 2 percent.

### Non-life sector composition and distribution
- Motor insurance (including compulsory third party liability insurance (TPL)) accounted for 52 percent of non-life gross written premium (GWP) in 2018.
- Accident and Health accounted for 18 percent; Property accounted for 15 percent of non-life GWP.
- Consumers tend to rely on public assistance for earthquakes and floods rather than private insurance.
- Use of FinTech: some insurers issue “instant insurance” products (low-premium and short-duration policies).
- Direct distribution including internet accounts for about five percent of total premium.
- About three quarters of non-life products are distributed through insurance agents.

### Foreign participation and cross-border activity
- European Economic Area (EEA) insurance undertakings collected 17 percent of total insurance premiums in 2017, mostly in life insurance (via Freedom to Provide Services (FOS) or Freedom of Establishment (FOE)).
- IVASS is the conduct supervisor for FOS/FOE entities in Italy; home supervisors are the prudential supervisors.
- Only nine Italian insurers have significant cross-border activities in other EU countries; Generali is an exception operating in 50 countries.

### Investment portfolios and concentration risks
- Analysis excludes separate account assets backing unit linked business.
- Aggregate general account assets: 46 percent invested in government bonds.
  - 39 percent invested in Italian government bonds (Buoni del Tesoro Poliennali (BTP)).
  - This 39 percent is nearly twice the 24 percent average for insurers in the EU region.
- By insurer type (general account):
  - Life insurers: 50 percent of assets in BTPs (percentage has been reducing).
  - Non-life insurers: 28 percent of assets in BTPs.
  - Composite insurers: 25 percent of assets in BTPs.
- Equity holdings:
  - Non-life insurers: 6.5 percent equities.
  - Composite insurers: 25 percent equities.
- Separate account assets are mostly invested in mutual funds, accounting for over 80 percent of total separate account assets in 2018.
- High concentration in BTPs is a key risk; increased credit spread on BTPs heightened supervisory attention since May 2018.
- IVASS conducted top-down stress tests (latest as of September 30, 2018) based on scenarios of the 10-year BTP and the German Government bond yield spread.
- Insurers have been de-risking by gradually reducing BTP holdings in both general and separate accounts, but exposure is likely to remain high in the medium term.

### Profitability, interconnectedness, and distributional ownership
- The insurance sector returned to profitability in 2012 and both life and non-life sectors have seen stable profits in the past four years.
- Interconnectedness with banks is not high:
  - Bank deposits account for a small share of insurers’ assets.
  - Excluding ULPs, less than 8 percent of insurers’ assets are invested in other financial institutions; 41 percent of that relates to Italian banks.
  - In aggregate, exposure to banks is limited with a slight increasing trend.
- Ownership links:
  - 10 domestic and 9 foreign banks have shareholdings in 31 insurers.
  - Holding is less than 10 percent in 10 of the cases.
- Distributional impact:
  - Banks (including post offices) accounted for 60 percent of distribution of life insurance products; this poses little impact on financial system stability.

### Regulatory and supervisory arrangements
- IVASS is the principal regulator and supervisor for the insurance sector; established by law number 135 in August 2012 and operational on January 1, 2013.
- IVASS responsibilities: prudential and market conduct regulation and supervision of insurers, reinsurers and insurance intermediaries.
- Other agencies sharing conduct responsibilities:
  - CONSOB: responsible for intermediaries’ conduct associated with distribution of insurance-based investment products (IBIPs) through bancassurance channels. IVASS is responsible for conduct when distribution is direct by insurers or via traditional agents/brokers. This arrangement is new since implementation of the Insurance Distribution Directive (IDD) in October 2018.
  - AGCM: overlaps with IVASS on protection from unfair commercial practices; IVASS handles individual consumer complaints; AGCM handles sector-wide unfair practices. Under a 2014 cooperation agreement, IVASS alerted AGCM and provided 10 opinions on unfair practices and reported seven possible cases since 2014.
- Governance of IVASS:
  - IVASS operates independently without political direction by statute.
  - Governed by a President, a Board of Directors and a Joint Directorate.
  - President is legal representative and chairman of the Board; by statute the President shall be the Director General of the Banca d’Italia (BdI).
  - Board of Directors: three members (President and two insurance experts) appointed by the President of the Republic on Council of Ministers’ resolution, term six years renewable once.
  - Joint Directorate: seven members (Governor of BdI, Senior Deputy Governor of BdI who is concurrently the President of IVASS, the three Deputy Governors of BdI, and the two expert IVASS board members); responsible for strategic direction and supervision of significant matters.
- Ministerial role and confidentiality tensions:
  - By the Code of Private Insurance 2005, the Minister for MISE is approving authority for withdrawal of authorization, winding up, and placing an insurer/reinsurer under extraordinary administration acting on IVASS recommendation; this requires IVASS to disclose entity-specific information to the Minister, which is prohibited by IVASS Statute.
  - MISE establishes criteria for assessing fitness and propriety for key positions in insurance undertakings.
- Accountability and funding:
  - IVASS is accountable to the Parliament and the Government and funded through fees levied on regulated entities (insurers, reinsurers, and intermediaries).
  - IVASS submits an annual report on activities to Parliament and Government.
  - Fees established by a decree of the Minister for Economy and Finance based on IVASS recommendation; IVASS sets staff remuneration.
- Organization and staffing:
  - IVASS structured into nine directorates reporting to the Secretary General, and three offices reporting to governing bodies.
  - Statutory cap on permanent staff: 355 (level of ISVAP at end-2012).
  - Need to establish an arbitration function mandated by IDD added 45 headcounts dedicated to the new function with effect from 2020.
- Insurance guarantee schemes:
  - Schemes limited to compulsory insurance; assets backing technical provision are ring-fenced and policyholders have priority of claim above other creditors.
  - No other protection for life policyholders; no life insurer failure requiring compensation since 1979.
  - CONSAP (Concessionaria Servizi Assicurativi Pubblici) manages Guarantee Fund for Road Victims and Guarantee Fund for Hunting Victims; funded by a percentage of insurance premiums.
  - A Guarantee Fund for Medical Malpractice is under consideration, to be administered by CONSAP if established.
  - Guarantee Fund for Road Victims covers damages related to MTPL involving unidentified or uninsured vehicles or insurers under mandatory winding-up.
  - Guarantee Fund for Hunting Victims covers damages related to hunting involving unidentified or uninsured hunters or insurers under mandatory winding-up.
  - Contemplated Guarantee Fund for Medical Malpractice would cover damages that: (a) exceed the maximum amount of insurance coverage of healthcare facilities or professionals; (b) involve insurer under mandatory winding-up at the time of incident; or (c) relate to healthcare facilities or professionals uninsured for unilateral termination by the undertaking or subsequent non-existence or removal from the relevant register.

### Cooperation, international engagement, and supervisory coordination
- Coordination Agreement between IVASS, BdI and CONSOB signed on March 31, 2006 to share information on Italian financial conglomerates.
- Cooperation on financial stability matters is less structured in the absence of a national macroprudential policy authority; IVASS is invited to attend the Coordination Committee for Financial Stability of BdI (meets three times a year).
- IVASS participates actively in EIOPA, European Systemic Risk Board, IAIS, and Financial Stability Board.

### Findings and recommendations (overview)
- Most recommendations of the 2013 assessment have been implemented.
- The 2013 assessment found a high level of observance of the ICPs; most were assessed as observed or largely observed and only five ICPs were rated as partly observed.
- Four of the ICPs rated as partly observed have been addressed through EU-wide prudential and conduct standards since 2016 (Solvency II Directive, IDD, PRIIP Regulations).
- The mission assessed the remaining ICP previously rated as partly observed (ICP 2–Supervisor) to be largely observed; areas for IVASS improvement are discussed in subsequent paragraphs (not included in this unit).

