## 1.  A detailed assessment of observance of the International Association of Insurance Supervisors (IAIS) Insurance Core Principles — note prepared by Daniel Hardy (content as provided)

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---

### Institutional and macroprudential setting
- FMA remains responsible for regulation and supervision of the insurance sector and pension funds, along with other financial sector institutions and markets.
- Austrian economy: growth above the euro-area average, falling unemployment, low inflation; interest rates rose gradually; Vienna Stock Exchange (VSE) index increased sharply; real estate price inflation was moderate.
- Cross-border activity and sector structure:
  - At end-2006 there were 52 companies, of which 33 engaged wholly or mainly in life business; there are no independent reinsurance companies.
  - Number of Austrian subsidiaries in CESE countries rose from 58 in 2004 to 95 in 2007.
  - These subsidiaries contributed about 24 percent of premia written in 2006 for the relevant groups.
  - In addition there were 60 small mutual associations, two of which are being wound down.
- Pension and retirement arrangements:
  - 19 occupation-related pension funds.
  - Zukunftsvorsorge introduced in 2003; investments receive tax benefits and guaranteed principal.
  - Zukunftsvorsorge products offered by insurance companies, staff provision funds and investment funds.
  - Mandatory employee protection fund (Mitarbeitervorsorgekasse) mainly provides severance insurance.
- Sector size and portfolios:
  - Total insurance sector assets amounted to €82 billion at end-2006, equivalent to 32 percent of GDP.
  - Occupational pension funds held over €12 billion in assets.
  - About €1.8 billion was in Zukunftsvorsorge funds.
  - About €1.1 billion in the Mitarbeitervorsorgekasse.
  - Portfolios concentrated in high-quality bonds; relatively little allocated to real estate or equity.
  - Companies have begun to invest in hedge funds and structured products, but the amounts involved are small.
  - Solvency ratios trended slowly upwards; profitability adequate (helped by dividends from subsidiaries in CESE countries); operational efficiency improved.
  - Austria prone to idiosyncratic natural events (e.g., snow pressure); no natural catastrophe as severe as the flood in 2002 has recently occurred.

### Implementation of IAIS Insurance Core Principles — overview
- Detailed IAIS ICP assessment undertaken in October 2003 found regulatory framework and implementation generally of high standard and effective.
- Main challenges identified in 2003 remain relevant: expansion into CESE region and prospective introduction of Solvency II requirements.
- 2007 note provides factual update of regulatory regime in force in December 2007, benchmarking against ICP as revised in October 2003.
- Main information sources: Insurance Supervision Act (VAG), material provided by the FMA (including a thorough self-assessment), and discussions during the FSAP Update mission in December 2007.

### A. Conditions for effective insurance supervision
- Actuarial profession and reporting:
  - FMA issued a circular on professional and personal qualifications of actuaries in 2004; FMA has denied certification to some applicants due to lack of qualifications.
  - Regulation on actuaries’ reports introduced in 2005 indicating scope and structure of reports.
  - Austrian Actuarial Association strengthened standards for chartered actuaries in 2005.
- Supply constraints and future demand:
  - Availability of well-trained actuaries in sufficient numbers remains a constraint.
  - Prospective introduction of Solvency II requirements in 2012 will increase demand for actuaries.
  - Universities have begun to offer more comprehensive courses, but it will take time for supply to catch up with demand.
  - IFRS requirements increased demand for specialized accountants and auditors; shortage of well-qualified staff is of some concern.

