## _cr1102 - Executive Summary ## Source details **Canonical URL:** [_cr1102 - Executive Summary](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1102.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1102.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1102.pdf.json) --- ### Assessment scope and methodology - Benchmarked Guernsey’s regulatory regime against the Insurance Core Principles (ICPs) issued by the IAIS in October 2003; also took into account relevant IAIS standards and guidance. - Assessment conducted from March 1 to 10, 2010 under the Fund’s Financial Sector Assessment Program (FSAP). - Coverage: all regulated entities licensed by the GFSC, including captive insurers and insurance intermediaries; captive regime benchmarked against the IAIS Guidance Paper on the Regulation and Supervision of Captive Insurers. - Observance ratings reflect assessment of essential criteria only; advanced criteria are not taken into account. - Observance rating categories used: Observed; Largely observed; Partly observed; Not observed. - Assessment based solely on laws, regulations, supervisory requirements and practices in place at time of assessment; took account of GFSC self-assessment and responses to pre-mission questionnaire. ### Market structure and key statistics - Total insurance entities operating in Guernsey as at December 31, 2009: 699. - Breakdown of licensed insurers: - Domestic insurers: 21 - International insurers: - Life insurer/reinsurer: 21 - Life insurer/reinsurer cells: 78 - General insurer/reinsurer: 44 - General insurer/reinsurer cells: 67 - Captive insurers: 290 - Captive insurers cells: 178 - Total international insurers: 678 - Total (all insurers): 699 - Captive insurers/cells account for approximately 60 percent of the market. - Market scale and resources: - Total premiums written by Guernsey insurers in 2008: £3.3 billion - Gross assets held by Guernsey insurers in 2008: £21.0 billion - Insurance sector employment in 2009: approximately 840 staff - Number of insurance managers: 21 - Number of insurance intermediaries: 40 - Ownership and origin statistics: - As at end-December 2009, 210 (59 percent) of the 355 international insurers are owned by U.K. parents. - 36 percent of the 323 international reinsurer cells are owned by U.K. parents. - Approximately 40 percent of the U.K. FTSE 100 companies and 95 of the global 1500 companies own captives in Guernsey. - About 50 percent of the international business originated from the UK. - Recognized foreign insurers without a physical presence: about 30 active foreign recognized insurers conducting domestic businesses without a physical presence. - Insurers’ loans to parents as at March 3, 2010: £5.8 billion; of which £5.2 billion was approved for solvency purposes, representing 33 percent of net assets. ### Industry segmentation and key characteristics - Two distinct segments: domestic and international. - Domestic segment: 21 domestic insurers; caters to Guernsey residents and risks based in Guernsey; includes four locally incorporated insurers and a number of Guernsey branches of U.K. insurers; market consolidating via mergers and acquisitions; two locally incorporated insurers are friendly societies offering short-term sickness benefits. - International segment: 678 international insurers (including 323 PCC/ICC cells); dominated by captive insurers (about 60 percent of sector); international life insurers offer mainly unit-linked products for expatriates and high-net-worth individuals. - Cell structures: - Protected cell companies (PCCs): single legal entity divided into unlimited number of cells with legal segregation of assets and liabilities from each other and from the “core” cell. - Incorporated cell companies (ICCs): each cell is a separate company with limited liabilities; unlike PCCs where cells are not separate companies. - Fronting arrangements: - Approximately 60 percent of captive insurers employ fronting arrangements generally using EU insurers, mainly from the UK. - All but one captive insurer are managed by insurance managers. - Fronting insurers typically require collateral (e.g., letters of credit that meet regulatory standards) to protect legal and credit exposures. ### Risk exposures and market sensitivity - Industry more exposed to external risks than local conditions due to dominance of international sector. - Domestic insurers primarily exposed to weather risks in Guernsey (motor and property lines). - Captive and international life insurers susceptible to: - Global economic downturns - Industry-specific events affecting captive parents - Changes in legislative and political climates in insurers’ home markets - Changes in Guernsey’s corporate taxation regime (current review) that may significantly impact the captive sector - Product and investment risk notes: - Life insurers offer mainly unit-linked products; policyholders typically bear investment risks, so market risks have minimal impact on technical provisions and solvency requirements, though profitability was reduced by lower management fees during the financial crisis. - Impact of global financial crisis: - Some insurers’ parent companies were affected; a small number of captives had exposures to Icelandic banks or Icelandic parents. - Some captives placed reinsurance with a reinsurer group in distress; impact determined to be immaterial. - Several insurers writing mortgage indemnity business ceased business and returned capital to parents. ### Supervisory framework, practices, and recent initiatives - GFSC approach and capabilities: - Adopts a risk-based and proportionate approach to supervise a large population of insurers, promoting efficient allocation of regulatory resources. - Issues individual licenses to captive insurers and applies consistent prudential regulation to both captive and commercial insurers. - On-going supervision of captives is exercised through insurance managers. - GFSC has adequate powers and well-documented policies, procedures, and customized checklists to ensure consistency in supervisory decisions. - Regulatory frameworks: - Corporate governance, risk management, and AML/CFT frameworks are comprehensive and robust. - Introduction of Own Solvency Capital Assessment (OSCA) by insurers has been well received by the industry. - Cross-border and cooperation considerations: - GFSC recognizes foreign insurers by description (EU, Jersey, Isle of Man) or via notification; in practice, only recognized insurers from the UK and IOM at time of mission. - Recognized insurers may carry on business in Guernsey only through licensed insurance intermediaries; insurers seeking recognition must submit a notification form with details of home supervisor and authorized business description. - GFSC relies on relevant home supervisors to supervise recognized insurers. - Insurance intermediaries must declare recognized insurers they deal with to the GFSC annually. - Solvency II and equivalence considerations: - GFSC mindful of implications of the EU Solvency II Directive for captives using EU fronting insurers — reinsurance cessions to reinsurers subject to non–Solvency II equivalent regimes may not be fully admissible for solvency requirements of ceding insurers. - GFSC committed to following international standards in enhancing its risk-based solvency regime and is assessing implications should Guernsey decide to implement a risk-based solvency regime. - An independent review of implications of Guernsey seeking Solvency II equivalence has been commissioned by the commerce and employment department (CED); GFSC fully involved in that review. ### Findings, supervisory observations, and recommended enhancements - Findings and strengths: - Guernsey’s status as the largest international insurance center in Europe hinges on progressive infrastructure and operational flexibility. - Regulatory regime updated continually; all recommendations from the 2003 OFC assessment have been implemented. - High level of observance with the Insurance Core Principles (ICPs), with a risk-based supervisory approach and comprehensive frameworks. - Areas for enhancements and supervisory attention: - Establish effective cooperation arrangements with relevant home/host supervisors in respect of recognized insurers without a physical presence to protect foreign policyholders of international life insurers. - Consider expanding the GFSC’s range of enforcement powers. - Consider how best to implement the IAIS public disclosure standards. - Continually assess practical implementation of OSCA, including establishing criteria on the use of internal models. - GFSC recognizes the need to support expansion in reinsurance and specialist lines with adequate specialist staff (e.g., after licensing of Lloyd’s syndicates in Guernsey). ### Summary grading (selected) - Observed (O): 25 - Largely observed (LO): 1 - Partly observed (PO): 1 - Not Applicable (NA): 1 - Total: 28 ### Key recommended action items (selected from Recommended Action Plan) - ICP1 – Conditions for effective insurance supervision: - Consider providing clear guidance to accountants, auditors, and actuaries on their respective roles, including professional independence, with respect to regulated entities. - ICP2 – Supervisory objectives: - Have a clear articulation of GFSC’s regulatory and supervisory scope as well as objectives in protecting domestic policyholders in respect of recognized insurers. - ICP15 – Enforcement or sanctions: - Review heavy reliance on licensing conditions and consider establishing a wider range of enforcement powers, e.g., appointment of judicial managers and receivers. - ICP16 – Winding-up or exit from the market: - Consider establishing (a) an explicit legal provision in legislation to ensure that policyholders and claimants are given high priority in the event of insolvency; and (b) regulatory policies on pledging or encumbrance of assets by insurers. - ICP18 – Risk assessment and management: - Refine the risk matrix to incorporate explicit factors addressing insurers’ corporate governance and risk management framework. - ICP19 – Insurance activity: - Provide guidance on how GFSC assesses the insurance risks of captive insurers seeking approval to have no reinsurance protection. - ICP20 – Liabilities: - Consider including an explicit legal provision in the IBL requiring insurers to maintain adequate technical provisions at all times. - ICP25 – Consumer Protection: - Consider effective regulatory cooperation with relevant regulatory authorities to enhance the protection of policyholders located outside of Guernsey. - ICP26 – Information, disclosure and transparency towards markets: - Consider how best to