## 1belea2023007 - EXECUTIVE SUMMARY ## Source details **Canonical URL:** [1belea2023007 - EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2023/english/1belea2023007.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1belea2023007.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1belea2023007.pdf.json) --- ### Overview and scope - The Financial Sector Assessment Program (FSAP) conducted a focused review of insurance regulation and supervision in Belgium. This technical note (TN) provides an update on the insurance sector and highlights risks and vulnerabilities. - The TN analyzes regulatory and supervisory oversight covering: supervisor; the solvency framework; supervision (micro and macro); changes in control and portfolio transfer; reinsurance; conduct of business; and group supervision and supervisory co-operation and co-ordination. - Analysis based on laws, regulations and supervisory practices in place as at the date of the mission and draws on a full self-assessment provided by the National Bank of Belgium (NBB) and the Financial Services and Markets Authority (FSMA). ### Market structure, size, and performance - Insurance industry assets equal 59 percent of GDP. - Number of insurers: 72 insurance companies operating in the Belgian market at the end of 2022 (down from 80 in 2018). - Premiums and market shares: - Total premiums in 2021 were approximately EUR 41.5 billion: about 60 percent non-life and 40 percent life business. - Premium income: top ten companies hold a market share of 70 percent. - Belgium ranked 7th among EEA countries for gross written premiums for non-life business (end of 2022Q3) and 9th for life business (end of 2022Q3). - Distribution and product features: - Dominance of guaranteed-rate products in life insurance, with a shift towards unit linked policies in recent years. - Non-life dominated by traditional lines; increasing specialist risks such as cyber insurance. - Distribution channels mostly traditional; most sales through independent brokers. - Broker channel market share: from just over 40 percent in 2010 to nearly 53 percent in 2021. - Distribution by product: 61 percent of non-life distributed through brokers; bancassurance tied channels account for about 8 percent of non-life distribution. - Life unit linked distribution: bancassurance about 53 percent. - Number of intermediaries: decreased from just under 22,900 in 2008 to just under 9,500 in 2022. ### Key vulnerabilities and emerging risks - Macro and sectoral risks: - Increased interest rates and persistent high inflation rates. - Life sector: less sensitive to inflation than non-life but faces inflationary pressure on expenses and inflation-linked benefits (e.g., pension payments). - Non-life sector: long-tail business lines particularly exposed to high and/or rising inflation. - Concentration and asset risks: - Significant exposure to mortgage loans and real estate requires continued supervisory focus on valuation, potential regulatory arbitrage between insurers and banks, and the quantity and quality of mortgage loans. - Mortgage exposures: mortgages (residential real estate exposures) represented 6.8 percent of the investment portfolio at end of 2021. - Exposure to banks: about 7 percent of total investments; exposure decreased from EUR 42 billion (Dec 2018) to EUR 40 billion (June 2022). - Emerging risks: - Cyber underwriting and operational resilience; specialist products (e.g., cyber insurance) warrant assessment of underwriting adequacy. - Sustainability: need to assess environmental and social risks and governance across the sector. - InsurTech and digitalization: limited InsurTech insurer presence; 17 known InsurTech players mainly intermediaries or service providers. ### Regulatory and supervisory environment - Twin peaks model: - NBB responsible for prudential supervision at both micro and macro levels. - FSMA mandated with conduct of business supervision. - Recent and forthcoming regulatory initiatives increasing supervisory obligations: - Solvency II Review. - Insurance Recovery and Resolution Directive (IRRD). - Digital Operational Resilience Act (DORA). - Prudential framework: - Strengthened since 2018 FSAP but can benefit from further enhancements, including issuance of NBB Circulars to clarify expectations and address new IAIS ICP requirements. - Conduct supervision aligns with EU requirements with national add-ons but could be strengthened by enhancing legislative powers for pre-emptive conduct supervision, including cross-border data sharing, and increasing reporting requirements on conduct data (including complaints). ### Supervisory capacity and operational recommendations - NBB staffing and capability: - As of December 2022, NBB had 115 staff (full-time equivalent) in insurance supervision, compared with 112 at the end of 2018. - More than half of its insurance supervisors have ten or more years of supervisory experience and 72 percent of its insurance supervisors have five or more years of supervisory experience. - Recommended supervisory actions: - Assess resource needs to be fit for purpose given increased supervisory obligations. - Conduct assessments and readiness surveys for insurers on impact of regulatory changes (Solvency II review, IRRD, DORA). - Continue supervisory focus on mortgage loan and real estate exposures, including valuation consistency. - Build on work on emerging risks and develop initiatives to assess environmental and social risks and governance. - Follow-up on 2022 cyber survey findings; identify measures to address potential under-pricing or under-capitalization for cyber underwriting. - Enhance risk-based supervisory model by including conduct risks that may translate into prudential risks. - Strengthen group supervision and supervisory co-operation with third-country supervisors and conduct joint on-site inspections where relevant. - Strengthen legislative powers and reporting to enable more pre-emptive conduct supervision and regular complaints reporting. - Independent assessment (internal audit) of internal control of insurance supervision’s critical processes. ### Selected main recommendations (extract from Table 1) - Minister of Economy to finalise the proposals to adapt the legislation on natural catastrophes to ensure certainty (22). Addressee: MoE. Timing: NT. Priority: H. - Identify initiatives to address environmental and social risk, and governance (23). Addressee: NBB. Timing: NT. Priority: H. - Identify the appropriate supervisory measure(s) to address potential under-pricing and or capitalization for cyber underwriting (24). Addressee: NBB. Timing: NT. Priority: M. - Conduct a follow-up review to establish if the non-articulated cyber cover has been removed from the insurance policies (25). Addressee: NBB. Timing: I. Priority: H. - The Authority to assess its resource needs to meet supervisory obligations (both in terms of number and skill set) (33). Addressee: NBB. Timing: NT. Priority: M. - Independent assessment (internal audit) of the overall state of the internal control of insurance supervision’s critical processes (34). Addressee: NBB. Timing: NT. Priority: M. - An assessment and or readiness survey of the impact on the insurers of the new regulatory changes i.e., Solvency II review and DORA (43 and 45). Addressee: EIOPA/NBB. Timing: I. Priority: H. - Provide guidance to enhance the consistency in the valuation of mortgage loans (67). Addressee: NBB. Timing: NT. Priority: M. - Address shortcomings on Enterprise-wide Risk Management in the Governance circular (68). Addressee: NBB. Timing: I. Priority: H. - Finalize and issue the updated Onsite Inspection Circular (79). Addressee: NBB. Timing: I. Priority: M. - NBB’s risk assessment framework should include those conduct risk that can translate into prudential risk (80). Addressee: NBB. Timing: NT. Priority: M. - Finding ways to further shorten the formal feedback time on on-site inspections (where possible) (81 and 105). Addressee: NBB/FSMA. Timing: I. Priority: M. - Deep-dive assessment and comparison of the quality of insurers’ and banks’ mortgage loan books (82). Addressee: NBB. Timing: C. Priority: H. - Contact third country supervisors to assess the basis for sharing and collecting information (94). Addressee: NBB. Timing: NT. Priority: H. - Conduct joint on-site visits with involved supervisors where the NBB is the group-wide supervisor (95). Addressee: NBB. Timing: I. Priority: M. - Engage with EIOPA and the PRA, UK to set up a platform for supervisory co-operation for Lloyd’s (96). Addressee: NBB. Timing: NT. Priority: M. - Take the necessary initiatives at EIOPA level to ensure changes in the conduct rules to allow for a more pre-emptive approach to supervision (106). Addressee: FSMA/EIOPA. Timing: NT. Priority: M. - Publish an aggregate report of selective information of the annual submission of the conduct of business survey (107). Addressee: FSMA. Timing: NT. Priority: M. - FSMA to engage Government to obtain legal powers to introduce regular complaints reporting by insurers (108). Addressee: Gov./FSMA. Timing: I. Priority: H. ### Products, guaranteed rates, and distribution - Life products: - Most common products are the guaranteed rate products (also referred to as Branch 21 products). - Characteristic: guaranteed return on accumulated values plus a discretionary profit-sharing scheme. - Regulatory formula for maximum guaranteed interest rate for life contracts (longer than 8 years): - Formula: maximum guaranteed interest rate = 85 percent of the last 24 months average of the yields of 10-year linear Belgian government bonds, rounded to the nearest 25 bps. - Absolute bounds: absolute minimum of 0.75 percent and absolute maximum of 3.75 percent. - Rate calculation timing: rate is calculated on the 1st of June each year. - NBB submits a proposal to the MoE to adopt the maximum guaranteed rate (for 2022 