### B. The supervisory system
- Staffing and resources:
  - About 36 insurance supervisors and 4 pension fund supervisors at time of writing, compared to 32 and 3, respectively, in 2003.
  - Active training program.
  - Insurance sector pays a levy to pay for supervision; levy is capped by legislation, but the cap is currently far from binding.
  - Human resources for supervision strained by preparation for Solvency II, when more effort and expertise will be needed to verify companies’ own models and risk management systems.
- International cooperation:
  - FMA actively participates in CEIOPS (established 2004) and cooperates on protocols.
  - FMA is lead supervisor for five Austrian companies with operations abroad and is a member of supervisory “college” for foreign companies with operations in Austria.
  - Exchange of information reportedly satisfactory; scope for more joint analysis.
  - MoUs concluded as needed (e.g., with Switzerland); some MoUs with CESE countries became redundant upon EU accession.
  - Signature by Austria of the IAIS Multilateral MoU on information exchange is expected shortly.
  - Bilateral contacts maintained with supervisory authorities in non-EU CESE countries where Austrian companies are active.
  - First joint on-site inspection recently undertaken.

### C. The supervised entity
- Fit and proper and governance measures:
  - Fit and proper criteria for supervisory board members strengthened.
  - Amendment coming into force on January 1, 2008: chairperson of supervisory board of a financial institution with a gross written premium volume over €500 million is subject to a fit and proper test covering probity and professional experience, including relevant sectoral expertise; chairperson required to report all relevant information to the supervisory board.
  - Audit committee mandatory subcommittee of supervisory board for all insurance companies with a gross written premium volume over €750 million; must include a financial/accounting expert (specific conditions set).
  - Fit and proper tests are not applied to all supervisory board members.
  - Fit and proper requirements for managers of insurance holding companies introduced via VAG amendment in 2004.
- Audit, actuarial and internal controls:
  - Guidance on minimum standards for internal audit introduced in 2005 to supplement legal requirement to establish an audit department and appropriate internal controls.
  - External auditors required to rotate every five years; audit firms not required to rotate (VAG amendment, 2005).
  - Company’s responsible actuary must report to the executive board within five months of the end of the financial year, or sooner if a serious deficiency is detected; report is passed to the FMA.
- Broader corporate governance measures:
  - 2005 Stock Corporation Act requires establishment of an audit committee for all listed companies and other larger corporations.
  - Provisions to limit conflicts of interest for supervisory board members and statutory auditors.
  - All listed companies and insurance companies required to declare adoption of a corporate governance framework from 2008.
  - Austrian Code of Corporate Governance most recently reviewed in June 2007.

### D. Ongoing supervision
- Financial monitoring and reporting:
  - Financial soundness and performance indicators regularly compiled; frequency of reporting of many indicators increased from annual to quarterly (for example, on portfolio composition).
  - System established to communicate data among companies, the insurance association, and the FMA to generate quantitative and qualitative soundness indicators.
- Supervisory focus on CESE exposures:
  - Indicators collected for CESE countries include market share of Austrian companies, size and growth of local insurance market, GDP growth rates, and country ratings.
  - FMA generates country vulnerability reports combined with insurance group reports to decide supervisory strategy for CESE exposures.
  - Follow-up actions for warning signs include close monitoring, intensified cooperation with host supervisors, and on-site inspections.
- Stress testing:
  - FMA undertakes an increasing range of stress tests for insurance companies and pension funds; results help determine supervisory priorities.
  - Scenarios include shocks to asset values (declines in equity and bond prices, deterioration in loan quality) and to some liabilities (increase health insurance claims).
  - Stress tests for longevity risk are not performed.
  - Regulation on actuaries’ reports requires actuaries to investigate impact of adverse behavior of mortality assumptions and report findings to the FMA.
  - Market-based indicators—such as distance to default measures and credit default swap rates—are not monitored, but would be available for relatively few Austrian companies.
- On-site supervision:
  - 31 inspections were carried out in 2006 and 33 in 2007.
  - Several targeted on-site inspections and follow-up visits conducted (about 60 such visits in 2006) on internal audit and risk-management systems.
  - In 2006 FMA performed its first joint on-site inspection of a foreign subsidiary of an Austrian insurance company; more are planned.
  - No joint on-site inspection of a foreign company hosted by Austria has yet occurred.
- Group and consolidated supervision:
  - Both stand-alone and consolidated supervision of groups are conducted; FMA has a department devoted to consolidated supervision.
  - EU conglomerates directive transposed into national legislation in 2004.
  - Financial groups required to have group-wide risk management systems.
  - Following reorganization of bank supervision responsibilities, FMA insurance supervisors will have to work more closely with Oesterreichische Nationalbank (OeNB) bank supervisors.
- Enforcement powers and actions:
  - FMA has extensive powers to require corrective actions and to apply sanctions.
  - “Recovery plans” for three companies were instituted in 2007 to ensure capital increased to meet higher minimum absolute capital requirements.
  - In 2006, the Administrative Court approved an injunction on the tariff of a life insurance contract out of line with actuarial projections, and the correction of a pension fund contract inconsistent with regulations on employers’ contributions.

