## _cr15215 ## Source details **Canonical URL:** [_cr15215](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15215.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15215.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15215.pdf.json) --- ### Executive summary — sector size, structure, and recent performance - Total assets of insurance companies: KM 1.2 billion. - Share of financial sector assets: about 5 percent (as of end-2013). - Insurance penetration: about 2.1 percent of GDP. - Premiums collected in 2013: KM 527 million, a 4.3 percent increase from a year earlier. - Nonlife sector share of premiums: over 80 percent. - MTPL contribution: about two-thirds of total premiums (mandatory Motor Third Party Liability insurance). - Asset composition: - About half of insurance sector assets are held in bank deposits. - Investments account for 72 percent of assets, of which over 67 percent are held in bank deposits (sector-level data). - Real estate and receivables together make up 32 percent of assets (18.5 percent receivables; 13.5 percent real estate) — (aggregate figures). - Market concentration and solvency: - Ten insurance companies, accounting for 40 percent of the nonlife market, have solvency margins close to supervisory minima. - Two insurers account for 10 percent of the market and are insolvent (source-level statements vary by entity; specific tables list one insurer insolvent in one excerpt). - Solvency framework follows Solvency I; it does not incorporate all relevant risks and may understate sector resilience. - Liquidity and exposures: - Liquidity is not a major systemic risk given the high share of bank deposits; a few insurers are heavily exposed to real estate and hold large amounts of receivables. - Total exposure of the insurance sector assets to the banking sector: KM 587 million (aggregate statement) / KM 460 million (FBiH excerpt) / KM 127 million (RS excerpt) — preserve source figures as reported in respective sections. - Life insurance: - Relatively new with low interest rate risk; maximum discount interest rate for life mathematical reserves: 5 percent. ### Market conduct, tariffs, and actuarial practice - MTPL market conduct: - Market participants are not always compliant with statutory tariff. - Competition has led in some cases to insufficient premiums for risks assumed. - Market participants are bypassing tariff and commission regulation via additional non-regulated expenses (e.g., administration and servicing); bonus-malus applicable in only one entity. - Technical provisions and actuarial practice: - Technical provisions depend heavily on appointed actuaries who work for the companies. - Regulations do not call for external actuarial audits; actuarial reviews have been carried out but a market-wide independent review of technical provisions is necessary. - Every insurer must appoint an actuary; composite insurers must appoint two actuaries (life and nonlife). - Registered actuaries: 30 in RS-ISA and 24 in FBiH-ISA (as reported). ### Institutional and regulatory environment - Supervisory architecture: - Entity-level supervisors: RS-ISA and FBiH-ISA. - State-level coordinating agency: BiH Insurance Agency (BiH-IA), established 2004, mandated to coordinate, monitor harmonization with EU-level legislation, consolidate insurance statistics, resolve jurisdictional conflicts and represent BiH internationally. - BiH-IA and entity ISAs preparing MoUs; none signed so far (information exchange occurs in some situations). - Legal and regulatory framework: - Main laws/by-laws include: the Law on Insurance Companies (LIC), the Law on Insurance Companies Private Insurance (LICPI), Company Law, Federation Company Law, Standards of Corporate Governance, Law on Obligations (Contract Law), Law on Intermediaries (LoI), The Law on Intermediaries in Private Insurance (LoIPI), Law on Bankruptcy Proceedings, Law on Liquidation Proceedings, Law on Consumer Protection, law on Motor Third Party Liability. - Legislation similar across entities but amendments occurred at different times, causing occasional differences that affect supervisory effectiveness. - Accounting, auditing and actuarial frameworks: - Disclosure follows IFRS. - Auditors require annual approval by RS-ISA but not by FBiH-ISA; Chamber of Auditors has yet to create quality control committees. - Recommendation: establish quality control committees for auditing work. ### Supervisory agencies' progress since 2006 FSAP - RS-ISA: - Previously non-operational in 2006 FSAP; since then staff doubled to 26, operational processes, internal controls, supervisory and inspection manuals in place; over 30 by-laws enacted; onsite comprehensive inspections now occur. - RS-ISA is described as well positioned to supervise the market. - FBiH-ISA: - Staff increased from 12 in 2007 to 17 in 2014 (nine dedicated to supervision). - Operational processes and internal controls in place but supervision and inspection manuals missing; no centralized IT system; supervision reliant on a few experienced staff members. - Onsite comprehensive and market-wide inspections carried out; licenses revoked for three insurers (liquidation). ### Prudential framework, solvency, and capital regime - Solvency regime: - Capital regime follows Solvency I; required solvency margin adequacy ratio at least 100 percent. - Minimum guarantee fund thresholds (cannot be less than): - KM 2 million for specified lines (vehicle owners/users MTPL, aviation third party liability, vessel marine third party liability, general liability, credit insurance and surety insurance); - KM 2 million for another set of lines (accident, health, motor CASCO, railway rolling stock CASCO, aircraft CASCO, hull damage, goods in transit, fire and other natural perils, financial loss, travel insurance); - KM 1 million for other perils to property and/or legal protection insurance; - KM 3 million if engaging in life insurance; - KM 3 million if company engages only in reinsurance activities. - Supplementary capital cannot exceed 50 percent of core capital; core and supplementary capital components and deductions prescribed in rulebooks. - Valuation and technical provisions: - Valuation performed in accordance with IFRS (standard No. 4 referenced). - Technical provisions: - Life: mathematical reserves by technical note; maximum discount interest rate: 5 percent. - Nonlife and group life: unearned premium reserve, outstanding claims reserve and IBNR; unearned premiums on a pro rata basis; claims reserves set in full or by supervisory discretion. - Only 20 percent of technical provisions are allowed to be discounted for corporate tax income (FBiH excerpt). - An actuarial opinion on correctness and sufficiency of technical reserves required annually. - Investment regulation and admissible assets (FBiH rulebook snapshot): - Examples of limits (as stated): securities issued/guaranteed by BIH/entities: Nonlife 50% (and up to 20% in same issuer) / Life 50% (and up to 20% in same issuer); Bonds traded: Nonlife 35% (up to 10% per issuer) / Life 35% (up to 10% per issuer); Real estate and related: Nonlife 10% (up to 2% per debtor) / Life 10% (up to 2% per debtor); admissible assets tables included in source. - FBiH-ISA requires 50 percent of minimum guarantee fund in bank deposits as liquid assets; RS-ISA requires liquid assets to cover the minimum guarantee fund (leading to large bank deposits). - Observed shortcomings and recommendations: - Solvency I is not risk sensitive and inappropriate for market liberalization/complexity; recommendation to gradually incorporate risk elements (e.g., credit risk surcharges, differentiated factors by line of business), develop early warning systems, implement stress testing, and design a ladder of intervention with prompt corrective actions. - Revise liquidity ratio to exclude assets dedicated to cover technical provisions. ### Market structure, performance, and key statistics - Aggregate (country-level / mixed-sourced figures): - Total assets: KM 1,234.16 million (2013 / Table 3 aggregate). - Total premium 2013: KM 527.03 million (increase of 4.3 percent from 2012; breakdown: 2 percent nonlife and 15 percent life noted in one section; other sections show different aggregates for entities). - Insurance penetration (2013): about 2.1 percent of GDP. - Insurance density: USD 80 annual expenditure per capita; 55 percent attributable to mandatory insurance. - FBiH (2013 specific series): - Total assets: KM 799.07 million (2013). - Total premium 2013: KM 386.83 million (increase of 6 percent from 2012; nonlife KM 300.13; life KM 86.70). - Life premium share: 22 percent in 2013 (life premium KM 86 million). - Nonlife: over 78 percent of premium; 56 percent of nonlife relates to MTPL. - Number of insurers (end-2013, FBiH): 13 (Life: 1; Non-life: 5; Composite: 7; Reinsurance: 1). - Intermediaries (FBiH, 2013): Agents 165; Brokers 5. - Republika Srpska (RS) (2013 specific series): - Total assets: KM 323.51 million (2013). - Premium 2013: Total KM 140.20 million (Nonlife KM 127.13; Life KM 13.07). - Number of insurers (end-2013, RS): 12 (9 nonlife; 3 composite). - Brokers (RS): increased from 5 in 2012 to 58 in 2013. - Nonlife MTPL share: MTPL accounts for 72 percent of total nonlife premium (RS excerpt). - Product mix and concentration: - Nonlife drivers (FBiH 2013 distribution): Motor 15.50%; Property 14.92%; Liabilities (including MTPL) 55.95%; Accident and health 10.93%; Others 2.70%. - Heavy reliance on mandatory MTPL: almost 56 percent of nonlife business in FBiH (FBiH data) / 72 percent in RS (RS data). - Life sector concentration: three insurers account for 78 percent of FBiH life market; Grawe dominant with 85.89 percent in RS life market. - Profitability and technical metrics: - FBiH nonlife ROE (after tax) 2009–2013: 7.06; 5.74; 4.53; 6.07; 4.63 (Average 5.61). - FBiH life ROE (after tax) 2009–2013: 0.04; 0.78; 7.89; 7.48; 6.92 (Average 4.62). - Combined ratios and technical provisions indicate underwriting pressure: combined ratios at or above 100 percent in multiple years; many insurers depend on investment yields to generate profits. - DAC increases flagged as warning sign (examples: RS DAC increased from 9.17 in 2009 to 19.07 in 2013 in nonlife RS tables). ### Solvency position and selected insurer-level ratios - Examples (FBiH nonlife insurers’ solvency ratios, 2013 – 2014Q2 table as reported): - Insurer 1: 2013 = -71; 2014Q2 = -40 - Insurer 2: 2013 = 97; 2014Q2 = 108 - Insurer 3: 2013 = 103; 2014Q2 = 101 - Insurer 4: 2013 = 105; 2014Q2 = 105 - Insurer 5: 2013 = 112; 2014Q2 = 109 - Insurer 6: 2013 = 114; 2014Q2 = 122 - Insurer 7: 2013 = 127; 2014Q2 = 126 - Insurer 8: 2013 = 127; 2014Q2 = 131 - Insurer 9: 2013 = 140; 2014Q2 = 144 - Insurer 10: 2013 = 143; 2014Q2 = 149 - Insurer 11: 2013 = 244; 2014Q2 = 224 - Insurer 12: 2013 = 529; 2014Q2 = 552 - RS solvency snapshots (nonlife, 2013–June 2014 examples reported as ratios): - Insurer 1: 2013 1.04; 2014Q2 1.06 - Insurer 2: 1.08; 1.08 - Insurer 3: 1.19; 1.30 - Insurer 4: 1.28; 1.00 - Insurer 5: 1.30; 1.35 - Insurer 6: 1.47; 1.69 - Insurer 7: 1.63; 1.74 - Insurer 8: 1.79; 0.74 - Insurer 9: 2.46; 2.25 - Insurer 10: 2.49; 2.20 - Insurer 11: 2.68; 1.41 - Insurer 12: n.a.; 1.00 - Observations: - Several insurers have solvency ratios close to 100 percent; some are below regulatory minima and some companies’ solvency positions are supported by assets that may be illiquid or concentrated. ### Reinsurance regulation and practice - Reinsurance usage: - Reinsurance is not widely used and mainly placed with the local reinsurer. - Less than 16 percent of premium reinsured in one aggregate statement; other entity-specific figures report less than 12 percent or similar low usage. - MTPL retention high because large claims are covered by the Green Card/Protection Fund (examples: MTPL retention as high as 96.6 percent/91.3 percent depending on entity data). - Supervisory practice: - Insurers must adopt an internal reinsurance rulebook and submit reinsurance contracts annually to the supervisor. - FBiH-ISA and RS-ISA must approve foreign reinsurers not licensed in the entity. - Recommended enhancements: - Analyze financial stability of reinsurers annually. - Specify risk transfer requirements on reinsurance contracts. - Include cash call clauses for catastrophic events. - Prohibit side letters to guarantee integrity of contracts. ### Market conduct, intermediaries, consumer protection and AML-CFT - Licensing and intermediaries: - Independent intermediaries must pass an exam and be registered; brokers require capital KM 200,000 (LoIPI/LoI references). - Agents working full time for an insurer are not required to be licensed in FBiH; recommendation: require licensing for all intermediaries irrespective of working arrangement. - Consumer protection: - FBiH-ISA and RS-ISA handle complaints but with inadequate resources (one person in charge in several instances). - Ombudsperson exists in RS (appointed 2008) with no direct staff; FBiH lacks an ombudsperson. - Recommendations: introduce consumer protection regulation aligned with IAIS standards; appoint ombudsperson in FBiH; empower ombudsperson to adjudicate small claims or create small claims mechanism; develop national strategy to raise insurance financial literacy. - Market discipline and disclosure: - Disclosure follows IFRS; additional disclosure rulebook recommended (detailed suggested items listed in source). - Fraud and AML-CFT: - Insurance fraud is a crime but regulation does not require insurers/intermediaries to implement comprehensive fraud prevention measures. - Recommendation: establish centralized MTPL claims database; implement regular analysis of large claims; enhance AML-CFT resources and training (FBiH-ISA and RS-ISA designated AML-CFT supervisors since June 2014 with limited resources). ### Liquidity, asset concentration and stress testing - Liquidity: - Sector-level liquidity not systemic due to heavy bank deposits and cash holdings (examples: 54 percent / 55–66 percent bank deposits/cash reported in different sections). - A portion of insurers have high real estate exposure and could face liquidity crunches if real estate valuations are excessive. - Stress testing and early warning: - Offsite supervision lacks robust early warning systems and market-wide stress testing; recommendation to develop early warning indicators and to introduce stress testing at company and market levels. - IT and reporting: - FBiH-ISA: over 70 reporting forms; no centralized IT system yet (procurement underway); monthly liquidity ratios required with immediate reporting if below minimum. - RS-ISA: transitioning reporting to electronic records; automated ratio calculations planned as of 2015. - Recommendation: acquire modern IT systems; consider outsourcing with in-house monitoring; document offsite analysis and decision-making. ### Market exit, liquidation, and policyholder protection - Liquidation and special liquidation: - FBiH-ISA and RS-ISA have powers to revoke licenses and initiate special liquidation; provisional administrators and liquidators procedures described with timing and reporting obligations. - Policyholders have priority claims in special liquidation; life policyholders rank before nonlife in FBiH (article 70). - Legal and procedural gaps: - Four laws covering liquidation (bankruptcy proceedings, LIC liquidations, Company Law, Law on MTPL Protection Fund) are not fully harmonized; recommendation to clarify interplay and include Protection Fund as creditor and clarify open-claim payments for MTPL prior to liquidation. - In FBiH, legal provisions to appoint a temporary administrator for recovery/restructuring unclear; RS-ISA has clear extraordinary management powers (articles 12 and 67a). - MTPL Protection Funds: - Protection Funds exist in each entity; secured amounts per insured event (Law on MTPL): - damage to persons KM 1,000,000 regardless of number of victims in same accident; - damage to property KM 350,000 per one event regardless of number of claims arising from same accident. - All insurers licensed to conduct auto liability insurance are members; governance structures defined; contribution rates (As percentage of MTPL premiums, 2011–2013): - RS: 2011 1.61; 2012 1.57; 2013 1.82 - FBiH: 2011 2.6; 2012 1.9; 2013 1.8 ### Key FSAP recommendations (selected, priorities and timing as stated) - Immediate / I (within one year): - Update the Law to allow ISAs to be sued as institutions and not staff; clarify ISA responsibility for legal defense costs and extend legal protection to all FBiH-ISA staff. (Parliament) — I - Ensure appointment of FBiH-ISA director follows the Law. (FBiH Government) — I - Enact new Insurance Law in FBiH aligned or converging toward EU insurance directives. (FBiH Parliament) — I - Create a Coordinating Committee among financial sector supervisors in FBiH with formal information sharing with banking supervisor regarding banks holding significant insurance sector assets. (FBiH government) — I - Establish formal regular information-sharing channel with banking supervisor in RS. (RS Coordinating Committee) — I - Grant RS-ISA power to enforce removal of voting rights of non-approved qualified shareholders; specify FBiH-ISA power to appoint temporary administrator for recovery/restructuring; grant both ISAs power to remove any board member. (Parliaments) — I - Update solvency regime by gradually incorporating risk elements, develop an early warning system, introduce stress testing at company and market levels, and develop ladder of intervention with prompt corrective actions; capacity building required. (ISAs) — I - Require regular market-wide independent actuarial reviews. (ISAs) — I - Acquire centralized IT system and consider outsourcing IT with in-house monitoring. (ISAs) — I - Near-term / NT (1–3 years): - Introduce consumer protection regulation aligned with IAIS Core principles and implement it. (ISAs) — NT - Develop a comprehensive national strategy to increase insurance literacy; evaluate BiH-IA leadership. (Government) — NT - Develop comprehensive group supervision framework and provide required training. (ISAs/Parliament) — NT - Introduce macroprudential supervision framework as market develops; consider assigning development to BiH-IA and implement powers to ISAs. (State government) — NT - Revise administrative fines and enforcement measures to ensure effective deterrence. (Legislature/ISAs) — NT - Medium-term / MT (3–5 years): - Strengthen governance, internal controls, risk management, and corporate governance requirements; establish internal audit, actuarial and risk management functions with independence and resources. (ISAs) — MT *Source: IMF staff technical note (2014 FSAP) — Executive Summary and excerpts as provided in the supplied content.* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### Sector size, structure, and recent performance - Total assets of insurance companies: KM 1.2 billion. - Share of financial sector assets: about 5 percent (as of end-2013). - Insurance penetration: about 2.1 percent of GDP. - Premiums collected in 2013: KM 527 million, a 4.3 percent increase from a year earlier. - Nonlife sector share of premiums: over 80 percent. - MTPL contribution: about two-thirds of total premiums (mandatory Motor Third Party Liability insurance). - Asset composition: about half of insurance sector assets are held in bank deposits. - Market concentration and solvency: - Ten insurance companies, accounting for 40 percent of the nonlife market, have low solvency margins and may require supervisory action in the near future. - Solvency framework follows Solvency I; it does not incorporate all relevant risks and may understate sector resilience. - Liquidity and exposures: - Liquidity is not a major risk given the high share of bank deposits. - A few insurers are heavily exposed to real estate and hold large amounts of receivables. - Life insurance: relatively new with low interest rate risk. ### Market conduct, tariffs, and actuarial practice - MTPL insurance pressures: - Market participants are not always compliant with the statutory tariff. - In some cases, competition has led to insufficient premiums for the risks assumed. - Market participants are bypassing regulations for tariffs and commissions. - Technical provisions and actuarial reviews: - Technical provisions depend heavily on appointed actuaries who work for the companies. - Regulations do not call for external actuarial audits. - Actuarial reviews are carried out, but independent reviews of technical provisions are necessary. ### Institutional and regulatory environment - Harmonization: - Insurance regulation has improved in both entities but harmonization between entities and with EU directives is still insufficient. - The Insurance Agency of Bosnia and Herzegovina (BiH-IA) is expected to enhance harmonization of entity-level regulations within BiH and with the EU insurance directives. - Legal framework differences: - Main laws (Insurance Law, Contract Law, Law on Intermediaries, MTPL law) do not have significant disparities across entities, but amendments have been carried out at different times, resulting in occasional differences that affect supervisory effectiveness and decisiveness. ### Supervisory agencies' progress since 2006 FSAP - Republika Srpska Insurance Supervision Agency (RS-ISA): - Previously found not operational in 2006 FSAP. - Progress: staff doubled; mix of professionals with legal and actuarial backgrounds; operational processes, internal controls, supervisory and inspection manuals in place. - Result: RS-ISA is well positioned to supervise the market. - Federation of Bosnia and Herzegovina Insurance Supervision Agency (FBiH-ISA): - FBiH-ISA took over function of old ISA; inherited experienced staff but legacy problems hinder a fresh turnaround. - Progress is fairly limited. - Operational processes and internal controls are in place, but supervision and inspection manuals are missing. - Supervision is heavily reliant on a few experienced staff members. ### Remaining challenges and vulnerabilities - Prudential framework: - Needs updating if MTPL tariffs are liberalized, or if the market grows or becomes more complex. - Current Solvency I framework is not risk sensitive and inappropriate for modern supervision. - Liberalization of tariffs should be preceded by: early warning systems, stress testing, risk-based solvency, and a ladder for interventions with prompt corrective actions. - Consumer protection and financial literacy: - Both ISAs handle complaints but with inadequate resources. - An Ombudsperson for the insurance sector exists in the RS but not in the FBiH. - Regulation should be issued and implemented based on IAIS standards on consumer protection. - A national strategy to raise insurance financial literacy should be developed; participation of all stakeholders recommended and consideration whether BiH-IA should lead this initiative. - Institutional independence and staff protection: - Independence of FBiH-ISA needs safeguarding; staff legal protection must be strengthened in both ISAs. - FBiH-ISA is understaffed to discharge obligations. - Appointment of managers is not based on prescribed legal requirements. - Revision of the Insurance Law in FBiH delayed; a proposed MTPL law was presented to BiH-IA without FBiH-ISA or MoF involvement. - Legal protection is provided only to the director, leaving out staff; legal defense cost coverage by ISAs is unclear. - Group and macroprudential supervision: - Group supervision framework and macroprudential supervision need development. - Missing supervisory powers: - Power to remove members of supervisory boards is missing in both ISAs. - RS-ISA lacks power to enforce voiding of voting rights of qualified shares acquired without its approval. - FBiH-ISA’s power to appoint a temporary administrator without withdrawing an insurer’s license needs clarification. - Power to remove board members is absent in both ISAs. ### Main FSAP recommendations (selected and timing) - Update the Law to allow ISAs to be sued as institutions and not staff; at minimum clarify ISA responsibility for legal defense costs and extend legal protection to all FBiH-ISA staff. (Parliament) — I - Ensure appointment of FBiH-ISA director follows the Law. (FBiH Government) — I - Enact new Insurance Law in FBiH aligned or converging toward EU insurance directives. (FBiH Parliament) — I - Create a Coordinating Committee among financial sector supervisors in FBiH with formal information sharing with banking supervisor regarding banks holding significant insurance sector assets. (FBiH government) — I - Establish formal regular information-sharing channel with banking supervisor in RS. (RS Coordinating Committee) — I - Grant RS-ISA power to enforce removal of voting rights of non-approved qualified shareholders; specify FBiH-ISA power to appoint temporary administrator for recovery/restructuring; grant both ISAs power to remove any board member. (Parliaments) — I - Update solvency regime by gradually incorporating risk elements, develop an early warning system, introduce stress testing at company and market levels, and develop ladder of intervention with prompt corrective actions; capacity building required. (ISAs) — I - Introduce consumer protection regulation aligned with IAIS Core principles and implement it. (ISAs) — NT - Develop a comprehensive national strategy to increase insurance literacy; evaluate BiH-IA leadership in this effort. (Government) — NT - Update governance requirements to align with IAIS core principles. (ISAs) — NT - Require regular market-wide independent actuarial reviews. (ISAs) — I - Develop comprehensive group supervision framework and provide required training. (ISAs) — NT - Introduce macroprudential supervision framework as market develops; consider assigning development of macroprudential tools to BiH-IA and grant implementation powers to ISAs. (State government) — NT - Timing legend: “I-Immediate” is within one year; “NT-near-term” is 1–3 years; “MT-medium-term” is 3–5 years. *Source: IMF staff technical note (2014 FSAP) — Executive Summary as provided in the supplied content.