## Detailed Assessment of Observance of the IAIS Insurance Core Principles ## Source details **Canonical URL:** [Detailed Assessment of Observance of the IAIS Insurance Core Principles](https://www.imf.org/-/media/files/publications/ofca/english/cr07156.pdf) ## Other formats - [Markdown version](/-/media/files/publications/ofca/english/cr07156.pdf.md) - [Structured JSON version](/-/media/files/publications/ofca/english/cr07156.pdf.json) --- ### General - The assessment is of observance of the International Association of Insurance Supervisors (IAIS) Insurance Core Principles (ICP) in Gibraltar. - The assessment was conducted as part of a Module 2 assessment under the International Monetary Fund’s (IMF) offshore financial center assessment program. - The assessment mission to Gibraltar took place during March 6–17, 2006 and was conducted by William McCullough (consultant to the IMF). - Considerable assistance was provided by the Financial Services Commission (FSC), the insurance supervisory authority. ### Information and methodology used for assessment - The assessment used the IAIS insurance core principles and methodology adopted by the IAIS in 2003. - Principle observance definitions applied: - “Observed” = all essential criteria met without significant deficiencies. - “Largely observed” = only minor shortcomings that do not raise material concerns. - “Partly observed” = shortcomings sufficient to raise doubts about ability to achieve observance. - Reference material included the IMF assessment 2002 and a recent review comparing Gibraltar standards to the United Kingdom FSA standards. - Relevant legislation and supervisory instruments cited include: - Insurance Companies Ordinance and Regulations 1987 (ICO). - Financial Services Ordinance and Regulations 1989 (FSO). - European Union Directives enacted through local legislation. - Insurance Guidance notes and newsletters issued by the FSC. ### Institutional and market context - Market structure and drivers: - 50 licensed companies as of end-March 2006, up from 39 in 2004. - Captive insurance companies are licensed but represent a diminishing proportion of the market; captives include 11 single-parent and include two protected cell companies (PCC). - Majority of companies are managed by resident and licensed insurance managers and provide services in the United Kingdom. - All foreign establishments operating in Gibraltar were EU-based and covered by EU directives, including the directive on freedom of establishment. - Key attractions: ability to passport services to EU member states; lower head office costs; acceptable capital requirements; speed of licensing; accessibility of the supervisory authority. - Domestic market size and statistics: - Population in the region of 30,000. - Domestic market is quite small; some domestic business placed outside Gibraltar is not reflected in published statistics. - Statistics are published on the FSC web site; initial omissions in domestic market statistics (business carried out by agents and brokers placing business outside Gibraltar) were noted and rectified by the FSC. ### Principle-by-principle findings (selected summary of Principles 1–6) - Principle 1 — Conditions for effective insurance supervision - FSC through the Commissioner for Insurance is responsible for supervision to ensure compliance with EU directives, U.K. obligations, and international standards. - Judicial and professional framework: effective judicial system based on U.K. legislation; access to U.K. Privy Council; International Accounting and Audit Standards applied; no resident actuaries (sourced from U.K. or other EU states); auditors must be registered in Gibraltar by the Auditors Registration Board. - Assessment: Observed. - Comment: Government has established an effective insurance supervisory system; FSC published a self-assessment against the U.K. Combined Code of Corporate Governance. - Principle 2 — Supervisory objectives - FSCO establishes principal duties of the Commission; FSC published “guiding principles” and issued guidance notes addressing reporting obligations. - Assessment: Observed. - Comment: FSC is establishing a strategic plan based on prudential supervision; Commissioner proposed amendments to FSCO to set objectives, functions, and responsibilities in law. - Principle 3 — Supervisory authority - ICO identifies the authority and provides sufficient powers; FSC corporate governance structure established in legislation; Commissioner is Chair and chief executive; FSC includes seven independent part-time members appointed by the Governor (with U.K. approval where applicable). - Operational independence: FSC is operationally independent of the Government of Gibraltar; U.K. government approval required for appointments but U.K. has no supervisory authority over Gibraltar. - Funding: FSC activities financed in part by Government subvention (now minor); fees payable by supervised institutions determined by Government; FSC has built reserves to operate in crises; FSC prepares its own budget. - Assessment: Observed. - Comment: High degree of experience and skills in the insurance division; additional staff recruitment planned in 2006; need noted to increase on-site inspections and consideration of outsourcing. - Principle 4 — Supervisory process - ICO, Regulations, and FSO specify supervisory processes; FSC web site provides legislation and guidance notes; risk-based framework for supervision published. - Consistency and appeals: internal review committee and judicial review mechanisms; remedial powers in Section 105B and appeal rights in Sections 111 and 112. - Assessment: Observed. - Comment: Initial complication in publishing insurance statistics had been rectified by the FSC. - Principle 5 — Supervisory cooperation and information sharing - ICO Section 16 permits sharing of information with other supervisors absent an MOU; EU protocol applies; FSC may sign MOUs; proposed Financial Services (Information and Co-operation: Powers and Confidentiality) Ordinance to consolidate powers. - Assessment: Observed. - Comment: FSC participates in the IAIS and the Offshore Group of Insurance Supervisors. - Principle 6 — Licensing - ICO Sections 16A and 17 require licensing of insurers carrying on insurance business in or from Gibraltar; Commissioner authorized to issue licenses. - Licensing criteria set out in Part IV of the ICO and the Insurance Companies (Prescribed Particulars) Regulations; risk management, IT, and internal control systems requirements referenced in Sections 26 and 28 and Schedule 15. - Assessment: Licensing requirements are clear, objective, and public in the ICO framework. ### Licensing and notification of requirements - A Notification of Requirements imposing conditions and restrictions on a licensee can be served on initial licensing or at any future time. - There is a time period of six months after receiving all required information for a decision on an application to be made. - Reasons for refusal must be given in writing, in accordance with Section 26(3) of the ICO. - Wide powers of discretion to refuse a license exist under Sections 26 and 28 and in the Insurance Guidance notes. - After licensing, detailed monitoring is based on the Notification of Requirements and on Sections 50 and 52 of the Insurance Companies (Accounts and Statements) Regulations. - Assessment: Observed. - Comment: The insurance supervisory division controls licensing procedures effectively for locally incorporated insurance companies, branch offices of overseas licensed