implement the public disclosure standards established by the IAIS. ### Authorities’ selected responses - ICP1: GFSC will consider how best to address the IMF’s recommendations. - ICP2: Work is under way to provide improved transparency in relation to the protection of domestic policyholders in respect of recognised insurers. - ICP15: GFSC will consider how best to address the IMF’s recommendations. - ICP16: GFSC will be working with the relevant parties to improve the legislation with respect to policyholders and claimants in the event of insolvency. - ICP18: GFSC’s risk matrix is being reviewed to incorporate the additional risk factors. - ICP19: GFSC will consider how best to address the IMF’s recommendations. - ICP20: The position on technical provisions will be addressed when the insurance legislation is reviewed following the revision of the IAIS ICPs in October 2011. - ICP25: GFSC will consider how best to address the IMF’s recommendations. - ICP26: Disclosure rules, which have already been made, come into force in September 2010 and will be reviewed against the revised IAIS ICPs when they are issued in October 2011. ### Selected highlights from the detailed principle-by-principle assessment - Principle 1 (Conditions for effective insurance supervision): Observed. Legal basis: FSC Law, IBL and IMIIL. Accounting standards prescribed: International Financial Reporting Standards, U.K. GAAP, and U.S. GAAP. Recommendation: provide clear guidance to accountants, auditors and actuaries on roles and professional independence. - Principle 6 (Licensing): Observed. All insurance entities operating in or from within Guernsey must be licensed or recognized by GFSC. Long-term business safeguards: assets representing at least 90 percent of policyholder liabilities must be held in trust; trustee reporting and withdrawal notification requirements specified. - Principle 13 (On-site inspection): Observed. Three-year rolling inspection program; inspections of managers, intermediaries and insurers not managed by an insurance manager; focused thematic visits and follow-up processes in place. - Principle 15 (Enforcement or sanctions): Observed. GFSC empowered to impose discretionary financial penalties up to £200,000; main enforcement tool in practice is licensing conditions; scope to widen enforcement powers recommended. - Principle 16 (Winding-up or exit from the market): Largely observed. Legal framework provides for orderly winding up and exits, but policyholders and beneficiaries are not given legal priority in insolvency; recommendation to consider explicit legal priority and regulatory policies on pledging/encumbrance. - Principle 17 (Group-wide supervision): Not applicable. GFSC currently has no responsibilities as group/home supervisor; committed to establish framework when it acquires such responsibilities. Observed group concentrations: insurers’ loans to parents as at March 3, 2010 totaled £5.8 billion of which £5.2 billion was approved for solvency purposes, representing 33 percent of net assets; two large captives skewed figures and posed concentration and contagion risks. - Principle 18 (Risk assessment and management): Observed. GFSC uses a risk matrix for risk-based supervision; recommendation to refine the risk matrix to explicitly capture corporate governance and risk management factors. - Principle 20 (Liabilities): Observed. CGC requires maintenance of adequate technical provisions; IBL does not explicitly require insurers to maintain adequate technical provisions at all times; recommendation to consider explicit legal provision in IBL. - Principle 21 (Investments): Observed. Insurance Business (Approved Assets) Regulations, 2008 categorize approved assets; Class 3 and Class 4 assets limited to 10 percent per counterparty; insurers required to conduct resilience testing as part of OSCA. - Principle 23 (Capital adequacy and solvency): Observed. Minimum solvency margin as lower solvency control level; OSCA acts as upper solvency control level. In practice insurers required to hold solvency capital equal to at least 150 percent of the MCR. Guidance allows certain forms of capital; internal models expected to be limited to certain large long-term insurers and reinsurers; recommendation to continually assess practical implementation of OSCA, including establishing criteria on use of internal models. - Principle 24 (Intermediaries): Observed. Comprehensive framework for licensing and supervising insurance managers and intermediaries; mandatory Guernsey Insurance Certificate for AIRs advising on long-term insurance introduced in June 2006. - Principle 25 (Consumer Protection): Observed. Codes of Conduct and conduct rules apply; GFSC has no jurisdiction over overseas intermediaries working with international life insurers; recommendation to consider regulatory cooperation to protect foreign-located policyholders. - Principle 26 (Information, disclosure and transparency): Partly observed. IBL requires limited disclosures and only upon specific request; GFSC issued consultation on Public Disclosure Rules proposing annual public disclosure of quantitative and qualitative financial information (exemption for captive insurers that do not insure unrelated party risks). - Principle 28 (AML/CFT): Observed. AML/CFT framework based on FATF Recommendations; Guernsey satisfied European Commission equivalence to second EU money laundering directive and had UK equivalence statement in May 2008; AML/CFT Handbook provides risk-based guidance and GFSC supervises compliance. ### Appendix 1 — Status of Implementation of 2003 Recommendations (selected) - CP 1 Organization of an Insurance Supervisor: - Recommended Action: Amend FSC Law to remove Advisory and Finance Committee power to provide guidance and direction; establish safety, soundness and integrity as GFSC objectives and eliminate “development”; increase staff. - Action Taken: The FSC law has been amended to implement the recommendation. The Insurance Division appears to have adequate staff resources and may engage external experts as necessary. - CP 8 Capital Adequacy and Solvency: - Recommended Action: Increase the legally required solvency minimum. - Action Taken: GFSC introduced Own Solvency and Capital Assessment requiring Boards to consider their own specific risk profile in determining appropriate capital in excess of the minimum capital requirement. - CP 14 Sanctions: - Recommended Action: Complete range of sanctions by empowering supervisor to impose administrative fines. - Action Taken: The FSC law has been amended to implement the recommendation. *Italic: Executive Summary and selected excerpts from IMF FSAP staff report assessing Guernsey insurance sector (mission March 1–10, 2010).* ### Executive Summary ...................................................................................................... ### _cr1102 - Executive Summary ...................................................................................................... ### Assessment scope and methodology - Benchmarked Guernsey’s regulatory regime against the Insurance Core Principles (ICPs) issued by the IAIS in October 2003; also took into account relevant IAIS standards and guidance. - Assessment conducted from March 1 to 10, 2010 under the Fund’s Financial Sector Assessment Program (FSAP). - Coverage: all regulated entities licensed by the GFSC, including captive insurers and insurance intermediaries; captive regime benchmarked against the IAIS Guidance Paper on the Regulation and Supervision of Captive Insurers. - Observance ratings reflect assessment of essential criteria only; advanced criteria are not taken into account. - Observance rating categories used: - Observed - Largely observed - Partly observed - Not observed - Assessment based solely on laws, regulations, supervisory requirements and practices in place at time of assessment; took account of GFSC self-assessment and responses to pre-mission questionnaire. ### Market structure and key statistics - Total insurance entities operating in Guernsey as at December 31, 2009: 699. - Breakdown of licensed insurers (Table 1): - Domestic insurers: 21 - International insurers: - Life insurer/reinsurer: 21 - Life insurer/reinsurer cells: 78 - General insurer/reinsurer: 44 - General insurer/reinsurer cells: 67 - Captive insurers: 290 - Captive insurers cells: 178 - Total international insurers: 678 - Total (all insurers): 699 - Captive insurers/cells account for approximately 60 percent of the market. - Market scale and resources: - Total premiums written by Guernsey insurers in 2008: £3.3 billion - Gross assets held by Guernsey insurers in 2008: £21.0 billion - Insurance sector employment in 2009: approximately 840 staff - Number of insurance managers: 21 - Number of insurance intermediaries: 40 - Ownership and origin statistics: - As at end-December 2009, 210 (59 percent) of the 355 international insurers are owned by U.K. parents. - 36 percent of the 323 international reinsurer cells are owned by U.K. parents. - Approximately 40 percent of the U.K. FTSE 100 companies and 95 of the global 1500 companies own captives in Guernsey. - About 50 percent of the international business originated from the UK. - Recognized foreign insurers without a physical presence: about 30 active foreign recognized insurers conducting domestic businesses without a physical presence. - Insurers’ loans to parents as at March 3, 2010: £5.8 billion; of which £5.2 billion was approved for solvency purposes, representing 33 percent of net assets. ### Industry segmentation and characteristics - Two distinct segments: domestic and international. - Domestic segment: 21 domestic insurers; caters to Guernsey residents and risks based in Guernsey; includes four locally incorporated insurers and a number of Guernsey branches of U.K. insurers; market consolidating via mergers and acquisitions; two locally incorporated insurers are friendly societies offering short-term sickness benefits. - International segment: 678 international insurers (including 323 PCC/ICC cells); dominated by captive insurers (about 60 percent of sector); international life insurers offer mainly unit-linked products for expatriates and high-net-worth individuals. - Cell structures: - Protected cell companies (PCCs): single legal entity divided into unlimited number of cells with legal segregation of assets and liabilities from each other and from the “core” cell. - Incorporated cell companies (ICCs): each cell is a separate company with limited liabilities; unlike PCCs where cells are not separate companies. - Fronting arrangements: - Approximately 60 percent of captive insurers employ fronting arrangements generally