* ### 5. The assessor is very thankful to the staff of the supervisory agencies in both entities as ### _cr15215 - 5. The assessor is very thankful to the staff of the supervisory agencies in both entities as ### A. Institutional Framework and Arrangements - Two autonomous entities and a coordinating state-level agency were assessed: - Federation of Bosnia and Herzegovina (FBiH), Republika Srpska (RS), and Brčko District (Brčko District not covered by the FSAP). - Highly decentralized governance with a bicameral legislature and a three-member Presidency. - Supervisory architecture: - Entity-level supervisors: - RS: RS Insurance Supervision Agency (RS-ISA), RS Banking Agency, RS Securities Commission. - FBiH: FBiH Insurance Agency (FBiH-ISA), corresponding banking and securities supervisors. - State-level coordinating agency: - BiH Insurance Agency (BiH-IA), established 2004, mandated to coordinate, monitor harmonization with EU-level legislation, consolidate insurance statistics, resolve jurisdictional conflicts between entity ISAs, and represent BiH internationally. - BiH-IA and entity ISAs are preparing MoUs to enhance information exchange; none signed so far, but information exchange occurs in certain situations (e.g., supervisory colleges, fit and proper assessments). - Legal and regulatory framework: - Main laws and by-laws governing insurance activity in each entity include: - the Law on Insurance Companies (LIC), - the Law on Insurance Companies Private Insurance (LICPI), - the Company Law, - the Federation Company Law, - the Standards of Corporate Governance adopted by the Securities Commission (apply to all joint-stock companies listed on the Stock Exchange, including all insurers listed on the Banja Luka Stock Exchange), - the Law on Obligations (Contract Law), - the Law on Intermediaries (LoI), - The Law on Intermediaries in Private Insurance (LoIPI), - the Law on Bankruptcy Proceedings, - the Law on Liquidation Proceedings, - the Law on Consumer Protection, - the law on Motor Third Party Liability. - Insurance legislation is similar across entities with minor differences due to different amendment paces; BiH-IA checks newly enacted regulation for harmonization and EU convergence intent. - Market discipline and disclosure: - Disclosure follows IFRS. - Public disclosure has achieved reasonable transparency in RS but not in FBiH. - Financial literacy is low; no institutionally organized financial education program in place despite ISAs’ efforts. - Market and investment constraints: - Financial market is underdeveloped and illiquid: two stock exchanges (one per entity); daily trade volumes range from KM 5,000 to KM 13,000. - Limits on foreign assets for covering technical reserves; foreign investment allowed subject to ISA approval. - Insurance investments dominated by bank deposits and real estate. - Accounting, auditing and actuarial frameworks: - Law on Accounting and Auditing requires IAS and IFRS; Chamber of Auditors established in each entity; Ministry of Finance grants working permits to auditing firms. - Auditors of insurance companies need annual approval by RS-ISA but not by FBiH-ISA; FBiH-ISA may replace poorly performing auditors via the Chamber of Auditors. - Chamber of Auditors has yet to create quality control committees; recommendation: establish quality control committees for auditing work. - Actuarial requirements: - Every insurer must appoint an actuary; composite insurers must appoint two actuaries (life and nonlife). - Rules on Conditions for the Performance of Actuarial Tasks regulate acquisition/revocation of appointed actuary title. - Actuarial Association in FBiH is a full member of IAA as of 2012; Actuarial Association of RS is an associate member and will be admitted to full membership after implementation of continued education. - Registered actuaries: 30 in RS-ISA and 24 in FBiH-ISA. - MTPL Protection Fund: - Protection Funds established in each entity to cover damages where compensation cannot otherwise be obtained (unknown responsible person, uninsured vehicle, bankruptcy/liquidation of insurer). - Secured amounts per insured event (specified by the Law on MTPL): - damage to persons KM 1,000,000 regardless of number of victims involved in the same accident; - damage to property KM 350,000 per one event regardless of number of claims arising from the same accident. - All insurance companies licensed to conduct auto liability insurance in BiH are members of the corresponding Protection Fund. - Governance: Members’ Assembly, Board of Directors, and Director; financed by contributions from members calculated as a percentage of MTPL annual premium; contribution rate determined by RS-ISA Management Board in RS and by Director of FBiH-ISA in FBiH. - Evolution of contribution rates (Table 2): - Rate of contributions (As a percentage of MTPL premiums, 2011 -2013) - RS: 2011 1.61; 2012 1.57; 2013 1.82 - FBiH: 2011 2.6; 2012 1.9; 2013 1.8 - Data availability and industry representation: - Both ISAs web-pages contain relevant sector information; BiH-IA publishes detailed annual market data; Institutes of Statistics keep economic, financial and company statistics. - Two insurance associations: - Association of Insurance Companies in the FBiH (founded 2006): well organized, issued a code of business ethics, has a court of honor, strong lobbying power; proposed new MTPL law draft submitted to BiH-IA. - Association of Insurance Companies of RS (part of RS Chamber of Economy, founded 2009): collected fees only since 2013 and requires substantial development. - Financial stability coordination: - Standing Committee on Financial Stability (SCFS) exists for banking sector; members include the Fiscal Council, CBBH Governor, directors of both banking agencies, and director of DIA. - Insurance supervisory agencies are not SCFS members; recommendation: include ISAs to improve understanding of financial sector stability matters. - Judiciary roles: - FBiH: Law on Courts governs municipal, cantonal, and Supreme Court; municipal courts handle first-instance criminal and commercial matters; appeals progress to cantonal and Federation Supreme Court; possible proceedings before Constitutional Courts. - RS: Law on Courts prescribes Basic, District, and Supreme Courts, plus District Commercial Courts and Higher Commercial Court; Basic Courts, District Courts, Supreme Court, District Commercial Courts, Higher Commercial Court coverage described. - RS-ISA appears before Basic Courts mainly for misdemeanors; District Courts handle obligations and first-instance civil law cases where parties are legal entities or entrepreneurs; District Commercial Courts handle first-instance bankruptcy and liquidation proceedings. ### B. Market Structure - Size and composition (2013): - Total assets: KM 1,234 million. - Share of financial sector assets: 4.9 percent. - Total premium 2013: KM 527 million (increase of 4.3 percent from 2012; breakdown: 2 percent nonlife and 15 percent life). - Nonlife segment: over 80 percent of insurance premium; two-thirds of nonlife relates to MTPL. - Investments account for 72 percent of assets, of which over 67 percent are held in bank deposits. - Real estate investments and receivables together make up 32 percent of assets (18.5 percent receivables; 13.5 percent real estate). - Key sector indicators (Table 3, In KM million, 2009–2013): - Total assets: 2009 1006.87; 2010 1011.32; 2011 1076.77; 2012 1173.79; 2013 1234.16 - Gross Premium: 2009 458.85; 2010 470.45; 2011 488.11; 2012 505.09; 2013 527.03 - Investments: 2009 647.10; 2010 666.95; 2011 725.35; 2012 801.73; 2013 892.70 - Government securities: 2009 10.73; 2010 18.97; 2011 27.25; 2012 36.72; 2013 56.13 - Corporate securities: 2009 3.4; 2010 16.4; 2011 40.00; 2012 0.13; 2013 0.05 - Equities: 2009 43.03; 2010 37.89; 2011 33.01; 2012 30.67; 2013 31.97 - Real estate and real-estate related: 2009 162.70; 2010 137.42; 2011 144.22; 2012 154.79; 2013 165.58 - Cash and bank balances: 2009 347.07; 2010 380.14; 2011 433.76; 2012 495.67; 2013 571.51 - Receivables: 2009 144.47; 2010 122.13; 2011 122.69; 2012 132.68; 2013 105.25 - Intra-group/related company receivables: 2009 19.77; 2010 13.58; 2011 16.10; 2012 16.80; 2013 13.37 - Reinsurance recoverables: 2009 82.43; 2010 94.64; 2011 94.85; 2012 108.57; 2013 109.83 - Other assets: 2009 105.71; 2010 106.31; 2011 109.01; 2012 104.45; 2013 102.37 - Insurance penetration, density and usage (2013): - Insurance premium about 2.1 percent of GDP. - Insurance density: USD 80 annual expenditure per capita; 55 percent attributable to mandatory insurance. - Regional comparison of insurance usage (Penetration, Density): - BiH 2.1, 80.2 - Bulgaria 2.1, 156.0 - Czech Republic 3.8, 760.0 - Croatia 2.7, 372.0 - Romania 1.4, 124.0 - Slovakia 2.7, 506.0 - Slovenia 5.6, 1309.0 - Serbia 1.8, 104.0 - BiH has the lowest expenditure per GDP on insurance in the region; insurance penetration about half of OECD average. - Large uninsured risks exist: example given that in the latest flood with estimated loss of KM 4 billion, only five percent of the losses were insured, of which over 80 percent were reinsured. - Growing the sector will require a comprehensive strategy addressing financial literacy, trust and incentives in the use of insurance. *Prepared by Dr. Rodolfo Wehrhahn, IMF consultant.* ### 26. The further development of the insurance sector will depend on economic growth, and ### _cr15215 - 26. The further development of the insurance sector will depend on economic growth, and ### Overview - Further development of the insurance sector depends on economic growth and "the set of right actions." - Nonlife premium growth is strongly correlated to the number of cars and hence with economic growth due to relatively large MTPL business and high compliance. - Development of the life sector, particularly long-term insurance, requires strong incentives to motivate postponement of present consumption. - Building trust and reducing frictional costs from lack of harmonized regulation are relevant for sector development. - Analysis recognizes market differences across entities and is carried out individually. ### Key findings — solvency, profitability, and asset composition - Ten insurance companies, accounting for 40 percent of the nonlife market, have solvency margins close to supervisory minima. - Two insurers, accounting for 10 percent of the market, are insolvent. - Eight insurers, accounting for just over 30 percent of the market, have a solvency ratio between 100 percent and 110 percent. - Solvency I requirements do not fully allocate capital according to the risks assumed; sector resilience could be worse than indicated by Solvency I metrics. - A few insurers have solvency ratios not covered by liquid assets within regulatory limits. - Some nonlife combined ratios (claims plus expenses over premiums) are above 100 percent, indicating profits linked to investment performance while yields on investments are falling. - On average, insurers hold over 50 percent of their assets in bank deposits; liquidity is therefore not a systemic risk sector-wide, though some insurers are heavily exposed to real estate and/or hold large amounts of receivables. - Life business is recent; interest risk in the sector is currently not relevant. ### MTPL market conduct and technical provisions - MTPL insurance remains under pressure; market participants do not always comply with statutory tariffs and commission limits. - Fragmented nonlife market and well-distributed premiums have increased competition, sometimes resulting in insufficient premiums for assumed risks. - Market participants bypass tariff and commission regulation by paying additional non-regulated expenses (e.g., administration and servicing). - Balance sheets show increments in DAC and other flexible accounting positions that can offset insufficient premium. - Bonus malus is applicable in only one entity. - The level of technical provisions heavily relies on appointed actuaries; regulation does not require an external actuarial audit. - Actuarial reviews have been carried out but a market-wide independent review of technical provisions is due. ### Exposure to banking sector and recommended supervisory information sharing - Approximately fifty percent of insurance sector assets are in bank deposits, creating relevant exposure to the banking sector. - FBiH-ISA requires insurers to hold 50 percent of the minimum guarantee fund in bank deposits. - RS-ISA requires liquid assets to cover the minimum guarantee fund, which results in large bank deposits. - Total exposure of the insurance sector assets is KM 587 million. - Recommendation: establish a formal regular channel of information with the banking supervisor to gain timely information on the financial soundness of all banks holding above a threshold of the insurance sector assets. ### Regulatory harmonization and supervisory progress - Regulation has improved in both entities, but harmonization between entities and with EU directives is still insufficient. - Initial four main laws (insurance law, contract law, law on intermediaries, MTPL law) do not have significant differences; cross-entity branch operation is well regulated and fully harmonized. - Amendments have occurred at different paces across regions, causing current legislative differences that affect supervisory effectiveness and decisiveness. - Progress since the 2006 FSAP: - RS-ISA: initial non-operational state improved; staff doubled; operational processes, internal controls, supervisory and inspection manuals in place; over 30 by-laws enacted; onsite comprehensive inspections now occur; varied supervisory corrective actions and fines imposed; Solvency I framework adopted for prudential matters. - FBiH-ISA: evolved from the old ISA; staff increased from 12 to 17 with nine dedicated to supervision (including one actuary assistant director); operational processes and internal controls in place but supervision and inspections manuals not developed; over 80 reporting forms and several instructions/bylaws issued; no centralized IT system to support onsite supervision; onsite comprehensive and market-wide inspections carried out; licenses of three insurers revoked and those companies are in liquidation; Solvency I framework adopted for prudential matters. ### Remaining challenges and prioritized recommendations - Need to update prudential framework when MTPL tariffs are liberalized or market grows/complexifies: - Solvency I is not risk sensitive and is inappropriate for modern supervision of complex markets or markets without fixed tariffs. - Authorities, together with the World Bank, are working on MTPL tariff liberalization. - Recommendation: liberalize tariffs only after supervisors implement early warning systems, stress testing, risk-sensitive solvency, and a ladder of interventions for prompt corrective actions. - Consumer protection and financial literacy: - Consumer protection policies and financial literacy gaps must be addressed urgently. - Both supervisory agencies handle complaints but with inadequate resources. - An ombudsperson exists in the RS but not in the FBiH. - Regulation requires pre-contractual information and regulated claim payment terms of no more than 14 days or 30 days depending on business line, but consumer protection can be strengthened. - Recommendations for regulation to require: - insurers to take into account interests of different client profiles in product development and marketing; - insurers and intermediaries to promote products/services in a way that is clear, fair and not misleading; - insurers and intermediaries to establish and implement fair treatment of customers policies as part of business culture. - Implement alternative dispute resolution mechanisms for policyholders; increase resources and powers of the ombudsperson in one entity; appoint an ombudsperson with sufficient resources and powers in the other entity. - Develop a national strategy to raise financial literacy in insurance matters involving all stakeholders; consider whether the Insurance Agency should lead. - Institutional independence, staffing, and governance: - Safeguard independence of FBiH-ISA and provide clear legal protection to all staff in both ISAs. - FBiH-ISA is understaffed: number of staff increased from 12 in 2007 to 17, nine involved in supervision; actuarial reviews only started in the last 12 months. - The director appointment process is not complying with legal requirements to be proposed by the MoF including insurance experience. - Overdue revision of the insurance law is delayed; a proposed MTPL law was presented to the insurance agency without FBiH-ISA or MoF involvement. - Legal protection is provided only to the director in FBiH-ISA; legal defense costs in both ISAs are not clearly assigned. - Recommendation: introduce deputy director position to enhance operational continuity. - Recommendation: create an internal audit function. - Recommendation: publish draft regulation to solicit public comments. - Group supervision and governance: - Group supervision needs development; FBiH rulebook (2007) requires reporting on group structure, group financial statements, material intra-group transactions, and related party details; insurers subject to supplementary group supervision must adjust solvency calculation discounting related party transactions and minimum capital requirements. - RS has stringent limits on related party transactions or excludes them as liquid assets. - Recommendation: improve regulation and supervision of insurance groups by widening scope, providing broader supervisory powers to inspect and supervise holding companies, limit intra-group transactions, require fit and proper control positions for holding companies, and implement a comprehensive group supervision framework including group capital requirements. - Governance requirements in law are minimal (shareholders assembly, director, board of directors, auditing body) and lack qualitative elements. - Governance improvements recommended in: - board structure and committees, governance standards, board composition and knowledge, and board effectiveness assessment; - remuneration policy for board members and senior management; - duties of individual board members including acting in the best interests of the insurer and policyholders; - timely and effective communication with RS-ISA and relevant stakeholders on governance structure. - Supervisory powers and macroprudential tools: - Missing supervisory powers: both ISAs lack the power to remove members of an insurance company’s supervisory board; RS-ISA lacks power to enforce suspension of voting rights of qualified shares acquired without ISA approval; FBiH-ISA’s ability to appoint a temporary administrator without withdrawing a license needs elaboration for legal certainty. Addition of these powers is recommended. - Macroprudential supervision is limited to analyzing market trends; macroprudential tools have not been developed and market-wide stress tests are required. - There is no framework to define systemic risk in the sector. - Recommendation: consider the insurance agency as the institution developing macroprudential tools with regional ISAs responsible for implementation. ### The Federation of Bosnia and Herzegovina — institutional arrangements for supervision - Supervisory objectives and mandate: - Pertinent ICPs: ICP 1 and ICP 2 (setup and mandates), aspects of ICP 3 and ICP 25 (exchange of information), and ICP 26 (cooperation in crises). - Article 6 of the LICPI: principal objective of the supervisor is to protect policyholders and insurers for the benefit of the insurance industry, maintaining a safe and stable sector with trust in the insurance function. - Articles 5 to 8 of the LICPI establish FBiH-ISA as independent non-profit institution accountable to the government of the FBiH with regulatory and supervisory functions; issues and revokes licenses for insurers and intermediaries. - FBiH-ISA is managed by a director appointed for a term of 4 years and responds to the Experts Council. - Experts Council: chairperson and four members appointed for 5 years and can be dismissed by the FBiH government at the proposal of the Federal Minister of Finance; pursuant to article 10, the Experts Council passes Statutes and adopts bylaws with government approval. - Director position and staffing - All