## _cr09170

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---

### Executive Summary — Overview and institutional intent
- ICCS introduced significant supervisory and regulatory reforms in the insurance area since the last assessment in 2005.
- Regulatory approach: "in principle reflective of and appropriate for the low complexity and sophistication of the insurance market in Cyprus."
- ICCS empowered to acquire and customize an IT-based information system to:
  - process prudential data,
  - create regular and ad-hoc reports,
  - support off-site analysis.
- Institutional constraints:
  - ICCS not empowered to recruit the resources it needs to perform core duties.
  - Superintendent of Insurance (SI) not allowed to recruit or contract dedicated legal resources; must apply to Ministry of Finance (MoF) and rely on the Attorney General’s Office.
  - Lack of in-house legal expertise characterized as "a clear violation of international’s accepted standards on supervision" and undermines independence and operational capability.
  - Budgeting autonomy not granted to the SI; final authority to issue orders and guidance can be influenced by the MoF.
  - Administrative decisions, including sanctions, can be appealed; appeal process "can thwart timely interventions" and undermine policyholders’ interests.

### Market structure and key statistics (as of December 2007 unless otherwise stated)
- Number of supervised companies: 40.
- Total gross written premiums (GWP) for supervised companies: EUR 1,196 million.
- Total underwriting results for non-life businesses: EUR 114 million.
- Net profit from life businesses: EUR 52 million.
- Non-domestic GWP:
  - Life: EUR 113.00 million
  - Non-life: EUR 451 million (mainly reinsurance business)
- Industry composition:
  - 11 life insurers
  - 21 non-life insurers
  - 8 reinsurers
  - 46 branches of insurers headquartered in other EU states notified intention to carry on business on a freedom of service (FOS) basis
- Employment: More than 1900 employees in the direct insurance industry.
- Total premiums written by the direct insurance industry in Cyprus: EUR 632 million in 2007, equivalent to 4.1 percent of GDP, roughly divided:
  - Life: EUR 310 million
  - Non-life: EUR 322 million
- Life premium composition: About 65 percent of new life premiums are from investment-linked policies (ILPs).
- Non-life market concentration: Motor insurance accounted for 58 percent of net premiums.
- Product details: Credit insurance accounts for only 0.02 percent of both domestic and non-domestic premiums.
- Market concentration:
  - Top 5 life insurers wrote 78 percent of total business premiums in 2007.
  - Top two life insurers (bank-owned) had a combined market share of 42 percent at end 2007.
  - Top 10 non-life insurers assumed more than 70 percent of domestic risks.
  - Top three non-life insurers assumed more than 35 percent of domestic risks.
  - Subsidiaries of foreign groups have market share of less than 5 percent.
- Total assets held by the insurance industry as at end-2007: EUR 3,984 million, broken down:
  - Life insurers: EUR 3,019 million (76 percent)
  - Non-life insurers: EUR 313 million (8 percent)
  - Reinsurers: EUR 651. million (16 percent)
- Non-life asset allocation:
  - Fixed interest deposits: 48 percent
  - Property: 19 percent
  - Equities: 15 percent
  - Government bonds or other fixed interest securities: 6 percent
- Reinsurance and retention:
  - All Cypriot business is reinsured with non-domiciled reinsurers.
  - Cyprus hosts two reinsurers which write non-domestic business and account for 46 percent of the total non-life business.
  - Retention rate for non-life: 79.4 percent (stable for last three years).

### Supervisory practices, gaps, and specific concerns
- On-site inspections:
  - ICCS does not conduct on-site inspection on a regular and planned basis; inspection activity is only on specific issues.
  - Recommendation: Complete the design of on-site inspections and develop a handbook for on-site work in preparation for an on-site visit plan.
- Concentration risk in investments:
  - Current regulation allows companies to invest up to 50 percent of their technical reserves in a counterparty that is an appropriate credit institution, of which no more than 10 percent shall relate to assets other than deposits.
  - Identified risk: Four insurance companies have more than 40 percent of their assets with only one counterparty in one non-tradable financial instrument.
  - At time of update:
    - 17 companies had invested more than 30 percent of their total assets in bank deposits totaling EUR 477.71 million or 45 percent of all deposits by insurers.
    - The five companies with highest exposure to bank deposits have invested a total of EUR 31. 1 million or 64 percent of all assets deposited by insurance companies with banks.
    - The overall amount of assets deposited with banks is EUR 1,053.95million.
  - Recommendation: Amend regulation on concentration risk and require companies to provide a viable plan to comply over an appropriate timeframe.
- Solvency and reporting timeliness:
  - Solvency position of each company is assessed annually based on audited returns.
  - Severe delay: on average, returns as of December 31 arrive at the ICCS in late June or early July.
  - Recommendation: ICCS should request companies to send in preliminary reports and update data later when audited accounts arrive.
- Supervisory process and communication:
  - Supervisory process has improved; more guidance on internal processes is available and will be supported by IT systems.
  - Little progress in communicating objectives and processes to markets since the last assessment; the annual “Report on Insurance in Cyprus 2006” could have been used more effectively.
  - Laws, regulations, notices, guidelines: subject to consultation prior to enactment and, after enactment, are available on the ICCS website.
- Supervisory cooperation and non-EU business:
  - ICCS observes home-host protocol between EU regulators pursuant to freedom to provide services.
  - Licensed insurance companies conducting non-domestic business outside the EU meet existing ILS requirements and report results to ICCS, but "there is no proof that their business activity is in compliance with regulation in those non-domestic markets."
  - Recommendation: SI should require written confirmation from those companies that they are in contact with local regulatory authorities and that all existing standards and regulations are met; where confirmations are not submitted, respective market authorities should be informed. Establish cooperation and coordination arrangements with those supervisory authorities is desirable.
- Licensing framework: Aligned with EU single market structure; firms categorized into:
  - (i) those authorized by the SI;
  - (ii) those authorized in another EU or EEA state with at least one branch in Cyprus (establishment firms);
  - (iii) those authorized in another EU or EEA state that provide services into Cyprus without a physical presence (passporting firms).