using EU insurers, mainly from the UK. - All but one captive insurer are managed by insurance managers. - Fronting insurers typically require collateral (e.g., letters of credit that meet regulatory standards) to protect legal and credit exposures. ### Risk exposures and market sensitivity - Industry more exposed to external risks than local conditions due to dominance of international sector. - Domestic insurers primarily exposed to weather risks in Guernsey (motor and property lines). - Captive and international life insurers susceptible to: - Global economic downturns - Industry-specific events affecting captive parents - Changes in legislative and political climates in insurers’ home markets - Changes in Guernsey’s corporate taxation regime (current review) that may significantly impact the captive sector - Product and investment risk notes: - Life insurers offer mainly unit-linked products; policyholders typically bear investment risks, so market risks have minimal impact on technical provisions and solvency requirements, though profitability was reduced by lower management fees during the financial crisis. - Impact of global financial crisis: - Some insurers’ parent companies were affected; a small number of captives had exposures to Icelandic banks or Icelandic parents. - Some captives placed reinsurance with a reinsurer group in distress; impact determined to be immaterial. - Several insurers writing mortgage indemnity business ceased business and returned capital to parents. ### Supervisory framework, practices, and recent initiatives - GFSC approach and capabilities: - Adopts a risk-based and proportionate approach to supervise a large population of insurers, promoting efficient allocation of regulatory resources. - Issues individual licenses to captive insurers and applies consistent prudential regulation to both captive and commercial insurers. - On-going supervision of captives is exercised through insurance managers. - GFSC has adequate powers and well-documented policies, procedures, and customized checklists to ensure consistency in supervisory decisions. - Regulatory frameworks: - Corporate governance, risk management, and AML/CFT frameworks are comprehensive and robust. - Introduction of Own Solvency Capital Assessment (OSCA) by insurers has been well received by the industry. - Cross-border and cooperation considerations: - GFSC recognizes foreign insurers by description (EU, Jersey, Isle of Man) or via notification; in practice, only recognized insurers from the UK and IOM at time of mission. - Recognized insurers may carry on business in Guernsey only through licensed insurance intermediaries; insurers seeking recognition must submit a notification form with details of home supervisor and authorized business description. - GFSC relies on relevant home supervisors to supervise recognized insurers. - Insurance intermediaries must declare recognized insurers they deal with to the GFSC annually. - Solvency II and equivalence considerations: - GFSC is mindful of the implications of the EU Solvency II Directive for captives that use EU fronting insurers—reinsurance cessions to reinsurers subject to non–Solvency II equivalent regimes may not be fully admissible for solvency requirements of ceding insurers. - GFSC committed to following international standards in enhancing its risk-based solvency regime and is assessing implications should Guernsey decide to implement a risk-based solvency regime. - An independent review of implications of Guernsey seeking Solvency II equivalence has been commissioned by the commerce and employment department (CED); GFSC fully involved in that review. ### Findings, supervisory observations, and recommended enhancements - Findings and strengths: - Guernsey’s status as the largest international insurance center in Europe hinges on progressive infrastructure and operational flexibility. - Regulatory regime updated continually; all recommendations from the 2003 OFC assessment have been implemented. - High level of observance with the Insurance Core Principles (ICPs), with a risk-based supervisory approach and comprehensive frameworks. - Areas for enhancements and supervisory attention: - Establish effective cooperation arrangements with relevant home/host supervisors in respect of recognized insurers without a physical presence to protect foreign policyholders of international life insurers. - Consider expanding the GFSC’s range of enforcement powers. - Consider how best to implement the IAIS public disclosure standards. - Continually assess practical implementation of OSCA, including establishing criteria on the use of internal models. - GFSC recognizes the need to support expansion in reinsurance and specialist lines with adequate specialist staff (e.g., after licensing of Lloyd’s syndicates in Guernsey). *Source: Executive Summary of IMF assessment of Guernsey insurance sector (assessment mission March 1–10, 2010).* ### 18. The GFSC is the integrated regulator for the financial sector in Guernsey. The ### The GFSC is the integrated regulator for the financial sector in Guernsey. ### Mandate and role - Established under the Financial Services Commission (Bailiwick of Guernsey) Law, 1987 (FSC Law). - Main functions: - Take such steps as it considers necessary or expedient for maintaining confidence in the safety, soundness, and integrity of the financial services sectors in Guernsey. - Responsible for countering financial crime and the financing of terrorism, pursuant to Guernsey’s AML/CFT legislation. - Does not have a mandate for promotion and development of the financial services sector: - The CED is responsible for development of the industry. - Promotion responsibility sits with the Guernsey Ministry of Finance. ### Governance and oversight - Activities of the GFSC’s executive are overseen by members of the commission (Commissioners), who are elected by the States of Guernsey from persons nominated by the States of Guernsey Policy Council (PC). - Appointment terms: - The chairman and vice-chairman are appointed for a period of one year. - Each commissioner is appointed for a period not exceeding three years. - Composition notes: - All the commissioners are non-executive—three reside in Guernsey, with the remainder living in the UK. - The PC is responsible for international financial matters and establishing the policy framework for financial regulation, including the government’s relationship with, and reporting lines for, the GFSC. ### Insurance regulatory framework - Insurance Division responsibilities: - Regulating and supervising insurers; insurance managers and intermediaries. - Governing laws: - Insurance Business (Bailiwick of Guernsey) Law, 2002 (IBL). - Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002 (IMIIL). - IBL empowers the GFSC regarding: - (a) licensing of insurers; - (b) changes in control; - (c) solvency and capital requirements; - (d) disclosure and regulatory requirements. - Regulations and codes under the IBL enhance requirements in licensing, annual returns, approved assets, and corporate governance. - Supervision of captives: - GFSC licenses captives individually and supervises captives through their appointed insurance managers. - Where a captive is not managed by an insurance manager, the GFSC supervises the captive directly. - Consistent prudential regulatory requirements apply to both commercial and captive insurers. - IMIIL covers insurance managers and intermediaries, including licensing, changes in control, and disclosure of information. - GFSC has issued regulations, codes, and rules under the IMIIL detailing supervisory expectations in licensing, annual returns, safeguarding client monies, and market conduct. ### Consumer protection and compensation arrangements - Financial Services Ombudsman: - Guernsey is considering establishment of a Financial Services Ombudsman. - In August 2008, the GFSC issued a consultative paper revisiting introduction of an ombudsman scheme intended to cover all types of regulated financial services business. - Policyholder compensation: - GFSC has taken a conscious decision not to establish a policyholder compensation scheme. - Policy position: life policyholders are better-protected under the segregated trust fund requirement for long-term insurers. - Trust fund requirements: - Assets representing at least 90 percent of policyholder liabilities must be held in trust by a Guernsey-based trustee licensed for fiduciary business by the GFSC. - The trustee must report full details of the assets held to the GFSC at least quarterly. - The trustee must inform the GFSC if the insurer instructs a withdrawal of more than 5 percent of the market value of the assets held within one month. - The trustee may hold assets directly or appoint a custodian; custodians do not have to be Guernsey-based. - Trust fund requirement does not apply to general insurance, including mandatory insurances. - GFSC legal advice: the FSA Handbook treats policies issued by U.K. insurers to Guernsey policyholders as protected contracts of insurance; such policies are protected by the U.K. Financial Services Compensation Scheme. - GFSC view: policyholder compensation arrangements for domestic business of locally incorporated domestic insurers would be unworkable given the scale and structure of the market. ### Decision-making, enforcement, and insolvency tools - Decisions committee procedures: - Established to consider adverse decisions in relation to regulated entities proposed by the GFSC’s executives. - The decisions committee comprises at least three commissioners. - Adverse decisions include license applications and conditions, suspension or revocation of licenses, objections to controllers or key officers, and imposing financial penalties. - The decisions committee may take adverse decisions where necessary. - Enforcement powers: - FSC Law amended to empower the GFSC to impose financial penalties as from 2008. - Main enforcement tool in practice is imposition of licensing conditions; scope exists for review to widen enforcement powers. - Insolvency and exit: - Legal framework provides for orderly winding up and exits from the market that take into account rights and interests of policyholders and beneficiaries. - Policyholders and beneficiaries are not given legal priority in the event of insolvency. ### Solvency framework and risk-based supervision - Own Solvency Capital Assessment (OSCA): - Introduced in 2008 to take account of evolving international standards. - Applicable to all insurers, including captives. - Objective: ensure boards consider their own specific risk profile in determining appropriate capital levels. - Guidance: GFSC