supervisory decisions are taken by the director. - Director requirements (article 30 of the LICPI): - a university degree - VII degree in humanities, - at least 8 years of work experience in the profession on the same or similar tasks, of which at least 5 years in managerial positions, - possession of managerial and organizational skills, - high personal integrity and reputation gained as an expert in the field of insurance. - Recommendation: introduce the deputy director position. - Director’s term coincides with government elections; recommendation to avoid coincidence to add independence and to respect requirements for insurance expertise and proposal by the MoF. - Governance, transparency, and operations - FBiH-ISA publishes externally audited financial statements annually and reports regularly to the Government; audited statements adopted by Experts Council and approved by Government. - No internal audit function; recommendation to create one. - Organization: two sectors, staff of 17 with nine supervisors. - Financial supervision and accounting sector: 7 people. - Licensing and administration sector: 9 people, including legal and investments core departments and technical supervision department. - Internal organizational structure and position descriptions in place; code of ethics exists and must be signed by every employee. - Annual working plan adopted by Experts Council and approved by government. - ISA web page publishes market information and final regulation. - Recommendation: publish draft regulation to allow public comments. *Source: _cr15215 - 26. The further development of the insurance sector will depend on economic growth, and* ### 42. The FBIH-ISA is understaffed to discharge its obligations. The funding of the FBIH-ISA is ### 42. The FBIH-ISA is understaffed to discharge its obligations. The funding of the FBIH-ISA is ### Staffing and funding - Findings: - Funding of the FBiH-ISA is through industry levies linked to the premium and licensing fees. - The budget increased from KM 1.239 million in 2006 to around KM 1.996 million in 2014. - Initial startup funding was not available; much of the budget was used to purchase the offices of the ISA. - Reserves accumulated will be used to acquire an IT system. - Staff increased from 12 in 2007 to the current level of 17, of which nine persons, including an actuary who is also the assistant director, are involved in supervision. - External experts are hired to support staff on supervisory activities. - The intensity of supervision is dictated by staffing limitations rather than supervisory needs. - Recommendations: - Develop a strategy to increase the number of dedicated resources to supervision. - Consider outsourcing administrative work if headcount limitations exist. - Urgently hire actuaries. - Explore other funding for IT and use fees for supervisory work rather than for infrastructure. ### Legal protection of staff - Findings: - Article 9 of the LICPI and the Statutes of the FBiH-ISA: the director will not be legally liable to third parties for any action taken or omission made in good faith while performing the functions of the Supervision Agency. - Notwithstanding the above, the director will be liable to the FBiH-ISA for the loss caused by any act or omission under the provisions of the Law on Contracts and Torts. - There is no analogous provision established for employees. - Recommendations: - Update the law to allow the FBiH-ISA only to be sued as an institution and not the staff. - If the above is not possible, extend the legal protection enjoyed by the Director to all FBiH-ISA staff. - Specify in law that the FBiH-ISA bears the expenses to defend staff sued while performing duties. ### Confidentiality and IT integrity - Findings: - Article 18 of the LIC addresses protection of confidentiality and imposes penalties for disclosure. - Article 18 text excerpt: “All persons who are currently employed or who have been employed in the Agency of FBiH, as well as the auditors and experts hired by the Agency of FBiH, shall have the obligation of professional secrecy. None of the confidential information received during the performance of their duties may be disclosed to any other person or authority, except in total and cumulative form such that the identity of the individual insurance companies cannot be identified, without prejudging cases covered by criminal law.” - IT system integrity and protection is currently assigned to one person in the FBiH-ISA. - Recommendations: - Boost the IT function, particularly if done in-house. - Alternatively, outsource IT to a reputable firm and have the in-house expert constantly monitor the outsourced service. ### Information exchange and coordination - Findings: - Pursuant to article 18 of the LICPI, the FBiH-ISA is authorized to exchange with the RS-ISA all documents and information useful for supervising companies operating in both FBiH and RS. - Law permits information exchange between the FBiH-ISA and: - the authorities in charge of supervision of credit institutions and other financial institutions and the authorities in charge of supervision of the financial market; - bodies involved in liquidation and bankruptcy and similar procedures; - persons responsible for conducting statutory audits of accounts of companies and other financial institutions, in discharge of their supervisory functions, or disclosure to bodies administering compulsory winding-up proceedings, or to guarantee funds, of information necessary for performance of their duties. - Information received by those authorities, bodies and persons is subject to professional secrecy. - The competent bodies of the parliament of the BiH, on terms laid down by the LICPI, authorize disclosure of certain information needed to conduct an investigation to federal authorities responsible for credit, financial, investment and insurance companies, as well as to inspection bodies of the FBiH. - Recommendations: - Establish a Coordinating Committee for financial sector supervisors comprising the highest-level representatives: the Minister of Finance, the Director of the Securities Commission, the Director of the Banking Supervision Agency, and the Director of the Insurance Supervision Agency. - Committee powers/activities: create a formal platform for coordination and regular formal supervisory information exchange; potentially evolve into an integrated supervisor for the whole financial sector if necessary. ### Offsite supervision — data, reporting, IT and process limitations - Findings: - FBiH-ISA collects wide-ranging data for offsite supervision, including: - data from the register of insurance companies; - financial statements and annual business report with actuary opinion; - audit report with management letter; - work program and reports of internal audit; - report on implementation of coinsurance and reinsurance policy with actuary opinion; - business plan, articles of association and bylaws and amendments; - adopted business policy actions and amendments with prior actuary opinion; - notice of appointment/change of certified actuary and internal auditor; - notice of convening shareholders' meeting and records from shareholders' meeting; - other reports and data as defined by insurance regulations. - Data frequency: monthly, quarterly, and annual submissions in formats determined by FBiH-ISA. - Over 70 reporting forms and a series of reporting guidelines issued, including: - Decision on reporting by insurance companies; - Decision on reporting by insurance intermediaries; - Decision on reporting by the protection fund; - Decision on the Form and Content of and format of financial reports by insurance companies; - Rulebook on the Amount and Method of Investment for Covering of the Technical Reserves and Guarantee Fund of Insurance Companies; - Rulebook on Elements and Control of Solvency Margin of Insurance Companies; - Rulebook on Liquidity; and - Instruction on valuation of the Balance and Off-balance Items. - Current insurance legislation lacks requirements regarding outsourcing; inclusion of outsourced activities in reporting regulation is recommended. - Electronic submissions required, but FBiH-ISA lacks a centralized IT system to capture data and produce automatic reports; procurement of an IT system is underway. - Liquidity ratios are reported monthly; companies must monitor liquidity daily and report immediately (next working day) if the ratio falls below minimum together with explanations and remedial plan. - The current liquidity ratio allows use of assets backing technical provisions as liquid assets, disregarding their subordinated condition; this does not properly reflect liquidity. - Recommendations: - Acquire a modern IT system to allow efficient offsite supervision. - Revise the liquidity ratio to exclude assets dedicated to cover technical provisions. - Include reporting requirements for outsourced activities. ### Offsite supervision — process and capacity shortcomings; early warning and stress testing - Findings: - Offsite reporting is analyzed by only two experts; basic indicators are processed manually. - The FBiH-ISA receives monthly data but produces comprehensive written reports only every 6 months; quarterly focus is on insurers under supervisory measures. - Quarterly discussions are oral without written records. - Recommendations: - Allocate sufficient resources and use appropriate IT systems to produce timely offsite reports on all insurers. - Document decision-making meetings where insurers’ conditions are discussed. - Develop an early warning system with robust quantitative and qualitative indicators calibrated to market conditions. - Introduce stress testing at the company level and market wide. - Provide capacity building in these areas. ### Onsite inspections — planning, execution, quality and documentation - Findings: - FBiH-ISA adopts an annual plan for regular onsite supervision covering insurance companies, subsidiaries from FBiH, intermediaries and the protection fund; plan defines entity, subject matter, period and persons in charge. - Number of comprehensive onsite inspections fluctuated: 12 in 2011, 4 in 2012, 9 in 2013, and 9 planned for 2014. - External experts were used to carry out the first five actuarial reviews since operation commenced in 2013/2014. - Onsite inspections: 3–4 inspectors typically spend one week at insurers’ premises; the whole inspection process takes a few months. - Inspection report is discussed with the insurer before official submission to the director and the board; final measures can be challenged in court. - There is no internal practice of filing the initial inspectors’ report to track changes made during discussions. - No inspection manual exists; quality and comprehensiveness rely heavily on inspectors’ experience. - Recommendations: - Introduce a process to track initial findings and subsequent changes to inspection reports before submission to insurers. - Develop internal guidelines/inspection manual for regular and exceptional onsite supervision to maintain consistent quality and scope. - Conduct actuarial reviews for all companies. - Increase the number and frequency of onsite inspections of intermediaries. - Carry out market-wide actuarial reviews. ### Use of onsite inspections and follow-up - Findings: - Onsite inspections are used to interview management/significant owners on findings and the need for preventive or corrective measures. - Implementation of imposed supervisory measures is followed up regularly. ### Supervisory powers and enforcement tools - Findings: - Article 55 of the LICPI empowers FBiH-ISA to take prompt corrective measures when an insurer does not meet solid business practices or regulatory conditions. - Available corrective measures include prohibition on disposal of assets, temporary ban on acquiring new business, withdrawing insurer’s assets from a bank in poor condition, orders to eliminate illegalities and irregularities, prohibition of dividend payments, license revocation, intervention and liquidation. - Specific irregularities that trigger an order to remove them include: - work on important activity performed by person without company consent or for whom FBiH Agency ordered dismissal; - insurer not meeting requirements for all or certain insurance operations; - violations of rules on risk management, liquidity and solvency; - violations of business records, financial statements, audit, internal audit; - violations of reporting and informing FBiH Agency; - violations on appointment of authorized auditor and certified actuary; - failure to respect adopted business policy acts; and - other regulatory violations. - Violations of prudential indicators trigger remedial actions including: - order requiring an action plan to meet capital adequacy, improve liquidity and solvency, provide investment funds to cover technical and mathematical reserves; - temporary or permanent prohibition to conclude new insurance contracts in some or all types of insurance; - prohibition or restriction of free disposal of funds that cover technical or mathematical reserves and other assets; - order requiring removal/replacement of executive directors, executive board members; - requirement to submit a plan for short-term financial recovery whenever capital adequacy requirements are not met. - Articles 55, 59, 61 and 63 of the LICPI grant the FBiH-ISA power to require replacement or limitation of powers of board members, top management, key supervisory persons, major owners and external auditors if they severely or repeatedly hinder supervision. - In case of insurer in financial difficulties, the law allows ordering that assets be held in whole or in part by a trustee (paragraph 2 of article 12 of the LICPI). Assets held may be released to company only by consent of the supervisory agency; trustee needs FBiH-ISA approval. FBiH-ISA may limit the volume of insurance activity within a specified period and may order increase or decrease of premium rates for a specified insurance class if premiums are inadequate. *Source: _cr15215 - 42. The FBIH-ISA is understaffed to discharge its obligations. The funding of the FBIH-ISA is* ### 63. Administrative fines are listed and the FBIH-ISA can impose them but the amounts are ### _cr15215 - 63. Administrative fines are listed and the FBIH-ISA can impose them but the amounts are ### Administrative fines and enforcement - Articles 73 through 78 of the LICPI prescribe pecuniary sanctions against the insurance company, the responsible person in the insurance company - directors, as well as other persons (auditor and actuary) in case of violation of legal regulations proportionate to the established violation. - Stated fine ranges in the LICPI: - For the insurance company: from KM 10,000 to KM 50,000. - For responsible persons in the insurance company: from KM 1,000 to KM 10,000. - List of actions that trigger fines (examples provided in the LICPI): - providing false information; - auditor or actuary making a false statement, false claims assessment; - failing to comply with the orders of the FBIH-ISA; - investing the assets contrary to the legal provisions; and - hindering the authority to perform an inspection. - Constraint on fine amounts: - The amount of these fines cannot be higher than the general law on misdemeanors that sets the limits of KM 100 for natural persons and KM 500 for legal persons. - This general law is in the process of been changed. - Recommendation: - Revise the amount of fines to have an effective tool to deter unwanted behavior. ### Supervisory protective actions and temporary administration - Article 68 of the LICPI authorizes measures to establish a plan for financial restoration and a plan of short-term financing to preserve or restore a company’s financial situation, including interventions affecting pre-existing rights of parties other than those of the company. - Possible interventions include: - appointment of a temporary administrator; - suspension of payments; - suspension of enforcement measures; and - reduction of claim amounts. - Limitations and gaps: - Legal provisions for appointment of temporary administration are clear only in case of liquidation (special liquidation requires license revocation before appointment of temporary administration). - Legal procedures to appoint a temporary administrator for recovery or restructuring actions are not clear. - Article 68 allows the MoF to introduce procedural and material regulations on supervision over reorganization measures; those regulations have not been issued. - Implication: - Effective protection against unwanted disposal of assets is ensured primarily for insurers in the process of liquidation, not clearly for recovery/restructuring scenarios. ### License withdrawal powers and triggers - The FBIH-ISA may withdraw the license of an insurer or broker under certain circumstances when policyholders’ interests are severely affected; this power has been used on a few occasions. - Grounds for license withdrawal under the LICPI include: - serious violation of the provisions of the Law on Technical Provisions and Investment Funds; - a legally valid verdict that constitutes an obstacle to the conduct of business; - company ceases to fulfill requirements for insurance activities or prior license conditions no longer exist or have been altered to an extent that the Supervision Agency would not have issued a license; - inability, within the prescribed time limit, to take measures specified in the restoration plan or financing scheme; - serious violation of provisions regarding calculation and management of technical provisions and solvency margin, threatening policyholders’ interests; - company has not started operations within 12 months from issuance of the license, or has discontinued operations in whole or in part for six months in a current year, wholly or partially, for a period longer than six months; - failure to satisfy an obligation to the BiH Green Card Bureau or the Protection Fund; and - company does not apply tariffs and conditions for all classes of insurance. ### Group supervision - A rulebook on supplementary group supervision was issued in 2007 to cover related party transactions for insurers belonging to an insurance group or mainly insurance holding company. - Supplementary group supervision requires reporting of: - group structure; - financial statements of the group; - details of material transactions among group entities and other related parties. - Material transactions to be reported include: - loans and credits; - guarantees and other businesses creating off-balance sheet liabilities; - legal transactions aimed at investing in securities and other financial instruments and real estate; - other legal transactions with significant impact on adjusted solvency margin calculation; - reinsurance services; and - cost sharing agreements. - Requirement: - Insurer subject to supplementary supervision must adjust solvency calculation discounting related party transactions and minimum capital requirements of group entities. - Observations and recommendations: - The rulebook needs enhancement to widen scope and provide powers for inspection and supervision of holding companies, limit intra-group transactions, and require fit and proper control positions of the holding company. - Implement a comprehensive group supervision framework, including group capital requirements. ### Macroprudential supervision - Current practice: - Macroprudential supervision is limited to an annual elementary overview of the market (annual market overview report). - FBIH-ISA has not engaged in market-wide analysis except when producing the annual overview. - On a few occasions, regulators initiated onsite inspection based on market trend findings. - Gaps: - Macroprudential tools have not been developed. - Market-wide stress tests are not required. - No framework exists to define systemic risk in the sector. - Recommendations: - Introduce a macroprudential supervision framework as the market develops. - Include the FBiH-ISA into the SCFS. - Consider assigning development and usage of macroprudential tools to the Insurance Agency and grant implementation power to the ISAs. ### Market entry: licensing, intermediaries, and fit and proper - Licensing: - Insurance activity is regulated; insurers and insurance intermediaries need a license to operate (LICPI article 3). - Licensing requirements are transparent and published on the FBIH-ISA webpage. - Licensing requires a three year business plan assessed for viability, funding sufficiency, and systems availability; internal controls and operational procedures; source of capital and identity of owners; tariff setup mechanism and reinsurance agreements. - If complete documentation is presented, the FBIH-ISA has 60 days to issue the license. - Licenses are currently renewed within 15 days. - Reinsurance: - Reinsurance activity is licensed by the FBiH-ISA. - Insurance companies operating in the FBiH cannot enter into reinsurance contracts with reinsurance companies lacking an FBiH operating license without prior approval of the FBiH-ISA. - FBiH-ISA grants approval to reinsurance companies meeting internationally acceptable standards for sound conduct. - Independent insurance intermediaries: - Must pass an exam and be registered. - Required capital must be registered; propriety proven; valid error and omission insurance policy submitted. - Registered intermediaries are listed on the FBiH-ISA web page. - License for intermediaries needs biannual renewal. - FBiH-ISA can revoke licenses of intermediaries not fulfilling requirements. - Agents selling on behalf of an insurer do not need to pass the certification exam. - Recommendation: require examination for all intermediaries of insurance including those that work as staff for an insurance company. - Fit and proper requirements: - Article 60 of the LICPI and rulebook on persons holding key positions set fit and proper requirements. - Requirements to be appointed as member of the management board include: - a university degree—a graduate economist or a graduate lawyer; - at least three years of experience in managerial positions in a company, i.e., six years of experience on the jobs in financial institutions; - not be a member of the management, board of directors/supervisory board of a company against which bankruptcy proceedings have been instituted, i.e., whose operating license has been revoked due to a violation of the law; - not be a member of the management and/or a procurator in another company; - not be a member of the supervisory board of a related company; - not be convicted of corporate fraud and embezzlement, abuse of trust, forgery, use of forged documents, theft of public or private property, making false statements, giving or taking bribes, or any other criminal offence related to the performance of a professional activity; - not be a person who was a member of the management board of a bankrupt insurance company or the insurance company whose license was revoked. Such a person can be nominated for key positions mentioned hereof on expiry of 5 years. - Scope gap: - Control positions considered include CEO and other executive directors, interim managers and dissolution trustees as well as