### Prudential framework, risk management, and capital adequacy
- Risk assessment and management:
  - SI currently does not issue guidelines or regulations on risk management.
  - Information on measuring, assessing, reporting and controlling risk is part of business plans submitted at licensing; changes thereafter must be disclosed to ICCS.
  - With Solvency II preparation, companies expected to face risk-based capital requirements and increase attention to risk management.
  - Recommendation: ICCS should participate in CEIOPS courses and coordinate with Cypriot banking supervisor to increase knowledge on shared challenges.
- Liabilities and reserving:
  - ICCS has improved capability to assess adequacy of reserves; requires chain ladders and claims triangles.
  - Recommendation: require these data quarterly to allow quicker analysis and inter-annual solvency projection.
- Investments:
  - Investments in complex or structured products are prohibited.
  - Market exposures: little exposure to international financial markets outside the EU; high exposure to local property and equity markets; some equity exposures highly concentrated with few local counterparties.
  - Recommendation: allow companies to hedge concentrated equity positions; conduct meetings between ICCS and companies soon.
- Capital adequacy (Solvency I regime):
  - Current solvency/capital regime based on EU Solvency I is not risk sensitive; requirements based on premium and/or reserve levels.
  - In practice, Cypriot insurers possess on average a solvency margin of 180 percent of the requirement stipulated under Solvency I.
  - Minimum capitalization requirements (in line with Solvency I):
    - EUR 3.2 million for life not transacting accident and health business and non-life insurers;
    - EUR 2.2 million for non-life non-liability class insurers;
    - EUR 5.4 million for life insurers transacting accident and health business.
  - Recommendation: ICCS should request companies to send preliminary reports and update data when audited accounts arrive.

### Supervision of markets, intermediaries, consumers and fraud
- Intermediaries (ICP 24):
  - Recommendations implemented; careful allocation of resources; all European directives implemented.
- Consumer protection (ICP 25):
  - Consumer complaints will be deferred to an Ombudsman in the future.
  - Bill for establishment of a Financial Ombudsman submitted in 2007 and pending.
- Information, disclosure and transparency (ICP 26):
  - SI publishes market trends and statistics every second year and is moving towards an annual report.
  - Recommendation: increase qualitative information and provide quantitative information on a company level.
- Fraud (ICP 27):
  - Little progress on increasing company awareness to reduce exposure to insurance fraud.
  - Recommendation: SI should liaise with the International Insurance Fraud Agency for input and international experience.

### Suitability, governance, and ongoing supervision (selected ICP findings)
- Suitability of persons (ICP 7):
  - Licensing requirements align with IAIS standards.
  - SI lacks explicit legal power to require significant owners who no longer meet fit and proper requirements to dispose of their interests; remedial powers exist under sections 149(3) and 150(4) of the Insurance Law.
  - SI not explicitly empowered to disqualify key functionaries including actuaries who do not comply with fit and proper requirements.
  - Under proposed new fitness and probity regime, insurers will be required to notify ICCS of changes regarding fitness and probity of senior personnel.
  - Recommendation: SI/ICCS could extend suitability requirements to key functionaries.
- Corporate governance (ICP 9) and Internal control (ICP 10):
  - ILS has no specific corporate governance provisions; entities subject to corporate code governance rules; larger listed groups subject to CySEC rules.
  - Recommendation: ICCS could collect existing governance rules of supervised companies and issue tailored governance requirements where needed.
  - Internal control: no specific ILS requirements; principle-based regulation may be the only feasible approach but requires focused on-site inspection attention.

### Recommended Action Plan — selected items
- Empower ICCS/SI to recruit or contract dedicated legal expertise to comply with internationally accepted standards and to avoid delays in regulation and Solvency II preparation.
- Amend concentration risk regulation and require transition plans from affected companies (noting four companies with >40 percent assets with one counterparty).
- Implement planned, regular on-site inspection program and produce an on-site inspection handbook; adapt competent manuals (e.g., Government Actuaries Department U.K.) and develop a risk rating system.
- Require preliminary solvency/financial reports to reduce dependence on delayed audited returns; update when audited accounts arrive.
- Require written confirmations from licensed entities operating non-domestic business outside the EU that they comply with local regulatory requirements; notify respective market authorities if confirmations are not provided.
- Increase communication with market participants on ICCS objectives and processes; utilize reports and circulars effectively, and provide company-level quantitative information.
- Continue development and use of IT-based information systems to support off-site analysis and supervisory processes.
- ICCS to participate in CEIOPS courses and liaise with Cypriot banking supervisor to improve risk management supervision.
- SI to liaise with the International Insurance Fraud Agency for fraud prevention input.
- Amend winding-up provisions in the ILS to address policyholder participation and increase SI independence; prepare contingency plans for winding-ups.