*Source: IVASS and Insurance Association of Italy (ANIA) data; IVASS data; content extracted from the provided chapter.*

### 26.   The implementation of Solvency II has addressed many of the gaps identified in

### 26.   The implementation of Solvency II has addressed many of the gaps identified in

### Implementation and regulatory enhancements
- Solvency II transformed the approach to: capital adequacy, valuation of assets and liabilities, the regulation of investments, insurance group supervision, governance, risk management and internal controls systems.
- IDD and PRIIP Regulations introduced new and more extensive disclosure requirements relating to the sale of relevant policies.
- IVASS strengthened offsite and onsite supervision of insurers and enhanced its supervisory framework for intermediaries.

### IVASS organizational structure, independence and governance
- Inconsistency in laws on IVASS–MISE relationship:
  - IVASS is prohibited from disclosing entity-specific information to MISE.
  - The Minister for MISE is the approving authority on the withdrawal of authorization and winding-up of an entity, which requires IVASS to disclose entity-specific information to the Minister.
  - Recommendation: amend the Code of Private Insurance (enacted in 2005) to remove the Minister’s approving power relating to withdrawal of approval and winding-up of insurers to ensure full independence of IVASS, as envisaged in the IVASS Statute (enacted in 2012).
- Fit-and-proper assessment competence:
  - Currently vested to the Minister for MISE (Article 77 of the Code of Private Insurance).
  - Recommendation: amend the Code of Private Insurance to enhance fit and proper requirements, pursue alignment with the banking sector framework, and transfer this competence from the Minister to IVASS.
  - Note: The fit-and-proper requirements for banks are set by the Minister for Economy and Finance.

### IVASS staffing and resources
- IVASS met increasing workload despite a statutory limit on manpower.
- Sources of increased demand since 2013 include: validation and ongoing supervision of internal models for Solvency II, development and implementation of forward-looking onsite and offsite supervisory methodology, increased cross-border supervisory coordination for group supervision, and expanded macroprudential analysis.
- Example of staff secondment: 6 out of the 60 professional staff in the Prudential Supervision Directorate are seconded from BdI.
- Recommendation: IVASS should review and justify manpower needed to deliver its strategic plan, and amend the IVASS Statute if necessary.

### Solvency II adoption specifics and supervisory enhancements
- IVASS adopted Solvency II in full, with specific enhancements in two areas:
  - For the determination of solvency requirements calculated using the standard formula, specific guidance is provided for the application of the loss-absorbing capacity of deferred taxes.
  - The calculation of solvency requirements presented in the annual Solvency and Financial Condition Report (SFCR) are subject to an audit requirement.
- LACDT (loss absorbing capacity of deferred tax) allows companies to reflect that a future loss may result in a reduction of future tax liabilities, helping to reduce capital requirements.

### Industry solvency outcomes (Table 3 summary)
- Industry aggregate solvency ratio change from Solvency I–Dec 31, 2015 to Solvency II Day-One: Jan 1, 2016:
  - Life:
    - Min. Capital Requirement (EUR mns): 14,040 → Solvency Capital Req. (EUR mns): 11,337
    - Available Capital (EUR mns): 18,556 → 27,973
    - Solvency Ratio (%): 132 → 247
  - Non-life:
    - Min. Capital Requirement (EUR mns): 2,026 → Solvency Capital Req. (EUR mns): 4,049
    - Available Capital (EUR mns): 5,377 → 7,252
    - Solvency Ratio (%): 265 → 179
  - Composite:
    - Min. Capital Requirement (EUR mns): 11,024 → Solvency Capital Req. (EUR mns): 34,487
    - Available Capital (EUR mns): 38,205 → 82,264
    - Solvency Ratio (%): 347 → 239
  - Total:
    - Min. Capital Requirement (EUR mns): 27,090 → Solvency Capital Req. (EUR mns): 49,873
    - Available Capital (EUR mns): 62,137 → 117,489
    - Solvency Ratio (%): 229 → 236
- Aggregate industry solvency ratio improved from 229 percent to 236 percent upon Solvency II implementation.
- By segment upon adoption:
  - Life insurers: solvency ratio increased from 132 percent to 247 percent.
  - Non-life insurers: solvency ratio declined from 265 percent to 179 percent.
  - Composite insurers: solvency ratio declined from 347 percent to 239 percent.
- On entity basis, eight insurers with market share of 0.5 percent fell below 100 percent upon Solvency II adoption; this has since been rectified.

### Internal models, USP and LTG measures
- Internal models and parameters:
  - Fourteen insurers at solo level approved to use full or partial internal models:
    - 4 authorized to use full models.
    - 10 authorized to use partial models.
    - These 14 insurers represent 69 percent of the industry SCR and 40 percent of the industry technical provisions.
  - Eight solo non-life insurers authorized to use undertaking specific parameters (USP) for non-life business lines.
  - Remaining 79 solo insurers using the standard formula represent 27 percent of the industry SCR, and 57 percent of the industry technical provisions.
  - Insurance groups: three groups authorized to use partial internal models and two groups authorized to use USP.
- Long-term guarantees (LTG):
  - The Volatility Adjustment (VA) is the only LTG measure used by Italian insurers.
  - Seventy-four Italian insurers applied VA at the end of 2016.
  - On average, VA improved the solvency ratio by 9 percentage points for Italian insurers at end-2016 (compared to as high as 50 to 80 percentage points in some EU countries).

### Supervisory powers and use
- IVASS powers:
  - May restrict payment of dividends and other forms of distribution of capital (Article 188 of the Code of Private Insurance).
  - May require capital add-on based on deficiencies in risk governance, subject to conditions: (a) not punitive, (b) temporary, and (c) applied on a collaborative process.
  - IVASS used dividend restriction twice in the last two years out of prudential concerns.
  - IVASS imposed a capital add-on on one insurer in 2018 after two years of intense supervisory activity; the insurer is required to report the add-on in its SFCR.

### Business practice changes due to Solvency II
- Group structure: some groups simplified and streamlined structure by eliminating intermediate levels and merging entities to make cost and capital structure more efficient.
- Quality of governance: need for multi-disciplinary competence in boards and qualified professionals at management level; independence of control functions introduced beyond traditional internal audit.
- Risk management: requirements for strategic planning, capital management, risk appetite framework, and ORSA; stronger integration of risk management into all aspects of the organization and increased role of Chief Risk Officer in board decisions.
- Products: for life business, emphasis shifted to products with lower capital charges; traditional products with interest guarantees reduced from between 2 to 3 percent, to less than 1 percent.
  - Interest guarantees distribution (technical provisions relating to policies with interest guarantees in segregated funds):
    - 2015: More than or equal to 5%: 0% | Between 4% and 5%: 5% | Between 3% and 4%: 3% | Between 2% and 3%: 48% | Between 1% and 2%: 27% | Between 0 and 1%: 17%
    - 2017: More than or equal to 5%: 0% | Between 4% and 5%: 4% | Between 3% and 4%: 3% | Between 2% and 3%: 24% | Between 1% and 2%: 29% | Between 0 and 1%: 41%
- Investment: removal of quantitative limits on assets representing technical provisions and introduction of the prudent person principle; insurers updated investment process, ALM and liquidity risk policies.