### E. Prudential requirements
- Technical reserves and annuity tables:
  - Provisions on calculation of technical and mathematical reserves are amended from time to time.
  - Maximum interest rate for calculation of life insurance provisions most recently amended with effect on January 1, 2006: reduced to 2.25 percent from 2.75 percent.
  - FMA requires companies to adopt the current annuity table (AVÖ 2005 R) for calculation of new annuity contracts and to strengthen reserves of existing annuity contracts accordingly.
  - 2005 regulation requires that policyholders’ participation in profits or refund of premia in life and health insurance amount to at least 85 percent of the assessment base.
- Zukunftsvorsorge-specific requirements:
  - Providers must submit to the FMA details of the model used in control and management of risks relative to their actuarial obligations.
  - Model must be evaluated by an outside expert and certified by the responsible actuary.
  - Additional technical provisions required when investment risk on Zukunftsvorsorge contracts is greater than on ordinary life insurance (for example, because of the principal guarantee).
- Investment rules and limits:
  - Investment policy governed by Kapitalanlageverordnung (last amended in 2007) and regulations on assets covering technical provisions (last amended in 2006).
  - Regulations contain limits on asset shares, liquidity, etc.
  - Derivatives may be used only in connection with hedging of asset positions; short positions are prohibited.
  - Hedge fund investments limited to 7 percent of the portfolio for insurance companies.
  - Legislation on investment by pension companies passed in 2005; implementing regulations took effect in 2006.
  - Pension company investments must either be guided by procedures in compliance with risk management regulations (with a few caps) or abide by simpler but more restrictive quantitative restrictions; currently, no fund has opted for the quantitative restrictions.
- Prudent person rule and reinsurer requirements:
  - A “prudent person rule” has applied to pension companies since 2006 and is expected to be introduced for insurance companies in 2012 as a result of Solvency II.
  - FMA aware that greater freedom under a “prudent person rule” will require closer supervision of risk management systems and consumer protection.
  - Since 2007 reinsurers are required to cover technical provisions by admissible assets.
  - Adequacy of reinsurance arrangements, including financial strength of reinsurers used by Austrian companies, is monitored as part of FMA supervision.

### F. Markets and consumers
- Intermediaries and consumer protection:
  - FMA supervises only bank intermediaries of insurance and pension products.
  - Federal Ministry of Economics and Labor has general authority over intermediaries, using local administrative authorities.
  - Maximum fine for illicit activity by an intermediary is only €3,600.
  - 2002 EU Insurance Mediation Directive implemented in 2005 through amendment of the Trade Act; introduced indemnity insurance for brokers and information duties.
  - 2005 amendment of the Maklergesetz introduced strictly segregated client accounts.
  - Review of the Insurance Mediation Directive planned for 2008.
  - Various laws contain provisions on consumer protection.
  - Requirements to disclose relationship between intermediary and insurance company were strengthened in 2005 Trade Act amendment.
  - Relatively limited requirements to disclose and fully explain all fees and expected returns associated with savings products such as pension plans appear to remain.

### G. Anti–Money Laundering/Combating the Financing of Terrorism (AML/CFT)
- Legislation implementing the third EU AML Directive is currently before parliament.
- In 2008 a full review of all issues on AML/CFT based on the Financial Sector Action Task Force 40+9 Methodology will be conducted in collaboration with the IMF.