### Appendix II — Authorities' response to the 2005 assessment (selected implementation points)
- Staffing and systems (September 2007–March 2008):
  - Appointments: 2 Senior Insurance Officers (qualified Actuaries) as Deputy Superintendents; 2 Insurance Officers A’ (qualified Chartered Accountants); 1 Administrative Officer; 3 Insurance Officers; 1 Assistant Insurance Officer.
  - "One more Insurance Officer is expected to be employed by the end of 2008 and one more Assistant Insurance Officer in 2009."
  - "Since June 2008 the ICCS has introduced a complete computerization system."
- Market analysis and Solvency II preparation:
  - ICCS guided industry participation in QIS 4; prepared Cyprus Country Report for QIS 4, following extensive stress testing and market analysis.
  - Circular in April 2008 encouraging QIS 4 participation (seven companies participated); seminar in June 2008 with 27 insurance companies.
  - Technical committee formed with members from the Institute of Actuaries, the Cyprus Insurance Association, the Institute of Certified Accountants and the ICCS.
- On-site inspections and reserve assessment:
  - Aim to start regular on-site inspections following recruitment; preparation of a manual under consideration.
  - Chain ladder methods used since 2006; life liabilities assessed by ICCS actuaries.
- Capital and solvency:
  - "Since 2005 proactive supervisory action was taken for ensuring compliance with Solvency I requirements by insurance companies. As a result, all companies have successfully increased their capital levels to comply with Solvency I requirements."
  - Only companies identified as having capital problems are requested to report solvency levels on a quarterly basis.
- Consumer protection and ombudsman:
  - "The Bill for the establishment of a Financial Ombudsman has been submitted in 2007 by the MoF to the House of Representatives where it is still pending."

*Source: _cr09170 - Executive Summary and selected sections*

### Executive Summary ......................................................................................................

### Executive Summary

### Overview of recent reforms and supervisory intent
- The Cypriot Insurance Company Control Service (ICCS) has introduced significant supervisory and regulatory reforms in the insurance area since the last assessment in 2005.
- The regulatory approach is "in principle reflective of and appropriate for the low complexity and sophistication of the insurance market in Cyprus."
- The ICCS has been empowered to acquire and customize an IT-based information system to:
  - process prudential data,
  - create regular and ad-hoc reports,
  - support off-site analysis.

### Institutional capacity, independence, and legal support
- Despite a significant increase in supervisory resources, the ICCS is still not empowered to recruit the resources it needs to perform its core duties.
- The Superintendent of Insurance (SI) is not allowed to recruit or contract dedicated and specialized legal resources from the market; instead ICCS must apply for support from within the Ministry of Finance (MoF) and rely on the Attorney General’s Office for legal services.
- Consequences noted:
  - Lack of in-house legal expertise is characterized as "a clear violation of international’s accepted standards on supervision" and undermines independence and operational capability.
  - Hinders building expertise and capability within the ICCS.
  - Delays new regulation and prevents active support for developments such as Solvency II.
- Budgeting autonomy is still not granted to the SI; final authority to issue orders and guidance can be influenced by the MoF.
- Administrative decisions, including sanctions, can be appealed; the appeal process "can thwart timely interventions" and undermine policyholders’ interests.

### Market structure and key statistics (as of December 2007 unless otherwise stated)
- Number of supervised companies: 40.
- Total gross written premiums (GWP) for supervised companies: EUR 1,196 million.
- Total underwriting results for non-life businesses: EUR 114 million.
- Net profit from life businesses: EUR 52 million.
- Non-domestic GWP:
  - Life: EUR 113.00 million
  - Non-life: EUR 451 million (mainly reinsurance business)
- Industry composition:
  - 11 life insurers
  - 21 non-life insurers
  - 8 reinsurers
  - 46 branches of insurers headquartered in other EU states notified intention to carry on business on a freedom of service (FOS) basis
- Employment: More than 1900 employees in the direct insurance industry.
- Total premiums written by the direct insurance industry in Cyprus: EUR 632 million in 2007, equivalent to 4.1 percent of GDP, roughly divided:
  - Life: EUR 310 million
  - Non-life: EUR 322 million
- Life premium composition: About 65 percent of new life premiums are from investment-linked policies (ILPs).
- Non-life market concentration: Motor insurance accounted for 58 percent of net premiums.
- Product details: Credit insurance accounts for only 0.02 percent of both domestic and non-domestic premiums.
- Market concentration:
  - Top 5 life insurers wrote 78 percent of total business premiums in 2007.
  - Top two life insurers (bank-owned) had a combined market share of 42 percent at end 2007.
  - Top 10 non-life insurers assumed more than 70 percent of domestic risks.
  - Top three non-life insurers assumed more than 35 percent of domestic risks.
  - Subsidiaries of foreign groups have market share of less than 5 percent.
- Total assets held by the insurance industry as at end-2007: EUR 3,984 million, broken down:
  - Life insurers: EUR 3,019 million (76 percent)
  - Non-life insurers: EUR 313 million (8 percent)
  - Reinsurers: EUR 651. million (16 percent)
- Non-life asset allocation:
  - Fixed interest deposits: 48 percent
  - Property: 19 percent
  - Equities: 15 percent
  - Government bonds or other fixed interest securities: 6 percent
- Reinsurance and retention:
  - All Cypriot business is reinsured with non-domiciled reinsurers.
  - Cyprus hosts two reinsurers which write non-domestic business and account for 46 percent of the total non-life business.
  - Retention rate for non-life: 79.4 percent (stable for last three years).
- Regulatory responsibility: The SI is Director of the ICCS, a Directorate of the MoF; SI and deputies are civil servants appointed by the Council of Ministers.
- Professional bodies supplementing regulation include the Cyprus Association of Actuaries, the Cypriot Insurance Agency Association, and the Institute of Certified Public Accountants of Cyprus (more than 2500 fellow members).
- Actuarial profession: As at October 2008, there were 56 Actuaries registered by the Cyprus Actuarial Association.