### Industry practical challenges and recommendations
- Practical challenges raised by industry (IVASS aware and will discuss with EIOPA):
  - Need for clarity in application of the proportionality principle of Solvency II beyond governance (e.g., reporting and Pillar I requirements).
  - Catastrophe (cat) risk under the standard formula does not take into account policy limits common in Italian non-life policies, resulting in unnecessary reinsurance premium and capital requirement.
  - Standard formula for non-life premium risk is based on average commission rates; where actual commission rates are higher, capital requirement is inadvertently imposed on the excess commission.
- Harmonization:
  - Even though Solvency II is a maximum harmonization directive, national adoption differs in detail; differing national interpretations can create potential for regulatory arbitrage.
  - Recommendation: IVASS should raise harmonization and consistency issues at EIOPA level.
- Regulatory reporting:
  - Industry feedback: number of reports could be reduced and/or streamlined to avoid duplicate reporting of similar information.
  - Recommendation: IVASS should initiate discussion at EIOPA level to review reporting requirements after three years of experience with Solvency II to assess usefulness, adequacy and need to improve reporting templates.

### Financial reporting bases and IFRS 17 considerations
- Three different bases for financial figures:
  - Solo entity level: Italian GAAP (required by corporate law; except listed entities, none currently).
  - Consolidated group level: IFRS (required whether or not group is listed).
  - Solvency purposes: Solvency II basis.
- Seventy-seven of the 100 insurers need to prepare three sets of accounts: GAAP, IFRS and Solvency II, since they belong to groups.
- IVASS has discussed adoption of IFRS at solo level with the Government and industry to simplify reporting, but no conclusions reached due to uncertainty around IFRS 17.
- IFRS 17:
  - Issued by the International Accounting Standards Board in May 2017.
  - Sets out principles for recognition, measurement, presentation and disclosure of insurance contracts.
  - Takes effect in January 2022 (with restated 2021 accounts).
  - Its use in Italy is subject to adoption at EU level.
  - Subject to endorsement at the EU level, IFRS 17 is expected to have significant impact on financial statements.
  - Recommendation: IVASS should continue dialogue with Government and industry, balance simplification benefits against IFRS 17 implementation cost, and ensure those on IFRS start planning for implementing IFRS 17 immediately.

### Insurance supervision framework, data and inspection practices
- Risk-based supervisory framework:
  - Developed to align supervisory intensity with risk and impact assessment; effort started in 2015, RAF completed in 2017 and incorporated into Supervisory Handbook in 2018.
  - Process is automated but supervisors expected to exercise judgment and document rationale for overrides; rationale is subject to review.
  - IVASS fully complies with EIOPA’s guidelines on supervisory review process.
- Offsite analysis:
  - Main source is regulatory reporting: quarterly and/or annual quantitative information based on Solvency II templates, on three bases (local GAAP, IFRS, Solvency II).
  - Annual narrative information includes SFCR, ORSA, Regular Supervisory Report, and report on frauds.
  - 2018 ORSA reviews: IVASS requested improvements from 8 insurance groups and 41 solo entities (37 of which belong to the 8 groups); coordinated comments from five supervisory colleges where IVASS is group supervisor; conducted follow-up onsite inspection to two entities.
  - Other information sources: customer complaints and macroprudential analysis outcomes.
- SupTech and data tools:
  - IVASS uses technology to facilitate data analysis, information sharing, report-generation and ad hoc inquiries.
  - Regular and ad hoc reports include high level dashboards and firm dossiers for directors, and detailed supervisory reports, capital adequacy indicators, trends in lapses and assets for supervisors and inspectors; the database can generate special reports using a query software.
- Onsite inspections:
  - Risk-based with no minimum required frequency.
  - Inspection plan prepared annually following risk-based principles with input from offsite supervisors; plan indicates entities to be inspected and inspection scope taking into account: risk and impact assessments, date of last inspection, need for follow-up inspection, extraordinary events (mergers, acquisitions, transfers of portfolio), certain risk profiles, types of business, issues from macroprudential analysis, and size of the entity.
  - Inspection plan is approved by the board.

*Source: Extract from IMF PDF chapter on Italy: implementation and effects of Solvency II.*

### 43. The number of inspections has increased over the past three years.  The number of entities

### 1itaea2020003 - 43. The number of inspections has increased over the past three years.  The number of entities

### Onsite inspections: scope, coverage, and duration
- The number of entities inspected over the past three years represents about 80 percent of the insurance market.
- Average duration of an inspection:
  - Insurer: 40 to 44 days (shorter for a follow-up inspection)
  - Intermediary: 10 days
- Table 5. Italy: Onsite Inspections Conducted (Note: * This is based on the respective entities’ market share in 2017. Source: IVASS.)
  - 2018: Life Insurers: 12 (Market Share* 21.6 %); Non-Life Insurers: 13 (Market Share* 40.9 %); Intermediaries (Number) 18
  - 2017: Life Insurers: 10 (Market Share* 44.2 %); Non-Life Insurers: 9 (Market Share* 34.9 %); Intermediaries (Number) 19
  - 2016: Life Insurers: 6 (Market Share* 14.5 %); Non-Life Insurers: 6 (Market Share* 2.9 %); Intermediaries (Number) 12
  - Total: Life Insurers 28 (80.3); Non-Life Insurers 28 (78.7); Intermediaries 49

### Inspection reporting and follow-up
- Inspection report process:
  - IVASS issues and presents an inspection report to the Board of Directors of the entity after inspection.
  - The Supervisory Handbook requires the inspection team to complete the inspection report within three months following the completion of the field work.
  - The report outlines findings and recommendations for improvement; and is approved by the Board.
  - In case of considerable deterioration of financial condition and/or serious breach of consumer protection rules, the report may be delivered together with a supervisory letter.

### Frequency of inspections: issues and recommendations
- Observations:
  - The Italian market is concentrated; a few large insurers have large market shares.
  - A purely risk-based prioritization without a minimum inspection frequency leads to many small insurers not being inspected for many years.
  - Over a three-year period, the inspection program covered 80 percent of market by premium, but only 56 percent by number of undertakings.
  - Potential impacts of not inspecting small insurers include social, reputational and possibly political impacts, despite likely minor financial stability impact.
- Recommendation:
  - IVASS should consider a minimum frequency of inspection to address coverage gaps and align with its consumer protection ethos.

### Group supervision and cross-border cooperation (summary of IVASS arrangements)
- Subgroup supervision:
  - IVASS applies subgroup supervision to three of the ten Italian subgroups after consultation with relevant group supervisors and groups themselves.
  - These subgroups receive proportionate supervision coordinated with the relevant group supervisor; e.g., not required to submit quarterly templates or the group SFCR.
  - IVASS decided not to apply subgroup supervision of the Italian subgroups of non-EEA groups.
- Scope and exclusions:
  - Group supervision scope includes all risks and all related entities, whether or not regulated, located in EEA or not.
  - On a case-by-case basis, IVASS may exclude non-EEA entities when legal obstacles to information transfer exist, or when entities are negligible or their inclusion would be inappropriate or misleading. So far, there have been no cases of exclusion.
  - There are 21 Italian groups and three subgroups subject to group supervision in areas including group solvency calculation, system of governance, ORSA, risk concentration and intra-group transactions.
- Transparency and registers:
  - IVASS maintains a register of ultimate parent undertakings on its website to provide transparency and information to policyholders.
  - Currently, there are 29 insurance groups in the register, including 8 subgroups of EEA and non-EEA countries; they are subject to offsite supervision, onsite inspections and IVASS’ power of direction.
- Supervisory colleges and cooperation:
  - IVASS participates in 22 supervisory colleges and acts as the group supervisor in six colleges.
  - As group supervisor, IVASS coordinates college activities, draws up annual work plans, hosts and chairs meetings, and coordinates feedback.
  - All colleges meet at least annually; IVASS provides dedicated platforms to share information to ensure confidentiality and security.
  - As host supervisor in 16 colleges, IVASS assesses the risk profile of Italian companies of the group and shares its assessment with the group supervisor and within the college.
  - IVASS participates in joint onsite inspections organized by college members on specific topics and may establish specialist teams within colleges.
- Risk assessment in colleges:
  - Since 2014, risk assessment is performed regularly by each member supervisor using a tool developed by the group supervisor and agreed within the college.
  - The group supervisor collects individual risk assessments and performs a risk analysis for the whole group; results are discussed and inform the college work plan.
- Information sharing:
  - No constraints on sharing non-public information with non-EEA supervisory authorities when governed by MoU and confidentiality agreements.
  - IVASS is a signatory to the IAIS Multilateral Memorandum of Understanding on Cooperation and Information Exchange (MMoU) and has signed MoU or confidentiality agreements with a number of supervisory agencies.
- Overall assessment:
  - Arrangements for group supervision and cross-border cooperation are adequate.