### Conclusions and overall observations
- Regulation and supervision continue to evolve with the market: new products, more complex investment strategies, intensified cross-border linkages.
- Episodes of managerial failure in other financial sectors highlight the importance of effective corporate governance.
- Authorities commended for reacting promptly to developments and building on a strong base.

---

### 31.  The authorities are aware of a number of areas in which further strengthening is

### Recommendations for further strengthening (paragraph 31)
- Enhance FMA staff size and relevant expertise to prepare for Solvency II regime and pension sector growth; provide adequate resources and cooperate with industry, professional organizations, and universities.
- Consider extending “fit and proper” requirements to some supervisory board members besides the chairman, at least in larger companies.
- Consider requiring the responsible actuary to present his/her report to the supervisory board (not just the executive board), and to do so immediately if company policies grossly contravene sound actuarial principles.
- Extend FMA stress testing to cover insurance companies’ and pension funds’ liabilities, specifically addressing longevity risk.
- Investigate use of market-based soundness indicators, such as distance to default measures and credit default swap rates—where available—to supplement balance sheet-based indicators.
- Conduct more on-site inspections, especially in Austrian companies’ subsidiaries abroad; invite home supervisors of foreign companies operating in Austria to participate to strengthen coordination.
- Following reorganization of bank supervision responsibilities, FMA insurance supervisors need closer cooperation with the OeNB in supervising financial groups.
- Keep guidelines on asset allocation by insurance companies under review and elaborate supervision methods in parallel with move toward full application of the “prudent person rule,” given potential increased use of alternative investments (high-yield bonds, asset-backed securities, hedge funds).
- Increase maximum fines to the maximum allowable under administrative law to ensure deterrents are substantial given large sums involved in insurance and pension transactions.
- Remain vigilant for attempts by companies and intermediaries to circumvent disclosure provisions on potential returns, risks, and fees.

### Authorities’ reactions (paragraphs 32–34)
- Paragraph 32: Austrian Ministry of Finance and the FMA consider the recommendations valuable and generally in line with their own assessments and priorities.
- Paragraph 33: Authorities fully agree that Solvency II introduction and pension sector growth will require enhancement of supervisory staff size and expertise; FMA will continue to monitor asset allocation, further develop stress testing and monitor implementation of disclosure rules.
- Paragraph 34: FMA notes that Conglomerate Supervision has, since 2004, been organized as supplementary supervision coordinated under a cross-sector unit (IV/1 Integrierte Finanzmärkte) within the FMA and performed through cooperation of all competent staff; the new situation will entail inclusion of competent banking group analysts from OeNB as a source of information in addition to current supervisory teams.

*Source: _cr08207 - 1.  A detailed assessment of observance of the International Association of Insurance Supervisors (IAIS) Insurance Core Principles — note prepared by Daniel Hardy (content as provided); _cr08207 - 31.  The authorities are aware of a number of areas in which further strengthening is*