the appointed actuary. - Members of the governance board appointed by the shareholders assembly are not subject to approval by the FBIH-ISA. - Recommendation: - Require fit and proper for all governance board members and the internal auditor to allow better supervision and removal if necessary. - Assessment process: - Fit and proper assessment is carried out based on documentation. - Recommendation: interview candidates for control functions to better assess fit and proper and knowledge of insurance regulation pertinent to the position. - Acquisition of qualifying holdings: - Approval of the FBIH-ISA is required to become a qualified shareholder (at least 10 percent of shares or voting rights) (article 61, paragraph 1 of the LICPI). - FBiH-ISA approval also required for exceeding thresholds of 20 percent, 33 percent and 50 percent (article 62). - For the 50 percent threshold it is recommended that requirements equivalent to obtaining a new license be mandated. - Supervisory actions for unauthorized acquisition of qualifying holdings: - If qualifying holding is acquired or increased over thresholds without notifying or obtaining approval, exercise of voting rights resulting from such holding shall be null and void. - The Supervision Agency may impose penalties, individually or cumulatively: - a fine in favor of the Federation budget amounting to up to 10 percent of the value of shares transfer; - debarring individuals from serving on the company’s management board, as well as from any managerial post within the company for a definite or indefinite time. - Portfolio transfers: - Any insurers intending to transfer a portfolio need the approval of the FBIH-ISA. - Intentions must be made public in the press for 2 weeks; policyholders disaffected can complain to the FBIH-ISA. - The ISA can force a portfolio transfer under certain conditions. - Approval is granted once the FBIH-ISA is convinced that accepting insurers will not be impaired and that policyholders are protected (articles 64-65 of the LICPI). ### Market exit and liquidation - Liquidation framework: - Liquidation procedures are prescribed by the Law on Liquidation Proceedings, the Law on Bankruptcy Proceedings and the Law on Insurance Companies in Private Insurance. - Liquidation of an insurer is initiated by the FBiH-ISA; in case of insolvent insurers or violation of legal provision, FBiH-ISA can start liquidation by revoking the license. - Decision to revoke the license is made by the director. - Upon revocation, FBiH-ISA appoints a provisional administrator and special liquidation of the insurer is declared, served on the company and published in the Official Journal of the FBiH and the Official Gazette of the RS, if applicable. - All powers of management and authorized persons cease on the date the provisional administrator appointment is published in the Official Journal of the FBiH. - The provisional administrator must submit a request within five days from appointment to the competent court to initiate liquidation proceedings and to appoint the liquidator. - Upon appointment of the liquidator, the provisional administrator monitors liquidation progress, gives opinions, submits written information to the FBiH-ISA on progress once in two months, and performs duties requested by the Supervision Agency; submits a report upon conclusion of special liquidation. - There are no provisions about the duration of the process. - Recommendations: - Introduce a requirement to expedite special liquidation. - Remove the liquidator that unduly delays concluding the special liquidation proceedings. - Policyholders’ priority: - When a company reaches special liquidation, policyholders have a priority claim on all company assets, giving them priority over all other creditors. - Life policyholders rank before nonlife policyholders in creditors’ priorities (article 70 of the LICPI). - MTPL Protection Fund ambiguity: - Law on MTPL obliges the Protection Fund to pay claims covered under MTPL policy issued by an insurer under special liquidation. - Legal ambiguity exists whether payment should be made ahead of liquidation (then become a creditor) or only after the liquidator transfers assets to the Protection Fund. - Recommendation: remove legal ambiguity so that the Protection Fund pays insured victims of traffic accidents for any claims against an insurer under special liquidation immediately. ### Prudential framework and valuation - Valuation standards: - Valuation of insurers’ assets and liabilities is performed in accordance with standard No. 4 of the International Financial Reporting Standards (IFRS). - IFRS prescribes an economic valuation reflecting risk-adjusted present values of cash flows and addresses recognition, de-recognition and measurement of assets and liabilities. - Insurers must keep insurance liabilities in the statement of financial position until discharged, cancelled, or expired, and present insurance liabilities without offsetting them against related reinsurance assets. - Valuation of assets and liabilities is undertaken on consistent bases. - The value of technical provisions and other liabilities does not reflect the insurer’s own credit standing. - Additional instructions: - Estimation, valuation and recognition of individual balance and off-balance positions are regulated in detail by: - Instructions on the valuation of balance sheet and off-balance sheet items (Official Journal of the Federation of Bosnia and Herzegovina, 73/13); and - Instructions on Amendments to the Instructions on the valuation of balance sheet and off-balance sheet items (Official Journal of the Federation of Bosnia and Herzegovina, 104/13). - Most significant off-balance sheet items include collection of dubious claims under granted loans and recourse claims. *Source: _cr15215 - 63. Administrative fines are listed and the FBIH-ISA can impose them but the amounts are — IMF staff report content provided.* ### 85. Insurers are required to set up the basic technical reserves. For life business, the ### Insurers are required to set up the basic technical reserves. ### Technical reserves and discounting - For life business, the mathematical reserves are determined by the technical note. - The maximum discount interest rate is 5 percent. - For the nonlife sector and group life business, required reserves: unearned premium reserve, outstanding claims reserve and incurred but not reported claims (IBNR). - Unearned premiums are set up on a pro rata basis. - Claims reserves are set in full amount, or at the discretion of the supervisor in case of a court dispute. - The rulebook allows reserves for catastrophic risk, but not the accounting standards. - Only 20 percent of the technical provisions are allowed to be discounted for corporate tax income. - An actuarial opinion on the correctness and sufficiency of the technical reserves is required on an annual basis. - MTPL table of benefits for disability are not in place. - Recommendation: modify the corporate income tax law to allow for a full recognition of the technical provisions as expenses, but without loss of income for the government. ### Investment regulation and admissible assets - The supervisor establishes requirements applicable to the investment activities of the insurer. - LICPI grants the FBIH-ISA the power to regulate the investment activities for solvency purposes (article 57). - FBiH-ISA requires internal company documents governing investment, providing admissibility and limits of assets to cover technical provisions, mathematical reserve and the guarantee fund for solvency purposes. - Article 3 of the rulebook requires consideration of security, diversification, matching of liabilities and liquidity for investments. - Admissible assets and their limits are published on the webpage of the FBIH-ISA and updated regularly. - Foreign investments are allowed after approval by the FBIH-ISA. - Related parties investments are not allowed for capital requirements. - FBiH-ISA approves the type of investments for assets in excess of the minimum guarantee fund that are not used to cover technical provisions or the mathematical reserve. - Rulebooks set diversification, liquidity, and permissible securities for assets to cover technical provisions, mathematical reserves and the minimum guarantee fund. - Limits for life reserves on less liquid assets are higher than for nonlife; admissible assets to cover the minimum guarantee fund are only liquid assets (50 percent in bank deposits). - Rulebook on Investments - admissible assets and allowed percent (as stated): - Securities issued or guaranteed by BIH, the entities, Brcko District: Nonlife: 50% and up to 20 % in securities issued by the same issuer and for the same purpose; Life Mathematical Reserve: 50% and up to 20 % in securities issued by the same issuer and for the same purpose - Bonds and other debt securities traded in the organized securities market in BiH: Nonlife: 35%, and up to 10% per one issuer; Life: 35%, and up to 10% per one issuer - Bonds and other debt securities not traded in the organized securities market in BiH, if issued by a legal entity with a seat in BiH: Nonlife: 5%, and up to 1% per one issuer; Life: N/A - Shares traded in the organized securities market in BiH: Nonlife: 30%, and up to 5% per one issuer; Life: 25%, and up to 5% per one issuer - Shares not traded in the organized securities market in BiH, if issued by a legal entity with a seat in BiH, which recorded a positive financial result in the financial statements of the last two years: Nonlife: 5%, and up to 1% per one issuer; Life: N/A - Loans secured by a lien registered on real estate, if the lien is registered in the land register in BiH, and if the value of the loan does not exceed 40% of the value of the real estate estimated by a court certified appraiser: Nonlife: 10%, and up to 2% per one debtor; Life: 10%, and up to 2% per one debtor - Loans secured by securities under article 9, Item a) and b) of the rulebook: Nonlife: 20%, and up to 2% per one debtor; Life: 20%, and up to 2% per one debtor - Loans secured by guarantees issued by banks with a seat in BiH, which recorded a positive financial result in the financial statements of the last two years: Nonlife: 20%, and up to 2% per one debtor; Life: 20%, and up to 2% per one debtor - Loans in the amount of surrender value based on life insurance contract: Nonlife: N/A; Life: In line with the terms of the insurance contract ### Concentration and banking sector exposure - Having over half of the insurance sector assets in bank deposits creates a relevant exposure to the banking sector that needs monitoring. - FBiH-ISA requires insurers to hold at least 50 percent of the minimum guarantee fund in bank deposits. - Total exposure of the insurance sector assets to the banking sector is KM 460 million. - FBiH-ISA can order changing the bank used for deposits based on the financial condition of the bank, which is a mitigating factor. - Recommendation: establish a formal channel of information with the banking sector supervisor to gain timely information on the financial soundness of all banks holding insurance sector assets above the threshold. ### Capital regime and solvency - The capital regime follows Solvency I. - LICPI articles 50, 54 and 55 set forth capital requirements and additional obligations to ensure maintenance of an adequate capital position. - Rulebook on the Amount and Method of Investment for Covering of the Technical Reserves and Minimal Guarantee Fund stipulates a company must ensure investments equal at least the amount of calculated technical reserves. - The calculation is based on the maximum of the amounts calculated by applying factors to the premium and to the claims but cannot be lower than the minimum guarantee fund. - The Rulebook on the Elements and Control of the Solvency Margin and the Rulebook on Manner of Appraisal of the Balance and Off-balance Items of the Insurance Companies regulate calculation and control related to available capital and solvency margin. - Required solvency margin is determined by the minimum guarantee fund. Minimum guarantee fund cannot be less than: - KM 2 million if the insurance company engages in one or more types of the following insurance activities: vehicle owners or users motor third party liability insurance, aviation third party liability insurance, vessel owners or users marine third party liability insurance, general liability insurance, credit insurance and surety insurance; - KM 2 million if the insurance company engages in one or more types of the following insurance activities: accident insurance, health insurance, motor CASCO insurance, railway rolling stock CASCO insurance, aircraft CASCO insurance, sea, lake and river vessels hull damage, goods in transit insurance, fire and other natural perils insurance, financial loss insurance and travel insurance; - KM 1 million if the insurance company engages in the insurance activities of other perils to property and/or legal protection insurance; - KM 3 million if the insurance company engages in life insurance; and - KM 3 million if the company engages only in reinsurance activities. - The capital regime should begin introducing risk sensitive elements. - Recommendation: gradual incorporation of risk elements into the solvency framework, e.g., introducing credit risk capital surcharges on the assets and differentiated factors depending on line of business for premium and claims calculation. - Solvency margin adequacy ratio requirements: - The actual solvency margin adequacy ratio for an insurer is required to be at least 100 percent. - A ratio below 100 percent triggers supervisory action; FBIH-ISA must apply selected enforcement measures and sanctions in accordance with the LICPI. - Recommendation: once a risk sensitive solvency regime and an early warning system are in place, develop a ladder of intervention based on capital levels with a corresponding set of prompt corrective actions. ### Governance, internal controls, and risk management - Governance, internal controls, and risk management examined under ICP 7–8. - Basic governance requirements are defined in the LICPI and the Federation Company Law. - Under Federation Company Law, article 239, insurers should establish shareholders assembly, appoint the director, the board of directors and have an auditing body. - Federation Company Law provisions (articles 246, 269, 313, 314, 304, 305) prescribe board and management roles and responsibilities, including: - supervising management; - approving semi-annual and annual financial statements with balance sheet, income statement and audit report; - submitting an annual report including auditor’s report, supervisory board and audit committee reports, and a business plan; - approving asset transactions whose value ranges from 15 percent to 33 percent of the book value of total assets; - appointing chairpersons and members of remuneration and appointments committees; - setting up ad hoc commissions; and - convening the general assembly meeting. - Executive board responsibilities: implement decisions of the board of directors and manage the company (article 275). ### Internal audit and control functions - Internal audit function must be established; audit functions are subject to explicit legal requirements. - Federation Company Law article 285 defines the audit committee; all insurance companies obliged to comply. - Audit committee audits semi-annual and annual financial statements and financial operations at the request of shareholders holding at least 10 percent of voting shares. - FBiH-ISA Rulebook on Internal Audit requires internal audit to be autonomous and independent, reporting to the company’s audit committee. - Internal audit duties include continuous monitoring, analysis, evaluations, expert opinions, recommendations and advice to implement laws, identify and assess risks, improve organization and decision-making, ensure IT functioning, and evaluate internal controls. - Internal audit controls and evaluates: - conduct of insurance business in accordance with the Law on Insurance Companies in Private Insurance and related regulations; - suitability and implementation of risk management policies and procedures; - accounting procedures and organization of accounting tasks, including IT system; - reliability, validation and accuracy of financial data and information. ### Gaps in corporate governance and risk management; recommended strengthening - Corporate governance requirements lack qualitative elements; LICPI has minimal quality governance requirements. - Areas for improvement: - board structure, corresponding committees, governance standards, board composition and knowledge, assessment of board effectiveness; - remuneration policy for board members and senior management; - duties of individual board members including acting in the best interests of the insurer and policyholders; - timely and effective communication with the FBIH-ISA and relevant stakeholders (including policyholders) on the governance structure. - Basic risk management requirements exist via bylaws: - Rulebook on the elements of the solvency margin (FBiH Official Journal 55/13); - Rulebook on the level and manner of funds investment (FBiH Official Journal 64/13, 66/13 and 96/13); - Rulebook on liquidity (FBiH Official Journal 24/13); - Law on Insurance Companies and internal company regulations concerning retention and transferring excess risk to reinsurers. - Internal controls and business processes required for operating license: Decision on Documents prescribes mandatory business policy documents to accompany license application, including: - general, special and supplementary insurance terms and premium rates; - decision on technical bases in insurance; - decision on criteria, method of determination and table of maximum retention and total amount of retention; - rulebook on conditions and manner of depositing and investing funds of the company; - rulebook on maximum rates of loading for expenses of management; - rulebook on the formation and the method of calculation for unearned premiums; - rulebook on the formation and the method of calculation of mathematical reserves; - rulebook on the formation and the method of calculation of provision for outstanding losses; - rulebook on the formation and use of reserves for profit sharing (life insurance); - rulebook on the formation and use of reserves for bonuses and rebates; - rulebook on the conditions and manner of exercising recourse; - rulebook for handling compensation claims; and - rulebook on the use of loss prevention funds. ### Actuarial function - Actuarial function is well defined. LICPI article 20 mandates actuarial tasks be carried out by certified actuaries; every company must appoint an actuary. - Rulebook on the actuary prescribes requirements for acquiring and revocation of the title of certified actuary and related documents. - Certified actuary responsibilities include: - assess annual accounts and annual report on operations; carry out general or special examinations per Supervision Agency orders; - assess business documents, their use and implementation; - estimate the situation of funds, their placement and security; - carry out actuarial tasks in life insurance; - carry out other supervisory, advisory and control operations at company request or Supervision Agency order; - certify by signing official company documents concerning mathematical reserves and confirm consistency with the law. - FBiH-ISA has not offered actuarial examinations for the last seven years. - Recommendation: offer actuarial examinations regularly to become an appointed actuary. ### Strengthening risk management and internal controls — specific recommendations - Develop regulation and implement requirements in risk management and internal controls; recommended areas for strengthening: - Scope of internal controls: comprehensive coverage of key business, IT and financial processes; key control functions minimally include internal audit, actuarial function, and risk management function; each key control function should be led by a suitable person, have sufficient independence, adequate resources, access to the board and provide regular board reports. - Duties of key control functions: - Risk management: assess risks enterprise-wide, define risk appetite, document approval processes and authorities, establish risk strategy, escalation and reporting procedures. - Internal audit: assess adequacy and effectiveness of policies, procedures, documentation and controls, and evaluate reliability and integrity of management information. - Compliance function: introduce to advise on compliance with laws, regulations and internal policies; integrate compliance procedures in work processes. - Regulation on outsourcing: require (a) board approval of outsourcing of material functions or activities, (b) due care and diligence in selecting outsourcing providers, (c) written documentation of outsourcing arrangements, and (d) periodic review of such arrangements. *Source: Excerpt from IMF staff report text provided in content unit _cr15215.