### Insurance conduct of business and intermediary supervision: risks, rules, and IVASS powers
- Key market conduct risks identified by IVASS:
  - Timeliness of paying claims:
    - Precise legal deadlines exist for payment of compulsory MTPL claims.
    - Most IVASS fines are related to late MTPL settlements.
    - In 2017, 76 percent of ordinances, corresponding to 48 percent of the number of fines, were related to MPTL.
    - In terms of amounts, the 2017 MTPL fines amounted to EUR 6.2 million (EUR 7.9 million in 2016).
    - Example of poor life insurance claim practice: unnecessarily burdensome requests for documentation for surrenders and for death benefits.
  - Tied-in sales:
    - Policies sold together with a non-insurance product, often a loan/mortgage protected by payment protection insurance.
    - In 2018 IVASS investigated uncorrelated policies sold with loans without any link between the two financial products.
    - Investigations were carried out in cooperation with AGCM, which investigated insurers for unfair practices and intermediaries for aggressive selling practices.
  - Complex products:
    - Complexity can be in wording or in substance.
    - Efforts to simplify policy wording are underway with Consumer Association and other stakeholders including ANIA to enhance understandability and facilitate suitability assessment.
    - Complexity in product design and suitability is more difficult to address.
- IDD (Insurance Distribution Directive) effects:
  - IDD came into effect in October 2018 and strengthened standards for business conduct.
  - IDD covers: knowledge and competence of distributors; product oversight and governance (POG); non-life product disclosure in an Insurance Product Information Document (IPID); disclosure on product bundling; additional disclosure on IBIPs; disclosure of the nature of remuneration.
  - POG aims to ensure products meet needs of identified customer groups and are targeted accordingly.
  - IVASS is developing a market conduct supervisory handbook to incorporate new requirements.
- Reporting and supervisory inputs:
  - Insurers (including FOS and FOE) are subject to regular reporting for conduct monitoring:
    - Half yearly reports on customer complaints lodged with insurers
    - Quarterly reports on premiums by lines of business (for FOE)
    - Annual reports on key figures of FOS/FOE activity in Italy (premiums and technical provisions by lines of business) disseminated by EIOPA based on Solvency II quarterly reporting template as submitted to EIOPA by the Home Supervisor
  - Other supervisory information sources: customer complaints lodged with IVASS, onsite inspection findings, mass and social media, consumer associations, web-surfing, and communication with other supervisors.
- Sanction powers:
  - Since October 2018, IVASS can issue pecuniary fines and “cease and desist” orders to insurers.
  - IVASS may take into account the history of repeat offences in setting sanction levels.
- Intermediary supervision:
  - All insurance intermediaries are registered with IVASS and subject to supervision.
  - There are over 225,000 registered individual and corporate agents, brokers and other intermediaries.
  - Insurers are held responsible for the conduct of their distributors, while IVASS exercises direct supervision as well.
  - Eligibility for registration includes minimum professional qualifications, free of criminal records and not in undischarged bankruptcy.
  - Actions IVASS may take against errant intermediaries:
    - Request the principal insurer to conduct audits or impose disciplinary action.
    - Summon the intermediaries for discussions.
    - Issue warning letters.
    - Issue market-wide letters.
- Development of conduct indicators:
  - IVASS is developing indicators for poor conduct for intermediaries and insurers to:
    - Assess insurers’ ability to monitor distribution channels and detect irregular conduct.
    - Monitor market compliance and take prompt action to counteract irregular conduct and possible contagion.
    - Capture distribution trends and detect channels that may affect customer interests.
    - Acquire a sound data set useful for statistical surveys at market/enterprise/sales channel level.
  - Indicators are mainly based on regular supervisory reporting, statistics on customer complaints and analysis of business sold by lines of business.
  - IVASS is exploring direct detection methods such as mystery shopping, though legal obstacles appear to exist.
  - Ultimate goal: incorporate market conduct indicators into the risk-based supervisory framework to prioritize supervisory activities.
- Division of responsibilities for IBIPs with CONSOB:
  - Pre-IDD: unit- and index-linked products were considered financial products regulated by CONSOB under MiFID/MiFID II.
  - Post-IDD: IBIPs are classified as insurance products under IDD.
  - IVASS and CONSOB are coordinating on division of responsibilities. Legislative allocation:
    - IVASS competent supervisor on: conduct of distribution of IBIPs through insurers, agents and brokers; POG of insurers manufacturing IBIPs; POG of agents and brokers distributing IBIPs; pre-contract information on IBIPs in addition to key information disclosure (KID).
    - CONSOB competent supervisor on: conduct of distribution of IBIPs through banks and post office; POG of banks distributing IBIPs; KID.
  - Recommendation: IVASS should expedite discussion with CONSOB to provide market clarity and harmonize differences between MiFID II and IDD relating to IBIPs.
- Consumer protection and complaints:
  - IVASS has a strong consumer protection mandate; the Consumer Protection Directorate handles 20,000 complaints each year.
  - Insights from complaints enhance supervisory capability but handling complaints is resource intensive.
  - A new insurance arbitration function will be established within IVASS with dedicated human resources by 2020.
  - Recommendation: IVASS should re-evaluate its involvement in complaint handling in light of the new arbitration function as part of its overall manpower review.
- Brexit considerations:
  - Brexit could significantly impact Italian consumers; IVASS has prepared since early 2018.
  - There were 126 British undertakings licensed to do business in Italy under FOS/FOE arrangements; 53 were active at the end of 2017, mainly in non-life insurance.
  - In 2017, 9.7 million Italian customers paid EUR 1.7 billion in premiums to British insurers.
  - One British insurer is a market leader in a niche line of liability insurance (medical malpractice) in Italy.
  - IVASS mapped contingency plans of the 58 (the United Kingdom and Gibraltar) undertakings active in Italy and discussed plans with the 11 most significant British non-life insurers and one life insurer operating in Italy.
  - Key exit strategies observed: establishing a Societas Europaea; portfolio transfer.
  - IVASS requested British insurers operating in Italy and Italian insurers operating in the United Kingdom to:
    - send adequate personalized information on the impact of Brexit to their Italian (or British for Italian insurers) policyholders and beneficiaries;
    - publish similar information on their websites; and
    - provide appropriate instructions to their distributors regarding information to be provided to current and potential customers.
  - IVASS also published information on Brexit and its impact on policyholders on its website.
- Overall assessment and recommendations for conduct supervision:
  - Overall, arrangements for insurance conduct of business supervision are adequate and IVASS has demonstrated willingness to act in cases of detected misconduct.
  - To maximize effectiveness with finite resources, recommended actions:
    - IVASS should expand its ability in direct detection of market misconduct, rather than solely relying on indirect detection through complaints and collection of statistics.
    - Consider monitoring policy lapse rate measured in terms of number of policies as an indicator for product suitability; analyze lapse rate by policy year to detect intermediary misconduct related to commission cycles.
    - Finalize and communicate division of responsibilities with CONSOB in area of IBIPs as soon as possible and harmonize differences between MiFID II and IDD relating to IBIPs.
    - As part of the overall manpower review, IVASS should review its involvement in resource-intensive complaint handling in light of the new insurance arbitration mandate.