issued the Guidance Note on Licensed Insurers’ Own Risk and Solvency Assessment detailing risk factors to consider. - Solvency control levels: - Minimum solvency margin, calculated on a formulaic basis, acts as the lower solvency control level where a breach requires immediate rectification. - OSCA acts as the upper solvency control level; GFSC may intervene if breached (e.g., impose licensing conditions to increase capital or reduce risks). - Supervisory approach: - Risk-based supervision with a three-year rolling program for on-site inspection. - Insurers with high risk ratings are supervised more closely. - GFSC requires insurers to conduct resilience testing as part of their OSCA. ### Supervision of market conduct, reporting, and cooperation - Market monitoring and reporting: - GFSC proactively monitors market developments both locally and globally, taking account of external events affecting parent companies of captive insurers. - GFSC has a well-developed and consistent process for reviewing annual returns and ongoing monitoring of insurers’ operations. - Cooperation: - GFSC regularly exchanges information with other supervisors and has signed eight MoUs with foreign supervisors covering the insurance sector. - GFSC has applied to become a signatory to the IAIS Multilateral MoU. ### Summary of Compliance with the Insurance Core Principles (selected entries) - ICP 1 - Conditions for effective insurance supervision: O - Well-established policy, legal, and institutional frameworks; recognizes accounting, auditing and actuarial standards and professional bodies from reputable jurisdictions. - Note: auditors and actuaries need clear understanding of GFSC expectations for reliance on their work. - ICP 2 - Supervisory objectives: O - Objectives and functions are clear; GFSC does not promote insurance industry. Recognized insurers permitted to write domestic risks without physical presence in Guernsey may have implications for protecting domestic policyholders. - ICP 3 - Supervisory authority: O - Adequate powers, legal protection, and resources; operationally and financially independent and accountable. - ICP 4 - Supervisory process: O - Defined and transparent supervisory approach; scope to provide more comprehensive public information on financial condition and technical performance. - ICP 5 - Supervisory cooperation and information sharing: O - Regular information exchange; eight MoUs; applied to become signatory to IAIS Multilateral MoU. - ICP 6 - Licensing: O - Clear and transparent licensing framework; relies on home supervisor for prudential supervision of recognized insurers. - Clarified recognition criteria to reflect practice: only from UK and IOM where domestic policyholders are protected under compensation schemes. - ICP 7 - Suitability of Persons: O - Due diligence on owners/controllers/directors prior to licensing and for changes; auditors and actuaries assessed; GFSC can issue disqualification orders. - ICP 8 - Changes in control and portfolio transfers: O - Assesses prospective owners/controllers as for new license applications; acquisition of 15 percent or more requires prior GFSC approval; portfolio transfers require GFSC or Court approval depending on business nature. - ICP 9 - Corporate governance: O - Corporate Governance Code (CGC) applies to all insurers; boards expected to apply CGC appropriate to nature, scale, complexity; insurers must certify adherence annually. - ICP 10 - Internal Controls: O - Internal control requirements incorporated into CGC and monitored during on-site visits; most captives rely on insurance managers' internal controls. - ICP 11 - Market Analysis: O - GFSC proactively monitors market developments and external events affecting relevant industry sectors. - ICP 12 - Reporting to supervisors: O - Well-developed and consistent process for reviewing annual returns and ongoing monitoring. - ICP 13 - On-site inspection: O - Clear inspection policies; three-year rolling inspection program; higher supervisory intensity for higher-risk insurers. - ICP 14 - Preventive and corrective measures: O - GFSC empowered to take proportionate measures to address supervisory concerns. - ICP 15 - Enforcement or sanction: O - Legal powers to take enforcement actions and impose sanctions; structured transparent process for adverse decisions; main tool is licensing conditions with scope to widen enforcement powers. - ICP 16 - Winding-up or exit from the market: LO - Framework provides for orderly winding up and exits, but policyholders and beneficiaries are not given legal priority in insolvency. - ICP 17 - Group-wide supervision: NA - GFSC currently has no responsibilities as group/home supervisor of any insurance group; committed to establish a framework when it acquires such responsibilities. - ICP 18 - Risk assessment and management: O - Guidance provided; risk-based approach with a risk matrix; need to update and enhance the risk matrix as experience is gained and to capture emerging risks. - ICP 19 - Insurance activity: O - Requires strategic underwriting and pricing policies approved and reviewed by Boards; GFSC checks insurance risk management; approves captive insurers writing without reinsurance on a case-by-case basis. - ICP 20 - Liabilities: O - CGC requires insurers to maintain adequate technical provisions; no explicit legal provision but GFSC may impose licensing conditions; GFSC checks insurers’ methodology for technical provisions. - ICP 21 - Investments: O - Clear regulatory requirements on investment activities; insurers required to conduct resilience testing as part of OSCA. - ICP 22 - Derivatives and similar commitments: O - Regulatory rules for derivative activities are well developed. - ICP 23 - Capital adequacy and solvency: O - GFSC has taken a proactive approach in the solvency area (continued in source). *Source: _cr1102 - 18. The GFSC is the integrated regulator for the financial sector in Guernsey._* ### introduction of OSCA and implementing a more risk- ### introduction of OSCA and implementing a more risk- ### Summary of Grading - Observed (O): 25 - Largely observed (LO): 1 - Partly observed (PO): 1 - Not Applicable (NA): 1 - Total: 28 ### Key Findings on Specific ICPs - ICP24 – Intermediaries - GFSC has a comprehensive framework for regulation and on-going supervision of the market conduct of insurance managers and intermediaries. - ICP25 – Consumer Protection - Regulatory measures to protect domestic policyholders are implemented via market conduct supervision of domestic insurers and intermediaries. - GFSC has no jurisdiction over overseas intermediaries working with international life insurers, who have significant business volumes in a number of jurisdictions. - ICP26 – Information, disclosure and transparency towards markets - The IBL requires limited disclosures and only upon specific requests of policyholders and potential policyholders. - GFSC has issued a consultation paper on public disclosure. - ICP27 – Fraud - GFSC has set clear requirements and provided meaningful guidance to insurers, insurance managers and intermediaries to combat insurance fraud. - ICP28 – Anti-money-laundering, combating the financing of terrorism - GFSC applies robust AML and CFT requirements to insurers and intermediaries for both life and general insurance products and supervises compliance through on-site inspections. - The AML/CFT handbook provides guidance in adopting a risk-based approach. ### Recommended Action Plan (selected items) - ICP1 – Conditions for effective insurance supervision - Consider providing clear guidance to accountants, auditors, and actuaries on their respective roles, including professional independence, with respect to regulated entities. - ICP2 – Supervisory objectives - Have a clear articulation of GFSC’s regulatory and supervisory scope as well as objectives in protecting domestic policyholders in respect of recognized insurers. - ICP15 – Enforcement or sanctions - Review heavy reliance on licensing conditions and consider establishing a wider range of enforcement powers, e.g., appointment of judicial managers and receivers. - ICP16 – Winding-up or exit from the market - Consider establishing (a) an explicit legal provision in legislation to ensure that policyholders and claimants are given high priority in the event of insolvency; and (b) regulatory policies on pledging or encumbrance of assets by insurers. - ICP18 – Risk assessment and management - Refine the risk matrix to incorporate explicit factors addressing insurers’ corporate governance and risk management framework. - ICP19 – Insurance activity - Provide guidance on how GFSC assesses the insurance risks of captive insurers seeking approval to have no reinsurance protection. - ICP20 – Liabilities - Consider including an explicit legal provision in the IBL requiring insurers to maintain adequate technical provisions at all times. - ICP25 – Consumer Protection - Consider effective regulatory cooperation with relevant regulatory authorities to enhance the protection of policyholders located outside of Guernsey. - ICP26 – Information, disclosure and transparency towards markets - Consider how best to implement the public disclosure standards established by the IAIS. ### Authorities’ Response (selected items) - ICP1: GFSC will consider how best to address the IMF’s recommendations. - ICP2: Work is under way to provide improved transparency in relation to the protection of domestic policyholders in respect of recognised insurers. - ICP15: GFSC will consider how best to address the IMF’s recommendations. - ICP16: GFSC will be working with the relevant parties to improve the legislation with respect to policyholders and claimants in the event of insolvency. - ICP18: GFSC’s risk matrix is being reviewed to incorporate the additional risk factors. - ICP19: GFSC will consider how best to address the IMF’s recommendations. - ICP20: The position on technical provisions will be addressed when the insurance legislation is reviewed following the revision of the IAIS ICPs in October 2011. - ICP25: GFSC will consider how best to address the IMF’s recommendations. - ICP26: Disclosure rules, which have already been made, come into force in September 2010 and will be reviewed against the revised IAIS ICPs when they are issued in October 2011. ### Detailed Principle-by-Principle Assessment — Selected Highlights - Principle 1 (Conditions for effective insurance supervision) - Legal framework: FSC Law, IBL and IMIIL provide the legal basis for supervision. - Accounting standards prescribed: International Financial Reporting Standards, U.K. GAAP, and U.S. GAAP. - Actuarial and audit oversight: Insurers carrying on