equaling the absolute minimum of 0.75 percent). - Political intervention: at the time of the FSAP the technical interest rate was fixed at 2.00 percent. - Complementary pensions: - FSMA determines the minimal guaranteed return for complementary pensions set-up as defined contributions or cash balance, recalculated every year based on the formula in Article 24 of the Law of 22 April 2003 on the occupational pensions. - Legal minimum: the minimum rate of return for the following year is set on the 1st of January each year. Since 2016, this rate is 1.75 percent, which is the absolute minimum set out by the law on occupational pensions. - Distribution: - Brokers distribute most life products except unit linked; bancassurance is highest distribution channel for unit linked products (about 53 percent). - Broker channel growth primarily at expense of tied agent channel. ### Financial performance, solvency, and investment profile - Financial performance: - Average return on equity (BGAAP) in the last 10 years: 10 percent. - Solvency metrics: - Weighted average SCR ratio for all EEA countries as at the end of 2022Q3: weighted average SCR ratio 261 percent; lowest 159 percent; highest 325 percent. - Belgium’s weighted average SCR ratio (end-2022Q3): 221 percent. - Investment composition (excluding unit linked business, Solvency II basis): - Government bonds 40 percent; corporate bonds 20 percent; exposure to real estate 12 percent. - Mortgages represented 6.8 percent of the investment portfolio at end of 2021. - Investments backing unit linked products: mainly investment funds. - Recent shifts: decrease in government bonds; growth in equities largely due to valuation changes (2021–2022); growth in loans and mortgages; growth in investment funds reflecting shift to unit linked business. - Derivatives: - Insurers mainly invest in interest rate derivatives ("44 percent"). - "80 percent of outstanding derivatives are traded over the counter (OTC)" and "around 70 percent of these derivatives are concentrated with 5 counterparties." ### Solvency II valuation, long-term guarantees, and capital modeling - Valuation principles under Solvency II: - Fully economic, market-consistent valuation of assets and liabilities. - Best estimate: probability-weighted average of present values of future cash flows discounted using a specified risk-free yield curve. - Insurance undertakings must add an explicit risk margin via a cost of capital approach in most cases. - Risk-free yield curve and extrapolation: - Basic risk-free interest rates derived based on interest rate swap rates, adjusted for credit risk; LLP of "20 years." - Beyond LLP, rates extrapolated to an ultimate forward rate of "3.45 percent." - Speed of convergence: "40 years." - Long-term guaranteed measures: - Matching adjustment (MA): with NBB approval; "No Belgium insurer is using the matching adjustment." - Volatility adjustment (VA): calculated by EIOPA; as at year end 2021, "36 insurers were using the volatility adjustment." - Aggregated Solvency ratios of VA users with and without the VA were "210 percent and 190 percent," respectively. - Transitional measure on technical provisions: one insurer applies it and discloses two Solvency ratios; Solvency ratio without the transitional measure "remained stable and above an SCR of 100 percent." - Internal models and parameters: - As at the end of 2021: "seven solo insurance undertakings and two insurance groups make use of an approved internal model." - Four solo undertakings use a full internal model. - Three solo undertakings and two insurance groups use partial internal models. - "Seven insurers use undertaking specific parameters (USPs)." - Capital quality: - Improved since the 2018 FSAP; only one insurer still applies transitional measures for technical provisions. - "The loss absorbency capacity of technical provisions makes up 12 percent of the gross Basic Capital Solvency Requirement." ### Mortgages, valuation differences with banks, and reporting - Insurer mortgage features: - Insurers invest in mortgage loans mainly for asset-liability matching; investments increased to "6.8 percent of total assets (excluding unit linked business)" at end-2021. - Mortgages split about equally between Belgium and the Netherlands. - Comparative metrics (selected): - Average maturity at origination: Banks "19 years (2020)" and "19 years (2021)"; Insurers "22 years (2020)" and "21 years (2021)". - Average Loan to Value at origination: Banks "73% (2020)" and "71% (2021)"; Insurers "78% (2020)" and "74% (2021)". - Average Debt Servicing to Income Ratio at origination: Banks "40% (2020)" and "40% (2021)"; Insurers "36% (2020)" and "35% (2021)". - Interest rate type: Banks "Majority fixed (just over 70%)"; Insurers "Majority fixed (just under 60%)". - Regulatory capital as % of outstanding mortgage loan (examples): Banks "1.85%" vs Insurers "3.56% before diversification" and "1.59% after diversification"; Banks "1.28%" vs Insurers "2.26% before diversification" and "1.11% after diversification". - Reporting and supervisory measures: - NBB introduced additional reporting on mortgage loan exposures applicable to insurers with exposures exceeding "5 percent of their investment portfolio or EUR 650 million." - NBB analyzed valuation basis differences between insurers (Solvency II market valuation) and banks (IFRS 9) and highlighted comparability difficulties. ### Reinsurance, run-off, portfolio transfers, and private equity observations - Reinsurance and run-off: - Insurers use traditional and non-traditional reinsurance; observations of proportional reinsurance, asset intensive reinsurance, and loss portfolio transfers that can strongly decrease capital requirements and create material reinsurance recoverables. - NBB circular on run-off finalized to clarify expectations and reinforce practices (e.g., collateral or Fund Withheld mechanisms). - NBB may request collateral for third-country reinsurance and disregard reinsurance impact for SCR if reinsurer has low credit quality. - Changes of control and portfolio transfers: - NBB must be notified of changes in control; notification thresholds include qualifying holding (10 percent) and thresholds of 20, 30 or 50 percent. - Any portfolio transfer must be authorized by the NBB; NBB can order compelled transfers in limited distress situations and may impose conditions including change of benefit structures or guarantee rates. - Private Equity: - Private Equity players more active in European life insurance market; legacy portfolios with high guaranteed rates were sometimes transferred using aggressive techniques like material proportional reinsurance. - Such transfers can enable capital released to be transferred to other group entities in third countries with much lower capital requirements, creating regulatory arbitrage. Number of cases in Belgian market remains limited. ### Group supervision, colleges, Lloyd’s, and crisis management - Group-wide supervision: - NBB discusses and agrees with involved supervisors on group-wide supervisor designation; NBB is group-wide supervisor for one IAIG: the Ageas SA/NV group. - NBB participates in supervisory colleges as host or group-wide supervisor for several IAIGs. - Supervisory colleges and crisis management: - NBB established supervisory college for its IAIG; meets at least annually. - NBB started to set up a crisis management group (CMG); a co-operation agreement drafted and first CMG meeting held late in 2022. - Implementation of the IRRD transposed into Belgian law would facilitate recovery and resolution planning of the IAIG. - Lloyd’s / LIC: - Post-Brexit Lloyd’s established Lloyd’s Insurance Company (LIC) in Belgium operating on a 100 percent reinsurance model; LIC highly dependent on Lloyd’s as shareholder, reinsurer, and service provider. - No platform currently exists for supervisory co-operation for Lloyd’s; recommended engagement with EIOPA and the PRA, UK to set up a platform. ### Cyber insurance: market, stress tests, and supervisory implications - Market and underwriting: - NBB noted a substantial increase of 60 percent between 2019 and 2021 in cyber underwriting. - Cyber underwriting currently done by a limited number of insurers; only twelve Belgian insurers provide explicit cyber coverages. - 62 percent of insurers (non-life and composite) have no explicit exclusion of cyber risk and could therefore cover it implicitly ("silent cyber"). - Incident patterns: - Increase in number of cyber incidents; systemic or international undertakings often victims. - Top 3 cyber-incidents: phishing, ransomware and business email compromise. - NBB stress-test scenarios and results: - Scenarios tested: a business blackout (countrywide power outage); a systemic ransomware attack on 10 percent of policyholders; a cloud outage of the largest cloud service provider leading to a bursting of the tech bubble (with a downturn in financial markets). - Capital impact: impact on average SCR ratio is -5 percent at sector level, with variance between 0 percent to 20 percent depending on volume of cyber insurance. - Silent cyber contribution: for the black-out scenario, the silent cyber component accounts for 80 percent of the claim costs. - Reinsurance: reinsurance tends to mitigate the shock less than expected, indicating cyber reinsurance arrangements not yet fully developed. - Pricing: pricing for cyber underwriting does not seem to reflect possible tail risk and might not be sufficient to generate adequate capital. - Cyber-specific supervisory recommendations: - NBB should identify appropriate supervisory measure(s) to address potential under-pricing and/or capitalization. - NBB should internally agree on supervisory measures to be introduced when underwriting of cyber risk becomes material. - NBB should follow-up to establish if non-articulated cyber cover has been removed or changed to be