### 1.  A detailed assessment of observance of the International Association of

### 1.  A detailed assessment of observance of the International Association of

### Institutional and macroprudential setting
- The FMA remains responsible for the regulation and supervision of the insurance sector and pension funds, along with other financial sector institutions and markets.
- Austrian economy performance and market context:
  - Growth above the euro-area average, falling unemployment, and low inflation.
  - Interest rates rose gradually.
  - Vienna Stock Exchange (VSE) index increased sharply; real estate price inflation was moderate.
  - Opportunities in CESE countries contributed importantly to outcomes.
- Insurance sector structure and cross-border activity:
  - At end-2006 there were 52 companies, of which 33 engaged wholly or mainly in life business; there are no independent reinsurance companies.
  - The number of Austrian subsidiaries in CESE countries rose from 58 in 2004 to 95 in 2007.
  - These subsidiaries contributed about 24 percent of premia written in 2006 for the relevant groups.
  - In addition there were 60 small mutual associations, two of which are being wound down.
- Pension- and retirement-related arrangements:
  - There are 19 occupation-related pension funds.
  - Zukunftsvorsorge introduced in 2003; investments receive tax benefits and guaranteed principal (consideration being given to allowing more flexible contracts).
  - Zukunftsvorsorge products are offered by insurance companies, staff provision funds and investment funds.
  - Mandatory employee protection fund (Mitarbeitervorsorgekasse) mainly provides severance insurance.
- Sector size and portfolio composition:
  - Total insurance sector assets amounted to €82 billion at end-2006, equivalent to 32 percent of GDP.
  - Occupational pension funds held over €12 billion in assets.
  - About €1.8 billion was in Zukunftsvorsorge funds.
  - About €1.1 billion in the Mitarbeitervorsorgekasse.
  - Portfolio concentrated in high-quality bonds; relatively little allocated to real estate or equity.
  - Companies have begun to invest in hedge funds and structured products, but the amounts involved are small.
  - Solvency ratios have trended slowly upwards; profitability has been adequate (helped by dividends from subsidiaries in CESE countries); operational efficiency has improved.
  - Austria is prone to idiosyncratic natural events (e.g., snow pressure); no natural catastrophe as severe as the flood in 2002 has recently occurred.

### Implementation of IAIS Insurance Core Principles — overview
- A detailed assessment of observance of the IAIS ICP was undertaken in October 2003; that assessment found regulatory framework and implementation generally of high standard and effective.
- Main challenges identified in 2003 remain relevant: expansion into CESE region and prospective introduction of Solvency II requirements.
- The 2007 note provides a factual update of regulatory regime in force in December 2007, benchmarking against ICP as revised in October 2003.
- Main information sources: Insurance Supervision Act (VAG), material provided by the FMA (including a thorough self-assessment), and discussions during the FSAP Update mission in December 2007.

### A. Conditions for effective insurance supervision
- Actuarial profession and reporting:
  - FMA issued a circular on professional and personal qualifications of actuaries in 2004; FMA has denied certification to some applicants due to lack of qualifications.
  - Regulation on actuaries’ reports introduced in 2005 indicating scope and structure of reports.
  - Austrian Actuarial Association strengthened standards for chartered actuaries in 2005.
- Supply constraints and future demand:
  - Availability of well-trained actuaries in sufficient numbers remains a constraint for insurance companies and their auditors.
  - Prospective introduction of Solvency II requirements in 2012 will increase demand for actuaries.
  - Universities have begun to offer more comprehensive courses, but it will take time for supply to catch up with demand.
  - Requirements of International Financial Reporting Standards have increased demand for specialized accountants and auditors; shortage of well-qualified staff is of some concern.

### B. The supervisory system
- Staffing and resources:
  - About 36 insurance supervisors and 4 pension fund supervisors at time of writing, compared to 32 and 3, respectively, in 2003.
  - Active training program.
  - Insurance sector pays a levy to pay for supervision; levy is capped by legislation, but the cap is currently far from binding.
  - Human resources for supervision are strained by preparation for Solvency II, when more effort and expertise will be needed to verify companies’ own models and risk management systems.
- International cooperation:
  - FMA actively participates in CEIOPS (established 2004) and cooperates on protocols.
  - FMA is lead supervisor for five Austrian companies with operations abroad and is a member of supervisory “college” for foreign companies with operations in Austria.
  - Exchange of information reportedly satisfactory; scope for more joint analysis.
  - MoUs concluded as needed (e.g., with Switzerland); some MoUs with CESE countries became redundant upon EU accession.
  - Signature by Austria of the IAIS Multilateral MoU on information exchange is expected shortly.
  - Bilateral contacts maintained with supervisory authorities in non-EU CESE countries where Austrian companies are active.
  - First joint on-site inspection recently undertaken.