### Supervisory practices, gaps, and specific concerns
- On-site inspections:
  - The ICCS does not conduct on-site inspection on a regular and planned basis; inspection activity is only on specific issues.
  - Recommendation: Complete the design of on-site inspections and develop a handbook for on-site work in preparation for an on-site visit plan.
- Concentration risk in investments:
  - Current regulation allows companies to invest up to 50 percent of their technical reserves in a counterparty that is an appropriate credit institution, of which no more than 10 percent shall relate to assets other than deposits.
  - Identified risk: Four insurance companies have more than 40 percent of their assets with only one counterparty in one non-tradable financial instrument.
  - Recommendation: Amend regulation on concentration risk and require companies to provide a viable plan to comply over an appropriate timeframe.
- Solvency and reporting timeliness:
  - Solvency position of each company is assessed annually based on audited returns.
  - Severe delay caused by auditing processes and company procedures: on average, returns as of December 31 arrive at the ICCS in late June or early July.
  - Recommendation: ICCS should request companies to send in preliminary reports and update data later when audited accounts arrive.
- Supervisory process and communication:
  - Supervisory process has improved; more guidance on internal processes is available and will be supported by IT systems.
  - Little progress in communicating objectives and processes to markets since the last assessment; the annual “Report on Insurance in Cyprus 2006” could have been used more effectively.
  - Laws, regulations, notices, guidelines: subject to consultation prior to enactment and, after enactment, are available on the ICCS website.
- Supervisory cooperation and non-EU business:
  - ICCS observes home-host protocol between EU regulators pursuant to freedom to provide services.
  - Licensed insurance companies conducting non-domestic business outside the EU meet existing ILS requirements and report results to ICCS, but "there is no proof that their business activity is in compliance with regulation in those non-domestic markets."
  - Recommendation: SI should require written confirmation from those companies that they are in contact with local regulatory authorities and that all existing standards and regulations are met; where confirmations are not submitted, respective market authorities should be informed. Establish cooperation and coordination arrangements with those supervisory authorities is desirable.
- Licensing framework: Aligned with EU single market structure; firms categorized into:
  - (i) those authorized by the SI;
  - (ii) those authorized in another EU or EEA state with at least one branch in Cyprus (establishment firms);
  - (iii) those authorized in another EU or EEA state that provide services into Cyprus without a physical presence (passporting firms).

### Key recommended supervisory actions (extracted)
- Empower ICCS/SI to recruit or contract dedicated legal expertise to comply with internationally accepted standards and to avoid delays in regulation and Solvency II preparation.
- Amend concentration risk regulation and require transition plans from affected companies.
- Implement planned, regular on-site inspection program and produce an on-site inspection handbook.
- Require preliminary solvency/financial reports to reduce dependence on delayed audited returns; update when audited accounts arrive.
- Require written confirmations from licensed entities operating non-domestic business outside the EU that they comply with local regulatory requirements; notify respective market authorities if confirmations are not provided.
- Increase communication with market participants on ICCS objectives and processes; utilize reports and circulars effectively.
- Continue development and use of IT-based information systems to support off-site analysis and supervisory processes.

*Source: _cr09170 - Executive Summary*

### 28. The licensing requirements are in line with IAIS standards and the legal

### _cr09170 - 28. The licensing requirements are in line with IAIS standards and the legal

### Suitability of persons (ICP 7)
- Licensing requirements align with IAIS standards.
- Legal limitations in dealing with persons who are not fit and proper should be addressed under the proposed new fitness and probity regime.
- Current powers of the SI:
  - No explicit legal power to require significant owners who no longer meet fit and proper requirements to dispose of their interests.
  - Under section 149(3) of the Insurance Law, the SI can demand corrective action where actions or omissions of owners result in the detriment of sound and prudent management.
  - Under section 150(4), in case of non-compliance the SI may:
    - take measures for termination of adverse influences exercised by owners;
    - remove them from the Board of Directors and from any management post;
    - postpone the exercise of voting rights until measures are taken;
    - forbid any new transaction with the Cyprus insurance company;
    - declare due and claimable all loans taken by the insurance company.
  - The SI can withdraw authorization as a last resort in extreme situations.
- Limitations:
  - The SI is not explicitly empowered to disqualify key functionaries including actuaries who do not comply with fit and proper requirements.
  - Actuaries require practicing certificates from their professional bodies; these professional decisions may not align fully with regulatory standards.
- Under the proposed new fitness and probity regime, insurers will be required to notify the ICCS of any changes regarding fitness and probity of senior personnel.
- Recommendation: The SI/ICCS could extend suitability requirements to key functionaries.