companies and managers of captive insurance companies but does not control licensing of insurance brokers and agents; the FSC Investment Services Division supervises brokers and agents. Several overseas companies operate in Gibraltar through main agents or branches with limited underwriting and claims authority. ### Suitability, changes in control, and corporate governance (Principles 7–9) - Principle 7 — Suitability of persons - Key functionaries identified in ICO Part V and Schedule 11; auditors and actuaries subject to disqualification provisions. - Detailed checks performed at license application, upon notification of changes, and during on-site inspections. - Assessment: Largely Observed. - Comment: FSC drafted an “Approved Person’s Regime” expected to be presented to the Gibraltar Assembly in 2006 to address legislative limitation on notification. - Principle 8 — Changes in control and portfolio transfers - Supervisory authority approves or rejects significant ownership changes and portfolio transfers; prior approval required where a notifiable holding increases or changes. - Portfolio transfer requirements in ICO Part IX and Schedule 10; Commissioner must be satisfied solvency margins will be met post-transfer. - Assessment: Observed. - Principle 9 — Corporate governance - Corporate governance principles fall under ICO Schedule 15 “Sound and Prudent Management” and in Insurance Internal Guideline No 3; newsletters and on-site inspections used to confirm compliance. - Assessment: Largely Observed. - Comment: Draft “Approved Persons Regime” incorporating Corporate Governance Principles is being considered; majority of companies may not require lengthy corporate governance statements because of size and nature. ### Internal control and ongoing supervision (Principles 10–13) - Principle 10 — Internal control - Supervisory authority requires insurers to have internal controls adequate for the nature and scale of the business; internal controls reviewed at licensing and annually. - Assessment: Observed. - Comment: Consideration should be given to strengthening legal requirements for internal controls. - Principle 11 — Market analysis - FSC monitors and analyses factors impacting insurers and markets with emphasis on EU markets; no requirement to identify domestic market trends due to small domestic market. - Assessment: Partly Observed. - Comment: Separation of supervision (intermediaries vs insurers) resulted in lack of aggregated market statistics; deficiency to be corrected in 2006. Additional statistical information should be obtained from all licensed companies, brokers and agents. - Principle 12 — Reporting to supervisors and off-site monitoring - Reporting system controlled; ICO Sections 50 and 52 require appropriate accounts and define scope and frequency; audit opinion required annually; Section 98 and Notification of requirements allow more frequent information. - Assessment: Observed. - Comment: Consideration should be given to reducing the reporting time to four months, instead of six as at present. - Principle 13 — On-site inspection - Powers to require documents and conduct detailed investigations under Sections 98, 100A, and 101; inspections of brokers carried out since 2003 and insurers since 2005. - Intention that inspections take place at least every two years unless concerns require more frequent monitoring. - Assessment: Observed. - Comment: Five inspections completed in 2005 and nine in 2006; initial inspections focused on Corporate Governance and extended to operational and internal controls. ### Preventive, corrective and enforcement measures (Principles 14–16) - Principle 14 — Preventive and Corrective Measures - Formal powers for preventative action in ICO Sections 67 and 98 to 109; powers to prohibit new business under Section 105 and to suspend authorization under Section 105B; corrective plans under Section 62A and 63. - Assessment: Observed. - Comment: Corrective measures have been used to protect policyholders and remedy two potentially serious situations in the past two years. - Principle 15 — Enforcement or sanctions - Powers to take corrective action contained in Sections 60, 62, 62A, 63, 100, and 105 to 108; restrictions on dividends, capital increases, transfers and subsidiary activities in Sections 60, 62A, and 63. - Assessment: (Assessment details concluded in preceding descriptions and comments.) - Principle 16 — Winding-up and exit from the market - Insurers’ exit and insolvency procedures in the Insurers (Reorganization and Winding up) Ordinance; Part V sets creditor priority with policyholders having priority after preferential debts. - Assessment: Observed. - Comment: Instances of winding up have resulted in actions ensuring policyholders' rights were protected. ### Group-wide supervision and prudential requirements (Principles 17–23) - Principle 17 — Group-wide supervision - Supervisory authority supervises insurers on a solo and group-wide basis; legislation implementing the Financial Conglomerates Directive expected to be introduced shortly. - Assessment: Observed. - Principle 18 — Risk assessment and management - Evidence of comprehensive risk management policies required with initial license; larger insurers required to establish risk management committees. - Assessment: Observed. - Principle 19 — Insurance activity (underwriting and reinsurance) - Detailed underwriting guidelines, reinsurance program, and premium pricing policies required with license application; PCCs require business plans for each cell. - Assessment: Observed. - Principle 20 — Liabilities (technical provisions and reserves) - Legal provisions include Section 58 of the ICO and relevant Regulations; life reserves reviewed by the U.K. Government Actuaries Department; general companies required to use actuaries. - Assessment: Largely Observed. - Comment: On-site inspections had not included examination of claims provisioning, reserves and adequacy but this has now been corrected. - Principle 21 — Investments - Requirements on investment policy, asset mix, diversification, and asset-liability matching set out in ICO and Guidance Notes; majority of companies outsource asset management and hold cash and bonds. - Assessment: Observed. - Principle 22 — Derivatives and similar commitments - Use of derivatives permitted under strict guidelines; disclosure and control requirements in Insurance Companies (Accounts and Statements) Regulations and Guidance Notes. - Assessment: Observed. - Principle 23 — Capital adequacy and solvency - Solvency regime criteria in Sections 58 and 59 of the ICO and relevant Regulations; FSC requires a minimum of 125 percent of the EU minimum levels for short-tail business and 300 percent for long-tail business. - Assessment: Observed. - Comment: FSC compares its regime against that operating in the United Kingdom; EU progressing towards “Solvency II.” ### Markets and consumers, fraud and AML/CFT (Principles 24–28) - Principle 24 — Intermediaries - Requirements for licensing intermediaries set out in FSO, Financial Services (Conduct of Business) Regulations, and Financial Services (Accounting and Financial) Regulations; intermediaries historically supervised by the financial services division. - Principle 25 — Consumer protection - Requirements include provision of timely, complete and relevant information to consumers from pre-contract to fulfillment; legal bases include FSO 1989, Financial Services (Conduct of Business) Regulations, and ICO Sections 70A and 70B. - Assessment: Observed. - Comment: Consumer protection in the event of insolvency available for policyholders with U.K. companies and U.K. policyholders insured with Gibraltar insurers; no similar scheme for domestic Gibraltar policies. - Principle 26 — Information, disclosure & transparency towards the market - Disclosure requirements in Sections 50 to 56 of the ICO and relevant Regulations; annual returns filed with Companies House and available to the public. - Assessment: Observed. - Principle 27 — Fraud - Powers to establish and enforce regulations set out in section 22 of the FSCO and Schedule 16 of the ICO; enforcement division cooperates with the police Financial Crimes Unit. - Assessment: Observed. - Principle 28 — Anti-money laundering, combating the financing of terrorism (AML/CFT) - Section 8 of the Criminal Justice Ordinance defines life insurance activities as relevant financial business; detailed AML guidance notes prepared and issued. - Assessment: Observed. - Comment: Effectiveness of AML/CFT measures to be confirmed through completion of on-site inspections. ### Summary observance of IAIS Insurance Core Principles - Principles Grouped by Assessment Grade: - Observed: 24 — CP 1, 2, 3, 4, 5, 6, 8, 10, 12, 13, 14, 15, 16, 17, 18, 19, 21, 22, 23, 24, 25, 26, 27, 28 - Largely observed: 3 — CP 7, 9, 20 - Partly observed: 1 — CP 11 - Not observed: None - Not applicable: None ### Key numeric facts preserved exactly - Mission dates: March 6–17, 2006. - Licensed insurers: 50 licensed companies as of end-March 2006, up from 39 in 2004. - Captive composition: 11 single-parent and include two protected cell companies (PCC). - Domestic population: in the region of 30,000. - IAIS methodology adoption year: 2003. - FSC solvency requirements: minimum of 125 percent of the EU minimum levels for short-tail business and 300 percent for long-tail business. - Reporting decision period on license applications: six months after receiving all required information. - Reporting time currently recommended to be reduced from six months to four months. - Inspections completed: Five inspections completed in 2005 and nine in 2006. ### Recommended action plan (selected recommendations) - CP 7 (Suitability of persons) - Legislation relating to the “Approved Persons Regime” should be introduced without delay. - CP 9 (Corporate governance) - Legislation relating to the “Approved Persons Regime” should be introduced without delay. - CP 10 (Internal control) - Strengthen legal requirements in relation to internal controls and the annual submission of detailed business plans. - CP 11 (Market analysis) - Compile complete market statistics and detailed analysis; pay attention to market analysis and trends in Gibraltar and EU states, particularly the United Kingdom. - CP 12 (Reporting to supervisors and off-site monitoring) - Reduce the reporting time for the submission of annual statements to four months. - CP 19 (Insurance activity) - Complete the cycle of on-site inspections as soon as possible to confirm application of approved underwriting procedures and operational risk control. - CP 20 (Liabilities) - Complete the cycle of on-site inspections to confirm practical application of declared policies on technical provisioning. - CP 28 (Anti-money laundering) - Complete the cycle of on-site inspections to confirm that approved AML/CFT procedures are applied in practice. ### Authorities’ response - The FSC welcomes the findings of the IMF assessment of compliance with IAIS standards. - The FSC appreciates the skill and attention given in conducting the review and has already actioned the recommendations made, which they fully accept. - The FSC notes its high level of compliance with the standards and states a commitment to applying new standards as and when they evolve. *IMF Module 2 assessment mission to Gibraltar, March 6–17, 2006 (assessment conducted by William McCullough, consultant to the IMF).* ### 1. Detailed Assessment of Observance of the IAIS Insurance Core Principles.........................5 ### 1. Detailed Assessment of Observance of the IAIS Insurance Core Principles ### General - The assessment is of observance of the International Association of Insurance Supervisors (IAIS) Insurance Core Principles (ICP) in Gibraltar. - The assessment was conducted as part of a Module 2 assessment under the International Monetary Fund’s (IMF) offshore financial center assessment program. - The assessment mission to Gibraltar took place during March 6–17, 2006 and was conducted by William McCullough (consultant to the IMF). - Considerable assistance was provided by the Financial Services Commission (FSC), the insurance supervisory authority. ### Information and methodology used for assessment - The assessment used the IAIS insurance core principles and methodology adopted by the IAIS in 2003. - Principle observance definitions applied: - “Observed” = all essential criteria met without significant deficiencies. - “Largely observed” = only minor shortcomings that do not raise material concerns. - “Partly observed” = shortcomings sufficient to raise doubts about ability to achieve observance. - Reference was made to the IMF assessment 2002 and a recent review comparing Gibraltar standards to the United Kingdom FSA standards. - Relevant legislation and supervisory instruments cited: - Insurance Companies Ordinance and Regulations 1987 (ICO) for insurers. - Financial Services Ordinance and Regulations 1989 (FSO) for intermediaries and managers. - European Union Directives enacted through local legislation. - Insurance Guidance notes and newsletters issued by the FSC. ### Institutional and market context - Insurance industry growth: - 50 licensed companies as of end-March 2006, up from 39 in 2004. - Captive insurance companies are licensed but represent a diminishing proportion of the market; captives include 11 single-parent and include two protected cell companies (PCC). - Market composition and drivers: - Majority of companies are managed by resident and licensed insurance managers and provide services in the United Kingdom. - All foreign establishments operating in Gibraltar were EU-based and covered by EU directives, including the directive on freedom of establishment. - Key attractions: ability to passport services to EU member states; lower head office costs; acceptable capital requirements; speed of licensing; accessibility of the supervisory authority. - Domestic market size: - Population in the region of 30,000. - Domestic market is quite small; some domestic business placed outside Gibraltar is not reflected in published statistics. - Statistical reporting: - Statistics are published on the FSC web site; however, domestic market statistics were not inclusive of domestic business carried out by all agents and brokers placing business outside Gibraltar (issue noted and rectified by the FSC). ### Principle-by-principle findings (selected summary of Principles 1–6) - Principle 1 — Conditions for effective insurance supervision - Description: FSC through the Commissioner for Insurance is responsible for supervision to ensure compliance with EU directives, U.K. obligations, and international standards. - Permitting legislation includes: FSCO, FSO, ICO, CJO, COO. - Judicial and professional framework: effective judicial system based on U.K. legislation; access to U.K. Privy Council; International Accounting and Audit Standards applied; no resident actuaries (sourced from U.K. or other EU states); auditors must be registered in Gibraltar by the Auditors Registration Board. - Assessment: Observed. - Comment: Government has established an effective insurance supervisory system; FSC published a self-assessment against the U.K. Combined Code of Corporate Governance. - Principle 2 — Supervisory objectives - Description: FSCO establishes principal duties of the Commission; FSC published “guiding principles” and issued guidance notes addressing reporting obligations; consultation with industry occurs for additional EU-driven regulations. - Assessment: Observed. - Comment: FSC is establishing a strategic plan based on prudential supervision; Commissioner proposed amendments to FSCO to set objectives, functions, and responsibilities in law. - Principle 3 — Supervisory authority - Description: ICO identifies the authority and provides sufficient powers; FSC corporate governance structure established in legislation; Commissioner is Chair and chief executive; FSC includes seven independent part-time members appointed by the Governor (with U.K. approval where applicable). - Operational independence: FSC is operationally independent of the Government of Gibraltar; U.K. government approval required for appointments but U.K. has no supervisory authority over Gibraltar. - Funding: FSC activities financed in part by Government subvention (now minor); fees payable by supervised institutions determined by Government; FSC has built reserves to operate in crises; FSC prepares its own budget. - Staff and safeguards: staff protected from legal action for actions in good faith; staff handbook contains conflict-of-interest rules; external consultants subject to same confidentiality controls; FSC commits resources to staff training and qualifications. - Assessment: Observed. - Comment: High degree of experience and skills in the insurance division; additional staff recruitment planned in 2006; need noted to increase on-site inspections and consideration of outsourcing. - Principle 4 — Supervisory process - Description: ICO, Regulations, and FSO specify supervisory processes; FSC web site provides legislation and guidance notes; newsletters and guidance notes explain EU Directive implementation; risk-based framework for supervision published. - Consistency and appeals: Section 113 ICO allows limited modification of provisions; reporting procedures, internal review committee, and judicial review mechanisms in place; Section 105B ICO contains remedial powers; Sections 111 and 112 set out rights of appeal and Court powers. - Reporting: FSC publishes annual report including conduct and performance of policy objectives and insurance industry statistics. - Assessment: Observed. - Comment: Initial complication in publishing insurance statistics (lack of data on business placed outside Gibraltar by agents/brokers) had been rectified by the FSC. - Principle 5 — Supervisory cooperation and information sharing - Description: ICO Section 16 permits sharing of information with other supervisors absent an MOU; EU protocol applies; FSC may sign MOUs; Section 16 requires the Commissioner be satisfied that other supervisor has confidentiality restrictions at least equivalent to Section 16; Insurers (Reorganization and Winding up) Ordinance 2004 and EU Protocol apply to information exchange. - Assessment: Observed. - Comment: FSC is a participant in the IAIS and the Offshore Group of Insurance Supervisors; FSC proposed a new Financial Services (Information and Co-operation: Powers and Confidentiality) Ordinance to consolidate and clarify powers. - Principle 6 — Licensing - Description: ICO Section 2 defines insurers and insurance business; Sections 16A and 17 require licensing of insurers carrying on insurance business in or from Gibraltar; permissible legal forms follow EU Life and Non-Life Directives; Commissioner of Insurance authorized to issue licenses (Section 16A); licensing criteria set out in Part IV of the ICO and the Insurance Companies (Prescribed Particulars) Regulations. - Additional provisions: Risk management, IT, and internal control systems requirements referenced in Sections 26 and 28 and Schedule 15; Schedule 11, Parts IV and V, and section 76 also relevant; EU passporting applies to EU companies; non-EU applicants subject to Sections 24B–28 and prescribed particulars regulations; inwards services business (reinsurance) by non-EU insurers is not required to be licensed, paralleling U.K. practice. - Assessment (implicit in description): Licensing requirements are clear, objective, and public in the ICO framework. ### Key numeric facts preserved exactly - Mission dates: March 6–17, 2006. - Licensed insurers: 50 licensed companies as of end-March 2006, up from 39 in 2004. - Captive composition: 11 single-parent and include two protected cell companies (PCC). - Domestic population: in the region of 30,000. - IAIS methodology adoption year: 2003. *Source: IMF Module 2 assessment mission to Gibraltar, March 6–17, 2006 (assessment conducted by William McCullough, consultant to the IMF).* ### Section 20 of the ICO and in Guideline No.1. EU Life and non-Life Directives also apply. ### Section 20 of the ICO and in Guideline No.1. EU Life and non-Life Directives also apply. ### Licensing and Notification of Requirements - A Notification of Requirements imposing conditions and restrictions on a licensee can be served on initial licensing or at any future time when considered necessary. - There is a time period of six months after receiving all required information for a decision on an application to be made. - Reasons for the refusal to grant a license must be given in writing, in accordance with Section 26(3) of the ICO. - Wide powers of discretion to refuse a license exist under Sections 26 and 28 and in the Insurance Guidance notes. - After licensing, detailed monitoring is based on the Notification of Requirements and on Sections 50 and 52 of the Insurance Companies (Accounts and Statements) Regulations. - Assessment: Observed. - Comment: The insurance supervisory division controls licensing procedures effectively for locally incorporated insurance companies, branch offices of overseas licensed companies and managers of captive insurance companies but does not control licensing of insurance brokers and agents; the FSC Investment Services Division supervises brokers and agents. Several overseas companies operate in Gibraltar through main agents or branches with limited underwriting and claims authority. ### Principle 7 — Suitability of persons - Objective: Significant owners, board members, senior management, auditors and actuaries of an insurer are fit and proper, possessing appropriate integrity, competency, experience and qualifications. - Key functionaries identified in ICO Part V and Schedule 11; definitions in Section 2 of the ICO; powers to take action in Schedule 11. - Auditors can be disqualified under Sections 47 and 48A of the ICO. - Appointment and disqualification of Actuaries under Sections 76 and 77 of the ICO. - Supervisory authority may exchange information to assist checks (additional tool as described in ICP 5). - Detailed checks and assessments performed at license application, upon notification of changes, and during on-site inspections. Guidance notes specify notification of changes but this is not required by law. - Assessment: Largely Observed. - Comment: To address legislative limitation on notification (EC g), the FSC drafted an “Approved Person’s Regime” expected to be presented to the Gibraltar Assembly in 2006. ### Principle 8 — Changes in control and portfolio transfers - Supervisory authority approves or rejects proposals