long-term businesses must furnish actuarial reports and notify GFSC of appointments/changes of actuaries; auditors and actuaries of licensees are approved at licensing stage and on changes. - Local professional capacity: More than 650 qualified accountants in 35 practicing firms, including the “big four”; Insurance Institute of Guernsey has some 300 members. - Assessment: Observed. - Recommendation reiterated: GFSC consider providing clear guidance to accountants, auditors and actuaries on roles and professional independence. - Principle 2 (Supervisory objectives) - GFSC’s mission: “primary objective is to regulate and supervise financial services in Guernsey, with integrity and efficiency, and in so doing help to uphold the international reputation of Guernsey as a finance centre.” - GFSC does not have mandate to promote or develop financial services sector. - Assessment: Observed. - Recommendation: GFSC advised to have a clear articulation of its regulatory and supervisory scope and objectives in protecting domestic policyholders in respect of recognized insurers. - Principle 3 (Supervisory authority) - Powers and governance: GFSC empowered by FSC Law; may make rules, issue codes, public statements and fines; Decisions Committee Procedures established February 2002. - Accountability and independence: Operationally independent; accountable to the States; Commissioners subject to appointment/dismissal procedures. - Resources and staff: Insurance division agreed headcount 19; currently 17; 2 new staff joined on April 5, 2010. All senior staff professionally qualified. - Confidentiality and indemnity: Commissioners and staff not personally liable except in bad faith; GFSC protects and indemnifies them; confidentiality rules and Data Protection Law apply. - Assessment: Observed. - Principle 4 (Supervisory process) - Risk-based supervision: Uses a risk matrix with risk ratings (low, medium, and high); prospective and retrospective supervision; regular on-site visits. - Transparency: Approach and laws published on GFSC’s website; annual reports and monthly statistics published. - Assessment: Observed. - Comment: Scope for more comprehensive public information on financial condition, e.g., technical performance for domestic and international sectors. - Principle 5 (Supervisory cooperation and information sharing) - MoUs and information sharing: As at December 2009, GFSC had signed 19 MoUs; eight cover exchange of information relating to insurance. - GFSC applied to become signatory to the IAIS Multilateral MoU. - Assessment: Observed. - Principle 6 (Licensing) - All insurance entities operating in or from within Guernsey must be licensed or recognized by GFSC. - Recognized insurers: GFSC recognizes insurers by description or notification; relies on home supervisor for prudential supervision of recognized insurers; during the mission, GFSC clarified recognized insurers are from UK and Isle of Man only. - Decision timelines: GFSC aims to decide on applications within one month from receipt of all relevant information. - Long-term business safeguards: Assets representing at least 90 percent of policyholder liabilities must be held in trust; trustee must report to GFSC at least quarterly and notify GFSC if withdrawal exceeds 5 percent of market value within one month. - Assessment: Observed. - Principle 7 (Suitability of persons) - Fit-and-proper regime: Personal questionnaire (PQ) required; PQ updated every five years; GFSC may serve notice of objection within 60 days. - Auditors and actuaries: GFSC checks qualifications and experience; empowered to disqualify auditors and actuaries but no disqualification orders issued to date. - Assessment: Observed. - Principle 8 (Changes in control and portfolio transfers) - Notification thresholds: Prior approval required for acquisition of 15 percent of voting power; acquisition of 5 percent or more must be notified. - Portfolio transfers: Must be approved by GFSC and, for long-term business transfers, by the Royal Court; policyholders and GFSC have right to make representations to the Court. - Assessment: Observed. - Principle 9 (Corporate governance) - Licensed Insurers’ Corporate Governance Code (CGC): Applies to all insurers; Boards must certify adherence; at least one independent director required unless waived by GFSC. - Board responsibilities: Establish sub-committees, remuneration policy, annual reviews, ensure actuaries have direct access to the Board for long-term insurers. - Outsourcing and manager oversight: Boards must ensure management agreements clearly set out duties and authorities of insurance managers. - Assessment: Observed. *Italic: IMF staff report content excerpt provided in the source content unit.* ### 9. The Boards of insurers are expected to apply the CGC in a manner ### 9. The Boards of insurers are expected to apply the CGC in a manner appropriate to the nature, scale and complexity of their business ### Principle 10 — Internal control - Description: - Boards must establish effective internal controls to ensure: (a) business is conducted prudently in accordance with strategies and policies; (b) transactions entered with appropriate authority; (c) assets are safeguarded; (d) records provide complete, accurate and timely information; (e) risks are assessed and managed effectively. - Includes establishing an internal audit function of a nature and scope appropriate to the business. - Insurers must demonstrate to GFSC that adequate operational procedures are in place; most captives rely on internal procedures and controls of appointed insurance managers (often included in management agreements). - Insurance manager shall advise the Board of any significant changes to its procedures and controls no later than the next Board meeting. - Boards expected to establish divisions of responsibilities between Board, senior management and third party service providers, clear delegation of authority, decision making procedures and segregation of duties. - Boards shall perform annual reviews of insurers’ risk assessment and management systems; internal control system should be reviewed at least annually. - Internal control systems shall include policies and procedures to: (a) address findings of internal/external audits and actuarial reports; (b) ensure compliance with legislation; (c) enable breaches to be identified, reported and rectified promptly; (d) oversee market conduct where insurer deals directly with public; (e) establish appropriate accounting procedures and controls; (f) establish clear accountability for all outsourced functions. - All insurers required to have an internal audit function appropriate to the business. Actuarial reports to be made available to senior management and Board where an actuary is appointed. - GFSC assesses internal controls during on-site visits; insurers submit auditors’ management letter as part of annual returns. - Assessment: Observed - Comments: - Regulatory requirements relating to internal controls are incorporated into CGC and monitored during GFSC’s on-site visits. - In practice, most captives rely on internal procedures and controls of appointed insurance managers. ### Ongoing supervision — Market analysis (Principle 11) - Description: - Guernsey market primarily a captive insurance market; influenced by global market conditions and events affecting parent-company industries. - GFSC monitors global insurance market events and industries of captive parents via specialist press, internet news services, and discussions with local insurers and managers. - Market analysis aims to identify future trends (e.g., formation of new captives or increased retentions) and includes sector work (example: captives writing mortgage indemnity guarantee insurance — GFSC discussed assumption standardization with advising actuarial firm). - Examples considered: potential impact of EU Solvency II Directive, changes to U.K. Controlled Foreign Companies tax legislation, increased levies to the London Fire Brigade. - GFSC uses narrative and statistical information, confidential information from licensees, other jurisdictions and international bodies such as the IAIS. - GFSC publishes selected aggregated market statistics on its website updated monthly; quarterly analysis provided to government and an annual report published; Guernsey Finance publishes statistical data. - GFSC monitored market-wide events for financial stability (e.g., at start of 2008/9 crisis wrote to all captive managers requesting information and took appropriate action). - Assessment: Observed - Comments: GFSC proactively monitors market developments locally and globally and considers external events affecting parent-company sectors. ### Reporting to supervisors and off-site monitoring (Principle 12) - Description: - All insurers must submit annual returns to GFSC within four months of financial year end, including audited accounts, updated business plans, margin of solvency calculations, claims information, asset information and an actuarial valuation report (for long-term business). - Actuarial valuations required for captive general business employing an actuary to assist in estimation of IBNRs. - Insurers must have accounts audited annually; auditor’s report must opine on: (a) proper preparation; (b) true and fair view; (c) compliance with IBL. Auditor must report inconsistencies between accounts and annual return. - General representative must sign declaration of compliance with IBL during financial period. - GFSC reviews annual returns using customised review checklists and assigned risk ratings; policy decision not to require more frequent submissions given captive market composition, but may require further/frequent reporting where concerns exist. - Occasional secondees from external audit firms assist in reviewing low-risk-rated annual returns under supervision and GFSC confidentiality rules. - FSC Law empowers GFSC to make regulations to charge financial penalties for late submission of annual returns; GFSC drafting regulations. - Any material changes to business plan must be notified to GFSC prior to implementation; business plans to include: - a) For general business — a spreadsheet showing unaudited financial projections for the next 12 months, a summary of proposed insurance program and reinsurance program, and any other material factors. - b) For long-term business — a summary, approved by the actuary, of the products offered and the markets, an actuarial valuation report, unaudited financial projections for the next three years, and any other material factors. - GFSC recently enhanced insurers’ reporting requirements; revised annual returns include details of method of