## SUPERVISION OF INSURANCE: ALTERNATIVE MODELS FOR AN INDEPENDENT AGENCY

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### Context and key issues
- The regulation and supervision of insurance in Spain falls under Ministerio de Economía y Hacienda (ME) through the Dirección General de Seguros y Fondos de Pensiones (DGSFP).  
- This arrangement is described as “unique” among Western European countries where insurance supervision is under independent agencies.  
- The assessment raised two important organizational issues: (i) the independence of the DGSFP from the government; and (ii) the ability of DGSFP to conduct group-wide supervision, supervision of conglomerates, and coordination with other supervisory agencies.

### Independence dimensions and current limitations
- Issues concerning independence of the DGSFP are grouped in three categories (Quintyn and Taylor, 2002):
  - Operational independence:
    - The legal framework gives the Spanish government and the ME the power to issue both regulations and secondary rules based on proposals prepared by DGSFP.
    - The DGSFP does not have legal capacity to issue rules by administrative means that are binding on the insurance industry.
  - Institutional independence:
    - There are no procedures in place regarding the appointment and dismissal of the head of the supervisory authority.
    - While the DGSFP is not institutionally independent from ME, there is no evidence of undue political interference.
  - “Budgetary” independence:
    - The DGSFP does not have its own budget; the budget allocated to the supervisory activities seems to be insufficient to attract and retain skilled staff and to develop the necessary supervisory infrastructure.
    - Insufficient budgetary independence creates obstacles to allocate resources in a timely manner in accordance with the risks the supervisory authority perceives.
- The DGSFP is one of several general directorates within the ministry and as such there is no scope for independence.

### Group-wide supervision, coordination, and conglomerate risks
- The DGSFP has signed MoUs with bank and securities supervisors to create a framework for coordination and collaboration, but in practice these agreements are limited to exchange of information on a case by case basis.
- There is no evidence of group-wide analysis or group-wide supervision of financial conglomerates from the insurance standpoint.
- Recent insurance failures with potentially systemic impact often involved life insurers or bancassurance companies (examples cited: Japan and Korea; Jamaica and United States).
- Financial conglomerates, including bancassurance, pose challenges such as:
  - Complex intra-group exposures (e.g. credit risk transfer and use of credit derivatives).
  - Risk of contagion.
  - Risk of multiple gearing.
  - Potential for regulatory arbitrage within financial services groups.

### International organizational alternatives and their pros/cons
- Arguments in favor of an integrated supervisory agency (Lumpkin, 2002):
  - Efficiency in oversight and compliance: less duplication, economies of scale and scope, facilitation of a lead supervisor for large complex conglomerates, enhanced cross-sectoral analysis and job rotation.
  - A level regulatory playing field: greater potential for consistent rule making and oversight across institutional types.
- Arguments against an integrated agency:
  - Loss of healthy competition between supervisors and concerns about concentration of power (risk of over-regulation, single-point failure, reduced innovation).
  - Possible loss of specialization required for sectors like insurance (e.g., emphasis on adequacy of technical reserves).
- Legal configurations of integrated regulators differ substantially across countries; activities and sector coverage vary (examples in the note include UK, Germany, Netherlands, Australia).
- Models described (as presented in the note):
  - Integrated Model 1 (UK): Macro prudential under central bank; micro prudential and Conduct of Business (COB) under an independent integrated supervisor.
  - Integrated Model 2 (Netherlands): Both macro and micro prudential under the central bank; COB under a separate independent agency.
  - Integrated Model 3 (Australia): Macro prudential under central bank; micro prudential under independent integrated agency; COB under a separate agency.
  - Separate supervisory agencies model (e.g., France and Italy): insurance, banking, and securities supervision under separate and independent agencies with the central bank responsible for macro prudential oversight.
- Coordination arrangements vary from informal exchanges (e.g., Switzerland) to formal joint bodies and charters (e.g., France’s CACESF and charter between the central bank and the CCAMIP) to support consolidated supervision and coordinated on-site inspections.

### Assessment for Spain and recommendation
- A greater independence in operational, institutional, and budgetary dimensions can be best accomplished through separation of insurance supervision from ME.
  - Separation would:
    - Give greater operational flexibility to develop, implement, and enforce regulatory policy.
    - Better ring fence the supervisor against outside interference—conditional on an adequate structure and accountability of the agency’s governing board.
    - Provide better and more flexible access to highly-skilled experts.
- The main recommendation:
  - Separation of insurance supervision from Ministerio de Economía y Hacienda to achieve greater operational, institutional, and budgetary independence.
- The choice among alternative independent models (integrated supervisor under central bank umbrella, fully independent integrated supervisor, or separate insurance supervisor) should consider:
  - Synergies emerging from different alternatives.
  - Transitional and operational costs involved.
  - The close link between Spanish insurance and banking business, which increases the need for effective coordination or integrated arrangements for group-wide supervision.

*International Monetary Fund—Technical Note: Supervision of Insurance: Alternative Models for an Independent Agency, May 2006.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06217.pdf_