explicit. - Insurers without explicit exclusions should reconsider contract wording, pricing and capital adequacy; NBB to take measures where insurers fail to act. - Broader related actions: - Continue climate, ESG and data workstreams; include climate stresses in ORSA; identify initiatives for environmental, social and governance risks. - Perform readiness surveys for DORA and Solvency II review and finalize relevant NBB Circulars (governance, run-off, risk mitigation). ### Outsourcing, macroprudential integration, and supervisory practices - Outsourcing: - High number of outsourced activities; Belgian insurers outsource more critical functions than EU average. - Key categories: Information technology, document storage, independent control functions. - Key statistics: 70 percent of Belgian insurers outsource at least one critical function intragroup; total outsourced functions: 617; 37 percent of outsourced functions related to intragroup outsourcing. - NBB performs off-site and on-site supervisory reviews and clarified expectations through governance circular. - Macroprudential framework: - NBB is macroprudential authority; conducts semi-annual macroprudential risk assessments and integrates insurance into cross-sectoral reviews. - Additional regular reporting introduced on liquidity risk, interest rate risks and mortgage loans. - NBB has process for identifying systemically important insurers; legal requirements still being implemented. - NBB publishes aggregated results of annual stress tests, Financial Stability Report and Annual Report. - Supervisory practices: - NBB supervision is risk-based, uses classification by systemic importance, insurer’s risk rating, and judgment-based assessment to drive supervisory priorities. - On-site inspections: from 2018 to 2022, "45 insurers have undergone an on-site visit." NBB plans a formal cycle for on-site inspections. - Recommendation to shorten time between on-site inspections and final reporting. ### Conduct of business and FSMA supervisory approach - FSMA oversight: - FSMA follows a risk-based approach and has a formal risk rating model for insurers. Elements include number of complaints, corrective actions, portfolio transfers, mergers and acquisitions, changes in licensing, growth in premiums, combined ratios. - FSMA uses information from NBB including Solvency II data, web-scraping, on-site inspections, Ombudsman reports. - FSMA introduced an annual reporting for insurers applicable from 2023. - Conduct rules and protections: - Regulatory framework aligns with EU regulations, supported by circulars, guidance and an IDD Manual. - Mandatory registration of intermediaries; insurers may only deal with FSMA-registered intermediaries. - Requirements on fair treatment of customers, product governance, disclosure and Key Information Documents (KIDs). - Complaints handling: insurers must have internal complaints procedures; customers can approach FSMA or Belgian Ombudsman; Ombudsman provides FSMA quarterly complaint data. - Data protection: insurers subject to GDPR; Law of 4 April 2014 prohibits differentiation in acceptance/pricing/coverage based on connected-object personal data consent. - FSAP recommendations for FSMA: - Improve turnaround time for reporting findings and orders from on-site inspections. - EIOPA should consider legislative changes to enable pre-emptive conduct supervision. - Publish an aggregate report of selective information from conduct-of-business survey to aid transparency and benchmarking. - Develop complaints reporting by insurers; FSMA to influence Government for legal empowerment. ### Progress on selected 2018 FSAP recommendations (highlights) - Recommendation 1: Engage with industry to improve quality of capital (NBB) — Implemented. At time of FSAP no insurers left applying grandfathering for subordinated debt; only 1 insurer applied grandfathering for technical provisions and met Solvency II with and without transition. - Recommendation 2: Address increasing liquidity risk (NBB) — Implemented. Law allows NBB to temporarily forbid lapses; circular on liquidity risk management published in 2022; first reporting due April 2023. - Recommendation 3: More detailed reporting for insurers with large mortgage exposures (NBB) — Implemented. Specific reporting introduced in 2018 (annual submission). - Recommendation 4: Analyze growth of reinsurance and enhance resources (NBB) — Implemented. Staff complement increased; insurance supervision restructured; various circulars issued. - Recommendation 5: Retain staff with Solvency II expertise (NBB) — Implemented. Communicated to HR; NBB successful in attracting and retaining skilled staff. *Source: IMF staff summary of the referenced chapter* ### EXECUTIVE SUMMARY __________________________________________________________________________ 4 ### EXECUTIVE SUMMARY ### Overview and Scope - The Financial Sector Assessment Program (FSAP) conducted a focused review of insurance regulation and supervision in Belgium. This technical note (TN) provides an update on the insurance sector and highlights risks and vulnerabilities. - The TN analyzes regulatory and supervisory oversight covering: supervisor; the solvency framework; supervision (micro and macro); changes in control and portfolio transfer; reinsurance; conduct of business; and group supervision and supervisory co-operation and co-ordination. - The analysis was based on laws, regulations and supervisory practices in place as at the date of the mission and draws on a full self-assessment provided by the National Bank of Belgium (NBB) and the Financial Services and Markets Authority (FSMA). ### Market structure, size, and performance - Insurance industry assets equal 59 percent of GDP. - There were 72 insurance companies operating in the Belgian market at the end of 2022 (down from 80 in 2018). - Premium income: top ten companies hold a market share of 70 percent. - Total premiums in 2021 were approximately EUR 41.5 billion: about 60 percent non-life and 40 percent life business. - Belgium ranked 7th among EEA countries for gross written premiums for non-life business (end of 2022Q3) and 9th for life business (end of 2022Q3). - Market characteristics: - Dominance of products with guarantees in life insurance, with a shift towards unit linked policies in recent years. - Non-life market dominated by traditional lines but increasing specialist risks such as cyber insurance. - Distribution channels remain mostly traditional, with most sales through independent brokers. - Limited bank—insurance linkages and limited interconnectedness with other parts of the financial sector compared with neighboring countries. - Industry remains profitable with high solvency ratios; insurers generally invest conservatively. ### Key vulnerabilities and emerging risks - Macro and sectoral risks: - Increased interest rates and persistent high inflation rates. - Life sector: less sensitive to inflation than non-life but faces inflationary pressure on expenses and inflation-linked benefits (e.g., pension payments). - Non-life sector: long-tail business lines particularly exposed to high and/or rising inflation. - Other risks and supervisory priorities: - Significant exposure to mortgage loans and real estate requires continued supervisory focus on valuation, potential regulatory arbitrage between insurers and banks, and the quantity and quality of mortgage loans (including transfers from affiliated banks). - Emerging risks include cyber underwriting and operational resilience; specialist products (e.g., cyber insurance) warrant assessment of underwriting adequacy. - Sustainability: need to assess environmental and social risks and governance across the sector. ### Regulatory and supervisory environment - Belgium operates a twin peaks model: - NBB responsible for prudential supervision at both micro and macro levels. - FSMA mandated with conduct of business supervision. - Recent and forthcoming regulatory initiatives increasing supervisory obligations: - Solvency II Review. - Insurance Recovery and Resolution Directive (IRRD). - Digital Operational Resilience Act (DORA). - Prudential framework has been significantly strengthened since the last FSAP but can benefit from further enhancements, including issuance of NBB Circulars to clarify expectations and address new IAIS ICP requirements. - Conduct of business supervision aligns with EU requirements with national add-ons but could be strengthened by enhancing legislative powers for pre-emptive conduct supervision, including cross-border data sharing, and increasing reporting requirements on conduct data (including complaints). ### Supervisory capacity and operational recommendations - The challenging macro environment, emerging risks, and new regulatory changes are expected to increase the supervisory obligations of the NBB; NBB should assess resource needs to be fit for purpose. - Specific supervisory actions and enhancements recommended: - Conduct assessments and readiness surveys for insurers on the impact of regulatory changes (Solvency II review, IRRD, DORA). - Continue focusing supervisory attention on mortgage loan and real estate exposures, including valuation consistency. - Build on existing work on emerging risks and develop initiatives to assess environmental and social risks and governance. - Follow-up on 2022 cyber survey findings and identify measures to address potential under-pricing or under-capitalization for cyber underwriting. - Enhance the risk-based supervisory model by including conduct risks that may translate into prudential risks. - Strengthen group supervision and supervisory co-operation with third-country supervisors and conduct joint on-site inspections where relevant. - Strengthen legislative powers and reporting to enable more pre-emptive conduct supervision and regular complaints reporting. ### Selected main recommendations (extract from Table 1) - Minister of Economy to finalise the proposals to adapt the legislation on natural catastrophes to ensure certainty (22). Addressee: MoE. Timing: NT. Priority: H. - Identify initiatives to address environmental and social risk, and governance (23). Addressee: NBB. Timing: NT. Priority: H. - Identify the appropriate supervisory measure(s) to address potential under-pricing and or capitalization for cyber underwriting (24). Addressee: NBB. Timing: NT. Priority: M. - Conduct a follow-up review to establish if the non-articulated cyber cover has been removed from the insurance policies (25). Addressee: NBB. Timing: I. Priority: H. - The Authority to assess its resource needs to meet supervisory obligations (both in terms of number and skill set) (33). Addressee: NBB. Timing: NT. Priority: M. - Independent assessment (internal audit) of the overall state of the internal control of insurance supervision’s critical processes (34). Addressee: NBB. Timing: NT. Priority: M. - An assessment and or readiness survey of the impact on the insurers of the new regulatory changes i.e., Solvency II review and DORA (43 and 45). Addressee: EIOPA/NBB. Timing: I. Priority: H. - Provide guidance to enhance the consistency in the valuation of mortgage loans (67). Addressee: NBB. Timing: NT. Priority: M. - Address shortcomings on Enterprise-wide Risk Management in the Governance circular (68). Addressee: NBB. Timing: I. Priority: H. - Finalize and issue the updated Onsite Inspection Circular (79). Addressee: NBB. Timing: I. Priority: M. - NBB’s risk assessment framework should include those conduct risk that can translate into prudential risk (80). Addressee: NBB. Timing: NT. Priority: M. - Finding ways to further shorten the formal feedback time on on-site inspections (where possible) (81 and 105). Addressee: NBB/FSMA. Timing: I. Priority: M. - Deep-dive assessment and comparison of the quality of insurers’ and banks’ mortgage loan books (82). Addressee: NBB. Timing: C. Priority: H. - Contact third country supervisors to assess the basis for sharing and collecting information (94). Addressee: NBB. Timing: NT. Priority: H. - Conduct joint on-site visits with involved supervisors where the NBB is the group-wide supervisor (95). Addressee: NBB. Timing: I. Priority: M. - Engage with EIOPA and the PRA, UK to set up a platform for supervisory co-operation for Lloyd’s (96). Addressee: NBB. Timing: NT. Priority: M. - Take the necessary initiatives at EIOPA level to ensure changes in the conduct rules to allow for a more pre-emptive approach to supervision (106). Addressee: FSMA/EIOPA. Timing: NT. Priority: M. - Publish an aggregate report of selective information of the annual submission of the conduct of business survey (107). Addressee: FSMA. Timing: NT. Priority: M. - FSMA to engage Government to obtain legal powers to introduce regular complaints reporting by insurers (108). Addressee: Gov./FSMA. Timing: I. Priority: H. _Executive Summary of "1belea2023007 - EXECUTIVE SUMMARY" (Technical Note prepared for the 2023 FSAP)._ ### 9. For life insurance, the most common insurance products underwritten are the ### 1belea2023007 - 9. For life insurance, the most common insurance products underwritten are the ### Products and guarantees - Life: most common products are the guaranteed rate products (also referred to as Branch 21 products). - Characteristics: guaranteed return on accumulated values plus a discretionary profit-sharing scheme. - Non-life: traditional products predominate, notably liability coverage and property insurance policies (covering construction or property damage). - Some insurances are legally compulsory (main example: motor liability insurance). ### Regulatory framework for minimum/maximum rates - Maximum guaranteed interest rate for life insurance contracts (longer than 8 years) is determined by the NBB using the formula in Article 216, § 1 of the Insurance Supervisory Law. - Formula: maximum guaranteed interest rate = 85 percent of the last 24 months average of the yields of 10-year linear Belgian government bonds, rounded to the nearest 25 bps. - Absolute bounds: absolute minimum of 0.75 percent and absolute maximum of 3.75 percent. - Rate calculation timing: rate is calculated on the 1st of June each year. - NBB submits a proposal to the MoE to adopt the maximum guaranteed rate (for 2022 equaling the absolute minimum of 0.75 percent). - Political intervention: on several occasions the MoE did not approve the NBB’s proposed maximum guarantee rate; at the time of the FSAP the technical interest rate was fixed at 2.00 percent. - Complementary pensions: the FSMA determines the minimal guaranteed return for complementary pensions set-up as defined contributions or cash balance, recalculated every year based on the formula in Article 24 of the Law of 22 April 2003 on the occupational pensions. - Legal minimum: the minimum rate of return for the following year is set on the 1st of January each year. Since 2016, this rate is 1.75 percent, which is the absolute minimum set out by the law on occupational pensions. - Operational practice: sponsors of occupational pension schemes manage obligations by obtaining insurance contracts offering at least the minimum guaranteed rate. ### Key findings on guaranteed rates and insurer solvency - A high investment guarantee rate can hurt profitability and solvency if not properly matched; insurers offering guarantees higher than investment returns can erode surplus funds and may exit products, creating protection gaps. - NBB requested reduction in the maximum guaranteed rate to protect financial soundness and manage potential systemic risk. - Expectation: given the formulas in both laws, maximum interest rates (Supervisory Law) would remain in line with the minimum rate of return (Law on occupational pensions). - Insurers have been able to reduce average guaranteed rates for individual contracts; average guaranteed rate for group insurance life contracts remained higher and in some years higher than investment returns earned by insurers. ### Market structure and distribution channels - Broker channel market share: from just over 40 percent in 2010 to nearly 53 percent in 2021. - Distribution by product: 61 percent of non-life insurance products distributed through brokers; bancassurance tied channels account for about 8 percent of non-life distribution. - Life sector: brokers distribute most products except unit linked products; bancassurance is the highest distribution channel for unit linked products (about 53 percent). - Change drivers: growth in broker channel mainly at expense of tied agent channel. - Number of intermediaries: decreased from just under 22,900 in 2008 to just under 9,500 in 2022. Main reasons: consolidation, retirements, reorganization in distribution models, rising operational and compliance costs, and rising costs of digitalization. ### Financial performance and solvency metrics - Average return on equity (BGAAP) in the last 10 years: 10 percent. - Solvency Capital Requirement (SCR) metrics (weighted average for all EEA countries as at the end of 2022Q3): weighted average SCR ratio 261 percent; lowest 159 percent; highest 325 percent. - Belgium’s weighted average SCR ratio (end-2022Q3): 221 percent. ### Investment profile and recent shifts - Investment composition (excluding unit linked business, Solvency II basis): government bonds 40 percent; corporate bonds 20 percent; exposure to real estate 12 percent (largest exposure to direct property investments). - Loans and mortgages are a material asset class for life insurers. - Equity and other risky assets are limited; use of derivatives limited, mainly interest rate swaps. - Investments backing unit linked products: mainly investment funds. - Outsourcing: insurers often outsource investment and asset management activities, frequently intragroup. - Recent shifts: decrease in government bonds (valuation changes, maturities, sales due to rising interest rates); growth in equities largely due to valuation changes (2021–2022) rather than new investments; growth in loans and mortgages reflects increased appetite for less liquid/riskier assets; growth in investment funds reflects shift to unit linked business. - Mortgages (residential real estate exposures) represented 6.8 percent of the investment portfolio at end of 2021. - Exposure to banks: about 7 percent of total investments; exposure decreased from EUR 42 billion (Dec 2018) to EUR 40 billion (June 2022). - Country exposure shifts: United Kingdom exposure declined to 7.5 percent of total banking exposure in 2022 (from 11 percent in 2018); exposure to French banks increased slightly to 18 percent (of total banking exposure) in 2022. ### Risks and vulnerabilities (macro and sectoral) - Macroeconomic environment: persistent high inflation and increasing interest rates pose challenges; inflation is important because Belgium indexes wages to inflation, which can impact insurer solvency, particularly long-tailed non-life business (e.g., workers’ compensation insurance). - Insurers can adapt to higher inflation through product design and pricing changes in the medium term. - Asset risk concentration: slight increases in exposures to real estate, mortgage loans, and some lower rated bonds in recent years; some insurers show higher increases than others. - Commercial real estate: insurers are major investors; increased investments in corporate bonds and commercial loans that are invested in commercial real estate could be strained by a more pronounced market worsening. - Mortgage risk: riskier segments with elevated LTV and DSTI ratios may become vulnerable if macro-financial conditions deteriorate. ### Emerging risks: technology, climate, and supervisory initiatives - InsurTech: limited risk due to small number of operators; only one InsurTech licensed as an insurer to date. Known InsurTech