* ### 104. This section covers reinsurance regulation and supervision. Reinsurance is not widely ### Reinsurance Regulation and Supervision ### Reinsurance framework and practice - Reinsurance is not widely used and mainly placed with the local reinsurer. - The relevant principle is contained in ICP 13. - Current reinsurance regulation provides basic guidelines only: - Insurers should reinsure the portion of the risk that they cannot retain. - Business plans accompanying license applications must include a program of envisaged reinsurance with tables of maximum retention by lines of insurance. - Insurers must adopt an internal rulebook on reinsurance and submit it to the FBIH-ISA. ### Supervisory practices - The supervisory agency supervises basic conditions of reinsurance contracts: - Pursuant to article 17 of the LICPI, supervision controls the identity of the counterparty (reinsurer), the terms and conditions of the reinsurance, and the proportion of the risk ceded. - On an annual basis, the FBIH-ISA receives all reinsurance contracts together with basic data including reinsured premiums and claims. ### Licensing of reinsurers - Reinsurers need a license to operate. - The FBIH-ISA must approve the use of foreign reinsurers that are not licensed in the FBiH. - The supervisory agency will not refuse to approve a license to work as a reinsurance company if the applicant fulfills internationally acceptable standards for sound conduct of reinsurance business. - The limitation in the previous paragraph does not apply to reinsurance companies with a license to operate in BiH. - Licensing requirements to operate in the BiH as a reinsurer are equivalent to those that apply to insurance companies and are applicable to the reinsurance business. ### Recommended enhancements to reinsurance regulation and supervision - The reinsurance regulation should consider the following enhancements: - The financial stability of reinsurers should analyzed annually and not only during a license assessment; - Risk transfer requirements on the reinsurance contracts should be specified; - Cash call clause should be included for catastrophic events; and - Prohibition of side letter to guarantee the integrity of the contracts should be implemented. --- ### Market Conduct and Consumer Protection ### Scope and licensing - Market conduct requirements on insurers, brokers and insurance intermediaries are covered under ICPs 18 to 22. - Insurance and reinsurance intermediation can only be carried out by legal entities (brokers and agents) or by physical persons (agents) after obtaining a license issued by the FBIH-ISA (LoIPI). - The licensing process includes fit and proper requirements and requires brokers to carry error and omissions insurance. - The capital requirement for a broker is KM 200,000 (article 7 and 9 of the LoIPI). - Agents working full time for an insurer are not required to be licensed. - Recommendation: Require the insurance intermediation license for any person engaged in insurance intermediation independently of working arrangements. ### Registration and supervision of intermediaries - Every independent intermediary and broker is registered on the web page of the FBIH-ISA. - At end-2013, the FBIH-ISA had registered 165 agents (down from 240 in 2009). Only 5 brokers were registered and active in 2013, including the FBiH Postal Service. - Intermediaries are subject to continuous supervision: - Brokers and independent agents must submit semi-annually and annually reports including financial statements, intermediated premiums, and earned commissions. - Licenses must be renewed every two years, subjecting intermediaries to additional controls. - The FBiH-ISA has carried out three onsite inspections to date and has the power to conduct onsite inspections. ### Conflicts of interest, client funds, and complaints - Brokers are not bound to disclose conflicts of interest or to segregate clients’ moneys; agents and brokers may collect money for voluntary insurance without specific safeguards. - Only one known case of fraud by an agent collecting money on behalf of an insurer; the FBiH-ISA revoked the agent’s license. - Recommendation: Require brokers to segregate funds that belong to policyholders and to disclose conflicts of interest. - Complaints are handled by the FBIH-ISA (one person in this department). The FBIH-ISA responds to consumer complaints if there are clear violations of existing regulations (e.g., payment of claims outside the stipulated period). Disputes on the amount of payment are rejected by the agency; policyholders must go to court. - Recommendation: Increase resources dedicated to consumer protection at the FBiH-ISA. ### Code of Business Ethics and client treatment - The code of business ethics (adopted 2009) sets standards for insurers’ conduct, including contracting, claims settlement, internal complaints procedures, and good business practices. - Violations are handled by a court of honor that can issue reprimands, public reprimand, expulsion from the Association, and filing complaints to the FBiH-ISA. - Recommendation: FBiH-ISA participation in the court of honor sessions. - The Code stipulates client treatment requirements including: - Providing accurate pre-contractual information on status, financial and organizational capabilities. - Fully and accurately informing clients of terms, conditions, premium rates, coverage options, and rights and obligations prior to contract conclusion. - Using clear and comprehensible language and avoiding misleading expressions. - Complying with registered insurance conditions and premium rates. - Ensuring equality and equal treatment of all clients. - Facilitating clients’ exercise of rights and settling disagreements amicably where possible. - Acting professionally, efficiently and fairly during claims processing and avoiding delay or failure to pay uncontested portions of claims. - Responding to complaints with due attention and expedience and following specified internal complaints procedure rules, including written responses and time limits (final response in no event later than 45 days, with provisions if additional evidence is needed and requirements to notify the client if unable to respond within the period). ### Consumer protection regulatory gaps and recommendations - Consumer protection regulation needs enhancement and adequate supervisory resources: - The FBIH-ISA has one person partly dedicated to consumer complaints. - The Code of Conduct is helpful; regulation requires pre-contractual information and conflict of interest disclosures by intermediaries. - Claim-payment terms are regulated to be no more than 14 days or 30 days depending on the line of business. - Recommendations to move consumer protection to the next level: - Issue regulation requiring insurance companies to consider interests of different client profiles in product development and marketing. - Impose insurance-specific requirements on companies and intermediaries to promote products and services in a way that is clear, fair and not misleading. - Develop regulation on the fair treatment of customers (the Law on Obligations does not detail fair treatment elements). - Issue regulation requiring insurers and intermediaries to establish and implement policies and procedures on the fair treatment of customers as part of business culture. - Appoint an ombudsperson as required by the LICPI. - Once appointed, allow the ombudsman to adjudicate small amount claims, or establish a small claims court system. - Boost FBIH-ISA resources dedicated to consumer protection to promote proactive protection. ### Market discipline, disclosure, and financial literacy - Market discipline is weak with basic public disclosure requirements and low financial literacy. - Following IFRS, insurers must publish financial and income statements together with the auditor’s opinion in an abbreviated form. The FBiH-ISA has not issued additional disclosure requirements. - Recommendation: Issue a rulebook on public disclosure enhancing information about insurers. Suggested disclosures in the annual report include: - General information on the insurance company, including information about the owners of qualifying holdings, members of the management board, the executive board and the audit committee; - Description of the business environment and the position of the insurance company in the FBiH insurance market; - Information on insurance claims per type of insurance (number, amount and status of reported and settled claims, number and amount of provisioned claims as of 31 December of the previous year and of the year for which the report is submitted); - Mortality and morbidity data (per insurance product); - Details on contracts concluded for life insurance, including number of active policies at the start of the accounting period, number of newly issued policies, number of canceled policies, etc.; - Analysis of the ratio between the costs of implementing insurance and overhead allowance; - Analysis of approved bonuses and discounts; - Liquidity indicators, cost ratio, claims ratio and combined ratio; - Other indicators of business efficiency of insurance companies; - Important business events in the period between the end of the business year and the date of submitting the financial report; - Assessment of the expected future development of the insurance company; - Most important research and development activities; - Aims and policies of the insurance company regarding risk management, together with risk protection policies for each planned transaction that needs protection; - Exposure of the insurance company to the price risk, credit risk, market risk, currency risk, liquidity risk and other risks present in the business operations of the insurance companies; - Rules of corporate governance that have been applied. - Recommendation: Improve public education on insurance matters and develop a national strategy to raise financial literacy in insurance; consider the Insurance Agency taking the lead. ### Fraud prevention and AML-CFT - Insurance fraud is codified as a crime (Article 302 of the Criminal Code of the FBiH). - Current regulation does not require insurers and intermediaries to take effective measures to deter, prevent, detect, report and remedy fraud in insurance. - Recommendation: Establish a centralized database for MTPL claims to combat fraud and to apply properly bonus-malus pricing. - Recommendation: Implement regular analysis of large claims to provide supervisory insights to detect fraud and encourage insurers to publish information on fraud deterrence. - FBIH-ISA designated since June 2014 as the AML-CFT supervisor in the insurance and pension sector: - The FBiH-ISA has been requiring insurers to monitor possible AML-CFT activities and has adopted guidelines for risk assessment and implementation of the Law on the Prevention of Money Laundering and Terrorist Financing. - With very limited resources and basically no training, the FBiH-ISA is recommended to increase engagement, training, and resources for supervision and enforcement of AML-CFT regulation. --- ### Market Structure and Industry Performance ### Size and growth of the sector - The insurance sector remains small. - In 2013, the assets of the insurance sector amounted to KM 799 million, accounting for 5.11 percent of financial sector assets or 4.7 percent of GDP. - The assets of the sector have been growing on average of 3.3 percent per year for the last four years, resulting in an increase of 17 percent between 2009 and 2013. - The insurance premium average growth rate has been six percent since 2009. - Total premium in 2013 amounted to KM 387, an increase of 6 percent from 2012 (4 percent for nonlife and 16 percent life). - The nonlife segment collects over 78 percent of the insurance premium, of which 56 percent relates to the mandatory motor third party liability insurance (MTPL). - The life premium share in total premium has been increasing: in 2009 life premium accounted for 18 percent of the total insurance premium and in 2013 accounted for twenty two percent; in absolute terms life premium in 2013 was KM 86 million. ### Key sector figures 2009–2013 (In KM million) - Total assets: - Nonlife: 2009 460.77; 2010 422.73; 2011 441.63; 2012 444.28; 2013 432.82 - Life: 2009 223.28; 2010 237.97; 2011 274.74; 2012 318.73; 2013 366.25 - Total assets: 2009 684.05; 2010 660.70; 2011 716.37; 2012 763.01; 2013 799.07 - Technical reserves: - Nonlife: 2009 233.84; 2010 233.00; 2011 237.58; 2012 252.12; 2013 257.75 - Life: 2009 173.81; 2010 189.87; 2011 225.67; 2012 265.03; 2013 309.14 - Total TP: 2009 407.65; 2010 422.87; 2011 463.25; 2012 517.15; 2013 566.89 - Own funds: - Nonlife: 2009 149.66; 2010 139.97; 2011 147.44; 2012 146.74; 2013 145.23 - Life: 2009 40.39; 2010 41.75; 2011 39.45; 2012 43.04; 2013 47.16 - Total: 2009 190.04; 2010 181.72; 2011 186.89; 2012 189.78; 2013 192.40 - Premium: - Nonlife: 2009 277.31; 2010 282.38; 2011 287.00; 2012 288.46; 2013 300.13 - Life: 2009 61.56; 2010 65.46; 2011 69.77; 2012 74.60; 2013 86.70 - Total: 2009 338.87; 2010 347.84; 2011 356.77; 2012 363.06; 2013 386.83 *Source: Authorities.* ### 124. The number of insurers has dwindled as the insurers have been liquidated since 2009. ### _cr15215 - 124. The number of insurers has dwindled as the insurers have been liquidated since 2009. ### Market structure and providers - At the end of 2013, 13 institutions were licensed in the FBiH, compared with 16 in 2009. - By business type: - Life (long-term): 1 - Non-life (general): 5 - Composite (life and non-life): 7 - Reinsurance: 1 - Total: 13 - Ownership and presence: - Seven of the 13 insurers are domestically owned, and six by foreign capital. - Nine branches of insurers licensed in FBiH are operating in the RS and account for around eight percent of the market; the FBiH-ISA is responsible for market conduct of these branches. - Intermediaries (2013): - Agents: 165 - Brokers: 5 ### Market concentration and competition - Nonlife sector: - Thirteen insurers serve the nonlife sector; eight have more than five percent market share, indicating low concentration and high competition. - Top nonlife insurers (Total premium, Percentage share of the industry, 2013): - Sarajevo: 20.53 - Euroherc: 14.89 - Bosna-Sunce: 13.91 - Croatia: 11.51 - Triglav: 9.08 - Uniqa: 8.05 - VGT: 7.69 - Zovko: 5.53 - ASA: 3.60 - Camelija: 2.97 - Total (top 10): 97.77 - Life sector: - Three insurers account for 78 percent of the market in FBiH. - Life insurers (Total assets, Percentage share of the industry, 2013): - Grawe: 31.74 - Merkur BH: 24.24 - Uniqa: 21.88 - Croatia: 8.26 - Triglav BH: 5.53 - Sarajevo osigur.: 4.31 - BSO: 4.04 - Total: 100.00 ### Product mix and premium composition - Nonlife business drivers (2013 distribution, In percentage of total premium): - Motor: 15.50 - Property: 14.92 - Liabilities (including MTPL): 55.95 - Accident and health: 10.93 - Others: 2.70 - Total: 100.00 - Observations: - Mandatory MTPL accounts for almost 56 percent of nonlife business, with an additional 15.5 percent related to motor insurance. - Remaining 28.5 percent mainly distributed among property and accident and health insurance. - Life sector premium: KM 86 million, mainly in participating endowments; development of voluntary insurance and life sector remains a challenge. ### Asset composition and liquidity - Overall asset allocation (sectoral summary): - Investments account for 82 percent of the assets, of which over 66 percent are held in bank deposits and cash. - Real estate investments and receivables make up 28 percent of assets. - Nonlife sector (Total assets, In million KM, 2009–2013): - Total assets: 460.77 (2009), 422.73 (2010), 441.63 (2011), 444.28 (2012), 432.82 (2013) - Investments: 289.30 (2009), 266.08 (2010), 278.42 (2011), 286.08 (2012), 296.78 (2013) - Real estate and real-estate related: 122.74 (2009), 88.86 (2010), 94.74 (2011), 96.55 (2012), 101.35 (2013) - Cash and bank balances: 87.53 (2009), 86.69 (2010), 96.61 (2011), 107.71 (2012), 128.09 (2013) - Receivables: 107.01 (2009), 88.08 (2010), 93.31 (2011), 82.62 (2012), 64.09 (2013) - Life sector (Total assets, In million KM, 2009–2013): - Total assets: 223.28 (2009), 237.97 (2010), 274.74 (2011), 318.73 (2012), 366.25 (2013) - Investments: 211.25 (2009), 227.00 (2010), 264.52 (2011), 307.09 (2012), 355.37 (2013) - Cash and bank balances: 172.86 (2009), 193.52 (2010), 226.79 (2011), 261.70 (2012), 300.55 (2013) - Real estate and real-estate related: 11.11 (2009), 10.51 (2010), 8.34 (2011), 9.39 (2012), 9.37 (2013) - Liquidity assessment: - With 54 percent assets held in bank deposits and cash, liquidity risk is not systemic for the sector as a whole. - A few insurers have an important percentage of assets in real estate and could be unprotected from liquidity crunches, especially if using excessive valuation for real estate. - Life insurers currently use real estate and government bonds to match long-term liabilities; demand for long-term assets will increase as life insurance liabilities grow. ### Reinsurance usage and retention - Reinsurance usage: - Less than 16 percent of premium is reinsured; the sector retains an important part of insurance risk. - MTPL retention is high because largest claims are covered by the green card guarantee fund; retention as high as 96.6 percent for liabilities (including MTPL). - Around 50 percent of property business is retained. - Retention ratios (In percentage of the written premium): - Motor: 77.09 (2011), 80.24 (2012), 80.64 (2013) - Property: 46.11 (2011), 53.97 (2012), 50.52 (2013) - Liabilities (including MTPL): 95.83 (2011), 96.41 (2012), 96.58 (2013) - Accident and health: 91.43 (2011), 92.69 (2012), 89.42 (2013) - Others: 79.36 (2011), 87.06 (2012), 23.56 (2013) - Average: 83.69 (2011), 86.39 (2012), 84.48 (2013) - Top ten claims and reinsurance participation (Damage Description, Amount In KM, Reinsurance share In percent): - Hydroelectric power plant - breakage: 2,967,648 — 90 - Fire: 2,808,921 — 56 - Property-burglary, robbery: 2,054,623 — 76 - Accident green card: 1,653,002 — 0 - Fire: 1,650,000 — 85 - Property - burglary, robbery: 1,584,096 — 85 - Accident abroad: 1,372,743 — 58 - Accident - tourists, income: 1,349,170 — 85 - Electricity: 1,012,500 — 90 - Property-fire: 987,227 — 85 - Effectiveness note: - Notwithstanding low usage, reinsurance programs appear effective; except for the green card accident (0 percent reinsurance share), most top claims had between 56 and 90 percent reinsurance participation. ### Profitability, investment returns, and technical provisions - Profitability: - Nonlife sector ROE (after tax) by year: 7.06 (2009), 5.74 (2010), 4.53 (2011), 6.07 (2012), 4.63 (2013); Average: 5.61 - Life sector ROE (after tax) by year: 0.04 (2009), 0.78 (2010), 7.89 (2011), 7.48 (2012), 6.92 (2013); Average: 4.62 - Investment income (In percentage, 2009-2013): - Nonlife investment income: 2.78 (2009), 2.73 (2010), 2.50 (2011), 3.43 (2012), 2.84 (2013); Average: 2.86 - Life investment income: 4.51 (2009), 5.05 (2010), 4.82 (2011), 4.64 (2012), 4.57 (2013); Average: 4.72 - Drivers of profits and costs: - Profits have been eroded by high costs and are partly supported by liberal valuation of real estate and loans. - Combined ratios (net claims and expenses over net premium, without reinsurance commission) are above or close to 100 percent, implying companies can only generate profits through investment yields. - Corporate tax of 10 percent supports net profits; only 20 percent of technical provision in nonlife can be deducted as expenses. - Technical provisions (As a percentage of premium in nonlife, 2009–2013): - Gross premiums: 112.03 (2009), 113.68 (2010), 121.05 (2011), 128.12 (2012), 127.13 (2013) - Technical provisions: 98.73 (2009), 99.50 (2010), 105.82 (2011), 114.59 (2012), 120.46 (2013) - Ratio: 88.13 (2009), 87.53 (2010), 87.42 (2011), 89.43 (2012), 94.75 (2013) - Combined ratio: 1.07 (2009), 1.11 (2010), 1.00 (2011), 0.93 (2012), 0.98 (2013) - Note: The reinsurance commission is not considered. ### Key risks and sector challenges - Market shrinkage: Number of licensed insurers declined from 16 (2009) to 13 (2013) as insurers were liquidated since 2009. - Concentration in life sector: Top three life insurers control 78 percent of the market. - Product concentration: Heavy reliance on mandatory MTPL and motor lines (almost 71.5 percent combined in 2013 for liabilities including MTPL and motor). - Liquidity and asset risk: Sector-wide liquidity appears adequate due to high bank deposits and cash, but insurers with high real estate exposure face liquidity and valuation risk. - Profitability constraints: High combined ratios and high operating costs limit underwriting profitability; reliance on investment returns and liberal asset valuations to sustain profits. - Development constraints: Voluntary insurance and life sector development (life premiums KM 86 million) remain a challenge. *Source: Authorities.* ### 131. Five companies accounting for 40 percent of the nonlife market have solvency margins ### Five companies accounting for 40 percent of the nonlife market have solvency margins ### Solvency position and market resilience - One insurer, accounting for 4 percent of the market, is insolvent. - Four insurers, accounting for just below 36 percent of the market, have solvency ratios between 100 percent and 110 percent. - Solvency I requirements do not fully allocate capital according to the risks, implying sector resilience could be worse than indicated by reported solvency ratios. - The fragmented nonlife insurance market, with premiums well distributed among participants, has increased competition and in some cases led to insufficient premium for the risks assumed. - Market participants bypass regulation that fixes tariffs and commissions by assuming additional non-regulated expenses (for instance in the areas of administration and servicing). ### Nonlife insurers’ solvency ratios (2013 – 2014Q2) - Source: Authorities. - Table 17. Federation of Bosnia and Herzegovina: Nonlife Insurers’ Solvency Position 2013-June 2014 (In percent) - Insurer 1: Solvency ratio 2013 = -71; Solvency ratio 2014Q2 = -40 - Insurer 2: Solvency ratio 2013 = 97; Solvency ratio 2014Q2 = 108 - Insurer 3: Solvency ratio 2013 = 103; Solvency ratio 2014Q2 = 101 - Insurer 4: Solvency ratio 2013 = 105; Solvency ratio 2014Q2 = 105 - Insurer 5: Solvency ratio 2013 = 112; Solvency ratio 2014Q2 = 109 - Insurer 6: Solvency ratio 2013 = 114; Solvency ratio 2014Q2 = 122 - Insurer 7: Solvency ratio 2013 = 127; Solvency ratio 2014Q2 = 126 - Insurer 8: Solvency ratio 2013 = 127; Solvency ratio 2014Q2 = 131 - Insurer 9: Solvency ratio 2013 = 140; Solvency ratio 2014Q2 = 144 - Insurer 10: Solvency ratio 2013 = 143; Solvency ratio 2014Q2 = 149 - Insurer 11: Solvency ratio 2013 = 244; Solvency ratio 2014Q2 = 224 - Insurer 12: Solvency ratio 2013 = 529; Solvency ratio 2014Q2 = 552 ### Key supervisory and structural findings (Republica Srpska excerpt) - RS-ISA objectives established in legislation include: monitor application of laws and bylaws in the insurance field, regulate the insurance activity, create market confidence, prevent and deter financial crime, educate the public, and protect consumers in areas of competence. - RS-ISA established as an independent and non-profit institution accountable to the National Assembly of the RS. - Governance and appointments: - RS-ISA run by a director appointed for a term of 4 years and responding to an appointed board for 5 years. - The board is not fulltime; all supervisory decisions are taken by the director. - No deputy director position exists; an acting director is appointed by the director before any leave is taken. - Recommendation: introduce a deputy director position and consider a full time managing board as the market grows. - Transparency and operations: - RS-ISA publishes externally audited annual financial statements and reports to the assembly. - Internal audit is outsourced; establishment of an internal audit department is anticipated during the coming year. - RS-ISA organized into five departments and has a staff of 26. - Operation manuals, position descriptions, a code of ethics, and an annual working plan are in place; the web page publishes market information and regulations. - Funding and potential conflict: - RS-ISA funding: licensing fees (10 percent of the funds) and industry levies linked to premium (90 percent). - Any change to levy percentages requires government approval after presentation to the MoF. - Budget has been increasing and operations run with a surplus kept as a reserve. - Concern: linkage of levies to premium can create misalignments because companies underpricing the market (even below claim cost) contribute less to supervision costs. - Recommendation: consider revising the basis to determine levies, taking account of the types of insurance provided by a company. - Legal protection of staff: - RS-ISA employees enjoy legal protection for acts performed pursuant to regulations unless proved intentional or grossly negligent. - The law has not defined who bears defense costs for RS-ISA employees in court proceedings for actions undertaken in good faith. - Recommendation: update the law so only the RS-ISA is sued as an institution and not the staff, or at minimum clarify that the RS-ISA bears defense costs for