### C. The supervised entity
- Fit and proper and governance measures:
  - Fit and proper criteria for supervisory board members strengthened.
  - Amendment coming into force on January 1, 2008: chairperson of supervisory board of a financial institution with a gross written premium volume over €500 million is subject to a fit and proper test covering probity and professional experience, including relevant sectoral expertise; chairperson required to report all relevant information to the supervisory board.
  - Audit committee mandatory subcommittee of supervisory board for all insurance companies with a gross written premium volume over €750 million; must include a financial/accounting expert (specific conditions set).
  - Fit and proper tests are not applied to all supervisory board members.
  - Fit and proper requirements for managers of insurance holding companies introduced via VAG amendment in 2004.
- Audit, actuarial and internal controls:
  - Guidance on minimum standards for internal audit introduced in 2005 to supplement legal requirement to establish an audit department and appropriate internal controls.
  - External auditors required to rotate every five years; audit firms not required to rotate (VAG amendment, 2005).
  - Company’s responsible actuary must report to the executive board within five months of the end of the financial year, or sooner if a serious deficiency is detected; report is passed to the FMA.
- Broader corporate governance measures:
  - 2005 Stock Corporation Act requires establishment of an audit committee for all listed companies and other larger corporations.
  - Provisions to limit conflicts of interest for supervisory board members and statutory auditors.
  - All listed companies and insurance companies required to declare adoption of a corporate governance framework from 2008.
  - Austrian Code of Corporate Governance most recently reviewed in June 2007.

### D. Ongoing supervision
- Financial monitoring and reporting:
  - Financial soundness and performance indicators regularly compiled; frequency of reporting of many indicators increased from annual to quarterly (for example, on portfolio composition).
  - System established to communicate data among companies, the insurance association, and the FMA to generate quantitative and qualitative soundness indicators.
- Supervisory focus on CESE exposures:
  - Indicators collected for CESE countries include market share of Austrian companies, size and growth of local insurance market, GDP growth rates, and country ratings.
  - FMA generates country vulnerability reports combined with insurance group reports to decide supervisory strategy for CESE exposures.
  - Follow-up actions for warning signs include close monitoring, intensified cooperation with host supervisors, and on-site inspections.
- Stress testing:
  - FMA undertakes an increasing range of stress tests for insurance companies and pension funds; results help determine supervisory priorities.
  - Scenarios include shocks to asset values (declines in equity and bond prices, deterioration in loan quality) and to some liabilities (increase health insurance claims).
  - Stress tests for longevity risk are not performed.
  - Regulation on actuaries’ reports requires actuaries to investigate impact of adverse behavior of mortality assumptions and report findings to the FMA.
  - Market-based indicators—such as distance to default measures and credit default swap rates—are not monitored, but would be available for relatively few Austrian companies.
- On-site supervision:
  - 31 inspections were carried out in 2006 and 33 in 2007.
  - Several targeted on-site inspections and follow-up visits conducted (about 60 such visits in 2006) on internal audit and risk-management systems.
  - In 2006 FMA performed its first joint on-site inspection of a foreign subsidiary of an Austrian insurance company; more are planned.
  - No joint on-site inspection of a foreign company hosted by Austria has yet occurred.
- Group and consolidated supervision:
  - Both stand-alone and consolidated supervision of groups are conducted; FMA has a department devoted to consolidated supervision.
  - EU conglomerates directive transposed into national legislation in 2004.
  - Financial groups required to have group-wide risk management systems.
  - Following reorganization of bank supervision responsibilities, FMA insurance supervisors will have to work more closely with Oesterreichische Nationalbank (OeNB) bank supervisors.
- Enforcement powers and actions:
  - FMA has extensive powers to require corrective actions and to apply sanctions.
  - “Recovery plans” for three companies were instituted in 2007 to ensure capital increased to meet higher minimum absolute capital requirements.
  - In 2006, the Administrative Court approved an injunction on the tariff of a life insurance contract out of line with actuarial projections, and the correction of a pension fund contract inconsistent with regulations on employers’ contributions.