calculating reserves, insurers’ OSCA paving way for implementation of a risk-based solvency assessment in line with international trends and IAIS framework. - Assessment: Observed - Comments: GFSC has a well-developed and consistent process for reviewing annual returns and ongoing monitoring. ### On-site inspection (Principle 13) - Description: - GFSC inspects insurance managers, intermediaries and insurers not managed by an insurance manager on a three year rolling program; selects a number of insurers when visiting a manager; makes ad hoc visits to address concerns. - Selection basis includes GFSC internal risk matrix tool ratings. - Inspections focus on procedures, internal controls, anti-money laundering procedures and their application; themed visits performed for particular areas (e.g., underwriting procedures). - GFSC may meet auditors and actuaries; auditors and actuaries have duty to report matters impinging on fitness and propriety to GFSC. - Licensees required to furnish GFSC a copy of auditor’s management letter or written confirmation none was issued. - GFSC discusses major issues at closing meeting and provides a formal report within four weeks; licensee given a deadline to respond with proposed measures; outstanding issues followed up; unresolved issues may lead to regulatory action. - GFSC has performed on-site visits at premises of any party associated with the licensee and may request documents from any person; has visited licensees’ operations in a few jurisdictions; may appoint inspectors for formal investigations. - During 2009, GFSC visited 14 insurance intermediaries, 11 insurance managers, five international life companies, one general company, and two domestic insurers; held annual review meetings with 25 intermediaries not subject to on-site inspection in 2009 and 22 regular coordination meetings with insurance managers. - Assessment: Observed - Comments: GFSC has clear, documented inspection policies and a three-year rolling program; high-risk insurers are supervised more closely. ### Preventive and Corrective Measures (Principle 14) - Description: - GFSC empowered to take preventive and corrective measures; primary regulatory measure is imposition of licensing conditions (unlimited in scope; can include cease writing new business, prior written consent before moving funds, submit a recovery plan); breach of condition is criminal offence and ground for revocation. - GFSC encourages minor preventive measures via discussions and seminars; holds individual meetings with managers and intermediaries. - Internal procedures set out levels of regulatory action: early warning, investigation, regulatory action, closure. - Insurers’ completion of OSCA gives GFSC advance warning of potential solvency breaches; urgent on-site visits may be carried out where necessary. - Assessment: Observed - Comments: GFSC empowered and does take proportionate measures to address supervisory concerns. ### Enforcement or sanctions (Principle 15) - Description: - GFSC sanctions include fines, public statements, prohibition orders; may apply to Royal Court for directors’ disqualification under Companies (Guernsey) Law, 2008 (CL). - Licensing conditions enable enforcement measures: transfer obligations of failing insurer, increased capital, restrict dividend payments, restrict asset transfers, require removal of specified persons. GFSC has restricted dividend payments on several occasions, especially where parent companies were in financial difficulties. - GFSC may give formal directions to revoked or surrendered licensees; breach of a direction by a former licensee is an offence. - GFSC can investigate unlicensed persons and may report to Attorney General for prosecution; may impose a license on an unlicensed insurer to use other powers; may apply to Court to wind up company acting as unlicensed insurer. - GFSC empowered to impose discretionary financial penalties of up to £200,000 for material breaches of legislation or licensing criteria. - Offences under IBL carry fines not exceeding level 5 on the uniform scale and/or imprisonment for between three months to two years. - FSC Law empowers GFSC to impose administrative financial penalties for late fees/filing, but enabling regulations not prescribed. - No dedicated enforcement staff currently; in process of recruiting legal counsel. Regulatory cases monitored at bi-weekly Division management meetings, bi-weekly Division meetings, bi-weekly Heads of Divisions meetings, monthly Commissioners’ meetings. Adverse decisions decided by Decisions Committee. - It is a criminal offence to provide false, deceptive or misleading information to GFSC or to withhold information relevant to GFSC’s functions. - GFSC may reduce or dispense with notice periods if it believes it is in the interests of policyholders, potential policyholders or the reputation of Guernsey. - Assessment: Observed - Comments: - GFSC has legal powers and structured transparent process for adverse decisions; main tool is licensing conditions and there is scope to widen enforcement powers. - Recommendation: GFSC should review reliance on licensing conditions and consider establishing a wider range of enforcement powers, e.g., appointment of judicial managers and receiver. ### Winding-up and exit from the market (Principle 16) - Description: - Winding-up procedures in CL; CL and IBL set out circumstances where GFSC may be involved in compulsory winding up. - CL provides general solvency test; IBL provides specific solvency requirement (see ICP23); compulsory winding up at Court discretion which will consider rights and interests of policyholders. - Long-term insurers shall not be wound up voluntarily and must ring-fence assets attributable to long-term business in a segregated fund under trust; assets of segregated fund available only for liabilities attributable to that business. No segregation requirement for general insurance business. - IBL is silent on whether policyholders and beneficiaries of life funds would rank higher or pari passu with other unsecured creditors where segregated fund assets are insufficient. Policyholders of general insurers not given high legal ranking. - GFSC does not have a published policy on whether insurers may pledge assets for credit facilities; secured creditors rank ahead of policyholders — regulatory policies on pledging/encumbrances recommended. Under Approved Assets Regulations, asset under lien is not an approved asset for solvency purposes unless securing an obligation under an insurance contract. - Assessment: Largely observed - Comments: - Legal framework provides for orderly winding up and takes into account policyholder rights, but policyholders/beneficiaries are not given legal priority in insolvency. - Recommendations: - a) Consider explicit legal provision to ensure policyholders and claimants are given high priority in insolvency. - b) Consider regulatory policies on pledging or encumbrance of assets by insurers. ### Group-wide supervision (Principle 17) - Description: - GFSC defines insurance group and financial conglomerate; not home regulator for any fully-fledged insurance group or financial conglomerates. - GFSC is home/lead supervisor for a PCC with operations in Gibraltar; host supervisor for a number of insurers; applied to join supervisory colleges for two insurance groups. - GFSC can obtain information relating to other group entities from a licensee and cooperates with other supervisors without requiring MoUs where legislation permits confidential information exchange. - GFSC approves changes in controller or management of insurers including group members; may refuse or withdraw license if group structure hinders effective supervision. - Outsourcing to other group entities must give GFSC right to visit outsourced functions; GFSC regularly visits outsourced functions. - No formal limits on intra-group transactions; related party assets not admissible for solvency unless specifically approved. GFSC has allowed parental loans; in some cases more than 90 percent of a captive insurer’s assets could be loans to parents. - As at March 3, 2010, insurers’ loans to parents totaled £5.8 billion of which £5.2 billion was approved for solvency purposes, representing 33 percent of net assets. Two large captives skewed figures, posing concentration and contagion risks; GFSC imposed restrictions and required reapplications post-2008/9 crisis. - GFSC established high level group supervision principles largely based on ICP 17 to form basis of framework when it acquires home-supervisor responsibilities. - Assessment: Not applicable - Comments: GFSC currently has no responsibilities as group/home supervisor; committed to establish framework when required. ### Prudential requirements — Risk assessment and management (Principle 18) - Description: - CGC requires Boards to take account of underwriting, reserving and investment risk and other risks; Boards must establish risk assessment and management systems appropriate to size, nature and complexity; identify, measure monitor and control significant risks on an on-going basis; provide timely information; regularly reviewed by Board. - Boards may establish sub-committees e.g., risk management committee. - Guidance Note on Licensed Insurers’ Own Risk and Solvency Assessment (ORSA) specifies risks for OSCA. - GFSC established a risk matrix addressing key risk areas: (a) structure/ownership risks; (b) business risks; (c) transactional risks; (d) changes in owners, directors and business plans. Matrix allows manual override; insurers assigned low, medium, high risk ratings. Similar matrix for intermediaries. - GFSC checks risk assessment and management systems during on-site inspections and via annual returns analysis. - Assessment: Observed - Comments: - GFSC has provided guidance and uses risk-based supervision via a risk matrix. - Recommendation: refine risk matrix to incorporate explicit factors addressing insurers’ corporate governance and risk management framework; update/enhance as experience and emerging risks evolve. ### Insurance activity (Principle 19) - Description: - CGC requires underwriting strategy including pricing and retention limits. - Annual returns: general insurers provide summary of proposed insurance and reinsurance programs incl. exposures, reinsurers’ names, security ratings and attachment points; long-term insurers provide product summaries approved by actuary and confirmation of actuarial approval. - Boards must establish reinsurance strategy considering reinsurance credit risk and diversification; monitor recoverability. - Insurers must declare reliance on reinsurers as part of annual returns; disclose