suits initiated against its staff. ### Selected FSAP recommendations relevant to solvency and supervision (excerpt) - Update the solvency regime by a gradual incorporation of risk elements into the solvency framework; start with credit risk capital surcharges on the assets, then differentiated factors depending on the line of business that apply to the premium and claims calculation (FBiH-ISA). Priority: High. Timeframe: Near Term. - Once a risk sensitive solvency regime and early warning system are in place, develop a ladder of interventions based on capital levels with corresponding prompt corrective actions (FBiH-ISA). Priority: High. Timeframe: Medium Term. - Create a centralized claims database for MTPL to combat fraud and apply properly bonus-malus pricing (FBiH-ISA). Priority: Urgent. Timeframe: Near Term. - Acquire a centralized IT system and consider outsourcing IT with dedicated in-house monitoring resources (FBiH-ISA). Priority: High. Timeframe: Immediately / Near Term. - Develop an early warning system and introduce stress testing at company and market-wide levels; capacity building required (FBiH-ISA). Priority: High. Timeframe: Near Term. - Allocate sufficient resources and appropriate IT systems to produce timely offsite reports for all insurers; document decision-making meetings where insurers’ conditions are discussed (FBiH-ISA). Priority: High. Timeframe: Immediately. - Introduce comprehensive group supervision framework in law and provide required training (Parliament). Priority: High. Timeframe: Near Term. - Revise liquidity ratio to exclude assets dedicated to cover technical provisions (FBiH-ISA). Priority: High. Timeframe: Near term. - Enhance public disclosure requirements following the IAIS principles (FBiH-ISA). Priority: High. Timeframe: Near Term. - Strengthen governance, internal controls, risk management, and corporate governance requirements, including establishing internal audit, actuarial and risk management functions with clear duties and independence (FBiH-ISA). Priority: High. Timeframe: Medium Term. - Enhance reinsurance supervision: analyze financial stability of reinsurers annually; specify risk transfer requirements; include cash call clause for catastrophic events; prohibit side letters (FBiH-ISA). Priority: Medium. Timeframe: Near Term. *Source: IMF staff report content provided for _cr15215 - 131. Five companies accounting for 40 percent of the nonlife market have solvency margins* ### 139. The confidentiality of the information gathered by the RS-ISA is well protected, but ### _cr15215 - 139. The confidentiality of the information gathered by the RS-ISA is well protected, but ### Confidentiality and IT arrangements - Article 18 of the Law (LIC) addresses protection of confidentiality of information held by the RS-ISA and proposes penalties for disclosure of confidential information. - Article 18 (excerpt): “All persons who are currently employed or who have been employed in the RS-ISA, as well as the auditors and experts hired by the RS-ISA, shall have the obligation of professional secrecy. None of the confidential information received during the performance of their duties may be disclosed to any other person or authority, except in total and cumulative form such that the identity of the individual insurance companies cannot be identified, without prejudging cases covered by criminal law.” - The IT system is protected by up-to-date security procedures and a detailed outsourcing contract is in place. - External IT provider: - Is a large international IT company that uses modern procedures to protect the IT system. - Will be audited by an external professional in the coming year. - RS-ISA plans: - To develop an in-house IT department. - Recommendation: have the outsourced IT constantly monitored by an in-house expert. - Current regulation gap: - Current insurance legislation does not contain requirements with regard to outsourcing. - Recommendation: inclusion in the regulation on the reporting of outsourced activities is recommended. ### Coordination Committee for financial sector supervisors (CCFSS) - Established: 2009 with the Act on the Committee for the Coordination of Financial Sector Supervision. - Purpose: institute cooperation and coordination between the three supervisory authorities (banking, insurance and securities in both entities) to adopt a uniform strategy and guidelines for supervision of the sector. - Membership: Minister of Finance, Chairperson of the Securities Commission, Director of the Banking Supervision Agency, and Director of the Insurance Supervision Agency. - Committee operation: - Supported by several working subcommittees. - Meets at least once every three months or more often, if necessary. - Acts as an advisory body which considers and evaluates relevant issues and potential measures to preserve the stability of the financial sector. - Coordination activities (including but not limited to): - Creating and implementing a unique strategy and guidelines in the area of regulation and supervision of the financial sector; - Initiating harmonization of regulations with market requirements, international standards and EU regulations; - Annual planning of activities and monitoring the implementation of signed agreements; - Identifying potential problems and detecting crisis situations to avoid negative consequences; - Proposing measures to strengthen and improve financial sector supervision; - Providing access to and exchange of information necessary for supervision of financial organizations; - Exchange of information in the licensing process and about related parties relevant to inspections; - Organization of joint inspections and protection of financial sector service users’ rights; - Other joint activities that contribute to stronger coordination and implementation of financial sector supervision. - Systemic risk role: - Committee deals with sector-wide issues, including systemic risks. - In case of significant changes and market turbulence, the Committee must inform the Government and the People's Assembly of the corresponding entity and propose stabilizing measures. - Recommendation: establish a regular and formalized information sharing process to enhance cooperation and allow all financial sector supervisors to gain access to supervisory data on a timely basis. ### Supervision — scope and practices (Sections B, Offsite and Onsite) - Analytical framework covered: ICP 9 (offsite and onsite supervision), ICP 10 (preventive measures), ICP 11 (enforcement ability), absence of a group supervision framework as required by ICP 23, and macroprudential supervision discussed under ICP 24. - Offsite supervision — information collected: - Data recorded in the register of insurance companies; - Financial statements and the annual business report, with the opinion of a certified actuary and of organs in the insurance company who perform oversight, with explanation; - Audit report with management letter; - Work program and reports of internal audit; - Report on implementation of the coinsurance and reinsurance policy, with the opinion of certified actuary; - Business plan, articles of association and other general acts and their amendments; - Adopted business policy acts, as well as all amendments to these acts, regarding which a certified actuary previously has provided his or her opinion; - Notice of the appointment or change of certified actuary and internal auditor, as well as notice of employment or change of actuary and internal auditor; - Notice of convening the shareholders' meeting and the records from the shareholders' meeting; - Other information, reports and data defined by the regulations governing the field of insurance. - Reporting and standardization: - RS-ISA requires data from insurers and intermediaries on a monthly, quarterly, and annual basis. - Reporting guidelines issued (titles preserved as in source): - Rulebook on the Method, Content and Deadlines for Submission of Reports, Notices and Other Information of Insurance Companies; - Rulebook on the Form and Content of Supervisory and Statistical Reports of Insurance and Reinsurance Companies; - Decision on the Form and Content of Supervisory Statistical Reports of Protection Fund of the RS; - Rulebook on the Amount and Method of Investment for Covering of the Technical Reserves and Minimal Guarantee Fund of Insurance Companies; - Rulebook on Elements and Control of Solvency Margin of Insurance Companies; - Rulebook on Method of Calculation of the Capital and Capital Adequacy of Insurance Companies; - Rulebook on Manner of Assessment and Monitoring of the Liquidity of the Insurance Companies; and - Rulebook on Manner of Appraisal of the Balance and Off-balance Items. - Transition to electronic reporting: - RS-ISA is transitioning its reporting requirements into electronic records. - After one year of parallel testing receiving both electronic records as well as paper records. - As of 2015, the data reporting will be exclusively electronic. - The calculation of certain ratios and data quality controls will be automated as of 2015. - Material change reporting: - Article 14, paragraph 6 of the LIC prescribes the obligation to report all material changes or incidents that may affect an insurance company’s position or clients promptly (e.g., liquidity or solvency ratios below regulatory requirements and reasons that would lead to license withdrawals). - Use of offsite reports: - Verification of compliance with regulations; - Identification of risks and negative trends; - Qualitative and quantitative analysis of insurers’ activities; - Triggering timely intervention and extraordinary onsite inspections when warranted. - Early warning and stress testing: - RS-ISA has started compiling financial indicators and is introducing CARMEL analysis (Appendix B). - Recommendation: develop an early warning system with robust quantitative and qualitative indicators calibrated to market conditions. - Recommendation: introduce stress testing at the company level and market wide. - Note: Capacity building in this area is required. - Offsite-to-action process: - Findings, recommendations, and proposals are prepared and discussed with RS-ISA senior management. - Additional company information may be requested; measures can be imposed or extraordinary onsite inspections initiated. - Onsite supervision — planning and methodology: - RS-ISA adopts an annual plan for regular onsite supervision covering insurance companies, subsidiaries from the FBiH, insurance intermediaries and the Protection Fund. - Plan defines entity, subject matter, period of supervision, and persons in charge; plan may be revised during the year. - RS Agency has adopted an internal Instruction on Conducting Regular and Exceptional on site supervision and multiple methodologies for different business segments. - Use of external experts for internal inspections is provided by the LIC, if needed. - Recent increase in onsite inspections: 11 in 2011, 15 in 2012, and 27 in 2013. - Recommendation: regular targeted actuarial assessment of the technical provisions. - Methodologies adopted (titles preserved as in source): - Methodology for Supervision of the Implementation of Reinsurance and Co-insurance Policies in Insurance Companies; - Methodology for Supervision of Investment for Covering of the Technical Reserves and Minimal Guarantee Fund of Insurance Companies; - Methodology for Supervision of Liquidity of Insurance Companies; - Methodology for Supervision of Advance Payments, Receivables and Placements of Insurance Companies; - Methodology for Supervision of Provisions for Damages of the Companies for Nonlife Insurance; and - Methodology for Supervision of Resolving Claims for Damages and Claims for Payment of Sums Insured. - Onsite outcomes: - Inspections can lead to preventive and corrective measures. - Article 54, paragraph 10 of the LIC: “an insurance company is within the set deadline obliged to eliminate the illegalities and irregularities, to comply with the additional measures and to submit a report to RS Agency, as well as documents and other evidence indicating that the illegalities and irregularities are eliminated, or that it acted in accordance with additional measures.” ### Supervisory powers, triggers, and remedial measures - Legal authority: - Article 54 of the LIC stipulates authority to take prompt corrective measures and early intervention proportional to severity. - Articles 54, 58, 60 and 62 of the LIC grant power to require replacement or limitation of powers of board members, top management, key supervisory persons, major owners and external auditors if they severely or repeatedly hinder supervision. - Preventive and corrective measures available: - Issue orders to eliminate illegalities and irregularities; - Prohibit dividend payments (article 52a paragraph 4 of the LIC); - License revocation. - Regulatory irregularities that trigger an order to remove them (non-exhaustive list): - Important position filled by a person without required consent or for whom RS Agency ordered dismissal; - Failure to meet requirements for all or certain insurance operations; - Violation of rules on risk management, liquidity, and solvency; - Violation of rules on keeping business records, preparing financial statements, audit, internal audit; - Violation of rules on reporting and informing RS Agency; - Violation of rules on appointment of authorized auditor and certified actuary; - Failure to respect adopted business policy acts or other insurance regulations. - Violations of prudential indicators trigger remedial actions, including (list preserved as in source): - An order requiring the insurance company to adopt an action plan to meet requirements of capital adequacy, improve liquidity and solvency, provision of investment funds to cover technical and mathematical reserves, improvement of the billing process of receivables due, which at least includes the assessment of costs, and a detailed assessment of revenues and expenditures from direct insurance, balance draft, assessment of required financial resources and their sources, reinsurance policy and program; - An order requiring the management board to convene a general meeting of shareholders regarding a decision on a capital increase; - Temporary or permanent prohibition to conclude new insurance contracts in some or all types of insurance; - Prohibition of certain types of financial transactions or financial transactions with certain legal entities or natural persons; - Prohibition for insurance company to conduct business with certain shareholders, director, executive directors, board members or affiliated companies; - Prohibition or restriction on disposal and investment of funds to cover technical reserves or funds to cover mathematical reserves and other assets of the insurance company; - An order requiring the insurance company to change the type of insurance operations, suspend the implementation or modification of the terms and tariffs of insurance, changes in capital structure, proper valuation of items in the balance sheet, improvement of information systems, the proper keeping of documents and strict records and other measures necessary for realization of the rules on limiting risks and measures to improve risk management processes; - An order requiring the insurance company to remove directors, executive directors, executive board members and members of the company organs who conduct supervision, and to appoint other persons on these positions; - An order requiring measures to protect the rights of insured persons; - An order requiring measures of reorganization; - Whenever an insurance company does not meet capital adequacy requirements, such insurance company is required to submit a plan for short-term financial recovery, which will resolve the deficiencies, to RS Agency for approval. - Additional protective powers: - Article 13 of the LIC provides power to restrict the scope of insurance activities performed by a company (overall or individual parts). - Prohibition on payment of dividends may be imposed if the company: - does not meet the requirements for capital adequacy established in the provisions which regulate the field of insurance; - does not meet the prescribed liquidity and solvency requirements, or would endanger the liquidity or solvency by the pay out; - fails to act upon the orders of the RS-ISA. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15215.pdf* ### 160. To protect policyholders, the RS-ISA has the power to impose interim management. ### _cr15215 - 160. To protect policyholders, the RS-ISA has the power to impose interim management. ### Interim and extraordinary management powers - Legal basis: article 12 and 67a of the law grant the RS-ISA the rights to introduce interim management in an insurance company that fails to meet prudential and other requirements; the interim management can only be removed by order of the RS-ISA. - Conditions allowing extraordinary management include: - further business activities of the insurance company could endanger its liquidity or solvency, that is, the security of insurers and other beneficiaries of insurance contracts; - the insurance agency has hidden from the RS-ISA, the authorized actuaries and authorized auditors, the business books, documents, records or property of the company, or has denied access to those books by authorized persons. ### Administrative fines and enforcement - Legal basis: Articles 72 through 78 of the LIC prescribe pecuniary sanctions against insurance companies and responsible persons (directors, auditor and actuary) for violations. - Fine amounts: - for the insurance company: from KM 10,000 to KM 200,000; - for responsible persons in the insurance company: from KM 2,500 to KM 20,000. - Actions that trigger fines include (non-exhaustive list from the source): - false information to obtain a license; - deceiving advertisement; - misleading advertisement; - compilation of reporting statements by an insurer (reinsurer) that results in a misrepresentation of the indicators contained therein or information about compliance with prudential requirements and/or other mandatory standards; - auditor or actuary makes a false statement, false claims assessment; - fails to comply with the orders of, or makes a false statement to, the RS-ISA; - invests the assets contrary to the legal provisions; - hinders the authority to perform an inspection. - Fining mechanism details: - RS-ISA fines are always set at the minimum value of the allowed range, and if accepted by the fined parties, are reduced in half. - The fine can be challenged in the minor demeanors courts that will decide within a few months. - If the fine is challenged, the court decides the final amount, which could be up to the maximum amount allowed for the given violation. - There is a unique register for monetary sanctions at the state level in which the RS-ISA enters information on imposed monetary sanctions. - The tax administration of the RS monitors the collection and performs compulsory enforcement of monetary sanctions. ### License withdrawal and supervisory enforcement - Legal basis: article 29 paragraphs 3, 4, and 5 of the law authorizes RS-ISA to withdraw the license in situations including: - if the license has been issued on the basis of incorrect and/or untrue data; - if within the given deadlines, the insurance company has failed to enforce the orders of the RS-ISA for removal of irregularities or implementation of additional or other measures, thus ceasing to fulfill the conditions for carrying out insurance activities, or if the conditions under which the license has been issued no longer exist or have changed to such an extent that the RS-ISA would not issue a license taking into consideration the new circumstances; - if the insurance company frequently violates its obligations towards the Green Card Bureau of Bosnia and Herzegovina or the Protection Fund of any entity; - if the extraordinary management has failed to bring stability and liquidity to the insurance company. - Additional grounds for withdrawing a license (listed conditions where RS-ISA may withdraw the license if irregularities persist): - violates the provisions of Article 55 to 58 of this Law and the secondary regulations related to prescribed technical and mathematical reserves and investment of assets of the company; - fails to meet the requirements for capital adequacy and solvency margin in accordance with articles 49, 52, 52a, 53 and 53a of this law and the secondary regulations of the RS-ISA; - performs activities for a certain type of insurance for which it has not obtained a work permit; - fails to apply the adopted insurance conditions and the premium tariffs when making offers, arrangements and conclusion of insurance contracts, as well as other acts of the business policy; - violates the rules on risk management, the rules on liquidity and solvency management and maintenance, prohibition on payment of a dividend; - violates the rules on keeping the business books, the rules on drafting the financial statements, audit and internal audit; - violates the obligation for timely and true reporting to and notification of the RS-ISA; - violates the rules on appointment of an authorized actuary and an authorized auditor; - fails to enforce entirely, or on time, the additional measures for realization of the rules on risk management and insurers’ protection, as well as measures from the plan on short-term financial recovery; - violates the provisions on appointment and dismissal of persons with significant positions as outlined article 60 of the law; - violates the provisions on qualifying holding from articles 61 and 62 of the law; - fails to cover the losses in the manner prescribed in the law; - fails to enable the performance of supervision by the RS-ISA, the performance of an audit by an authorized auditor and the performance of actuarial activities by an authorized actuary in the prescribed manner; - transfers or accepts a portfolio without the approval of the RS-ISA; - violates the regulations on protection of insurers, beneficiaries of insurance contracts, that is, third parties that have suffered damages, that is, if it fails to pay out compensation on damages and fails to meet other obligations arising out of the insurance contract; - provides false data regarding its business operations or data which may mislead the insurers, policyholders, beneficiaries of insurance contracts, that is, third parties who have suffered damages. ### Group supervision and macroprudential oversight - Group supervision: - Regulation does not have a framework for group supervision. - RS-ISA has special limits and reporting requirements on related party transactions but lacks an effective group supervision framework. - Consolidated supervision is not carried out and only ad hoc supervisory information is exchanged among pertinent supervisors. - Recommendation: develop a comprehensive group supervision framework together with required training for RS-ISA staff; basic group supervision should be introduced in the short term. - Macroprudential supervision: - Currently limited to market wide analysis of observed trends affecting the insurance sector. - RS-ISA has performed market