### E. Prudential requirements
- Technical reserves and annuity tables:
  - Provisions on calculation of technical and mathematical reserves are amended from time to time.
  - Maximum interest rate for calculation of life insurance provisions most recently amended with effect on January 1, 2006: reduced to 2.25 percent from 2.75 percent.
  - FMA requires insurance companies to adopt the current annuity table (AVÖ 2005 R) for calculation of new annuity contracts and to strengthen reserves of existing annuity contracts accordingly.
  - 2005 regulation requires that policyholders’ participation in profits or refund of premia in life and health insurance amount to at least 85 percent of the assessment base.
- Zukunftsvorsorge-specific requirements:
  - Providers need to submit to the FMA details of the model used in control and management of risks relative to their actuarial obligations.
  - Model must be evaluated by an outside expert and certified by the responsible actuary.
  - Additional technical provisions must be made when investment risk on Zukunftsvorsorge contracts is greater than on ordinary life insurance (for example, because of the principal guarantee).
- Investment rules and limits:
  - Investment policy governed by Kapitalanlageverordnung (last amended in 2007) and regulations on assets covering technical provisions (last amended in 2006).
  - Regulations contain limits on asset shares, liquidity, etc.
  - Derivatives may be used only in connection with hedging of asset positions; short positions are prohibited.
  - Hedge fund investments limited to 7 percent of the portfolio for insurance companies.
  - Legislation on investment by pension companies passed in 2005; implementing regulations took effect in 2006.
  - Pension company investments must either be guided by procedures in compliance with risk management regulations (with a few caps) or abide by simpler but more restrictive quantitative restrictions; currently, no fund has opted for the quantitative restrictions.
- Prudent person rule and reinsurer requirements:
  - A “prudent person rule” has applied to pension companies since 2006 and is expected to be introduced for insurance companies in 2012 as a result of Solvency II.
  - FMA aware that greater freedom under a “prudent person rule” will require closer supervision of risk management systems and consumer protection.
  - Since 2007 reinsurers are required to cover technical provisions by admissible assets.
  - Adequacy of reinsurance arrangements, including financial strength of reinsurers used by Austrian companies, is monitored as part of FMA supervision.

### F. Markets and consumers
- Intermediaries and consumer protection:
  - FMA supervises only bank intermediaries of insurance and pension products.
  - Federal Ministry of Economics and Labor has general authority over intermediaries, using local administrative authorities.
  - Maximum fine for illicit activity by an intermediary is only €3,600.
  - 2002 EU Insurance Mediation Directive implemented in 2005 through amendment of the Trade Act; introduced indemnity insurance for brokers and information duties.
  - 2005 amendment of the Maklergesetz introduced strictly segregated client accounts.
  - Review of the Insurance Mediation Directive planned for 2008.
  - Various laws contain provisions on consumer protection.
  - Requirements to disclose relationship between intermediary and insurance company were strengthened in 2005 Trade Act amendment.
  - There seem to be relatively limited requirements to disclose and fully explain all fees and expected returns associated with savings products such as pension plans.

### G. Anti–Money Laundering/Combating the Financing of Terrorism (AML/CFT)
- Legislation implementing the third EU AML Directive is currently before parliament.
- In 2008 a full review of all issues on AML/CFT based on the Financial Sector Action Task Force 40+9 Methodology will be conducted in collaboration with the IMF.

### Conclusions, recommendations, and authorities’ reactions
- The regulation and supervision of the insurance sector and associated pension sector continues to evolve with the market: new products, more complex investment strategies, and intensified cross-border linkages.
- A few episodes of managerial failure in other financial sectors have highlighted the importance of effective corporate governance.
- Authorities commended for reacting promptly to developments and building on a strong base.