to acquire significant ownership or interests that result in control; approves portfolio transfers or mergers of insurance business. - Power to approve or reject change of ownership; definitions in ICO Section 2 (notifiable holdings and voting rights). - Power to appoint/remove directors and controllers in Sections 40 to 46 and in Schedule 11. - Prior approval of the Commissioner required where a notifiable holding increases or changes. - Close relationships defined in Section 2(32) to 2(40) and Schedule 17. - Requirements of ICP 8 applied equally to new license applicants and changes in notifiable holdings. - Closely linked groups and companies with shareholding or voting rights (Schedule 17 of the ICO) should not be authorized if such links would prevent the Commissioner from performing statutory powers under Section 27. - Close links require ongoing notification under the Insurance Companies (Prudential Supervision) Regulations. - Portfolio transfer requirements in ICO Part IX and Schedule 10; Commissioner must be satisfied that the margin of Solvency required will be satisfied after the transfer and that transfer circumstances are justified and in the interests of policyholders. - Assessment: Observed. - Comment: The Head of Insurance and his Deputy are suitably qualified and experienced to make correct recommendations to the Commissioner. ### Principle 9 — Corporate governance - Corporate governance principles fall under ICO Schedule 15 “Sound and Prudent Management” and in Insurance Internal Guideline No 3; not set out separately in company law or the ICO. - Newsletters published by the FSC in 1998 set out responsibilities and requirements. - Required information obtained at time of application and annually when business plan is updated; details checked, verified and assessed before approval. - The proposed “Approved Persons Regime” will address omission related to EC g referred to in ICP 7. - Assessment: Largely Observed. - Comment: Draft legislation for “Approved Persons Regime” incorporating Corporate Governance Principles is being considered; when introduced it will confirm compliance. Until then, compliance addressed through on-site inspections. Majority of companies in Gibraltar expected not to require lengthy corporate governance statements because of size and nature. ### Principle 10 — Internal control - Supervisory authority requires insurers to have internal controls adequate for the nature and scale of the business; oversight and reporting systems to allow board and management to monitor and control operations. - ICO contains limited regulation on internal controls; supervisory authority requires adequate internal controls to be demonstrated on licensing and specific reference in the business plan. - FSC pays particular attention to internal controls in the business plan; information is updated annually. - Effectiveness verified by annual review of returns, off-site monitoring, and on-site inspections; Section 26 of the ICO applies. - Access to internal audit and actuarial reports under Sections 78 and 98 of the ICO. - Assessment: Observed. - Comment: Supervisors have experience assessing internal controls at licensing; verification during on-site inspections. Consideration should be given to strengthening legal requirements for internal controls. ### Ongoing Supervision — Principle 11 Market analysis - Supervisory authority monitors and analyses factors that may impact insurers and insurance markets using available sources. - Gibraltar population estimated to be in the region of 30,000; domestic market very small with three companies carrying on domestic business. - FSC does not seek to identify market trends in the domestic market and considers the principle not applicable to the domestic industry. - Majority of insurers are captives or passporting third party business into the United Kingdom; published market statistics are limited. - Analysis mainly qualitative and relies on external information focused on EU markets; FSC pays attention to published analysis and trends where Gibraltar insurers operate. - Submission of accounts and statements and preparation of annual accounts detailed in Sections 50 and 52 of the Insurance Companies Ordinance. - No requirements for statistical returns from all insurers operating in Gibraltar, though systematic financial reporting required under Sections 50 and 52. - Assessment: Partly Observed. - Comment: Separation of supervision (intermediaries vs insurers) has meant Gibraltar has not published aggregated market statistics; this deficiency will be corrected in 2006. Additional statistical information should be obtained from all licensed companies, brokers and agents. ### Principle 12 — Reporting to supervisors and off-site monitoring - Supervisory authority receives necessary information to conduct effective off-site monitoring and evaluate condition of each insurer and the market. - Reporting system specific and well controlled by the supervisory authority; action taken quickly for late reporting; potential problems discovered are acted upon immediately and followed until remedied to authority’s satisfaction. - Reporting requirements in ICO Part V, Insurance Companies (Accounts and Statements) Regulations, and in the Notice of requirements; ICO Sections 50 and 52 require appropriate accounts and define scope and frequency. - Audit opinion required annually (refer to ICP1ECe). Section 98 and the Notification of requirements provide for more frequent/additional information. - Insurance Companies (Valuations of Assets and Liabilities) Regulations apply to statutory returns; form and content in Insurance Companies (Accounts Directive) Regulations. - FSC has revised insurance returns regularly and revised forms to accommodate captive insurers and insurance managers. - Assessment: Observed. - Comment: Consideration should be given to reducing the reporting time to four months, instead of six as at present, particularly in view of the number of open market insurers operating in the United Kingdom. ### Principle 13 — On-site inspection - Supervisory authority carries out on-site inspections to examine insurer business and compliance with legislation and supervisory requirements. - Powers in ICO Section 98 to require license holders to produce documents; FSC may enter premises to obtain documents. Similar powers in FSO for intermediaries. - Powers under Section 100A permit detailed investigation; inspections under Section 101. - On-site visits to insurance brokers carried out since 2003; inspections of insurers commenced in 2005. - Intention that inspections take place at least every two years unless concerns require ongoing monitoring. - FSC Risk Assessment methodology intended to capture and validate information from statutory returns, corporate governance, and internal controls. - Auditors required under Section 48A of the ICO to disclose relevant information to the Commissioner and to note circumstances affecting going concern. - Assessment: Observed. - Comment: On-site visits to insurance brokers carried out by Investment Services Division expected largely completed in 2006. Some brokers and agents operate as managing agents or branches of insurers with head offices in another EU State; those EU companies are regulated by home supervisors but are inspected by the FSC. Head of Insurance and Deputy have required experience; FSC has produced a Risk Based Self-Assessment Questionnaire and is undertaking a risk-based framework of on-site inspections. Five inspections completed in 