exposures to any reinsurer and related companies exceeding 10 percent of insurer’s shareholder funds — if >10 percent additional information required. - Some captives have no reinsurance protection; GFSC approves such cases when aggregate risks are fully covered by available capital. - GFSC examines application of requirements via annual returns and on-site visits; higher-risk insurers monitored further. - Material changes to risk retention or reinsurance strategy are treated as business plan changes subject to prior notification. - Accounting treatment of risk transfer instruments checked by auditors per recognized accounting standards. - Assessment: Observed - Comments: - GFSC requires strategic underwriting and pricing policies approved and reviewed by Boards. - Recommendation: For transparency and consistency, GFSC is advised to provide guidance on how it assesses insurance risks of captive insurers seeking approval to have no reinsurance protection. ### Liabilities (Principle 20) - Description: - GFSC issued guidance on factors to include in actuarial valuation for long-term companies; insurers must provide summary of valuation methodology including per policy expenses, interest rate assumptions, unit growth rate, discount rate, inflation assumptions and mortality/morbidity rates; actuary should disclose any credit taken for negative reserves. - General insurers must provide summary of methodology used to calculate insurance reserves as part of annual returns, including IBNR and outstanding claim reserves, reconciliation by class of business; PCCs to provide information for core and each active cell where applicable. - Credit not given for reinsurance ceded to associated party unless reinsurer is a licensed insurer or with GFSC’s consent. - Actuarial reports must be prepared per appropriate actuarial standards and provided to GFSC where actuary advice used. - Methodology for technical provisions assessed during on-site visits and via actuarial valuation reports for long-term insurers; GFSC may impose licensing conditions to rectify shortfalls. - IBL does not explicitly require insurers to maintain adequate technical provisions at all times; CGC requires reserving risk control via adequate technical provisions based on sound accounting and actuarial principles, Board-established reserving policies, and stress testing adequacy of capital resources. - Assessment: Observed - Comments: - CGC requires maintenance of adequate technical provisions; GFSC may impose licensing conditions where appropriate. - Recommendation: GFSC is advised to consider including an explicit legal provision in the IBL requiring insurers to maintain adequate technical provisions at all times. ### Investments (Principle 21) - Description: - GFSC specified approved assets and limits under Insurance Business (Approved Assets) Regulations, 2008; approved assets categorized into four classes based on liquidity and quality; Class 3 and Class 4 assets limited to 10 percent of insurer’s total market value of gross assets per counterparty. - Derivatives (other than specified), accounts receivable from associated party, and encumbered assets do not qualify as approved assets. - Insurers required to provide investment details in annual returns; investments valued in accordance with generally accepted accounting principles; GFSC can approve specific investments and requires market or fair value valuation. - CGC requires Boards to establish an investment strategy approved and reviewed annually including contingency plan; investment monitoring procedures and asset/liability matching monitoring. - Insurers should conduct resilience testing for market scenarios (example: equity prices move by 25 percent and significant increase in inflation); where mismatch exists, consider capital position and specific mismatching reserve. - Investment risks to be addressed include market risk, credit risk, liquidity risk and custody risk; monitoring procedures should be segregated. - Boards responsible for custody and banking arrangements; key investment staff must have appropriate skills and integrity; ultimate responsibility remains with Board if functions outsourced. - Actuarial valuation for long-term insurers must detail asset/liability matching and resilience reserves. - Loans to related companies must be arms-length, at commercial rate, repayable on demand and not significantly impact financial resources or risk profile. - GFSC checks internal controls over asset management during on-site visits. - Assessment: Observed - Comments: GFSC has clear regulatory requirements on investment activities; insurers required to conduct resilience testing as part of OSCA. ### Derivatives and similar commitments (Principle 22) - Description: - Restrictions on derivatives applied through approved asset regulations; GFSC approval required before derivatives can satisfy solvency requirements. - Derivatives classified as Class 4 assets only if they meet specific stringent requirements; admissibility limited to 10 percent or less of insurer’s total gross assets per counterparty. - Class 4 assets include: (a) exchange traded derivative contracts not leveraged or used for index tracking, capital protected strategies, efficient portfolio management or to reduce investment risk; (b) forward foreign exchange transactions with recognized bank to hedge currency exposures; (c) derivatives changing characteristics of underlying assets. - CGC requires Boards to establish policy for derivatives use, subject to annual review; policy should include purpose, exposure limits, restrictions on types/amounts, and individual responsibility/accountability framework. - Boards should ensure directors collectively have sufficient expertise, suitably qualified staff oversee derivatives, pricing verification controls, and effective risk management integrated with non-derivative risks. - GFSC monitors derivatives use via annual returns review and on-site visits; accounts must follow recognized accounting standards with disclosure for financial instruments and derivatives. - Assessment: Observed - Comments: GFSC’s regulatory rules for derivative activities are well developed. ### Capital adequacy and solvency (Principle 23) - Description: - All locally incorporated insurers must maintain paid-up capital of no less than the minimum capital requirement (MCR). Shareholders’ funds must be at least 75 percent of MCR, taking account of currency fluctuations. Insurers not incorporated companies must maintain non-distributable funds of no less than the MCR. - General insurers must meet MCR as minimum solvency margin requirement. Minimum solvency margin for general insurers is the higher of: (a) the sum of 18 percent of the first £5 million of net premium income and 16 percent of the net premium income in excess of £5 million; or (b) 5 percent of loss reserves. - Long-term insurers required to maintain solvency margin not less than the greater of: (a) £250,000, or (b) 2½ percent of the segregated long-term insurance fund. - GFSC prescribed valuation basis for assets and liabilities under Insurance Business (Asset and Liability Valuation) Regulations, 2008 and admissible assets under Insurance Business (Approved Assets) Regulations, 2008. - GFSC may require higher solvency considering nature/classes of business, spread of risk, historic/industry claims data, size/complexity/business risks, and information relevant to evaluating loss reserves. In practice insurers required to hold solvency capital equal to at least 150 percent of the MCR. - “Risk gap” approach adopted for simple captive insurers: risk gap = difference between maximum total claim amount in any one year and expected premium income; risk gap should be more than covered by available capital (paid-up capital, partly paid capital and retained earnings). - Captives often use fronting EU insurers for certain classes; fronting insurer treats captive as “reinsurer” and must consider admissibility in its solvency calculations. - GFSC active in Solvency II discussions; consideration needed for PCCs where individual cells have recourse to core capital. - GFSC introduced OSCA in 2008 for all insurers to ensure Boards consider specific risk profile in capital determination; Guidance Note on OSCA issued detailing risk factors; CGC requires stress testing of capital resources. - On suitable capital forms, Guidance Note states additional capital can include unpaid partly paid share capital, letters of credit or loans to parent/group company; subordinated loans may be treated as capital. Intangible or illiquid assets generally not acceptable. Multiple gearing prohibited. - GFSC published policy on suitable forms of capital in line with IAIS guidance. - Post-2008/9 crisis GFSC reviewed all insurers with parental loan approvals; approvals carry expiry dates or triggers for review. - Minimum solvency margin acts as lower solvency control level; breach requires immediate rectification. OSCA acts as upper solvency control level and GFSC may intervene if breached; OSCA must be agreed by GFSC; additional capital requirements may be imposed. - Insurers may calculate OSCAs using internal models; expected limited to certain large long-term insurers and reinsurers; non-prescriptive approach currently with plan to refine framework. - CGC requires internal control system to monitor adequacy of resources to ensure compliance with MCR and solvency requirements at all times; breaches to be reported to GFSC within seven days. - Branches with head offices in EU, Jersey and Isle of Man carrying on business are exempted from capital and solvency requirements (historical licenses); GFSC working on withdrawal of inactive branches. Branches of non-U.K. life companies required to localize assets and meet solvency requirements via separate branch accounts. - GFSC conducts regular comparisons of solvency regime with other jurisdictions and monitors Solvency II; Guernsey is active member of IAIS Solvency Subcommittee. - Assessment: Observed - Comments: - GFSC proactive in OSCA introduction and risk-based solvency regime. - Recommendation: continually assess practical implementation of OSCA, including establishing criteria on the use of internal models. ### Intermediaries (Principle 24) - Description: - Insurance managers and intermediaries must be licensed by GFSC and meet minimum licensing criteria; must conduct business with prudence, integrity and appropriate professional skill. - Directors of intermediaries and Authorized Insurance Representatives (AIRs) must be fit and proper with relevant educational and professional qualifications. - Unlicensed intermediaries reported to Attorney General for potential