wide analysis on the MTPL business and carried out market wide inspections based on findings in a few insurers; supervisory actions have led to regulatory changes. - Macroprudential tools have not been developed, market wide stress tests are not required, and there is no framework to define systemic risk in the sector. - Recommendations: - Consider introducing a macroprudential supervision framework as the insurance sector develops. - Include the RS-ISA into the SCFS. - Consider assigning the development of macroprudential tools and their usage to the Insurance Agency and granting implementation power to the ISAs. ### Licensing, entry controls, and fit-and-proper regime - Licensing procedures: - Insurance activity is regulated; insurers and insurance intermediaries need a license to operate (Article 3 paragraphs 1 to 4 and 6 of the LIC). - Licensing requirements are transparent and published on the RS-ISA webpage and the Official Gazette. - Licensing requirements include a three year business plan which is analyzed for viability, funding sufficiency, and systems availability; internal controls and operational procedures are required. - Source of capital and identity of owners are checked; tariff setup and reinsurance agreements are analyzed. - If complete documentation is presented, the RS-ISA has 60 days to issue the license. - Insurance intermediaries must pass an exam and be registered; registration requires required capital, evidence of propriety, and a valid error and omission insurance policy. - Intermediary licenses must be renewed on a bi-annual basis with re-checks; some existing intermediaries do not comply at renewal and their licenses are not renewed. - Unlicensed activity penalties: - Article 75 of the LIC: “The person who, without being licensed or authorized, manages the insurance company in the RS or engages in the insurance activity without being licensed for or operates in any way against the provision of this Law, or as the representative of authorized person signs or mediates in signing insurance contract in the RS by the insurance company not licensed shall be sentenced to imprisonment from one to three years and penalty fee in the amount of KM 25,000.” - Enforcement requires cooperation of the police. - Fit and proper requirements (Article 60 paragraphs 1 to 6 of the LIC): - Key positions must be persons of high respect and moral, with satisfactory qualifications and management experience. - Persons sentenced for specified criminal offences cannot be nominated for directors, executive directors, authorized representatives or actuaries; persons who were members of the management board of a bankrupt insurance company or whose license was revoked can be nominated for key positions after expiry of 5 years. - Gaps and recommendations: - Scope of control functions is limited: key positions include CEO, other executive directors, members of supervisory bodies, associate managers, interim managers, dissolution trustees, and appointed actuary. Members of the governance board appointed by the Shareholders Assembly are not subject to approval by the RS-ISA. - Recommendation: impose fit and proper requirements on all governance board members and the internal auditor to allow RS-ISA to better supervise and remove board members if necessary. - Assessment of fit and proper is documentary; recommendation to conduct interviews of candidates to better assess knowledge of insurance regulation pertinent to the position. ### Change of ownership and portfolio transfers - Qualified shareholding approval: - Any acquisition of shares that would make a person a qualified shareholder (10 percent of the shares or voting rights) requires RS-ISA approval (article 61 paragraph 1 of the LIC). - RS-ISA approval also required when thresholds of 20 percent, 33 percent and 50 percent are breached. - Recommendation: establish a mandated process equivalent to assessing a new license application when approval sought is to exceed the 50 percent threshold. - Enforcement impediment: - LIC allows RS-ISA to void voting power of a non-approved qualified shareholder, but this power is not legally enforceable due to securities law requiring a court order which RS-ISA cannot initiate as it is not deemed an affected party. - Recommendation: incorporate supervisory power into legislation to request the insurer to start court process to void voting rights under threat of severe supervisory actions; consider enforcing disposal of shares acquired by a non-approved qualified shareholder. - Portfolio transfers: - Any insurer intending to transfer a portfolio needs RS-ISA approval; intention must be publicized in the press for 2 weeks; policyholders may complain to RS-ISA. - ISA can force a portfolio transfer under certain conditions. - Approval is granted once RS-ISA views that the insurer(s) accepting the business will not be impaired and policyholders are protected (articles 63–64 of the LIC). ### Market exit, liquidation, and policyholder protection - Grounds for initiating liquidation (Article 68 paragraph 1 of the LIC): - The RS-ISA revokes the license to operate as an insurance company; - The registration of the insurance company is declared null and void by a final court decision; - The assembly of the insurance company decides to cease operating as the insurance company. - Immediate supervisory protective actions: - RS-ISA may appoint a temporary administrator at the same time as the license is revoked (articles 67 and 67a of the LIC) to immediately intervene in insurers’ assets and activities. - RS-ISA appointed liquidator must report to RS-ISA regularly (article 67b). - Claim settlement priority: within 5 days of initiating liquidation, the liquidator has to start the claim settlement process (article 68 paragraph 10 of the LIC). - RS-ISA initiation of liquidation for insolvency or regulatory violations: - Article 29 paragraph 3, line 4 permits revocation if emergency management has not brought stability and liquidity. - Article 67a paragraph 1 lists points at which RS-ISA may adopt emergency management, including jeopardy to liquidity/solvency, concealment of business books/assets, failure to implement additional measures within deadlines, and failure to meet capital adequacy requirements despite measures. - Priority of policyholders in liquidation (Article 70 of the LIC): - Beneficiaries of insurance indemnity and their heirs have privileged claims against investments of the insurance company in relation to other claims, except costs of special liquidation process and bankruptcy costs. - In special liquidation, beneficiaries have privileged claims against all assets, giving them advantage over other creditors except for specified costs. - Privilege covers settling claims of the insured and their heirs, including third parties with direct claims; other creditors may be settled only if claims of the insured have been fully settled. - Beneficiaries of nonlife insurance indemnity are first settled with investments of nonlife insurance funds; beneficiaries of life insurance indemnity are first settled with investments of life insurance funds, in accordance with Article 56 and the regulation on investments. - Seizure of assets covered by investments is allowed only in favor of the beneficiaries stated in the Article; the insurance company must submit a copy of the decision on the seizure to the RS-ISA, otherwise the seizure is null and void. _Source: _cr15215 - 160. To protect policyholders, the RS-ISA has the power to impose interim management._ ### 180. The four laws covering the liquidation proceeding of an insurer need harmonization. ### _cr15215 - 180. The four laws covering the liquidation proceeding of an insurer need harmonization. ### Liquidation laws and interplay - Four laws apply to bankruptcy or liquidation proceedings of insurance companies: the regulations on bankruptcy proceedings, the LIC on the liquidation of insurers, the Company Law, and the Law on the MTPL Protection Fund. - Problem: Simultaneous application of the four laws can cause problems because certain proceedings are not clearly delimited and important gaps exist. - Specific gap identified: - The Protection Fund should be included as a creditor in liquidation proceedings. - The law should provide for open claims payments for MTPL claims before liquidation starts. - Recommendation: - Clarify the interplay between different laws, including the role of the Protection Fund. ### Prudential framework — overview - Focus areas: risk sensitivity of the solvency regime, market-consistent valuation of assets and liabilities, and investment requirements. - Relevant ICPs: ICPs 14–17. ### Valuation of assets and liabilities - Valuation performed in accordance with standard No. 4 of the International Financial Reporting Standards (IFRS). - IFRS prescribes an economic valuation reflecting risk-adjusted present values of cash flows, addressing recognition, de-recognition and measurement of assets and liabilities. - Requirements specified: - Insurer must keep insurance liabilities in its statement of financial position until discharged, cancelled, or expired. - Insurance liabilities must be presented without offsetting related reinsurance assets. - Valuations of technical provisions and other liabilities do not reflect the insurer’s own credit standing. - Additional regulation: valuation of individual positions regulated by the rulebook on the manner of assessment of balance and off-balance sheet positions of insurance companies. - Observation: Only two insurers show an off-balance position in their annual reports. ### Technical reserves and actuarial oversight - Insurers required to set up basic technical reserves. - Life business: - Mathematical reserves determined by the technical note. - The maximum discount interest rate is 5 percent. - Nonlife sector and group life business reserves required: unearned premium reserve, outstanding claims reserve and incurred but not reported claims (IBNR). - Reserve-setting rules: - Unearned premiums set up on a pro-rata basis. - Claims reserves set in full amount, or as an average in case of dispute using actuarial methods. - No explicit reserves for catastrophic risk. - Actuarial requirement: An actuarial opinion on correctness and sufficiency of technical reserves is required on an annual basis. ### Investment regulation and limits - Supervisor establishes investment requirements; the LIC grants RS-ISA power (article 56 paragraph 3). - RS-ISA Rulebook: admissibility and limits of assets to cover technical provisions, minimum guarantee fund and for solvency purposes; takes into account security, diversification and liquidity. - Foreign investments allowed within certain limits after RS-ISA approval; related party investments have stricter limitations. - RS-ISA lacks explicit powers to restrict ownership in subsidiaries or other investments not used to cover technical provisions or minimum guarantee fund. - Recommendation: - Regulate the type of investments insurers can undertake for all assets using the prudent person principle to move towards a total balance sheet supervisory approach. - Exposure and liquidity requirement consequences: - Requirements regarding diversification, liquidity and permissible securities apply to assets covering technical provisions, mathematical reserves and the minimum guarantee fund. - The rulebook sets admissible assets and limits; life reserves have higher limits on less liquid assets than nonlife; admissible assets to cover the minimum guarantee fund are only liquid assets. - Selected investment limits (as stated in Rulebook excerpts): - Maximum discount interest rate for life mathematical reserves: 5 percent. - Fixed-term deposits in banks in RS and BIH: Up to 50%, and in one bank up to 20% (Nonlife and Life). - Securities issued or guaranteed by BIH, the RS, BIH Central Bank and funds referred to under Article 8 of The RS Investment and Development Bank Act: Without limit (Nonlife and Life). - Bonds and other debt securities issued by a local authority in the RS or BIH: Up to 35%, and up to 10% per one issuer (Nonlife); Up to 40%, and up to 15% per one issuer (Life). - Shares traded on official stock market in RS and BIH: Up to 30%, and up to 10% per one issuer (Nonlife); Up to 20%, and up to 10% per one issuer (Life). - Real estate and other property rights: Up to 30% in one real estate or more real properties linked into one whole up to 15% (Nonlife); Up to 40%, and in one real estate or more real properties which are linked and form one whole up to 20% (Life). - Sum of US1, US2 and US3 up to 20%, and per one issuer up to 5% (Nonlife and Life) — where US1/US2/US3 refer to specified categories in the Rulebook. - Unearned premium charged against re-insurer, co-insurer or retrocessionaires: Up to 10%, and over 10% in accordance with the Agency's decision (Nonlife); Up to 5%, and over 5% in accordance with the Agency's decision (Life). - Deferred costs of acquisition of insurance: Up to 10%, in accordance with the Agency's decision (Nonlife). - Guarantee Fund admissible: Securities issued or guaranteed by BIH, the RS, BIH Central Bank and funds referred to under Article 8 of The RS Investment and Development Bank Act: Without limit; Fixed-term deposits in banks in RS and BIH: Without limit. - For Guarantee Fund: Sum of US1, US2 and US3 up to 20%, and per one issuer up to 5%. - Shares traded on an organized securities market in an EU member state: minimum market capitalization at the moment of investment is 500 million Euro (condition for eligibility as listed). - Note: The Rulebook links some allowances to credit ratings (decision based on the reinsurer having investment rating from Standard & Poor’s or Moody’s). ### Concentration risk with banks - Observation: Having over fifty percent of the insurance sector assets in bank deposits creates a relevant exposure to the banking sector. - Total exposure of the insurance sector assets in bank deposits is KM 127 million. - Recommendation: - Establish a formal channel of information with the bank sector supervisor to gain timely information on the financial soundness of all banks holding above a threshold of the insurance sector assets. ### Capital regime and solvency - Current capital regime follows Solvency I. - Legal requirements: - Articles 52, 52a, 53, 53a and 55 of the LIC require calculation of technical and mathematical reserves for all insurance contracts. - Rulebook on the Amount and Method of Investment for Covering of the Technical Reserves and Minimal Guarantee Fund: company must ensure investments at least equal to calculated technical reserves. - Regulatory capital adequacy requirements follow Solvency I; Rulebook on the Elements and Control of the Solvency Margin and Rulebook on Method of Calculation of the Capital and Capital Adequacy regulate calculation and control. - Required solvency margin determined by the minimum guarantee fund (cannot be less than): - KM 2 million if engaging in one or more of: vehicle owners or users MTPL insurance, aviation third party liability insurance, vessel owners or users marine third party liability insurance, general liability insurance, credit insurance and surety insurance. - KM 2 million if engaging in one or more of: accident insurance, health insurance, motor CASCO insurance, railway rolling stock CASCO insurance, aircraft CASCO insurance, sea, lake and river vessels hull damage, goods in transit insurance, fire and other natural perils insurance, financial loss insurance and travel insurance. - KM 1 million if engaging in other damages to property and/or legal protection insurance. - KM 3 million if engaging in life insurance. - KM 3 million if the company engages only in reinsurance activities. - Capital composition and limits: - Actual solvency margin (available capital) divided into core capital and supplementary capital. - Supplementary capital cannot exceed 50 percent of core capital. - Core capital components: paid share capital items (except based on cumulative preference shares), capital reserves (except reserves related to cumulative preference shares), statutory and legal reserves, and transferred net profit from previous years. - Reductions from core capital: own purchased shares, intangible assets, losses from current and previous years, and other prescribed items. - Supplementary capital components: paid share capital items based on cumulative preference shares, capital reserves related to such shares, subordinated financial debt instruments and other prescribed items. - In calculation of company capital, sum of core and supplementary capital reduced by: - amount of qualified shares in other insurance and reinsurance companies, banks and other financial institutions; - amount of subordinated debt instruments and other investments in legal entities (taken into account in their capital) where insurer owns a qualified share; - amount of illiquid assets. - Illiquid assets (as defined by RS-ISA Rulebook) include: - investments in shares and other securities traded at over the counter market; - investments in shares of stock exchange, clearing and depository institutions; - receivables from payments to guarantee accounts of clearing and depository institutions, BiH Green Card Bureau and receivables from payments made for other purposes earmarked for mutual guarantees for multiple-persons liabilities; - all receivables from insurance company shareholders with qualifying holdings and their related parties; - mortgage and lien assets; - the amount of receivables for which value impairment was not calculated in line with the regulation of the Agency determining the method for valuation of balance and off-balance items; - all other types of assets which cannot be cashed in an easy and fast manner when necessary to cover due liabilities. - Recommendation on solvency regime: - Update capital regime to introduce risk-sensitive elements. - Suggested starting points: credit risk capital surcharges on assets, introduction of differentiated factors depending on business line that apply to premium and claims calculation. - Once risk-sensitive solvency regime and early warning system are in place, develop a ladder of intervention based on capital levels and a corresponding set of prompt corrective actions. - Supervisory trigger: - Solvency margin adequacy ratio should be at least 100 percent. - A solvency margin adequacy ratio below 100 percent triggers RS-ISA enforcement measures and sanctions in accordance with the LIC. ### Risk management and governance - Scope: governance, internal controls, and risk management. Relevant ICPs: ICP 7–8. - LIC governance minima: - Article 60 paragraph 9 prescribes mandatory bodies: shareholders assembly, the director, the board of directors and an auditing body. - Company Law provisions (articles 304, 305, 313 and 314) prescribe roles and responsibilities for board, management and control functions of a joint stock company. - Board of directors responsibilities (Articles 304 and 305) include: - managing the development of the company and the strategy and oversight of executive directors and administration; - establishing or approving the business plan of the company; - adopting the six-month financial statements of the company; - election and dismissal of executive directors, approval of conditions in their contracts and determining their remuneration; - bookkeeping and internal supervision of operations (jointly with the CEO). *Source: _cr15215 - 180. The four laws covering the liquidation proceeding of an insurer need harmonization.* ### 196. The board composition is established in the Company Law. Article 313 of the Company ### 196–214 Board composition, internal controls, insurer governance, reinsurance, and market conduct ### Board composition and executive board (Article 313; Company Law) - A joint stock company may have one or more board members that are executive directors (Article 313 of the Company Law). - The number of executive directors shall never constitute a majority on the board of directors. - When a company has more than two executive directors: - The board of directors has to appoint the CEO. - An executive board has to be established; the CEO or general director is the chairperson of the executive board. - The board of directors may create the nomination and the remuneration committees, each having at least three members. ### Executive board responsibilities - The executive board is responsible for the implementation of the company strategy. - The executive board shall: - implement decisions of the board of directors; - manage the business of the company; and - act as legal representative jointly of the company, unless the founding act or statute limits representation to certain executive directors. ### Internal audit and audit committee (Articles 320–323; Company Law) - A joint stock company is obliged to provide for an internal audit function. - For listed companies, an audit committee must be formed; the audit committee must have at least three members or an odd number of members. - The audit committee of a joint stock company shall: - adopt a plan of internal audit; - review internal audit reports and make recommendations; - report to the board of directors on implementation of recommendations of the audit reports; - report to the shareholders assembly on the accounting, the reports and the financial operations of the company and its affiliated companies; - state its opinion on the proposal for the profit distribution to be adopted by assembly; - report on the compliance of the company with legal and other regulatory requirements; and - propose to the shareholders assembly the appointment of an independent auditor, if the company has an obligation to audit the financial statements. - The internal auditor of the joint stock company shall: - control and report to the audit committee on the credibility and completeness of the financial statements of the company; - control and report to the audit committee on the credibility and completeness of reporting to the shareholders on financial and other information; - control and report to the audit committee on the agreements concluded between the company and the members of the board of directors, as well as with related parties in terms of this Law; - control the compliance of the organization and the functioning of the company with the codes of conduct; and - control the procedures for settling complaints of shareholders, members of the bodies of the company or other persons regarding items a) to d) of this paragraph. - Reporting obligations: - The audit committee shall report to the shareholders at each annual assembly and at an extraordinary meeting when appropriate or requested by the Board of directors. - The audit committee shall submit a special report to the shareholders assembly on the agreements concluded between the company and related persons in terms of this law. - Powers of the internal auditor while carrying out duties: - Examine all company documents, check authenticity and information they contain; - Require reports and explanations from the Board of directors and employees; - Review the state of the company's assets. - If a closed joint stock company has an internal auditor, but no audit committee, the