players: 17, mainly acting as intermediaries or service providers on claims management. - Digitalization: insurers increasing budgets for digitalization and obtaining quick wins in cloud services and robotic process automation. NBB and FSMA developing SupTech supervisory tools nationally and at European level. - Innovation hub and FinTech contact point: FSMA launched a FinTech contact point linked to NBB; from 2023 NBB focuses on innovation hub to identify proportional prudential measures for InsurTech, clarify licensing process (non-technical application guide), and set expectations to the sector (in cooperation with FSMA and the Belgium Government). - Climate: NBB established a cross-departmental Climate Hub to share information, bring expertise together, and disseminate information; work includes a climate risk dashboard, improving data quality and quantity, developing disclosure frameworks, and starting to assess risks under the current regulatory framework. Focus includes both physical and transition risks; physical risk is largest but transitional risk is important and linked to the housing market (direct exposure via mortgage investments and indirect exposure via insurance cover on properties). ### Public-private initiatives and protection gaps - Government exploring public-private initiatives to close protection gaps (examples include protection against terrorism and public-private partnership for natural catastrophe events). - Principle: such partnerships should follow insurance principles (premium linked to risk cover) and ensure adequate risk mitigation and partnership with the insurance sector to avoid threatening sector sustainability. ### Case study — Floods of July 2021 - Event: heavy rainfall and mass flooding in southern Belgium (Wallonia) in July 2021 caused multiple deaths and thousands of houses damaged or collapsed; property class most impacted. - Legal cover: for simple risks (mostly retail) natural disaster-related property cover is limited by law and included in fire policies; fire insurance is compulsory within the fire and other damage to property insurance products, but fire insurance products are not compulsory for homeowners to purchase. In practice, a large percentage of homeowners have fire and other damage protection. - Existing legislation application would have limited claims cost for the insurance sector to EUR 320 million. Of the damage, 90 percent was insured risk and 10 percent uninsured risk. - One-time solution: due to unprecedented scale and regional fund funding levels, insurance sector and Belgian Regions agreed a one-time solution doubling intervention limits and advancing all payments on behalf of the Regions; those payments to be reimbursed by means of a government guaranteed loan. - Uncertainty: protocol contained a rendezvous clause if economic damages rose above 1.7 bn EUR, implying uncertainty on whether the Belgian insurance sector or the Walloon region will reimburse excess beyond this threshold. - Legislative adjustment: parallel negotiations to adapt natural catastrophe legislation aim to create a robust system to distribute future losses between insurers and public authorities clearly and reduce potential protection gaps and reinsurer confidence risk. *Source: IMF staff summary of the referenced chapter* ### 22. The Belgian insurance sector is the third largest cyber insurance market in the ### 22. The Belgian insurance sector is the third largest cyber insurance market in the European Union ### Cyber market findings and underwriting practices - Market size and growth - The NBB noted a substantial increase of 60 percent between 2019 and 2021 in cyber underwriting. - Cyber underwriting is currently done by a limited number of insurers in Belgium. - Incidence and loss patterns - For cyber operational risk, the NBB found that there has been an increase in the number of cyber incidents. - Systemic or international undertakings are most often the victims. - The top 3 cyber-incidents are phishing, ransomware and business email compromise. - Underwriting coverage and “silent cyber” - Only twelve Belgian insurers provide explicit cyber coverages. - 62 percent of insurers (non-life and composite) have no explicit exclusion of cyber risk in their policies and could therefore cover it implicitly (also referred to as silent cyber). ### NBB insurance stress-test (Box 3) — scenarios tested - The NBB tested three different scenarios: - A business blackout scenario with a countrywide power outage. - A systemic ransomware attack on 10 percent of policyholders. - A cloud outage of the largest cloud service provider leading to a bursting of the tech bubble. The cloud outage scenario also contained a downturn in the financial markets. ### NBB stress-test results and analysis - Capital impact - The results show that the impact on average SCR ratio is -5 percent at sector level, but with a variance between 0 percent to 20 percent depending on the volume of cyber insurance. - Silent cyber contribution - For the black-out scenario, the silent cyber component accounts for 80 percent of the claim costs. - Reinsurance and pricing observations - The NBB noted that reinsurance tends to mitigate the shock less than expected. This might be an indication that cyber reinsurance arrangements are not yet fully developed. - The NBB concluded that pricing for cyber underwriting does not seem to reflect the possible tail risk and might not be sufficient to generate adequate capital for cyber. ### Cyber-specific supervisory recommendations - Immediate supervisory focus - The NBB should identify the appropriate supervisory measure(s) to address potential under-pricing and/or capitalization. - The NBB should internally agree on supervisory measures to be introduced when the underwriting of cyber risk becomes material and can pose a risk to the financial soundness of those insurers that underwrite cyber risk. - Policy wording and follow-up - The NBB should conduct a follow-up review /assessment to establish if the non-articulated cyber cover has been removed or changed to be explicit in the insurance policies. - Insurers that do not explicitly exclude cyber risk coverage should reconsider the wording of their contracts as well as the pricing and if necessary, adapt them because silent cyber risk coverage might generate significant financial losses if the risks materialize. - The NBB should take the necessary supervisory measures where it is found that insurers have not taken actions as recommended. ### Broader supervisory and regulatory recommendations (relevant to cyber and other risks) - Climate, ESG and data workstreams - The NBB should continue building what has already been put in place for climate risk, including the work done in the Climate Hub, collecting of data, and improving the quality of data and reviews of the climate stresses in the Own Risk and Solvency Assessment (ORSA) reports. - The NBB should identify initiatives to address other environmental risks, social risks, and governance risks. - Legal and public-private frameworks - The legal framework of the natural catastrophe public-private partnership should be finalised to enhance predictability of insurance cover and ensure availability of public funds. - Resources and internal control - The NBB should perform an assessment of resources required to ensure that they are adequate (both in terms of number and skill set) to meet its supervisory obligations. - The NBB should do an independent assessment of the overall state of the internal control of insurance supervision’s critical processes; the independent assessment can be performed by the NBB’s internal audit function in compliance with its framework. - As of December 2022, NBB had 115 staff (full-time equivalent) in insurance supervision, compared with 112 at the end of 2018. - More than half of its insurance supervisors have ten or more years of supervisory experience and 72 percent of its insurance supervisors have five or more years of supervisory experience. - Regulatory implementation and readiness - The NBB should perform an assessment of the impact on the insurers under the current economic conditions of the proposed Solvency II review requirements (ideally at EIOPA/EU level; if not, by the NBB focusing on Belgian-market aspects such as the behavior of the VA). - The NBB should finalize and implement the various Circulars it is currently working on, in particular the governance and the run-off and risk mitigation Circulars, after the consultation process has been completed. - The NBB should perform a survey of insurers on their readiness for the implementation of DORA. Ideally this should be done at EIOPA level. If not, it is recommended that the NBB does its own readiness survey to identify areas for clarification and assist smaller insurers. *Source: NBB; excerpted from IMF country report content provided.