### Change in control and portfolio transfer (ICP 8)
- No recommendations on change in control in the last assessment.
- No incidents were reported.

### Corporate governance (ICP 9) and Internal control (ICP 10)
- The ILS has no specific provisions for corporate governance; supervised entities are limited companies subject to corporate code (CC) governance rules.
- Larger companies in listed groups are subject to Cyprus Securities and Exchange Commission (CySEC) governance rules.
- Challenge: Wide range of company sizes and complexity makes defining minimum governance standards difficult.
- Recommendation: ICCS could collect existing governance rules of supervised companies to:
  - identify quality of governance;
  - benchmark practices in other jurisdictions;
  - issue tailored governance requirements where needed.
- Internal control:
  - No specific ILS requirements on internal control.
  - Principle-based regulation may be the only feasible approach given company diversity, but may not lead to improvements.
  - Specific attention should be paid during planned on-site inspections in 2009.
  - Branches of foreign companies may be subject to parent-company internal control requirements; recommended that ICCS collect information on those requirements and enforce them.

### Ongoing Supervision (ICP 11–17)
- Market analysis (ICP 11):
  - ICCS capabilities have improved significantly: information can be processed, stored, and used to generate ad-hoc reports; cross-sectoral oversight contribution possible; earlier realization of market trends; benchmarking against peer groups possible.
  - ICCS collects investments and other asset information quarterly.
  - Recommendation: extend market analysis to collect macro-economic data for further analysis.
- Reporting to supervisors and off-site monitoring (ICP 12):
  - Insurers must submit balance sheet, profit and loss, and other financial data per ILS ordinance, including an investment subset.
  - ICCS recently generated standard reports for off-site monitoring to flag deviations from expected results or trends.
  - Reports should be standardized for life and non-life business.
  - ICCS should strengthen off-site analysis framework to collect and review information on four aspects:
    - Financial information on a quarterly basis, including claims provisioning and key ratios.
    - Operational information on company activities and constraints.
    - Solvency information to evaluate and project solvency position and potential breaches of capital requirements.
    - Comparison of performance and trends with market average and benchmarking against peer groups.
  - Each set should be reviewed to assess validity of prior assessments; on-site inspections should be initiated when deviations occur; off-site analysis outcomes should trigger on-site inspection priorities.
- On-site inspection (ICP 13):
  - ICCS does not conduct regular, planned on-site inspections; activity is issue-specific.
  - Recommendations:
    - Complete design of on-site inspections and develop an on-site handbook.
    - Adapt the competent on-site inspection manual prepared by the Government Actuaries Department (U.K.) to ICCS needs.
    - Develop a risk rating system to prioritize regulatory resources based on entities’ risk profiles.
      - Risk weightings should be assigned to inherent risk categories: group structure, supervisory complexity, corporate governance, capital, contagion and related parties risk, business risk, reputational risk, regulatory risk, operational risk, credit risk, market risk, insurance risk, etc.
      - Assess entity organization structure for risk impact.
- Preventive and corrective measures (ICP 14):
  - ICCS has a sufficient range of corrective measures and administers progressive escalation of sanctions/remedial measures appropriate to each case.
  - Recommendation: develop a supervisory ladder (escalation process) and inform staff and undertakings about preventive measures to be taken in future.
- Enforcement or sanctions (ICP 15):
  - Previous recommendation to strengthen SI powers and revise appeal process of sanctions has not been addressed; no changes to ILS in this area.
  - Industry resistance to appeal process changes persists, partly due to sub-efficient commercial court responses.
- Winding-up and exit from the market (ICP 16):
  - Minor issues in ILS winding-up provisions should be amended in a larger ILS revision:
    - Participation of policyholders in winding-up or liquidation.
    - Greater independence of the SI in the process.
  - SI should prepare plans and contingency plans to react to winding-ups.
- Group-wide supervision (ICP 17):
  - All recommendations from the last assessment have been implemented.
  - ICCS follows relevant work streams of EU working groups on Solvency II and related insurance company developments.