prosecution; GFSC may apply for injunction. - Mandatory minimum qualifications for AIRs providing advice on long-term insurance products introduced in June 2006 — requirement to hold Guernsey Insurance Certificate; nearly 150 AIRs have achieved this qualification. - GFSC issued Code of Conduct for AIRs: AIRs give advice only on competent matters; AIR advising on long-term insurance must understand relevant legislation and refer when unable to advise. - GFSC has similar powers against intermediaries as insurers: licensing conditions, revocation, prohibition orders, discretionary financial penalties and public statements. - Intermediary must open and maintain separate client money account, deposit client money no later than next business day (or record reason), notify client if not paid within 3 business days; carry out regular reconciliations; GFSC checks client monies compliance during on-site visits. - Insurers must ensure AIRs provide prospective clients with information on representation and products; intermediaries must disclose any interest in excess of 10 percent in any insurer. - It is an offence for an intermediary to induce insurance contracts by false, deceptive or misleading statements or dishonest concealment. - Assessment: Observed - Comments: GFSC has comprehensive framework for regulating market conduct of insurance managers and intermediaries. ### Consumer protection (Principle 25) - Description: - Licensed Insurers’ Code of Conduct and Code of Conduct for AIRs require business to be conducted “with utmost good faith and high standards of integrity” and to have fair dealing policies to avoid conflicts of interest. - Code of Conduct for AIRs does not apply to AIRs used by international insurers outside Guernsey (supervised by their authorizing supervisor). - Principles of Conduct of Finance Business require disclosure/open rules, ensuring customers receive information to make balanced decisions and institutions to seek relevant customer information. - AIR should obtain and record information on clients’ personal and financial circumstances necessary for suitable advice on long-term business; must explain principal terms and avoid advising conversion/lapse/cancellation unless demonstrably in client’s best interest with written advice provided. - Conduct of Business Rules and Licensed Insurers’ Code of Conduct require complaints procedures: (a) report to compliance officer; (b) escalate to Board member if unresolved within 30 days; (c) if unresolved within 30 days after escalation, inform complainant of rights; (d) notify GFSC if not resolved within 90 days; (e) provide information to customers to contact relevant parties. - AIRs shall not use or disclose client information except for negotiating a contract or handling a claim, unless client consent; disclosure permitted in public interest or by law. - GFSC issues consumer warning notices about unsupervised entities and risks of arranging insurance via internet or unlicensed intermediaries. - GFSC supports GTA University Centre and Guernsey Insurance Certificate examination programme; Guernsey considering establishing a Financial Services Ombudsman. - Assessment: Observed - Comments: - Regulatory measures to protect domestic policyholders implemented via market conduct supervision. - GFSC has no jurisdiction over overseas intermediaries working with international life insurers; recommendation to consider regulatory cooperation with relevant authorities to protect policyholders located outside Guernsey. ### Information, disclosure & transparency towards the market (Principle 26) - Description: - Domestic insurers required to make available annual audited accounts to policyholders and potential policyholders on request; accounts may be abridged with GFSC approval. - All insurers writing long-term business required to make available annual actuarial report on request to policyholders. - GFSC issued consultation on Public Disclosure Rules: proposed requirement for all insurers to publicly disclose annual quantitative and qualitative information on financial position and performance. Requirement does not apply to captive insurers that do not insure unrelated party risks. Insurers raised concerns about complying. - Assessment: Partly observed - Comments: - IBL requires limited disclosures and only upon specific request. GFSC should consider how best to implement IAIS public disclosure standards. ### Fraud (Principle 27) - Description: - Insurers required to establish procedures and controls to deter, detect, record and report fraud; managers and intermediaries must have adequate control systems including fraud deterrence. - Guidance on Preventing, Detecting and Remedying Insurance Fraud, 2008 provides clear guidance including need for training and industry-wide information exchange. - Insurance managers expected to assess identity and financial strength of parents, identity/location of insureds, third party involvement and ownership. - Higher fraud risks in some captive structures (e.g., producer-owned reinsurance captives). - Insurance Division assesses anti-fraud measures during on-site visits; Director of Insurance chairs IAIS Insurance Fraud Working Group. - Fraud Law effective 1 October 2009 and the Theft Law address insurer fraud and claims fraud; successful prosecution under Theft Law achieved. - All financial services businesses must have appropriate procedures for hiring staff to ensure employee probity and competence. - GFSC chairs IAIS Insurance Fraud Working Group and can exchange information under IBL and IMIIL; FSC Law empowers GFSC to cooperate for investigation, prevention or detection of crime. - Assessment: Observed - Comments: GFSC has set clear requirements and meaningful guidance to combat insurance fraud. ### Anti-money laundering, combating the financing of terrorism (AML/CFT) (Principle 28) - Description: - Guernsey’s AML/CFT legislation and supervisory practice based on FATF Recommendations and Special Recommendations; regime applies to all financial services businesses and both life and general insurance products; covers Guernsey-based branches and offices of companies incorporated outside Guernsey conducting financial services in Guernsey. - Guernsey satisfied the European Commission that its AML/CFT framework was equivalent to the second EU money laundering directive. The United Kingdom issued a statement on equivalence in May 2008 considering Guernsey and other Crown Dependencies equivalent to the EU (third EU money laundering directive). - The AML/CFT Handbook sets out rules and guidance; permits risk-based approach appropriate to insurer circumstances; insurers should consider additional measures to prevent exploitation of services/products and delivery channels. - International life insurers conducting business through financial advisers in other jurisdictions required to establish policies, procedures and customer due diligence; assessors informed that customer due diligence documentation maintained locally. - IBL, IMIIL and Proceeds of Crime Law empower GFSC to monitor AML/CFT compliance, request information and conduct on-site visits. - Directors, controllers, partners, managers and general representatives must be fit-and-proper; GFSC performs due diligence checks; PQs required and updated on material change and renewed every five years; GFSC can object to potential beneficial owners or managers. - All insurers must: (a) establish AML/CFT policies, procedures and controls; (b) Boards responsible for regular reviews; (c) ensure reviews discussed and recorded at Board meetings. - All insurers must have a Money Laundering Reporting Officer (MLRO) (may be MLRO of Insurance Manager); change in MLRO requires prior notification to GFSC based on completed PQ. - IBL, IMIIL and FSC Law enable GFSC to exchange information with law enforcement and other supervisory authorities for AML/CFT. - GFSC devotes resources to AML/CFT via training and on-site visits; Insurance Division has sufficient staff and fees provide sufficient financial resources; AML/CFT specialists in Policy and International Affairs Division provide technical expertise. - Separate LEG/IMF mission in May 2010 conducting full assessment of Guernsey’s observance with FATF AML/CFT standards. - Assessment: Observed - Comments: GFSC applies robust AML/CFT requirements to insurers and intermediaries for both life and general insurance products and supervises compliance through on-site inspections; AML/CFT handbook provides guidance on risk-based approach. *Source: IMF FSAP report content unit titled "9. The Boards of insurers are expected to apply the CGC in a manner appropriate to the nature, scale and complexity of their business" (excerpt). * ### Appendix 1. Status of Implementation of 2003 Recommendations ### Appendix 1. Status of Implementation of 2003 Recommendations ### CP 1 Organization of an Insurance Supervisor - Recommended Action: - In order to strengthen the operational independence of GFSC, the mission recommends that GFSC Law be amended to remove the power of the Advisory and Finance Committee to provide guidance and direction to GFSC. - The GFSC Law should establish safety, soundness, and integrity of the financial system as the objectives of GFSC, and eliminate “development” as one of the GFSC functions. Further, there should be no provisions in the Law that could potentially compromise the above-stated objectives. This would provide a clear legal framework that would avoid potential conflicts in the functions of GFSC. The attainment and sustainability of these objectives will enhance the reputation and contribute to the development of the financial system in Guernsey. - The number of staff has to be increased. - Action Taken: - The FSC law has been amended to implement the recommendation. - The Insurance Division appears to have adequate staff resources. It may also engage external experts as necessary such as accountants, lawyers and actuaries. ### CP 8 Capital Adequacy and Solvency - Recommended Action: - Increase the legally required solvency minimum. - Action Taken: - GFSC has introduced Own Solvency and Capital Assessment requiring Boards of insurers to consider their own specific risk profile in determining the appropriate level of capital to be held in excess of the minimum capital requirement. ### CP 14 Sanctions - Recommended Action: - Complete the range of sanctions by the power of the supervisor to impose penalties (administrative fines). - Action Taken: - The FSC law has been amended to implement the recommendation. * _cr1102 - Appendix 1. Status of Implementation of 2003 Recommendations_* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr1102.pdf_