### Macroprudential surveillance and stress testing
- Macroprudential Analysis Division (MPAD) (established 2013) tasks:
  - perform macroprudential analysis on the Italian insurance market;
  - develop macroprudential tools;
  - identify, assess and monitor macroprudential risks;
  - assess effects of stressed situations potentially emerging in financial markets towards insurance undertakings;
  - report results internally and externally.
- MPAD tools and outputs:
  - Developed indicators and standardized tools including quarterly risk dashboard, quarterly assessment of vulnerabilities, monthly liquidity monitoring, ad hoc surveys, and annual industry stress test.
  - Monitors share prices and credit spreads.
  - Performs more frequent analysis and top-down stress testing when needed to ensure stability of the insurance market.
- Risk identification and dashboard use:
  - The risk dashboard is produced quarterly and provides level and trend of key risks for the insurance sector; it is useful for macro- and micro-prudential supervision.
  - Example: Q2:2018 risk dashboard signaled a significant increase in “profitability and solvency risk” due to the spread crisis and political uncertainty, affecting solvency of life insurers and increasing liquidity risk.
  - Resulting actions from Q2:2018 dashboard:
    - The MPAD updated parameters and repeated the sensitivity analysis at the following reference date of June 2018.
    - The Prudential Supervision Directorate performed liquidity analysis for individual life insurers, taking into account information from other macroprudential tools such as liquidity monitoring and ORSA reports.

*Source: 1itaea2020003 - 43. The number of inspections has increased over the past three years.  The number of entities*

### 65.   Frequency of monitoring of liquidity risks was increased from quarterly to monthly since

### 1itaea2020003 - 65.   Frequency of monitoring of liquidity risks was increased from quarterly to monthly since

### Monitoring of liquidity risks and data collection
- Frequency of monitoring of liquidity risks was increased from quarterly to monthly since August 2018.
- 80 percent of life insurance is issued on a single premium basis. This could result in liquidity strains in times of high surrenders and other claims through maturity or death, although the shorter duration which characterizes the life insurance business sold in Italy in theory makes policyholder less prone to a run to the contracts.
- Since August 2018, IVASS re-activated the monthly collection of cash flow data to analyze potential liquidity strains.
- For life insurers, IVASS analyzes data on lapses and claims (cash outflows) against premiums (cash inflows).
- For all insurers, IVASS analyzes:
  - the composition of investments (other than assets covering ULP business);
  - the differences between the book value (local GAAP) and the market value of investments;
  - the amount of unrealized investment gains and losses;
  - the linkage between the size of unrealized investment gains and loss to the spread between BTP and Bund.

### MPAD surveys and qualitative monitoring
- MPAD conducts a quarterly survey of key risks and vulnerabilities to insurance businesses. The survey collects quantitative and qualitative information on:
  - items not part of the regular Solvency II reporting;
  - changes in the investment strategy with specific reference to the sale of securities with high spreads;
  - the use of liquidity swap transactions, short term funding, Term Structured Repo, ART;
  - changes in business mix (hybrid products/ULP);
  - main risks and challenges at entity level;
  - focus on (life) multi-class products.
- The survey also includes ad hoc requests on topical subjects to help identify emerging vulnerabilities, such as cyber security, climate change and crypto assets.

### Macroprudential risk assessment and reporting
- The key risk assessment function is the quarterly macro trend analysis. MPAD monitors the trend of major macroeconomic and financial indicators, focusing on the risks related to the insurance sector and the key performance indicators of the insurance sector, such as solvency ratio, combined ratio, return on equity, share price, composition of the eligible own funds, composition of assets, minimum interest rate guarantees, etc.
- This analysis provides a high-level view of the insurance sector against the macro trends.
- Risk reporting:
  - Results of macroprudential surveillance are communicated internally and externally and contribute to the Financial Stability Report published by BdI.
  - Senior Management of IVASS receives regular reports on macro trends, risk dashboard, liquidity analysis, equity and spread trends, stress test results, sensitivity analysis, ORSA analysis, SFCR review, etc.
  - IVASS colleagues have access to non-entity specific information through a dedicated intranet page; entity-specific information is shared only with relevant staff.
  - Selected results are also communicated to the industry through the Letters to the Market and IVASS’ annual report.

### Top-down stress testing (MPAD)
- MPAD performs top-down stress tests to assess the resilience of the sector.
- The shocks are based on the asset values on a specific date, determined based on the maximum value and the 75th percentile (or higher when warranted) of the historical series of the BTP-Bund spread.
- The stresses are applied to Italian Government bonds, corporate bonds and equities.
- Simplifying assumptions used in the top-down tests:
  - no shocks are applied to SCR;
  - post-stress balance sheets do not take into consideration any fiscal effects;
  - technical provisions (other than those for the unit- and index-linked business) are not recalculated but revalued considering the effect of volatility adjustment; hence the analysis does not take into account the potential ability of the technical provisions to reduce the discretionary benefits under the stressed conditions.
- IVASS performed top-down stress tests at December 31, 2016 and December 31, 2017.
- In light of increased pressure on BTP yield spread since May 2018, MPAD performed ad hoc stress tests during 2018; the latest was as of September 2018.
- Result highlight: there would be a number of insurers whose solvency ratios would drop below 100 percent under a more severe shock that involves an increase in Italian sovereign spreads to above 399 bps.

Key figures from Table 6 (Italy: Top-down Stress Test Results as at September 2018):
- As at Sep 30 — Reference date September 30, 2018
- Sample size 95 out of 97
- BTP-Bund spread (bps): 267 | 399 | 450 | 495
- Volatility Adjustment: 13 | 74 | 85 | 95
- Note: 1 Equivalent to the 82nd percentile of historical BTP-Bund spread. 2 Over the 10-year period from 2007 to 2017. 3 Volatility adjustment is an adjustment to the risk-free rate curve used for the valuation of technical provisions, to reduce the artificial volatility of financial statements due to the market-sensitive nature of Solvency II. 4 The box portions represent the range of the solvency ratios.

### Bottom-up stress testing and EIOPA 2018 stress test
- MPAD performs bottom-up stress tests coinciding with the EIOPA stress tests conducted once every two years.
- For the 2018 stress test:
  - four insurance groups participated in the EIOPA stress test, and IVASS selected eight more insurance groups for its own stress test.
  - These 12 insurance groups represent 74 percent of the market.
- Findings:
  - Due to high exposure to Government bonds, the Italian market is more vulnerable under the yield-curve-up scenario.
  - Liability duration is low (seven years) and well-matched with assets duration, making the Italian market less vulnerable under the yield-curve-down scenario compared to other European markets.
  - IVASS asked vulnerable insurers to mitigate portfolio risks and repeat the stress test at the end of 2018. Affected insurers reduced exposure to BTP and directed new investments to other EU government bonds. While the 2018 year-end stress test results were not yet available at the time of the FSAP visit, the solvency position of the affected insurers were improved at the end of 2018.

EIOPA 2018 stress test scenarios (data as of December 31, 2017)
- Scenario 1 — Yield curve up (YCU):
  - 10Y swap +85 bps
  - 10Y BTP +205 bps
  - EU Financial BBB +301 bps
  - Italian equity -40%
  - Insurance shocks: Mass lapse +20%; Cost of claims +2.24%/year
- Scenario 2 — Yield curve down (YCD):
  - 10Y swap -80 bps
  - 10Y BTP -20 bps
  - EU Financial BBB -36 bps
  - Italian equity -19%
  - Insurance shock: Longevity rates +15%
- Scenario 3 — Natural catastrophe (nat cat):
  - Four European windstorms, a set of two central and eastern European floods and a series of two Italian earthquakes.
  - Aggregate insured loss from these events = EUR 48 billion.
  - The nat cat scenario has very little impact on Italian insurance groups due to low exposure to nat cat coverages.