### Prudential Requirements (ICP 18–23)
- Risk assessment and management (ICP 18):
  - SI currently does not issue guidelines or regulations on risk management.
  - Information on measuring, assessing, reporting and controlling risk is part of business plans submitted at licensing; changes thereafter must be disclosed to ICCS.
  - With Solvency II preparation, companies are expected to face risk-based capital requirements and increase attention to risk management.
  - ICCS must build capabilities to supervise risk management effectively.
  - Recommendation: ICCS should participate in CEIOPS (Committee of European Insurance and Occupational Pensions) courses and coordinate with Cypriot banking supervisor to increase knowledge on shared challenges.
- Insurance activity (ICP 19):
  - Previous recommendation for ICCS to collect company risk profiles, including new products, rating factors, and changes in attitude to insurance risks, will be addressed with recommended off-site monitoring changes.
- Liabilities (ICP 20):
  - ICCS has improved capability to assess adequacy of reserves; requires chain ladders and claims triangles.
  - Analysis enables identification of reserving shortfalls and insufficient premium levels.
  - Recommendation: require these data quarterly to allow quicker analysis and inter-annual solvency projection.
- Investments (ICP 21):
  - ICCS implemented better and more timely analysis of insurers’ investments.
  - Investments in complex or structured products are prohibited.
  - Market exposures:
    - Little exposure to international financial markets outside the EU.
    - High exposure to local property and equity markets.
    - Some equity exposures highly concentrated with few local counterparties.
  - Recommendation: allow companies to hedge concentrated equity positions; conduct meetings between ICCS and companies soon.
  - Current regulation permits companies to invest up to 50 percent of their technical reserves in a counterparty that is an appropriate credit institution, of which no more than 10 percent shall relate to assets other than deposits—this presents unnecessary market (interest rate) risk.
  - Four insurance companies have more than 40 percent of their assets with only one counterparty in one non tradable financial instrument; regulation on concentration risk should be amended and companies should provide a plan for compliance over an appropriate timeframe.
  - At time of update:
    - 17 companies had invested more than 30 percent of their total assets in bank deposits totaling EUR 477.71 million or 45 percent of all deposits by insurers.
    - The five companies with highest exposure to bank deposits have invested a total of EUR 31. 1 million or 64 percent of all assets deposited by insurance companies with banks.
    - The overall amount of assets deposited with banks is EUR 1,053.95million.
- Derivatives (ICP 22):
  - No recommendations in the last assessment.
- Capital adequacy (ICP 23):
  - Current solvency/capital regime based on EU Solvency I is not risk sensitive; requirements are based on premium and/or reserve levels.
  - In practice, Cypriot insurers possess on average a solvency margin of 180 percent of the requirement stipulated under Solvency I.
  - Minimum capitalization requirements (in line with Solvency I):
    - EUR 3.2 million for life not transacting accident and health business and non-life insurers;
    - EUR 2.2 million for non-life non-liability class insurers;
    - EUR 5.4 million for life insurers transacting accident and health business.
  - Solvency position of each company is assessed annually based on audited returns; severe delays caused by auditing processes and company procedures.
  - Returns as of December 31 arrive at ICCS with delay.
  - Recommendation: ICCS should request companies to send preliminary reports and update data when audited accounts arrive.

### Markets and Consumers (ICP 24–27)
- Intermediaries (ICP 24):
  - Recommendations implemented; careful allocation of resources; all European directives implemented.
- Consumer protection (ICP 25):
  - Consumer complaints will be deferred to an Ombudsman in the future.
  - System for establishment of a financial ombudsman submitted in 2007 by the MoF to the House of Representatives and remains pending.
- Information, disclosure and transparency (ICP 26):
  - SI publishes market trends and statistics every second year and is moving towards an annual report.
  - Current quantitative detail is sufficient; qualitative information should be increased to elaborate on trends, changes, and EU developments.
  - Recommendation: provide quantitative information on a company level.
- Fraud (ICP 27):
  - Main recommendations linked to ICP 10 have not been implemented; little progress on increasing company awareness to reduce exposure to insurance fraud.
  - Recommendation: SI should liaise with the International Insurance Fraud Agency for input and international experience.

### Recommended Action Plan (selected items)
- Supervisory system (2–5):
  - Use next Annual Report to communicate supervisory objectives and upcoming activities.
  - Require written confirmation from companies conducting business outside the EU that they are in contact with local regulatory authorities and meet existing standards; inform respective market authorities where confirmations are not submitted.
- Supervised entities (6–10):
  - ICCS should assess existing governance rules to identify governance quality and issue bespoke governance requirements where needed.
  - Specific attention to principle-based regulation limits during on-site inspections in 2009.
- Ongoing supervision (11–17):
  - Extend market analysis to collect macro-economic data.
  - Strengthen off-site analysis covering financial, operational, solvency and market information; review each set and trigger on-site inspections when deviations occur.
  - Amend winding-up provisions in the ILS to address policyholder participation and increase SI independence; prepare contingency plans for winding-ups.
- Prudential requirements (18–23):
  - ICCS should participate in CEIOPS courses and liaise with Cypriot banking supervisor to improve risk management knowledge.
  - Amend concentration risk regulation; four companies have >40 percent assets with one counterparty in one non tradable financial instrument—require viable exit-strategies.
  - Request preliminary reports from companies to obtain earlier solvency information; update with audited accounts later.
- Markets and consumers (24–27):
  - Increase qualitative information in SI reporting and provide company-level quantitative information.
  - SI to liaise with the International Insurance Fraud Agency for fraud prevention input.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09170.pdf*

### Appendix II: Authorities Response to the Assessment of 2005

### Appendix II: Authorities Response to the Assessment of 2005

### ICP 1 — Effective Insurance Supervision
- Recommendation: "Regulation has to be developed to set a framework in which insurance undertakings can operate and in order to create clear expectations from a supervisory standpoint towards the companies."
- Response:
  - "Since 2005 legal services from the European Public Law Center in Greece have been acquired for further harmonization of the LIS and its Regulations with new EU Directives."
  - "The House of Representatives has already approved the new amendments into Law."
  - "The LIS and its Regulations constitute the legal framework of the insurance sector in Cyprus."