* ### 50. Under Solvency II, both assets and liabilities are valued on a market-consistent basis. ### 1belea2023007 - 50. Under Solvency II, both assets and liabilities are valued on a market-consistent basis. ### Valuation principles under Solvency II - Solvency II requires a fully economic, market-consistent, and realistic valuation of assets and liabilities that "fully reflects the risk-adjusted present values of the cash flows." - An insurer’s own credit standing cannot be recognized in the valuation of liabilities. - "In most cases an explicit risk margin, determined via a cost of capital approach, must be added to the best estimate." - The Solvency II best estimate: "the probability-weighted average of the present values of the future cash flows associated with insurance liabilities, discounted using a specified risk-free yield curve." - Cash flow projections include "all the cash in- and out-flows required to settle the insurance obligations over the lifetime thereof," including current estimates of all expenses, inflation and all payments to policyholders and beneficiaries, including future discretionary bonuses. ### Risk-free yield curves and extrapolation - Basic risk-free interest rates are derived "based on interest rate swap rates," adjusted for credit risk; if swap markets are not deep and liquid, government bonds are used. - Yield curves use market rates up to a last liquid point (LLP) of "20 years." - Beyond the LLP, rates are extrapolated to an ultimate forward rate of "3.45 percent." - The speed of convergence is "40 years." - Yield curve data are regularly published by EIOPA. ### Long-term guaranteed measures and adjustments (MA and VA) - Matching adjustment (MA): - Can be used, with NBB approval, for valuation of predictable liabilities cash-flow matched using fixed income assets. - "No Belgium insurer is using the matching adjustment." The Belgian market products do not meet strict eligibility conditions. - Volatility adjustment (VA): - Aims to avoid pro-cyclical investment behavior when bond prices deteriorate due to low liquidity or exceptional credit spread expansion. - Calculated by EIOPA; insurers using the VA must disclose two solvency ratios, with and without the adjustment. - As at year end 2021, "36 insurers were using the volatility adjustment." - Aggregated Solvency ratios of VA users with and without the VA were "210 percent and 190 percent," respectively. - Transitional measure on technical provisions: - One insurer applies the transitional measure and must disclose two Solvency ratios, with and without the transitional arrangement. - The Solvency ratio of this undertaking without the transitional measure "remained stable and above an SCR of 100 percent." ### NBB analyses and regulatory guidance on VA and valuation - NBB performed multiple analyses on VA use following the 2018 FSAP recommendation to monitor long-term guaranteed measures: - 2018: industry-wide mapping of market practices related to VA risk management. - 2020: thematic analysis of potential overshooting effects of the VA. - Outcomes were communicated to EIOPA and considered in its Solvency II Review proposals. - NBB issued circulars clarifying contract boundaries, application of long-term guaranteed measures, valuation of technical provisions, valuation of assets and liabilities other than technical provisions, and valuation of assets traded on inactive markets. ### Investment policy and constraints - Solvency II is based on the Prudent Person Principle and does not prescribe quantitative investment limits; insurers may only invest in assets and instruments for which they can properly identify, measure, monitor, manage, control, and report risks. - Derivative use is allowed only if they reduce risks or facilitate efficient portfolio management; most insurers are not active derivative users, though a few groups use them for hedging. - Some insurers in financial conglomerates engage in intragroup transactions with parent banks, including deposits, repos, securities lending, and participations in mortgage loans. - Solvency II requires all assets, including those covering the Minimum Capital Requirement (MCR) and the Solvency Capital Requirement (SCR), to be invested to ensure "safety, quality, liquidity, yield and consistency" and be "freely available and without encumbrance." - Assets covering technical provisions must be invested "in a manner that is consistent with the nature and term of the insurance or reinsurance obligations." ### Mortgage loan exposures and reporting - Insurers invest in mortgage loans mainly for asset-liability matching; investments increased to "6.8 percent of total assets (excluding unit linked business)" at end-2021. - Mortgage loans are about equally split between property in Belgium and the Netherlands. - Valuation and capital regimes differ between banks and insurers: - Banks: mortgage loans valued under IFRS 9. - Insurers: valuation based on fair-value principles under Solvency II, potentially requiring expert judgement in absence of quoted market prices. - Capital charges for banks: Basel III standardized or IRB models; for insurers: counterparty default risk model under Solvency II with diversification benefits across risk modules. - NBB introduced additional reporting on mortgage loan exposures (micro- and macroprudential components) applicable to insurers with exposures exceeding "5 percent of their investment portfolio or EUR 650 million." - Micro-prudential reporting elements include loan characteristics, new annual production, default risk and interest rate characteristics. - NBB analyzed differences in valuation bases between insurers and banks and highlighted comparability difficulties due to Solvency II’s market valuation principles. ### Comparative metrics: Banks versus Insurers (selected figures) - Average maturity at origination: - Banks: "19 years (2020)" and "19 years (2021)" - Insurers: "22 years (2020)" and "21 years (2021)" - Average Loan to Value at origination: - Banks: "73% (2020)" and "71% (2021)" - Insurers: "78% (2020)" and "74% (2021)" - Average Debt Servicing to Income Ratio at origination: - Banks: "40% (2020)" and "40% (2021)" - Insurers: "36% (2020)" and "35% (2021)" - Interest rate type: - Banks: "Majority fixed (just over 70%)" - Insurers: "Majority fixed (just under 60%)" - Regulatory capital as % of outstanding mortgage loan (examples): - Example 1: Banks "1.85%" vs Insurers "3.56% before diversification" and "1.59% after diversification" - Example 2: Banks "1.28%" vs Insurers "2.26% before diversification" and "1.11% after diversification" ### Derivatives exposures - Derivative use concentrated in a limited number of insurers but with high exposures. - Insurers mainly invest in interest rate derivatives ("44 percent"), such as swaps. - Use of interest rate derivatives has continuously increased; swaps are mainly used to protect against decreases in interest rates. - "80 percent of outstanding derivatives are traded over the counter (OTC)" and "around 70 percent of these derivatives are concentrated with 5 counterparties." ### Capital adequacy and internal models - Capital requirements are calculated in line with Solvency II; largest component is market risk. - As at the end of 2021: - "seven solo insurance undertakings and two insurance groups make use of an approved internal model" for SCR calculation. - Four solo undertakings use a full internal model. - Three solo undertakings and two insurance groups use partial internal models (mainly for Non-Life and Health underwriting risks). - "Seven insurers use undertaking specific parameters (USPs)" affecting premium risk and reserve risk sub-modules of the standard formula. - Quality of capital has improved since the 2018 FSAP; only one insurer still applies transitional measures for technical provisions. - "The loss absorbency capacity of technical provisions makes up 12 percent of the gross Basic Capital Solvency Requirement." ### Enterprise Risk Management (ERM) and ORSA - ERM activities, including ORSAs, are subject to extensive regulation and guidance covering Risk Appetite Framework, scenario analysis, stress testing, and liquidity risk specifications. - NBB guidance on expected ORSA content addresses the 2018 FSAP recommendation to challenge stress tests; guidance includes best practices in Stress Testing for both solo insurers and groups. - Companies are expected to assess sustainability risks (if material) in ORSA with very long-term stress tests "up to the year 2100." - NBB is updating its Governance Circular to address remaining shortcomings and changes in ICP 16 on enterprise-wide risk management, including additional requirements placed on IAIGs in ComFrame standards. - NBB issued a new circular on liquidity risk management (full application in 2023) requiring: - a liquidity risk management policy, - an effective governance and management system for liquidity risk, - a regular report on liquidity risk management, - liquidity stress tests and liquidity scenarios. ### Recovery planning - Currently limited circumstances exist under which NBB can officially require recovery plans from insurers. - NBB is working on a legislative proposal to integrate a requirement to set up pre-emptive recovery plans (during normal circumstances) for all insurers considered systemically relevant at local level. ### Supervision framework and practices - NBB supervision is risk-based, supported by an expanded financial analysis toolkit (since 2018) and a restructuring of supervision teams. - Risk classification uses three dimensions: systemic importance, insurer’s risk rating (insurance scorecard), and judgment-based assessment for intrusive supervision; classification drives supervisory priorities. - Baseline supervisory actions and timelines are assigned by classification: significant, close watch, specific watch, and other. Actions include regulatory reporting analysis, engagements with senior management and control functions, engagement with external auditors, on-site inspections and event-driven requests. - Off-site supervision tools include regular regulatory reporting analysis, annual stress tests (aligned with EIOPA and internal low yield scenario), and an annual combined risk analysis covering sovereign, liquidity, and interest rate risks. - On-site inspections focus on riskier and systemically relevant insurers; from 2018 to 2022, "45 insurers have undergone an on-site visit." - NBB plans to introduce a formal cycle for on-site inspections to cover all insurers. The time between on-site inspections and final reporting "seems to be long." - A documented insurance inspection manual exists; a Circular on On-site Inspections is in the process of being updated. ### Key recommendations - NBB should provide guidance to insurers on "the prudent valuation of mortgage loans to enhance consistency in the insurance sector." - NBB should include in the update of the Governance Circular the following ICP-aligned requirements: - "the independent review of the group wide ERM framework at least once every three years." - "ERM framework to include an explicit asset-liability management (ALM) policy which specifies the nature, role, and extent of ALM activities and their relationship with product development, pricing functions." *Source: 1belea2023007 - 50. Under Solvency II, both assets and liabilities are valued on a market-consistent basis.