Comparative outcomes (EIOPA 2018)
- Assets over liabilities ratio: Italian insurers appear more vulnerable to the YCU scenario, while European insurers tend to be more vulnerable to the YCD scenario.
- Excess of assets over liabilities: Italian insurers appear more vulnerable to the YCU scenario.
- SCR: Under the YCU scenario, the SCR increased for the Italian insurers, while it decreased for the European insurers. Overall, the SCR appear to be more stable for the Italian sector.
- Solvency ratio: The Italian insurers are much more affected by the YCU scenario, and fare better under the YCD scenario, as compared to their European counterparts. The solvency ratios of two small groups could not meet the 100 percent ratio under the YCU scenario.

### Other assessment tools and supervisory practices
- Other tools used by MPAD include:
  - Sensitivity analysis — to assess the effect of a single change in a material risk, such as a 100 bps increase in spread, on the financial position of the sector.
  - ORSA analysis — to include macroprudential perspectives in the review of ORSA reports, enabling IVASS to identify the key factors, assumptions and strategies affecting the industry.
  - SFCR review — IVASS performs a comparative analysis of the SFCRs published by the largest insurance groups; qualitative information is evaluated and results presented in a Letter to the Market suggesting areas for improvement.
  - Others — monitoring the use of derivatives on a semi-annual basis; analysing the effectiveness of reinsurance; evaluation of the systemic risk related to the interconnectedness within the insurance sector; and workshop with the stakeholders.

### Climate change monitoring (Box 1)
- According to EIOPA Financial Stability Report December 2018, 13 percent of European insurers’ assets are exposed to climate-related risks.
- IVASS analyzed exposure to climate-sensitive investments in the Italian market and found exposure is substantially lower at 2 percent of total industry assets.
- IVASS conducted a qualitative survey on the current and future impact of climate change on the insurance business.
- Key Findings:
  - The impact depends on the specific line of business in which entities are engaged.
  - The probability of impact of the risk is assessed through internal model or standard formula.
  - Risk mitigation is generally through reinsurance. Only one entity tapped capital market through cat bond.
  - Not all entities have developed risk management and investment policy relating to climate change. Those who have are mainly large/cross border entities who have already adopted ESG (Environmental, Social, and Governance) principals in their internal management processes and investment strategies, or other entities that deal with climate risks in their risk management framework.
  - On the supply side, climate change risk is still included in guarantees linked to natural events; some entities distribute eco-friendly insurance products or services (e.g., discounts on “green” vehicles).
  - Social commitment is widespread, and initiatives reported include reducing CO2 emission through energy efficiency; reduction of the environmental impact of business trips; control of waste and policies on reuse and recycling; reduction of use of paper and water.
  - The impact of climate change on the lines of business linked to health and life expectancy is to be monitored, but on long term perspective.

### Policy observations and recommendations
- Notwithstanding the decline in the concentration of exposures to Italian government bonds in the insurance sector, supervisors should explore policy options to encourage further diversification.
- IVASS has engaged in a dialogue with the most exposed insurers aiming to increase the resilience of the sector; this has contributed to reduce the exposure of the sector to Italian sovereign bonds.
- IVASS sensitivity analysis suggests the risk is meaningful for a number of institutions.
- Recommendations:
  - IVASS should continue to closely monitor insurers’ exposures to the sovereign and explore policy options to encourage further diversification.
  - The quarterly risk dashboard could be further improved by including indicators for the quality of insurance business, as developed by the market conduct supervisors.

*Source: 1itaea2020003 - 65. Frequency of monitoring of liquidity risks was increased from quarterly to monthly since (IVASS/IMF content provided in source PDF).*

### 5. It is recommended that

### 1itaea2020003 - 5. It is recommended that

### Recommendation: develop procedures and troubled company task force
- It is recommended that IVASS develop clear and consistent fundamental procedures for financial analysis supervision that identifies troubled companies and then implement a troubled company task force consisting of employees with significant areas of expertise that would regularly meet and focus on all elements of supervision of nationally significant troubled companies, to ensure the IVASS has in place procedures for the analysis conducted by the Prudential Supervision and Inspection Directorates.
- Actions taken:
  - In 2014 the Authority issued its Internal Supervisory handbook and since then there have been 6 releases in order to adapt it to the new Solvency framework.
  - The last version has been adopted with the Circular Letter n. 12 of the 12/6/2018.
  - The supervisory handbook has been updated to implement EIOPA Supervisory Review Process (SRP) Guidelines and some chapters of the EIOPA Supervisory Handbook (functioning of the Colleges of supervisors, Risk Assessment Framework, Technical Provisions, Investment and the application of the Prudent Person Principle, Governance).
  - The risk-based approach of the SRP, described in the Internal Supervisory Handbook, allows assessment of whether the capital and organizational structure of the undertakings/groups is appropriate to their risk profile.
  - The first phase, the Risk Assessment Framework (RAF), conducts a prior assessment of current and forward-looking risks of all undertakings and attributes a supervisory rating (from 1 to 4) to each insurer.
  - The RAF enables planning of supervisory actions for companies with a more complex risk profile and defining supervisory strategies in terms of timing and effort and to prioritize actions.
  - IVASS has adopted an IT plan for implementation of tools for the analysis of financial data (e.g., Assets analysis).

### Staffing, organisational impact, and operational responses
- Recommendation: consider limiting cross budget support practices due to heavy staffing and budget impacts from new EU legislative frameworks (Solvency II and implementing measures).
- Observations and constraints:
  - IVASS has faced significant impacts from implementing Solvency II and forthcoming implementation of the IDD.
  - IVASS must meet a staffing constraint imposed by law: 400 permanent headcounts, of which 45 for the looming Alternative Dispute Resolution set up.
- IVASS responses to staffing/obligations pressures:
  - Focused on improving effectiveness and efficiency of internal working processes.
  - Leveraged changes to organizational design where needed and improved technology through outsourcing of IT services to the Banca d’Italia.

### ICP 9: Supervisory review and reporting — specialization, processes, quality control, valuation guidance
- Recommendations:
  1. IVASS should consider developing specialized staff expertise in specific supervision areas (financial analysis, inspection expert, governance and enterprise risk management expertise, etc.).
  2. IVASS establish formal processes across both divisions that set forth trigger points and specific ladders of intervention to ensure consistent and expedient regulatory action.
  3. IVASS should implement internal quality controls and adopt formal communication and peer review processes that ensure accuracy and consistency in offsite analysis and onsite inspections, particularly for nationally significant companies.
  4. IVASS should develop guidelines along with a centralized asset valuation process to ensure that all staff members conduct the same valuation.
- Actions and outcomes:
  - Reorganization following establishment of IVASS unified previous two units of prudential supervision into one single Directorate.
  - Internal supervisory handbook updated to adapt to the Solvency II framework.
  - Since 2016 the use of undertakings’ impact assessment and risk classification process has been used de facto in the SRP cycle.
  - March 2017: set up of the Risks Analysis Division within the Prudential Supervisory Directorate to provide support on quantification and management of insurance undertakings/groups’ risks (technical, financial, credit, operational risks).
  - Risks Analysis Division performs horizontal assessments (peer review on technical provisions, back-testing on internal models, adequacy of the standard formula on non-life parameters).
  - Directorate coordinates activities across 4 Divisions with internal procedures to ensure consistent approach.
  - Inspection procedure supported by a robust review process: inspection reports shared with off-site supervision departments; specialized team of referees checks clarity, technical foundations, consistency, compliance with reporting standards.
  - IVASS Internal Audit team assesses Directorate procedures and suggests improvements.
  - Partial implementation of forward-looking supervisory approach including early intervention measures (e.g., RAF, tool on capital adequacy).
  - Development of IT tools for consultation and analysis of supervisory reports/data related to technical provisions and investments.