2005 and nine in 2006. Initial inspections focused on Corporate Governance and have been extended to include all operational and internal controls. ### Principle 14 — Preventive and Corrective Measures - Supervisory authority takes preventive and corrective measures that are timely, suitable and necessary to achieve supervision objectives. - Formal powers for preventative action in ICO Sections 67 and 98 to 109; investigations under Section 100A; inspections under Section 101. - FSC empowered to obtain action under Sections 98 and 99; investigators can be appointed under Section 100A and/or inspectors under Section 101. - FSC can prohibit a company from accepting new business under Section 105; Section 105B provides powers to suspend company authorization. - Powers under Section 106 to withdraw authorization to carry on insurance business. - Corrective plans triggered under Section 62A and 63 of the Insurance Companies Ordinance. - Assessment: Observed. - Comment: FSC held in high regard by the industry; industry responds positively to informal requests. Corrective measures under relevant Sections of the ICO have been used to protect policyholders and remedy two potentially serious situations in the past two years. ### Principle 15 — Enforcement or sanctions - Supervisory authority enforces corrective action and imposes sanctions based on clear and objective criteria. - Powers to take corrective action contained in Sections 60, 62, 62A, 63, 100, and 105 to 108 of the ICO. - Power to prevent insurers from issuing new policies in Sections 105 and 105B. - Transfer of obligations under policies can be made to another approved insurer (reference to ICP 8, EC 1). - Restrictions on dividends, increases in capital, share transfers, and activities of subsidiaries referred to in Sections 60, 62A, and 63 of the ICO. - Supervisory authority has powers to address management problems in Sections 40 to 46 and Schedule 11. - Conservation of assets addressed under relevant ICO provisions. - Assessment: (Assessment details concluded in preceding descriptions and comments.) *cr07156 - Section 20 of the ICO and in Guideline No.1. EU Life and non-Life Directives also apply.* ### Section 66A and the power to take control of an insurer can be exercised under Sections 66 and ### Section 66A and the power to take control of an insurer can be exercised under Sections 66 and ### Enforcement powers and sanctions - Section 66A and the power to take control of an insurer can be exercised under Sections 66 and 100 of the ICO. - For the protection of a Gibraltar insurer who is part of a group, powers could be exercised under sections 65, 66, 66A, and 100 ICO. - Court fines can be imposed under various Sections of the Ordinance. - Sanctions against persons withholding information can be imposed under Section 117. - Assessment: Observed. - Comment: The FSC has taken action under 65 and 66 of the ICO on two recent occasions to enforce sanctions; necessary steps were taken to protect policyholders and produced a satisfactory outcome. ### Principle 16 — Winding-up and exit from the market - Legal and regulatory framework defines options for orderly exit of insurers and establishes insolvency criteria and procedures. - In winding-up proceedings, the framework gives priority to the protection of policyholders. - Measures relating to maintenance of solvency margins are contained in Sections 62A and 63 of the ICO. - FSC discretion to determine a reasonable plan for restoration of a sound financial position under Section 62A/63; Insurance Companies (Valuation of Assets and Liabilities) Regulations apply when required. - Insolvency and winding up procedures set down in the Insurers (Reorganization and Winding up) Ordinance; Part V sets out creditor priority and provides for limited disruption to provision of claims of policyholders which have priority after preferential debts. - Assessment: Observed. - Comment: Instances of Gibraltar insurance companies being wound up have resulted in action to ensure policyholders' rights were suitably protected. ### Principle 17 — Group-wide supervision - Supervisory authority supervises insurers on a solo and group-wide basis. - Legislation implementing the Financial Conglomerates Directive is expected to be introduced shortly. - At present there are no financial or insurance conglomerates operating in Gibraltar. - Supervisory authorities of EU member states operate under the Helsinki Protocol regarding supervision of insurance entities in an insurance group. - Insurance Companies (Parent Undertaking Solvency Margin Calculations) Regulations and Insurance Companies (Solvency Margins and Guarantee Funds) Regulations set out solvency calculations. - Intra-group transactions, exposures, guarantees, and possible liabilities are covered in the Notice of Requirements. - Requirements of the Insurance Companies (Accounts and Statements) regulations require insurance groups and conglomerates to have adequate reporting systems in place. - Appropriate action may be taken under relevant sections of the ICO if a group structure hinders effective supervision. - Assessment: Observed. - Comment: If conglomerates enter Gibraltar, full cooperation with the home supervisor would be expected; existing legislation and licensing requirements cover criteria for observance of this principle. ### Prudential Requirements — Principle 18: Risk assessment and management - Supervisory authority requires insurers to recognize, assess, and manage the range of risks they face. - Evidence of comprehensive risk management policies and systems must be provided with the initial license application. - Formalized and documented risk management programs are required where appropriate to the size and nature of the business and must be in place prior to license approval. - Larger insurers required to establish risk management committees. - On-site inspections include a comprehensive review of risk assessment and management programs. - Assessment: Observed. - Comment: Business plans must address operational and financial risks; documented risk management programs must be approved by the FSC at licensing and updated with the annual business plan submission. On-site inspections confirm continued adherence. ### Prudential Requirements — Principle 19: Insurance activity - Supervisory authority requires detailed underwriting guidelines, proposed reinsurance program, and premium pricing policies with the license application. - Supervisor reviews methodology at application stage and requests annually updated business plan. - Reinsurance arrangements expected to be reviewed and approved by the board and management committee annually before submission to the supervisory authority. - FSC reviews reinsurance arrangements for adequacy relative to capital and risk profile; checks at inception and with annual business plan. - Reinsurance accounting checked through annual financial returns and on-site inspection of reinsurance contracts. - Generally “A” rated re-insurers are acceptable; single parent captive reinsuring with another captive requires confirmation of good standing by the relevant home regulator. - Recent legislation permitting licensing of PCCs has extended levels and scope of supervision; PCCs must provide same level of information at application stage for core company and for each cell to be authorized; business plans for each cell must be submitted and approved individually. - Assessment: Observed. - Comment: Scrutiny at license approval is high standard; management functions are