### ICP 2 — Supervisory Objectives
- Recommendation: "Clear objectives and measures should be defined for the SI and the ICCS. The SI and the ICCS should report on their achievements on a regular basis. Moreover, the SI should communicate through regulation how he wants the LIS to be applied."
- Response:
  - "Since 2005 the 'Report on Insurance in Cyprus' has been published annually."
  - "Also the SI has issued many instructions through Circulars to Insurance entities regarding the application of the LIS and its Regulations."

### ICP 3 — Supervisory Authority
- Recommendation: budget, annual plan, staffing skill assessment: "The SI has to be granted a budget... produce a plan laying out the priorities for a year... urgent need to assess the composition of skills required..."
- Response (staffing and systems improvements since 2005, specifically between September 2007 and March 2008):
  - "2 Senior Insurance Officers, who are qualified Actuaries and have been appointed as Deputy Superintendents of Insurance"
  - "2 Insurance Officers A’ who are qualified Chartered Accountants"
  - "1 Administrative Officer with accounting and financial academic background"
  - "3 Insurance Officers with economics and financial academic background"
  - "1 Assistant Insurance Officer with academic background"
  - "One more Insurance Officer is expected to be employed by the end of 2008 and one more Assistant Insurance Officer in 2009."
  - "All the above-mentioned new staff constitutes a significant addition to the existing professional staff of the ICCS which has in this way almost doubled since 2005. (The clerical staff remained largely the same in numbers since 2005)."
  - "Also, since June 2008 the ICCS has introduced a complete computerization system."

### ICP 4 — Supervisory Process
- Recommendation: improve efficiency, standardize internal procedures, publish materials.
- Response:
  - "The recruitment of additional personnel as described in ICP 3 has created a better organized and more effective staff structure within the ICCS..."
  - "For the purposes of the computerization of the ICCS, a systems specification manual has been prepared listing all internal procedures."

### ICP 5 — Supervisory Cooperation and Information Sharing
- Recommendation: contact home supervisors to determine activity under FOS.
- Response:
  - "Since 2005 the ICCS is exchanging information on a regular basis with other EU supervisory authorities in this respect."

### ICP 9 — Corporate Governance
- Observation: many small and family-owned businesses lack required control and balance mechanisms.
- Recommendation: joint effort by all three supervisory authorities; technical assistance necessary.
- Response:
  - "The SI has already requested assistance from the Institute of Certified Public Accountants."

### ICP 10 — Internal Control
- Recommendation: "Define standards on internal control... enforce those standards through reporting and auditing requirements... cover initial procedures for investment decisions and operational risk... contingency planning."
- Response:
  - "The ICCS has collected data with respect to internal control standards. The issue will be discussed soon with the Institute of Certified Public Accountants within the framework of the assistance already requested by the SI (see ICP 9)."

### ICP 11 — Market Analysis
- Recommendation: define required information and process for market analysis.
- Response:
  - Increased capacity due to staff increases and computerization.
  - ICCS guided Cyprus insurance industry participation in Quantitative Impact Study 4 (QIS 4) for the Solvency II Directive.
  - "The ICCS has managed to prepare on time the Cyprus Country Report for QIS 4, following extensive stress testing of the insurance companies involved and relevant market analysis."

### ICP 12 — Reporting to Supervisors and Off-site Monitoring
- Recommendation: electronic storage of company data, signed hard copies plus electronic files in prescribed formats, plausibility testing.
- Response:
  - "Since June 2008 the ICCS has introduced a complete computerization system."
  - "The system has a special procedure for testing the plausibility of figures in the Annual Accounting Returns."

### ICP 13 — On-site Inspection
- Recommendation: obtain right to contract third parties for on-site inspections; develop regular inspection plan.
- Response:
  - "With the recruitment of new qualified staff as described in ICP 3, the aim is to start regular on-site inspections of insurance companies."
  - "The preparation of a manual for on on-site inspections is under consideration."
  - "Meanwhile, targeted on-site inspections will continue where necessary, especially following the review of the Annual Accounting Returns."

### ICP 14 — Preventive and Corrective Measures
- Recommendation: develop regulatory rules enabling preventive action to avoid breaches.
- Response:
  - "This proposed measure is now under consideration."
  - "However, the ICCS has never taken any preventive or corrective measures without warning insurance companies in writing and without informing them in advance of the legal consequences following non-compliance with the insurance legislation."

### ICP 15 — Enforcement or Sanctions
- Recommendation: "The MoF should take steps to improve the independence and credibility of the SI and should therefore review the number of cases in which an appeal is possible."
- Response:
  - "The review of the appeal process is not an issue favored by the insurance industry which wants the appeal process to continue to exist as an intermediate step prior to resorting to courts, because the judicial system in Cyprus is very slow and court decisions are much delayed."