### ICP 14: Valuation — Solvency II alignment and valuation principles
- Findings and recommendations from prior assessment:
  1. Current valuation methods, excluding the anti-crisis measures, appear, as a whole, to be prudent. However, due to lack of transparency in the determination of the margins, its regulatory usefulness is doubtful. The implementation of Solvency II is recommended to gain clarity on the resilience assessment of the insurers.
  2. In the meantime, for transparency and consistency, IVASS should provide guidance on the expected level of prudency to be applied (for instance confidence levels or requirements on stochastic models).
- IVASS position post-Solvency II implementation:
  - IVASS is now in line with the valuation principles set out in ICP 14.
  - Criteria embedded in the current legal framework:
    - the amended Code of Private Insurance, which transposed the Solvency II Directive (see art. 30, 30bis, 35 quarter and 36 bis);
    - Commission Delegated Regulation (EU) 2015/35 (directly applicable at national level);
    - IVASS Regulation n. 34/2017, concerning the valuation of assets and liabilities other than technical provisions and the criteria used for their valuation and the relative report on the Regulation (implementing the EIOPA Guidelines on Governance);
    - IVASS Regulation n. 18/2016, regarding the application rules for determining technical provisions (implementing the EIOPA Guidelines on technical provisions).
  - Solvency II valuation principles:
    - Assets (liabilities) valued at the amount for which they could be exchanged (transferred) between knowledgeable willing parties in an arm’s length transaction (market consistent valuation) — art. 75 of the Directive.
    - Technical provisions equal to sum of a best estimate and a risk margin.
    - Risk margin ensures equivalence to amount insurance/reinsurance undertakings would require to take over and meet obligations; risk margin is consistent to the “MOCE” and calculated based on the capital requirement.
  - Reconciliation of local GAAP values with solvency values:
    - The Solvency and Financial Condition Report includes section D – Valuation for solvency purpose where main differences should be reported (per Commission Delegated Regulation (EU) 2015/35 and IVASS regulation n. 33/2016).

### ICP 17: Capital adequacy — Solvency II provisions, regulations adopted, SRP and RAF triggers, internal models
- Solvency II capital framework:
  - Two levels of capital: Solvency Capital Requirement (SCR) and Minimum Capital Requirements (MCR).
  - Prescribes calculation methods of solvency requirements on a risk-based approach and own funds eligible for coverage (classification in three tiers and quantitative limits) and their fungibility/availability.
  - Non-compliance activates different Supervisory actions.
- IVASS regulatory actions and instruments:
  - Implemented Solvency II in the Code of Private Insurance (Title III, Chapter IV-bis).
  - Issued Regulations, Regulatory Orders and Letters to the market clarifying aspects of capital adequacy for solvency purposes, including:
    - Regulation n. 35/2017 on the adjustment for the loss-absorbing capacity of technical provisions and deferred taxes for determination of the SCR calculated using the standard formula
    - Regulation n. 34/2017 laying down provisions on governance concerning valuation of assets and liabilities other than technical provisions and related report
    - Regulation n. 27/2016 on the implementation of the catastrophe sub-module of the health insurance for SCR (standard formula)
    - Regulation n. 25/2016 concerning items of basic own fund, following national implementation of EIOPA Guidelines on financial requirements
    - Regulation n. 20/2016 introducing provisions on the use of external experts for inspections on undertakings about internal models
    - Regulation n. 17/2016 on the group solvency calculation
    - Regulation n. 16/2015 on the implementation of market risk and counterparty default modules for SCR (standard formula)
    - Regulation n. 15/2015 concerning application of the life underwriting risk module in SCR (standard formula)
    - Regulation n. 13/2015 concerning ancillary own-fund items
    - Regulation n. 12/2015 on the use of internal models for SCR determination
    - Regulation n. 11/2015 concerning use by insurance and reinsurance undertakings of specific parameters of the undertaking and group-specific parameters in SCR (standard formula)
- SRP and RAF implementation:
  - In 2017 IVASS revised its Supervisory Review Process (SRP) to implement SII framework and EIOPA Guidelines.
  - SRP risk-based approach (described in Internal Supervisory Handbook) assesses capital and organizational structure appropriateness.
  - RAF structured to assess current and forward-looking risks, followed by scoring (supervisory rating from 1 to 4).
  - RAF allows planning of supervisory actions and prioritization.
  - Capital adequacy is a key RAF aspect; specific triggers identified (quantitative triggers in term of proportion of the SCR, and qualitative ones in terms of tiering) that contribute to judgment of risk level (low/medium-low/medium-high/high) and to greater intensity of supervision.
- Internal models (IM) approval and resources:
  - Recommendation: maintain resources and focus in approval work of internal models to avoid deficiencies in capital determination from use of internal models under Solvency II.
  - IVASS measures and processes:
    - 2014: adopted internal rules and procedures to manage pre-application processes for internal models.
    - IVASS was involved in seven processes at that time: three as a group supervisor and four as a local supervisor.
    - Top management involvement in critical steps; set up of a Committee for preparatory phase to SII.
    - 2014–2017 Prudential Supervision Directorate structure: 6 coordinators; qualitative teams (18 experts) and quantitative teams (25 experts) specialized in macro-areas of risks (two teams for the Non-Life and Aggregation Area, three teams for the Life, and Credit risks Area).
    - Pre-application model process steps:
      - definition of ad-hoc protocol for content and timeline of information flows between company and group, supervisors, and college of supervisors;
      - on-site visits (joint on-site visits for cross-border groups) followed by formal feedback shared with other supervisors highlighting problems/concerns;
      - drawing up a list of blocking points to approval of the internal model (ad-hoc excel file) updated with improvements by the company.
    - For IM approval application process (IMAP), IVASS uses the application package suggested by EIOPA. The IMAP process lasts 6 months and is followed by multi-step process envisaged by EIOPA Implementing Technical Standards.
    - Joint Directorate approves use of IM (joint decision if more than one supervisor involved). If IM needs minor adjustments, company draws up remediation plan to be approved by IVASS.
    - Supervision on approved IM based on ad-hoc annual plan for follow-up of remediation plan (with possible on-site visit) and assessment of new annual calibration.
    - 2016: adopted further rules for assessment and approval of major model changes (process similar to IM Approval but simplified governance). Minor IM changes monitored and assessed quarterly.
    - 2016 decision to require yearly complete documentation of IMs to provide annual update of calculation/calibration and methodology.
  - March 2017: set up Risks Analysis Division (DAR) within Prudential Supervisory Directorate:
    - Division divided into two technical areas (non-life and life), with two different heads and, respectively, six and seven staff members.
    - DAR tasks:
      - assessments on adequacy of methodologies for calculation of capital requirements using Standard Formula, USP/GSP and Internal Models;
      - monitoring, benchmarking and back-testing of approved internal models;
      - analyses and evaluations of model changes and follow-up of remedial plans;
      - analyses of the ORSA reports;
      - analyses linked to valuation of technical provisions using standardized methodologies.
    - DAR provides technical support to other 3 divisions and is involved in all steps of IM process via assignment of quantitative and qualitative experts.
- Undertaking Specific Parameters (USP) approvals and related processes:
  - November 2014: IVASS sent a Letter to the market to obtain initial view of undertakings’ compliance with requirements for USP use.
  - Approval process for USP: preliminary analysis similar to IM pre-application, followed by formal application.
  - Since 2015 IVASS has approved use of USP/GSP for 8 undertakings and 2 groups; one is still in pre-application process.
  - October 2015: Generali College set up a USP specialized team led by IVASS (with 5 European supervisors) dedicated to approval of these parameters for specific undertakings in different EU Member States to ensure consistency.
  - DAR comparative analysis of SF vs USP outcome showed that for 4 companies use of USP led to a much higher solvency capital requirement; these companies set a temporary conservative margin over the SCR till USP approval.