carried out by licensed insurance managers, underwriting and claims may occur in country of operation, necessitating regular on-site inspections. On-site inspections of underwriting managers have taken place. ### Prudential Requirements — Principle 20: Liabilities - Supervisory authority requires insurers to comply with standards for establishing adequate technical provisions and other liabilities, and for making allowance for reinsurance recoverables. - Legal provisions: Section 58 of the ICO, Insurance Companies (Accounts Directive) Regulations, Insurance Companies (Valuation of Assets and Liabilities) Regulations, and Insurance Guidance Note No.6. - Standards comply with EU Directives for liability provisions, technical provisions, and contingent liabilities; standards for reinsurance recoveries and collectibles established. - Stress test modeling takes place at application stage and subsequent to any change in business plans as required under Section 60, 62a and 63 of the ICO. - Life reserves reviewed by the U.K. Government Actuaries Department. - General companies required to use actuaries to value claims provisions and long tail liabilities. - Sufficiency of technical provisions reviewed by quarterly monitoring of management accounts, annual returns, and on-going on-site inspections. - FSC can issue directions under section 100 of the ICO to increase technical provisions if insufficient. - Assessment: Largely Observed. - Comment: Off-site monitoring includes quarterly monitoring of management accounts and annual accounts; on-site inspections had not included examination of claims provisioning, reserves and adequacy but this has now been corrected. ### Prudential Requirements — Principle 21: Investments - Supervisory authority requires insurers to comply with standards on investment activities: investment policy, asset mix, valuation, diversification, asset-liability matching, and risk management. - Requirements contained in the ICO, Insurance Companies (Valuation of Assets and Liabilities) Regulations, and Insurance Guidance Note Nos. 4 and 5. - Section 64B of the ICO sets out requirements concerning spread of assets covering liabilities and matching. - Notice of requirements and application form require an investment policy approved by the board; any alteration must be noted on the annual business plan review and notified to the FSC. - Majority of companies outsource asset management; in practice hold cash and bonds for liquidity and low volatility. - Risk management systems of control and accountability set out in Guidance note No. 5. - Stress testing not applied on a regular basis but would be used where considered necessary by the FSC. - Supervisory staff sufficiently experienced to assess investments and investment policy. - Assessment: Observed. - Comment: Considerable attention paid to financial reporting policies and statutory returns despite majority of companies being relatively small. ### Prudential Requirements — Principle 22: Derivatives and similar commitments - Supervisory authority requires compliance with standards on the use of derivatives: restrictions, disclosure requirements, internal controls, and monitoring. - Requirements set out in the Insurance Companies (Accounts and Statements) Regulations; use of derivatives permitted but strict guidelines issued by supervisory authority. - Disclosure requirements also in Guidelines 4, 5, 9, and 11. - Directors must certify as part of annual return compliance with Insurance Guideline No5 (Systems of Control over investments and counterparty exposure including the use of derivatives). - Assessment: Observed. - Comment: Unlikely that Gibraltar insurers would deal in or hold derivatives; guidance notes and disclosure requirements are clear and monitored satisfactorily. ### Prudential Requirements — Principle 23: Capital adequacy and solvency - Supervisory authority requires insurers to comply with prescribed solvency regime including capital adequacy requirements and suitable capital forms to absorb significant unforeseen losses. - Solvency regime criteria stated in sections 58 and 59 of the ICO, Insurance Companies (Solvency Margin and Guarantee Fund) Regulations, Insurance Companies (Valuation of Assets and Liabilities) Regulations, and relevant Guidance notes. - Regulations limit level of risk relieved by reinsurance; only “A” rated re-insurers permitted. - Minimum capital adequacy defined in Insurance Companies (Solvency Margin and Guarantee Fund) Regulations which follow the EU Life and Non-Life Directives. - FSC requires a minimum of 125 percent of the EU minimum levels for short-tail business and 300 percent for long-tail business. - Solvency control levels set out in Section 62A and 63 of the ICO. - Non EU insurers operating as a branch are dealt with in Sections 59A (2) and (3). - Assessment: Observed. - Comment: FSC has implemented the EU solvency regime and compares its regime against that operating in the United Kingdom; EU progressing towards “Solvency II.” Supervisory authority complies with all EU Directives relating to Solvency and Capital Adequacy. ### Markets and consumers — Principle 24: Intermediaries - Supervisory authority sets requirements, directly or through supervision of insurers, for conduct of intermediaries. - Historically agents and brokers involved in life pensions and financial planning have been supervised by the financial services division. - Requirements for licensing intermediaries set out in FSO, Financial Services (Conduct of Business) Regulations, and Financial Services (Accounting and Financial) Regulations. - Part V (A) of the FSO89 sets out professional requirements for intermediaries. - Sections 10 and 11 provide for restrictions on a license and for cancellation or suspension of the license. - Rules for safeguarding clients’ money set out in Section 38(C) of Part V (A) of the FSO89 and Part 5 of the Financial Services (Accounting and Financial) Regulations. *Source: IMF Financial Sector Assessment content unit cr07156 — Section 66A and related ICO powers and insurance supervision descriptions.* ### Section 3 of the FSO89, penalties are specified for persons contravening that section of the ### cr07156 - Section 3 of the FSO89, penalties are specified for persons contravening that section of the FSO89 ### Overview and supervisory framework - Section 3 of the FSO89 specifies penalties for persons contravening that section of the FSO89. - Supervision of requirements under the relevant legislation is provided by reporting procedures and on-site inspections and is monitored by the authority. - It is historical that all intermediaries are controlled by the investment services division and not the insurance supervisory division. - On-site inspections for this sector are advanced and should be completed by the end of 2006. ### Principle 25 — Consumer protection - The supervisory authority sets minimum requirements for insurers and intermediaries in dealing with consumers, including foreign insurers selling products on a cross-border basis. - Requirements include provision of timely, complete and relevant information to consumers from before a contract is entered into through to the point at which all obligations under a contract have been satisfied. - Legal and regulatory bases: - FSO 1989 and the Financial Services (Conduct of Business) Regulations apply to intermediaries. - Sections 70A and 70B of the ICO provide powers to make regulations. - Insurance Companies (Conduct of Business) Regulations in place for EU and non-EU insurance