### ICP 16 — Winding-up and Exit from the Market
- Recommendation: maintain short list of potential liquidators as part of withdrawal process.
- Response:
  - "The liquidation procedures so far have worked satisfactorily, as far as the appointment of liquidators are concerned."

### ICP 17 — Group-wide Supervision
- Recommendation: incorporate information exchange processes and terms of reference for coordinator into 2002 MoU.
- Response:
  - "A relevant MoU for the exchange of information has been signed between the competent authorities of the financial sector in Cyprus."
  - "The Solvency II Directive under preparation will incorporate specific terms of reference for the coordinator of groups based on which the said MoU will be amended accordingly."

### ICP 18 — Risk Assessment and Management
- Recommendation: consider initial steps toward risk management once internal control procedures are regulated.
- Response:
  - "The response under ICP 10 is relevant."
  - Solvency II actions: circular in April 2008 encouraging QIS 4 participation (seven companies participated); seminar in June 2008 with 27 insurance companies.
  - "A technical committee has been formed by the ICCS which consists of members from the Institute of Actuaries, the Cyprus Insurance Association, the Institute of Certified Accountants and the ICCS."

### ICP 19 — Insurance Activity
- Recommendation: require supervised companies to provide a risk profile stating new products, rating factors, and changes in attitude to insurance risks.
- Response:
  - "The upgrading of the quality of staff of the ICCS (see ICP 3) will enable the ICCS to implement fully this recommended action. (The said action is already implemented partially for the Life sector insurance companies as far as pricing and product range are concerned)."

### ICP 20 — Liabilities
- Recommendation: ensure ICCS can contract external resources and recruit skilled staff for reserve determination.
- Response:
  - "Since 2005 additional professional staff which consists of two actuaries and two chartered accountants have been employed."
  - "Chain ladder methods are used widely since 2006 by the ICCS staff for the assessment of general business claims liabilities. Assessment of life liabilities is also carried out by the ICCS actuaries."

### ICP 21 — Investments
- Recommendation: company investment policy should be part of risk profile submitted regularly; internal control to cover investment decision procedures and contingency plans.
- Response:
  - ICCS examines investment risk profile for each category of liabilities through analysis of Investment Registers submitted quarterly by insurance companies.
  - For Life Business, ICCS matches investment profile with detailed liability structure and compares expected return with the valuation interest rate used by appointed actuaries.
  - "Further improvement in this area (i.e., taking into consideration counterparty default risks), will result within the Solvency II framework."

### ICP 22 — Derivatives and Similar Commitments
- Response: "None."

### ICP 23 — Capital Adequacy and Solvency
- Recommendation highlights:
  - "Cash collection of premiums should be an essential part of the internal control procedures."
  - "Solvency capital should be reported to the ICCS on a quarterly basis..."
- Response:
  - "Since 2005 proactive supervisory action was taken for ensuring compliance with Solvency I requirements by insurance companies. As a result, all companies have successfully increased their capital levels to comply with Solvency I requirements."
  - "Only the companies that are identified by the ICCS as having capital problems are requested to report their solvency levels on a quarterly basis."
  - "The rules governing the admissibility of premium debts as an asset for covering technical provisions, have been extended to premium debts covering the solvency margin through Orders issued by the Superintendent in March 2006."
  - Note: "The Solvency I requirements, which will be enforced in March 2007 for existing businesses, will create difficulties for some of the smaller companies, mainly in General Lines. This problem is addressed in a technical assistance report."

### ICP 24 — Intermediaries
- Recommendation: review allocation of resources to intermediary supervision.
- Response:
  - "Since 2005 efforts are constantly made for maintaining the minimum possible allocation of resources for intermediary supervision, without jeopardizing the effectiveness of the ICCS in carrying out this type of supervision."

### ICP 25 — Consumer Protection
- Recommendation: publish company-level complaint frequency to incentivize customer-friendly behavior.
- Response:
  - "The Bill for the establishment of a Financial Ombudsman has been submitted in 2007 by the MoF to the House of Representatives where it is still pending."
  - "A first reading and discussion between all parties concerned has already taken place on June 5, 2008 in the relevant Committee of the House of Representatives."
  - "At any rate the LIS includes provisions for minimum requirements for insurers and intermediaries when dealing with consumers which include provisions for timely, complete and relevant submission of information to consumers before and after a contract is signed."

### ICP 26 — Information, Disclosure & Transparency towards the Market
- Recommendation: "Improve contents and frequency of market reports."
- Response:
  - "Since 2005 the Report is being published annually and its contents have been improved, though there is still room for further improvement which the ICCS is planning to adopt in future Reports."

### ICP 27 — Fraud
- Recommendation: see ICP 10.
- Response:
  - "Developments in internal controls under ICP 10 will also include fraud issues."

### ICP 28 — Anti-money Laundering
- Recommendation: identify a common approach; provide resources to deal with STRs as needed; concerns about single premiums into unit-linked contracts.
- Response:
  - "On-site inspections will deal with money laundering issues as well."
  - "The SI has already issued Guidance Notes for the insurance companies compliance with the Prevention and Suppression of Money Laundering Activities Law."

*Appendix II: Authorities Response to the Assessment of 2005*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09170.pdf_