*Italic: Source: Comments by the Authority on the Implementation of Recommendations from the 2013 FSAP (excerpt).*

### 1. IVASS is recommended to

### 1. IVASS is recommended to 

### Establishment of the new institution (ORIA project)
- The “ORIA project” envisaged by Italian Law 135/2012 (for the establishment of a body with registration, supervisory and sanctioning duties with respect to intermediaries) has so far not been implemented because in the course of the process the IDD Directive was passed, prohibiting, at its Article 12, the possibility of devolving supervisory duties to a private Body whose members directly or indirectly include insurance or reinsurance undertakings, intermediaries or associations thereof.
- The delegated Law of 2018 for the implementation of IDD and the subsequent amendments to the CAP (Legislative Decree no. 68 of 21 May 2018 transposing the directive) reintroduced and recalibrated, in line with Article 12, the provision of a Body for:
  - the registration of insurance intermediaries in the Single Register of Intermediaries, and
  - similar obligations pertaining to the maintenance of the lists of the persons within the undertakings who operate as distributors and of Italian and EU intermediaries who carry out cross-border activities.
- With its Internal Instruction of 28 September 2018, IVASS established a working group to define solutions that take into account:
  - the transfer of competences and activities to the new Body, and
  - the definition of the scope of IVASS supervision on its operations.
- The working group's deliverable was expected to be completed by April 2019, followed by dialogue with MISE and trade associations and the drafting of detailed regulations.

### Shift from register maintenance to proactive supervision and market-wide notices
- Recommendation: IVASS should consider publishing any market-wide notices to intermediaries if the Department discovers problems in certain areas of activity.
- Recommendation: IVASS should re-direct its focus on intermediaries from maintaining the Register to proactive supervision of intermediaries’ conduct of business.
- Actions taken:
  - Some market letters were issued on relevant aspects of mediation activity where guidance/clarification or information acquisition was necessary. Specifically:
    - letter of 6 November 2017 on segregated accounts, substitute guarantee, etc.;
    - letter of 28 November 2017 containing recommendations to intermediaries on cyber security, preceded by an investigation carried out through the associations on the basis of a questionnaire prepared by the Intermediaries Supervision Directorate;
    - letter of 16 February 2018 containing prescriptions directed at ensuring that brokers comply with regulatory provisions for the management of complaints; the letter was preceded by an investigation initiated by IVASS on 6 October 2017 on compliance with required safeguards;
    - letter of 12 October 2018 to the main associations concerning the review of the actions carried out by Italian intermediaries who operate cross border with UK undertakings to manage the effects of Brexit.
  - A comprehensive Guide and numerous FAQs were implemented and published on the IVASS site; the Guide was entirely revised in light of the IDD and implementing regulations, while the FAQs undergo evolutionary maintenance.
  - Numerous opinions were provided to intermediary trade associations to promote compliance and cultural growth.
  - The Intermediaries Contact Centre performs training/information functions daily, providing first response and support to intermediaries’ requests on administrative, regulatory and technical questions.

### Risk-focused approach and prioritization of inspections
- Recommendation: IVASS should adopt a risk-focused approach and prioritize its inspections of intermediaries, focusing on larger and more problematic intermediaries.
- Organizational changes undertaken to strengthen supervision:
  - March 2017 reorganization: appointment of a Deputy Head of Directorate, establishment of a new unit for supervisory duties (DVI - Intermediaries Supervision Directorate), and consolidation of Register management into a single Division (DGRUI - RUI Management Division).
- Preventive supervisory actions enhanced in 2017 included:
  - actions on principal undertakings and/or relevant intermediaries for network control to stimulate development of:
    - a) culture of control and efficient organisation, especially for medium/large sized intermediaries, based on more robust governance systems;
    - b) adequate levels of training focusing on the protection of consumers’ interests;
  - maintenance and update of a list of intermediaries considered “at risk” due to pre-existing findings, subjected to systematic and periodic monitoring (acquisition of information on the business);
  - meetings with intermediaries operating or intending to operate in innovative ways (digital brokers, platforms for the sale of micropolicies/instant insurance, P2P models, utilities, new players);
  - meetings/summons of intermediaries with present or potential critical issues;
  - warning letters when suspecting non-compliant behaviours;
  - intensification of exchanges with other ESA/NCAs and close collaboration with the Consumer Protection Directorate for EU cross-border operations (FoS and/or FoE) through Italian distribution networks;
  - off-site supervisory actions on websites and social network profiles of intermediaries with contents not fully compliant with regulatory requirements;
  - information requests to Italian intermediaries who notify intention to operate in other EU Countries immediately after registration in the RUI and/or in the presence of other warning signs;
  - systematic annual update and “clean up” of the RUI, carried out annually starting from 2014.

### Action plan against fake sites and online unauthorised distribution
- A specific contingency action plan launched in 2017 targeted the spread of aggressive sale of fake policies (mainly MTPL) via websites not connected with actually existing undertakings and/or intermediaries.
- Characteristics and risks:
  - Fraudsters often misappropriate and use identities and trademarks of actually existing intermediaries and companies.
- Operational outcomes and collaborations:
  - Over 150 fake sites were identified and reported to the Judicial Authority (on average, one every 3 days!), requesting takedown and prosecution of responsible parties.
  - Collaboration with stakeholders to obtain rapid removal of fake sites due to Judicial Authority delays in timely reactions since the second half of 2017.
  - Relations established with:
    - the Italian Domain Registry (NIC): cooperation led so far to the cancellation of 75 percent of fake domains with .it extension;
    - Google Italia: agreement on a “Fast-tracking” process to report possible non-compliance with Google policies of ads for fake websites;
    - Internet Service Providers (Italian and foreign) to urge intervention after verification of applicants’ subjective requirements for web hosting.
- Legal and regulatory measures:
  - Italian Legislative Decree no. 68 of 21 May 2018 transposing Directive (EU) 2016/97 introduced Paragraph 2-bis of Article 109 in the CAP, prescribing that for websites through which it is possible to exercise insurance distribution activities in accordance with Article 106, the holder of the domain must be registered in the RUI.
  - IVASS Regulation no. 40/2018 and specifically Article 78 further specified this requirement.
  - An information letter was issued for Companies offering information society services (Internet Service Providers with hosting functions in accordance with Article 16 of Legislative Decree no. 70/2003) communicating entry into force of the new provisions starting from 1 October 2018 with dual objectives:
    - suggesting that major Providers with registered office in Italy adopt operational and organizational safeguards to prevent persons not registered in the RUI from being domain holders and perpetrating insurance fraud;
    - enhancing collaboration with IVASS to counter unauthorised insurance distribution via the Internet.
- Outreach and public information:
  - Outcomes of investigations and advice on protection against scams were published through press releases, information campaigns, relations with consumer associations, and participation in radio and television broadcasts.

### Digitalisation and RUI (Single Register of Intermediaries) modernisation
- Measures taken:
  - General instruction (2015) imposed PEC (certified electronic mail) on first-level intermediaries and managed the address acquisition phase; the operation involved over 40,000 parties and had satisfactory returns.
  - Since March 2017, RUI management infrastructure was digitised using digitally signed dynamic PDF documents sent via PEC to a dedicated IVASS mailbox.
  - Immediate benefits of the shift from paper to digital included enormous streamlining and considerable requalification of work processes.
  - Currently, an IVASS-BDI project group is working on the definition of specifications directed at launching a new RUI management application, in portal logic.
- Strategic initiatives in 2018:
  - The Directorate started work on a reference framework (“Masterplan”) for a new model of structured analysis of data to intercept market-level and individual distributor behaviours not in line with laws and regulations.

*Source: 1itaea2020003 - 1. IVASS is recommended to*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1itaea2020003.pdf_