companies, and for Gibraltar; the EU Insurance Mediation Directive has been implemented. - Regulation 7 (Statement of principles) and Financial Services (Conduct of Business) Regulations require the supervisory authority to seek relevant information to assess insurance needs. - For insurance companies, section 70B and Schedules 12 and 15 of the ICO apply. - The FSC requires evidence of “Statement of Disclosures“ to customers. - Assessment: Observed - Comments: - All required legislation and guidance in relation to conduct of business are in place. - Consumer protection in the event of an insolvency is available to policyholders in Gibraltar insured with U.K. companies and to U.K. policyholders insured with Gibraltar insurers; there is no similar scheme available to policyholders for domestic insurance policies issued by Gibraltar companies. - The FSC has produced a consumer guide to various personal business lines and to life insurance and intends to continue a program of insurance awareness. ### Principle 26 — Information, disclosure & transparency towards the market - The supervisory authority requires insurers to disclose relevant information on a timely basis to give stakeholders a clear view of business activities and financial position and to facilitate understanding of risks. - Legal and regulatory bases: - Disclosure requirements set out in Sections 50 to 56 of the ICO, the Insurance Companies (Accounts and Statements) Regulations, Insurance Companies (Accounts Directive) Regulations, and in Guidance notes. - Annual returns are filed with Companies House and are available to the public. - Recent amendments to the Insurance Companies (Accounts Directive) Regulations require additional information in the directors report to the financial statements covering business reviews. - Public disclosure requirements are relative to the size and nature of the company’s business and satisfy the essential criteria. - The insurance supervisory division and investment services division closely review all financial statements, annual returns, and management accounts required by the insurance supervisors from all licensed companies. - Assessment: Observed - Comments: - Information on risk exposures is required at the time of licensing and included with the company’s annual business plan and is disclosed in annual returns filed under the Insurance Companies (Accounts Directive) Regulations which are filed at Companies House. ### Principle 27 — Fraud - The supervisory authority requires insurers and intermediaries to take necessary measures to prevent, detect and remedy insurance fraud. - Legal and enforcement framework: - Powers to establish and enforce regulations set out in section 22 of the FSCO and Schedule 16 of the ICO to communicate with other supervisors and enforcement authorities. - Enforcement division cooperates with the police Financial Crimes Unit and authorities in other jurisdictions as appropriate. - The FSC employs an enforcement officer. - Fraud and dishonesty offenses are addressed in the Gibraltar Criminal Offences Ordinance. - Financial Services (Conduct of Business) regulations for intermediaries and Schedule 15 of the Insurance Companies Ordinance set out other requirements to control and detect fraud. - Anti-fraud measures form part of the internal controls section of the annual business plan review, which is monitored off-site and reviewed during on-site inspections. - Assessment: Observed - Comments: - The supervisory authority is aware of potential problems from insurer fraud and the value of communication with other supervisors and the International Insurance Fraud Association. ### Principle 28 — Anti-money laundering, combating the financing of terrorism (AML/CFT) - The supervisory authority requires insurers and intermediaries to take effective measures to deter, detect and report money laundering and the financing of terrorism. - Legal and supervisory measures: - Section 8 of the Criminal Justice Ordinance defines the activities of life insurance companies and intermediaries as relevant financial business. - All relevant businesses required to implement systems of control to prevent and detect money laundering. - Powers exist in the ICO and in the FSO to apply regulatory and supervisory powers over regulated entities to ensure AML/CFT requirements are in place. - The insurance division is responsible for supervision of the insurance company sector and the financial services is responsible for insurance intermediaries. - The FSC’s risk assessment process covers all supervisory activities and includes assessment of AML/CFT procedures including on-site verification and validation. - Detailed AML guidance notes for the insurance sector have been prepared and issued. - Detailed checks are carried out on beneficial owners of companies at the time of application and when changes in shareholding are notified. - Assessment: Observed - Comments: - Although legislation and detailed guidance notes have been issued, their effectiveness can only be assessed during on-site inspections. - Inspections have been carried out on life insurance companies and agents which conform with the minimum requirements of this principle. ### Summary observance of IAIS Insurance Core Principles - Principles Grouped by Assessment Grade: - Count / List - Observed: 24 — CP 1, 2, 3, 4, 5, 6, 8, 10, 12, 13, 14, 15, 16, 17, 18, 19, 21, 22, 23, 24, 25, 26, 27, 28 - Largely observed: 3 — CP 7, 9, 20 - Partly observed: 1 — CP 11 - Not observed: None - Not applicable: None ### Recommended action plan (selected recommendations from Table 3) - CP 7 (Suitability of persons) - Legislation relating to the “Approved Persons Regime” should be introduced without delay. - CP 9 (Corporate governance) - Legislation relating to the “Approved Persons Regime” should be introduced without delay. - CP 10 (Internal control) - It is recommended that legal requirements should be strengthened in relation to internal controls and the annual submission of detailed business plans. - CP 11 (Market analysis) - Recommended that complete market statistics and detailed analysis should be compiled by the FSC and attention should be paid in detail to market analysis and trends both in Gibraltar and EU states, particularly the United Kingdom. - CP 12 (Reporting to supervisors and off-site monitoring) - It is recommended that reporting time for the submission of annual statements should be reduced to four months. - CP 19 (Insurance activity) - It is recommended that the cycle of on-site inspections be completed as soon as possible to confirm application of approved underwriting procedures and operational risk control. - CP 20 (Liabilities) - It is recommended that the cycle of on-site inspections be completed as soon as possible to confirm practical application of declared policies on technical provisioning. - CP 28 (Anti-money laundering) - It is recommended that the cycle of on-site inspections be completed as soon as possible to confirm that approved AML/CFT procedures are applied in practice. ### Authorities’ response - The FSC welcomes the findings of the IMF assessment of compliance with IAIS standards. - The FSC appreciates the skill and attention given in conducting the review and has already actioned the recommendations made, which they fully accept. - The FSC notes its high level of compliance with the standards and states a commitment to applying new standards as and when they evolve. --- _Source: https://www.imf.org/-/media/files/publications/ofca/english/cr07156.pdf_