* ### 75. The NBB performed an analysis across the insurance sector on outsourced activities. A ### 1belea2023007 - 75. The NBB performed an analysis across the insurance sector on outsourced activities. A ### Outsourcing in the Belgian insurance sector - High number of outsourced activities across the sector; Belgian insurers outsource more critical functions than the average for EU insurers. - Largest outsourcing categories: - Information technology - Document storage - Independent control functions - Key statistics: - 70 percent of Belgian insurers outsource at least one critical function intragroup. - Total outsourced functions: 617. - Of the total 617 outsourced functions, 37 percent related to intragroup outsourcing. - Supervisory approach: - The NBB performs both off-site and on-site supervisory reviews to monitor outsourced activities. - The NBB clarified expectations through its circular on governance. ### Macroprudential and microprudential integration; risk assessment and data collection - Institutional role: - The NBB is the macroprudential authority in Belgium. The NBB’s Board also acts as the Macroprudential Board. - The insurance sector is strongly embedded in the NBB’s macroprudential supervision. - Risk assessment framework: - Semi-annual macroprudential risk assessment is conducted. - The assessment is based on inputs from various teams within the NBB. - The framework covers a comprehensive set of quantitative and qualitative analyses and stress testing exercises to monitor inward and outward (systemic) risks, activities, and exposures. - Outcome: risk synthesis and risk dashboard. - Data collection: - NBB collects regulatory reporting under the Solvency II framework and additional data introduced by the NBB. - Additional regular reporting introduced on liquidity risk, interest rate risks and mortgage loans. - Ad-hoc data collection when required. - Insurance sector integrated into cross-sectoral semi-annual and annual risk reviews that set priorities for micro- and macroprudential supervision. - Systemically important insurers: - NBB has an established process for identifying systemically important insurers and insurance groups. - Legal requirements linked to this process are still being implemented. - NBB has an informal internal process and is refining its methodology; implementation of related legal requirements is work in progress. - Publication of statistics: - NBB publishes relevant data and statistics on the insurance sector and publishes aggregated results of the annual stress test exercises. - Additional publication venues: Financial Stability Report and the Annual Report of the NBB. - Supervisory expectation: - NBB integrates the insurance sector into its cross-sectoral macroprudential analysis framework. ### Recommendations (selected) - Finalize and issue the updated Onsite Inspection Circular (paragraph 80): - Update legal basis. - Clarify basis (in-person vs virtual) for onsite inspections. - Redefine the scope, restructure the circular, and remove outdated elements. - Update replaces circular issued in 2013. - Incorporate conduct risk into NBB’s risk assessment framework (paragraph 81): - Conduct risk is assessed by the FSMA but can translate into prudential risk; NBB and FSMA should find a way to incorporate conduct risk assessment into NBB’s risk assessment. - Improve turnaround time from on-site inspections to insurers (paragraph 82): - Reduce undue delays between draft and final reports to facilitate corrective action, especially for high-risk entities where recommendations could result in material changes to financial position or governance. - For macroprudential supervision (paragraph 83): - Continue detailed analyses of the quality of mortgage loans on the banking book vs mortgage loans on insurance balance sheets. - Continue exercise to determine how valuation basis and capital requirements for mortgage loans on insurers’ balance sheets differ from those on banking books, and the scope for regulatory arbitrage. ### Changes of Control, Portfolio Transfers, and Reinsurance - Changes in control and portfolio transfers: - Legislation empowers the NBB to be notified of changes in control and portfolio transfers and to prevent transactions that could place policyholders at risk. - Notification thresholds for changes in control include qualifying holding (10 percent), significant influence over the management, thresholds of 20, 30 or 50 percent or undertaking becoming/no longer being a subsidiary. - If NBB is not satisfied with shareholders’ qualifications, it may take measures to end the situation or oppose acquisition of participating interests. - Any portfolio transfer must be authorized by the NBB; NBB assesses ability of transferor and transferee to comply with prudential framework and to maintain sound and prudent management and not endanger financial stability. - NBB must inform the FSMA about transfer requests for FSMA to verify information to be communicated to policyholders. - Compelled transfers: - NBB can order transfer of a portfolio to another insurance undertaking in limited situations, typically where an insurer is under distress. - NBB can impose transfer of business and change benefit structures, including guarantee rates, when a transfer is imposed. - Reinsurance framework: - Legislation and regulation provide framework to manage reinsurance risks; insurers must implement adequate internal controls and actuarial function must opine on reinsurance appropriateness. - Stress test requirement included in ORSA. - The Insurance Supervisory Law allows NBB to ask for collateral for third-country reinsurance and to disregard reinsurance impact for SCR purposes if reinsurer has low credit quality. - Circular being drafted to include explicit recommendations for run-off and complex or material risk-mitigating techniques. - Observed market practices and supervisory response: - Insurers use less traditional reinsurance and more non-traditional structures; reinsurance used for capital management as well as risk mitigation. - For life and non-life: new proportional reinsurance structures (e.g., asset intensive reinsurance and loss portfolio transfers) can strongly decrease capital requirements and create material reinsurance recoverables supporting own funds. - New structures aimed at SCR relief without necessarily reducing underlying risk (SCR hedging) have been noted. - NBB complemented ORSA circular based on EIOPA opinion, asking undertakings to analyze balance between SCR relief and actual risk reduction and to perform scenario analyses on concentration, counterparty, basis, and liquidity risks. - Private Equity and regulatory arbitrage: - Observation: Private Equity players more active in European life insurance market; legacy portfolios with high guaranteed rates were transferred, sometimes to Private Equity-owned insurers using aggressive techniques like material proportional reinsurance. - Such transfers can enable capital released to be transferred to other group entities in third countries with much lower capital requirements, creating regulatory arbitrage. - Number of cases related to capital management and private equity players remains limited in Belgian market. - NBB is managing risk through powers to authorize portfolio transfers and adding conditions to approvals for heavily reinsurance run-off portfolios. - NBB has observed changes in capital requirements of some third countries that can further impact regulatory arbitrage risk. - NBB circular on run-off (paragraph 89): - Finalized circular clarifies expectations on run-off portfolios and risk mitigation, based on EIOPA’s supervisory statement. - Aims to reinforce regulation and best practices to manage credit and liquidity risks and ensure sufficient funds remain in Belgium to pay insurance obligations (e.g., collateral or Fund Withheld mechanisms for reinsurance). - Legal references: - The Insurance Supervisory Law: The Law of 13th March 2016. - Recent legislative requirement on data collection and discrimination: Law of 4 April 2014. ### Group supervision, supervisory co-operation and coordination - Group-wide supervision: - NBB discusses and agrees with involved supervisors on which is the group-wide supervisor for cross-border insurance groups operating in Belgium. - NBB is the group-wide supervisor for one IAIG: the Ageas SA/NV group. - IAIG designation notified to the group; IAIG designation assessed annually. - NBB participates in supervisory colleges of several IAIGs, including Axa, Allianz, Munich Re, Baloise Group, NN Group and QBE Group as a host authority. - Supervisory college and crisis management: - NBB established a supervisory college for its IAIG which meets at least annually; membership excludes host supervisors where group only has a participating stake. - Information exchanged regularly; ICS results presented and discussed in college. - NBB started to set up a crisis management group (CMG) in phases; a co-operation agreement was drafted and signed by CMG members describing objectives, roles, mandate, and coordination processes. - First CMG meeting was held late in 2022. - Implementation of the IRRD transposed into Belgian law would facilitate recovery and resolution planning of the IAIG. - College operations and group assessment: - NBB works with the college to build understanding of the group and lead