*Source: _cr08207 - 1.  A detailed assessment of observance of the International Association of Insurance Supervisors (IAIS) Insurance Core Principles — note prepared by Daniel Hardy (content as provided).*

### 31.  The authorities are aware of a number of areas in which further strengthening is

### _cr08207 - 31.  The authorities are aware of a number of areas in which further strengthening is

### Recommendations for further strengthening (paragraph 31)
- The prospective introduction of the Solvency II regime and the growth of the pension sector will require that the FMA enhance the size and, in particular, the relevant expertise of its staff. To this end, adequate resources will have to be provided. Cooperation with the industry itself, professional organizations, and universities will be helpful.  
- Consideration should be given to extending “fit and proper” requirements to some supervisory board members besides the chairman, at least in larger companies.  
- Consideration should be given to requiring the responsible actuary to present his/her report to the supervisory board and not just the executive board, and to do so immediately if it is discovered that the company’s policies grossly contravene sound actuarial principles. This requirement would parallel that applicable to auditors.  
- The FMA should extend its stress testing of insurance companies’ and pension funds’ liabilities. Specifically, longevity risk should be addressed. While demographic pressures in Austria do not appear to be as acute as in some other industrialized countries, longevity risk must be viewed as a major concern.  
- The FMA should investigate the use of market-based soundness indicators, such as distance to default measures and credit default swap rates—where available—to supplement its balance sheet-based soundness indicators.  
- The FMA’s plans to conduct more on-site inspections, especially in Austrian companies’ subsidiaries abroad, are well justified. The home supervisors of foreign companies operating in Austria could perhaps be invited to participate in on-site inspections in order to strengthen the coordination of analysis.  
- Following the recent reorganization of bank supervision responsibilities, the FMA insurance supervisors will need to work even closer with the OeNB in supervising financial groups.  
- The FMA should keep under review guidelines on asset allocation by insurance companies and elaborate supervision methods in this area, in parallel to the move toward full application of the “prudent person rule.” Companies currently make limited use of alternative investments, such as high-yield bonds, asset-backed securities, and hedge funds, but they may become more adventurous (especially if returns on conventional investments return to very low levels); the new investments may not be well understood by clients or even the companies’ own management.  
- Maximum fines should be increased to the maximum allowable under administrative law; insurance and pension transactions may involve large sums, and correspondingly the deterrents for misdeeds need to be substantial.  
- The FMA should remain vigilant for attempts by companies and intermediaries to circumvent provisions on the disclosure to clients of potential returns, risks, and fees. While existing regulations contain extensive protections in this area, experience elsewhere suggests that companies and intermediaries may find innovative ways to hide costs.

### Authorities’ reactions (paragraphs 32–34)
- Paragraph 32: The Austrian Ministry of Finance and the FMA consider the recommendations as very valuable and in general in line with their own assessments and priorities for the forthcoming years.  
- Paragraph 33: The authorities fully agree that, among others, the introduction of the Solvency II regime and the growth of the pension sector will require enhancement of size and expertise of the supervisory staff in order to maintain the effectiveness of insurance and pension supervision. The authorities are aware that the implementation of Solvency II will certainly pose significant challenges to the FMA in the near future. In particular, the FMA will also continue to closely monitor insurance companies’ asset allocation, further develop the stress testing and keep monitoring the implementation of disclosure rules.  
- Paragraph 34 (specific comment on Para. 31, Bullet Point 7): The FMA notes that Conglomerate Supervision has, in line with its characterization as supplementary supervision to insurance and banking group supervision, since 2004 been organized in such a way that supervision—based upon sectoral (banking and insurance) analysis—is coordinated and effected under the responsibility of a cross-sector unit (IV/1 Integrierte Finanzmärkte) within the FMA and is performed through the cooperation of all competent staff, including insurance supervisors, within a supervisory team. The new situation will entail the inclusion of competent banking group analysts from OeNB as a source of information in addition to the current constituency of these supervisory teams.

*Source: _cr08207 - 31.  The authorities are aware of a number of areas in which further strengthening is*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08207.pdf_