supervision; colleges supported by individual college coordination arrangements providing for free flow of information. - NBB undertakes comprehensive mapping exercises with the group and other supervisors to identify group structure and assess operations; cross-sectoral considerations reflected where relevant. - NBB provides an overall assessment of group risk and solvency based on group ORSA and solo-level information. - To date, no joint on-site visits with involved supervisors where the NBB is the group-wide supervisor have been conducted. - As host supervisor: - Where another supervisor is group supervisor, NBB supervises solo insurers operating in Belgium and participates in supervisory colleges as a host supervisor. - NBB must comply with strict professional secrecy with limited exceptions; exchange of information with foreign supervisors allowed only if those authorities have equivalent professional secrecy provisions. - Challenge: development of pre-emptive resolution plans given NBB is not yet a resolution authority for insurance; implementation of the IRRD would remedy this. - Lloyd’s of London / LIC: - Following Brexit, Lloyd’s established and licensed Lloyd’s Insurance Company (LIC), a wholly owned subsidiary in Belgium operating on a 100 percent reinsurance model. - LIC is highly dependent on Lloyd’s as shareholder, reinsurer, and main service provider. - Currently there is not a platform for supervisory co-operation for Lloyd’s. - Recommendations (selected): - NBB should contact third country supervisors to assess basis for sharing and collecting information, focusing on foreign entities that could be systemically relevant in that jurisdiction (paragraph 95). - NBB should conduct joint on-site visits with involved supervisors where NBB is the group-wide supervisor (paragraph 96). - NBB should continue to engage with EIOPA and the Prudential Regulatory Authority to set up a platform for supervisory co-operation for Lloyd’s (paragraph 97). ### Conduct of business supervision - Regulatory alignment and supervisory tools: - Regulatory framework aligns with EU regulations and is supported by circulars, communication, guidance, and feedback statements published by the FSMA. - FSMA publishes EIOPA documentation relevant to conduct supervision on its website and has developed an Insurance Distribution Directive (IDD) Manual summarizing mandatory measures under IDD. - Intermediaries: - Registration of all intermediaries operating in Belgium is mandatory. - Insurers in Belgium are only allowed to deal with FSMA-registered intermediaries. - Requirements on insurer-intermediary relationships include avoidance of conflicts of interest and limitations on intermediary remuneration. - Fair treatment and conduct policies: - Insurers and intermediaries must establish and implement policies and procedures on fair treatment of customers. - Legal requirement: insurance distributors shall always act honestly, fairly, professionally, and in the best interest of their customers. - FSMA requires policies and procedures supporting compliance and issues work programs clarifying expectations. - FSMA has conducted supervisory actions focusing on duty of care, conflicts of interest and product governance requirements. - Promotion, disclosure and KIDs: - Comprehensive requirements for promotion and disclosure: advertisements must be understandable, accurately identify the product provider, and be clear on what is offered and what is excluded. - Insurers required to draw-up a Key Information Document (KID) for each insurance-based investment product to support informed decisions and product comparison. - FSMA regularly monitors compliance with these requirements through supervisory activities. - Complaints handling: - Legal framework requires insurers to have internal policies and procedures for treatment of complaints. - Unsatisfied customers can inform the FSMA and/or request the Belgian Ombudsman to intervene. - The Ombudsman provides the FSMA with quarterly data on number of complaints received, types of products involved, subject of complaint, entity involved and outcome. - Data protection and limitations on use of connected objects: - Insurers are subject to the European General Data Protection Regulation (GDPR). - Law of 4 April 2014 introduced legislative requirement prescribing that no differentiation may be made in terms of acceptance, pricing and/or scope of coverage based on a condition that the insured agrees that his or her personal data can be requested by the insurer through a connected object that collects personal data on his/her lifestyle or health. *Source: INTERNATIONAL MONETARY FUND* ### 104. The FSMA follows a risk-based approach to its supervision. The FSMA has a formal risk ### The FSMA follows a risk-based approach to its supervision. ### Risk-based supervision and information sources - The FSMA has a formal risk rating model in place for assigning risk ratings to insurers. - Elements included in the risk rating model: - number of complaints - corrective or remedial actions taken - portfolio transfers - mergers and acquisitions - changes in licensing conditions - growth in premiums - combined ratios - Various sources of information are used to perform a risk assessment of an insurer, including: - information shared by the NBB including Solvency II information - web-scraping - on-site inspections - reports from the Ombudsman - The FSMA has introduced an annual reporting for insurers applicable from 2023. ### Co-operation and coordination - National collaboration partners: - NBB - Federal Public Service Economy (FPS Economy) (about market practices) - Office de contrôle des mutualités (Authority responsible for the supervision of mutual societies and their intermediaries) - International cooperation: - collaboration with other National Competent Authorities (NCAs) - signatory to the IAIS MMOU ### Recommendations (from the FSAP text) - Improve turnaround time for reporting findings and orders resulting from on-site inspections. - Note: The FSMA has over the last year done a lot to improve its turnaround times from on-site inspections and should continue to do so. - Rationale: Particularly important where conduct of insurers can be to the detriment of policyholders and because there is no policyholder compensation in place where an insurer or intermediary acted in non-compliance with the rules. - EIOPA should consider legislative changes to enable pre-emptive conduct supervision. - Rationale: EU level legislation prevents the FSMA from applying a pre-emptive approach to supervision. Pre-emptive supervision could assist the FSMA in identifying harmful practices before any consumer has had any financial losses. - Publish an aggregate report of selective information following the analyses of the annual submission of the conduct of business survey. - Benefits: - Contributes to transparency - Assists insurers with benchmarking - Assists Boards of insurance companies to identify areas for improvements - Develop complaints reporting for insurers. - Action: The FSMA should continue to influence the Belgian Government to empower them to introduce policyholder complaints reporting by insurers. - Benefit: Will assist the FSMA to have a detailed and holistic view on the complaints of policyholders. ### Annex I — Progress on 2018 FSAP Recommendations (selected entries) - Recommendation 1: Engage with the insurance industry to gradually improve the quality of capital. (NBB) - Timing: ST M - Authorities’ explanation and status: - 6 insurers left with subordinated debt that is grandfathered in under Solvency II (most less than 10% of Eligible Own Funds (EOF) 1 (26% of EOF) - Quality of (84% Tier 1) - Average SCR > 200% - EPIFP Quality of Own Funds is monitored - Implemented. At the time of the FSAP there was no insurers left that applied the grandfathering provisions for subordinated debt, There was only 1 insurer left that applied the grandfathering provisions for technical provisions. The insurer met the Solvency II requirements with and without the subordinated debt transition - Recommendation 2: Seek to impose appropriate measures to address increasing liquidity risk of the sector, with due consideration of policyholders’ protection and benefits. (NBB) - Timing: ST H - Authorities’ explanation and status: - Belgium law allows NBB to temporary forbid lapses - Published a circular in 2022 on “liquidity risk management.” First reporting due April 2023 - Implemented. The response by the NBB was evidenced during the FSAP. - Recommendation 3: Consider imposing more detailed reporting requirements on insurers with large exposures to mortgage loans. (NBB) - Timing: ST M - Authorities’ explanation and status: - Specific reporting introduced in 2018 (annual submission) - Analyses done on micro and macro level - Alignment with bank requirements on credit standards (comply or explain) - Implemented. The response by the NBB was evidenced during the FSAP. - Recommendation 4: Continue analyzing the business growth of reinsurance operations and enhance supervisory resources as needed. (NBB) - Timing: C H - Authorities’ explanation and status: - Increase staff complement (8) - Communicated expectations to industry (ORSA & Governance circular) - Assessment by NBB - Implemented. Staff complement has increased. The insurance supervision team was restructured. NBB issued various circulars to the insurance industry. - Recommendation 5: Strive to retain staff with high expertise in the implementation of Solvency II. (NBB) - Timing: C H - Authorities’ explanation and status: - Communicated to HR - Implemented. This was communicated to the Human Resource Department. The NBB has been successful in attracting and retaining skilled staff. *Source: IMF staff report text provided in the content unit.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1belea2023007.pdf_