internal auditor shall perform the duties. ### Corporate governance requirements for insurers (assessment and gaps) - Current framework: - LIC has minimal governance requirements and relies strongly on Company Law. - Company Law mandates only that the board is responsible for establishing adequate internal control processes including an independent internal audit function and risk management systems consistent with the insurer’s risk management strategies. - Identified areas for improvement: - Board structure including committees, governance standards, board composition and knowledge, and assessment of board effectiveness. - Remuneration policy of board members and senior management. - Duties of individual board members including acting in the best interests of the insurer and policyholders. - Timely and effective communication with the RS-ISA and relevant stakeholders (including policyholders) on the governance structure of the insurer. ### Risk management and internal controls (regulatory baseline and recommendations) - Regulatory baseline: - Article 52a paragraphs 2 and 3 require insurers to align capital management, reinsurance and coinsurance policy and investment policy for covering technical reserves with the risks taken. - Rulebook on the Amount and Method of Investment for Covering of the Technical Reserves and Minimum Guarantee Fund and the Rulebook on Method of Calculation of the Capital and Capital Adequacy specify obligation to identify, measure and monitor investment risk of assets covering technical reserves. - Rulebook on Manner of Assessment and Monitoring of the Liquidity of the Insurance Companies stipulates obligations and procedures in the event of insolvency. - Gaps: - Regulation is not comprehensive about the effectiveness of risk management systems, nor are insurers required to prove effectiveness. - RS-ISA recommended enhancements: - Scope of internal controls: - Internal controls should be comprehensive, covering key business, IT and financial processes. - Key control functions should include at minimum internal audit, actuarial functions, and risk management function. - Each key control function should be led by a suitable person, have sufficient independence from business units, adequate resources, and access to the board with regular reporting. - Duties of key control functions: - Risk management should assess risks enterprise-wide, define risk appetite, document approval processes and authorities, establish risk strategy, and set escalation and reporting procedures. - Internal audit should assess adequacy and effectiveness of policies and procedures and evaluate reliability and integrity of management information. - A compliance function should be introduced to advise on compliance with laws, regulations and internal policies; compliance procedures should be integrated in work processes. - Outsourcing regulation should require: - (a) board approval of outsourcing of material functions or activities; - (b) due care and diligence in selecting outsourcing providers; - (c) written documentation of outsourcing arrangements; and - (d) periodic review of such arrangements. ### Licensing, business processes, and required documentation for insurers (LIC article 34(2), Decision on Documents) - To obtain an operating license, an insurance company must accompany the license application with business policy acts. Required business policy acts include at least: - General and special conditions of insurance and premium rates; - Decision on Technical Basis of Insurance; - Decision on Criteria, Determination Methods, Maximal Retention Table and Total Retention Amount; - Rulebook on Conditions and Methods of Depositing and Investing of Company Assets; - Rulebook on Maximum Rates of Expense Load; - Rulebook on Formation and Calculation of Unearned Premiums; - Rulebook on Formation and Calculation of Mathematical Reserves; - Rulebook on Formation and Calculation of Claims Reserves; - Rulebook on Formation and Use of Bonus and Discount Reserves (life insurance); - Rulebook on Formation and Use of Settlement Reserves (nonlife insurance only); - Rulebook on Conditions and Methods of Coinsurance and Reinsurance; and - Rulebook on Conditions and Methods of Recourse. ### Actuarial function, internal audit, and compliance roles (LIC article 20; article 59) - Requirements: - Insurance companies must implement an effective actuarial function to assess and advise on technical regulations, premiums and pricing, and compliance-related legal and regulatory requirements (article 20 paragraphs 1, 6 and 8 to 10 of the LIC). - A certified appointed actuary is independent and appointment is approved by the RS Agency; the general meeting is obliged to appoint a certified actuary (article 20, paragraph 8). - A bylaw passed by the management board of the RS Agency provides for an obligation to provide opinions on the calculated technical provisions. - All insurance companies employ internal actuaries pursuant to applicable regulations. - Article 59, paragraph 9 requires the insurance company to organize internal audit as an independent activity; internal audit must adopt a systematic and disciplined approach to evaluating and improving effectiveness of risk management, supervision and governance. - A document detailing internal audit functioning in insurance companies is currently under development. - Gap: - No compliance position is mandatory. ### Reinsurance: regulation, supervision, and recommended enhancements (ICP 13 referenced) - Current usage and principle: - Reinsurance is sparingly used due to dominant MTPL business that is largely retained. - Relevant principle is contained in ICP 13. - Current regulatory framework: - Insurers should reinsure the portion of the risk they cannot retain (article 52a paragraph 2 of the LIC). - Business plans must include envisaged reinsurance with tables of maximum retention by lines of insurance. - Insurance companies must adopt an internal rulebook on implementation of reinsurance and coinsurance policy, with acceptable models of assessment of maximum possible loss, submitted to the RS-ISA. - RS-ISA supervision: - On an annual basis, RS-ISA receives all reinsurance contracts in force. - RS-ISA monitors reinsurance contracts: identity of reinsurers, conditions and provisions, and rate of ceded risk. - RS-ISA may examine credit ratings of reinsurers and retrocessionaires and can prohibit conclusion of reinsurance contracts with a foreign reinsurer. - Investment grade from Standard and Poor’s or Moody’s is required to allow reinsurance receivables as admitted assets to cover technical provisions. - Recommended enhancements (to be considered in a rulebook under preparation): - The financial stability of reinsurers should be analyzed annually. - Registration of foreign reinsurers should be started with basic information and a contact person in the home supervisory agency. - Risk transfer requirements on reinsurance contracts should be specified. - Cash call clause should be included for catastrophic events. - Prohibition of side letter to guarantee the integrity of the contracts should be implemented. ### Market conduct, intermediaries, disclosure and consumer protection (ICP 18–22 referenced) - Licensing and qualification for intermediaries: - Insurance and reinsurance intermediation can only be carried out by legal entities or physical persons after obtaining a license issued by the RS-ISA (Article 2 paragraphs 2 and 3 of the Law of Intermediaries). - Licensing includes fit and proper requirements and requires brokers to carry error and omissions insurance. - Capital requirement for a broker is KM 200,000. - Intermediaries must pass an exam; the exam and training material are prepared by the RS-ISA. - There are four types of examination: for all lines of business, for nonlife, for life and for MTPL. - Training material has not been changed since it was developed; it is recommended to update training material regularly. - Registration and statistics: - Every intermediary is registered on the RS-ISA web page (Article 3 of the LoI). - At the end of 2013, RS-ISA had registered: - 134 physical persons as insurance intermediaries (of which 20 established limited liability entities, 7 insurance intermediation companies, including Pošte Srpske, and 4 branches of intermediation companies from the FBiH); - 58 insurance brokers; - 3 brokerage companies from the RS (2 banks and 1 brokerage company); - 2 branches of brokerage companies from the FBiH. - The last examination was carried out in May 2014; the next planned examination will take place on November 15th. - Foreign reinsurance brokers are not registered and there are no legal requirements for their activity; recommendation to include registration of foreign and reinsurance brokers to gain oversight. - Supervision and enforcement: - RS-ISA has authority for ongoing supervision of intermediaries (articles 20 and 21 of the LoI). - Reporting requirements include financial statements, intermediated premium, and earned commission. - Licenses must be renewed every two years, providing an occasion for compliance supervision. - In 2013, the largest intermediaries were inspected; supervision of agents is included in insurer onsite inspections. - Intermediaries have been fined and, in some instances, licenses suspended or not renewed. - Recommendation to introduce corporate governance requirements for insurance intermediaries according to size and complexity, independently of legal form. - Disclosure, client money segregation, and fair treatment: - Brokers must ensure transparency of legal and economic relations that could affect impartiality and must disclose legal or financial dependence on insurers or reinsurers (Article 16 of the LoI). - Brokers must keep clients’ payments on a special segregated account (Article 18 of the LoI). - Article 16 paragraphs 1 to 5 of the LoI oblige brokers to protect policyholder interests, including: - prepare a proper risk analysis and appropriate coverage principles; - prepare an assessment of the financial ability of insurance companies to cover risks on the basis of technical information available to the broker; - provide assistance for the duration of the insurance contract, at the occurrence of the insured event and ensure the insured takes necessary legal actions to protect and enforce a contract in time. - Brokers must ensure advice provided prior to contract conclusion is appropriate given client-disclosed circumstances. - Consumer complaints: - Complaints against the insurance sector are handled by the RS-ISA through its Department for Consumer Protection. - The Department is staffed with one person and responds to consumer complaints if there are clear violations of existing regulation; it also submits complaints to the Ombudsperson. *Source: Extracted text from the provided IMF PDF content unit (paragraphs 196–214).* ### 215. An independent ombudsperson operates within the RS-ISA. With the infrastructure ### _cr15215 - 215. An independent ombudsperson operates within the RS-ISA. With the infrastructure ### Ombudsperson mandate and scope of work - Appointed in 2008 by the RS-ISA board for a period of 3 years with the possibility of one reappointment; started operating in 2009 with an annual budget based on the insurance premium of 0.05 percent. - Scope of work includes: - providing information on the rights and obligations of consumers and providers of services in insurance; - monitoring and proposing activities for improving relations between consumers and providers of services in insurance; - investigating activities in the insurance market ex officio or on the basis of objections, complaints, information, and other submissions, for the purposes of protecting the rights and interests of consumers and users of services in insurance; - reviewing submissions of consumers of insurance services, as well as applications for information provision, providing responses, recommendations, and opinions, and proposing measures for resolution of submissions; - intermediating in peaceful resolution of contentious relations between consumers and providers of services in insurance; - providing guidelines or recommendations for the application of good business practices and standards of the profession in the operations of providers of services in insurance; - proposing to the Management Board of the Agency adoption of enactments from his or her scope of competence in the area of protection of rights and interests of consumers and users of services in insurance; - independently, or in cooperation with other bodies and organizations, organizing and implementing training on the benefits and risks relating to services in insurance with the objective of counseling consumers and users of services in insurance, and the public; - independently, or in cooperation with other entities, preparing and publishing information and other educational materials, with the objective of educating consumers and users of services in insurance, and the public; - undertaking other actions within the area of protection of the rights and interests of consumers and users of services in insurance. ### Operational performance and disclosures - Resources and staffing: - The Ombudsperson has no direct staff and relies on RS-ISA support to perform its mandate. - Recommendation: providing for significant additional resources including staff to enhance independence, actively promote the use of the Ombudsperson function, and to allow for a proper discharge of the mandate. - Complaints handled (since establishment): - 474 written complaints processed. - more than 1400 oral complaints handled. - Majority of complaints correspond to MTPL insurance. - 2012 complaints by type (Table 20: Republika Srpska: Structure of Complaints (By type of insurance in 2012)): - Liability insurance for motor vehicles: 35 — 68.63 - Motor vehicle insurance (kesko) - risk: 7 — 13.73 - Insurance against fortuity and accidents: 4 — 7.84 - Insurance against damage on property: 3 — 5.88 - Insurance against third party liability: 1 — 1.96 - Health insurance: 1 — 1.96 - Total: 51 — 100.00 - Publications and transparency: - General recommendations are published; two information bulletins published during 2012: Motor Vehicle Insurance and What you need to Know about Insurance. - Detailed statistics per company on complaints received and handled is not published; publication of such statistics is recommended. ### Code of Ethics and fair treatment - The Ombudsperson has issued a Code of Business Ethics applying to all insurance companies with objectives to: - ensure protection of the insured and beneficiaries under insurance contracts; - rebuild trust in the insurance business and build a culture of insurance in the RS. - Code covers: - rules of behavior for contracting insurance policies; - procedures for settling claims and requests for benefit payments; - rules of internal complaints procedure; - definition of behaviors not in accordance with regulations and good business practices. - Rights under the Code: - Insured persons and third injured parties have the right to contact the Ombudsperson regarding any treatment by insurance companies and intermediaries contrary to the code. ### Consumer protection: current status and recommendations - Current strengths: - RS-ISA has a dedicated department for consumer protection. - Regulation requires pre-contractual information in a clear and accurate form and disclosures of conflict of interests by intermediaries. - Term to pay claims is regulated to be no more than 14 days or 30 days. - All companies apply the code of ethics and have internal policies and procedures for claims handling. - Recommendations to move consumer protection to the next level: - Issuing a regulation that requires insurance companies to take into account the interests of different profiles of clients in the development and marketing of insurance products; - Imposing insurance specific requirements on the insurance companies and intermediaries to promote products and services in a way that is clear, fair and not misleading; - Developing a regulation on the fair treatment of customers similar to the EU framework for insurance contracts; issuing a regulation requiring insurers and intermediaries to establish and implement policies and procedures on the fair treatment of customers that are an integral part of their business culture; - Increasing resources for the ombudsperson to allow stronger and more intensive insurance education programs; - Granting decision making power to the ombudsperson to adjudicate small amount claims, or establishing a small claims court system; - Boosting the RS-ISA resources dedicated to consumer protection to initiate activities like developing jointly with other stakeholders an insurance literacy strategy and actively implementing the fair treatment of customers’ business. ### Disclosure, market discipline and financial literacy - Disclosure framework: - Following IFRS and RS-ISA regulations, insurers must publish comprehensive annual reports on their web-pages (Article 2, item 2, of the rulebook on reporting). - Required annual report disclosures include (selected items): - general information on the insurance company, including information about the owners of qualifying holdings, members of management board, executive board and audit committee; - description of business environment and position in the RS insurance market; - information on insurance claims per type of insurance (number, amount and status of reported and settled claims, number and amount of claims provisioned as of 31 December of the previous year and of the year for which the report is submitted); - mortality and morbidity data (per insurance product); - details on contracts concluded for life insurance (number of active policies at start of accounting period, number of newly issued policies, number of canceled policies, etc.); - analysis of ratio between costs of implementing insurance and overhead allowance; - analysis of approved bonuses and discounts; - liquidity indicators, cost ratio, claims ratio and combined ratio; - other indicators of business efficiency; - important business events between the end of the business year and the date of submitting the financial report; - assessment of expected future development; - most important research and development activities; - aims and policies regarding risk management, together with risk protection policies for each planned transaction that needs protection; - exposure to price risk, credit risk, market risk, currency risk, liquidity risk and other risks; - rules of corporate governance applied. - Gap: market discipline is weak due to lack of financial literacy; RS-ISA is recommended to increase effort to educate the public on insurance matters and collaborate with industry; evaluate leadership by the BiH-IA. ### Fraud prevention and AML-CFT - Fraud prevention: - Current regulation does not require insurers and intermediaries to take measures to deter, prevent, detect, report and remedy fraud in insurance. - Insurance fraud is codified as a crime (article 240 of the Criminal Code of the RS). - RS-ISA monitors a claims database for the MTPL; recommendation: establish a centralized claims database for MTPL. - Recommendation: RS-ISA should implement regular analysis of large claims and encourage insurers to publish information on fraud deterrence; enact regulation requiring insurers and intermediaries to take measures to deter, prevent, detect, report and remedy fraud; implement formal analysis of large claims in the supervisory process. - AML-CFT: - RS-ISA designated AML-CFT supervisor in the insurance and pension sector since June 2014. - Nonlife sector is not required to comply with AML-CFT requirements; consequently only three companies and a few intermediaries are supervised for AML-CFT compliance. - RS-ISA has enforced compliance by requiring internal controls, including nominating a compliance officer, and management of AML-CFT risks according to regulations. - No additional resources have been allocated to RS-ISA for this task. - Recommendation: increase training and resources in RS-ISA to strengthen understanding, oversight and enforcement of AML-CFT regulations. ### Market structure, size and performance (key statistics) - Sector size and growth: - Insurance sector assets: 4.3 percent of GDP. - At end of 2013, total assets amounted to KM 323 million, about 40 percent increase from 2009. - The insurance sector in the RS has been growing at an average of eight percent in last five years. - 2013 segment aggregates (Table 21: Republika Srpska: Insurance Sector Assets, Technical Reserves, Own Funds and Gross Premium 2009–2013 (in KM million)): - Total assets (KM million): - Nonlife: 2009: 208.01; 2010: 216.96; 2011: 217.35; 2012: 243.61; 2013: 257.25 - Life: 2009: 25.48; 2010: 32.97; 2011: 41.29; 2012: 54.03; 2013: 66.26 - Total assets: 2009: 233.48; 2010: 249.93; 2011: 258.63; 2012: 297.63; 2013: 323.51 - Technical reserves (Total TP, KM million): - Nonlife: 2009: 98.73; 2010: 99.50; 2011: 105.82; 2012: 114.59; 2013: 120.46 - Life: 2009: 16.30; 2010: 21.26; 2011: 27.36; 2012: 35.29; 2013: 46.27 - Total TP: 2009: 115.03; 2010: 120.76; 2011: 133.18; 2012: 149.88; 2013: 166.72 - Own funds (KM million): - Nonlife: 2009: 89.43; 2010: 99.14; 2011: 89.87; 2012: 99.35; 2013: 107.87 - Life: 2009: 7.71; 2010: 8.48; 2011: 11.75; 2012: 15.65; 2013: 15.74 - Total: 2009: 97.15; 2010: 107.62; 2011: 101.62; 2012: 115.00; 2013: 123.61 - Premium (KM million): - Nonlife: 2009: 112.03; 2010: 113.68; 2011: 121.05; 2012: 128.12; 2013: 127.13 - Life: 2009: 7.95; 2010: 8.93; 2011: 10.29; 2012: 11.56; 2013: 13.07 - Total: 2009: 119.98; 2010: 122.61; 2011: 131.34; 2012: 139.68; 2013: 140.20 - Market structure and competition: - At end-2013: 12 institutions licensed to provide insurance in the RS (compared with 11 in 2009). - Nine companies are nonlife companies; three are composite insurers providing both nonlife and life insurance. - Seven branches of insurers licensed by the FBiH operate in the RS and are accountable for about 12 percent of the FBiH insurance market. - Eight of the 12 insurers are domestically owned; one by a financial sector entity; one by the state; four foreign-owned insurers are owned by financial sector entities. - Brokers: - Number of licensed brokers increased from 5 licensed brokers in 2012 to 58 in 2013. - Number of licensed brokers expected to reach at least 80 by end-2014. - Concentration and product mix: - Nonlife sector: - Nonlife sector shows no concentration; ten insurers serve the sector with seven having more than ten percent market share. - 2013 market share of nonlife insurers (percentage share of the industry, Table 23): - Jahorina osiguranje a.d.: 17.5 - Dunav osiguranje a.d.: 13.57 - Drina osiguranje a.d.: 13.3 - Bobar osiguranje a.d.: 11.95 - Brčko - gas osiguranje d.d.: 11.05 - Nešković osiguranje a.d.: 10.43 - Krajina osiguranje a.d.: 7.18 - Triglav osiguranje a.d.: 6.39 - Osiguranje Aura a.d.: 4.68 - Mikrofin osiguranje a.d.: 3.94 - Grawe: 0.01 - Total: 100 - Life sector: - Grawe has dominant market share of 86 percent in life (Table 24: Life insurers, 2013): - Grawe osiguranje: 85.89 - Jahorina osiguranje: 7.73 - Dunav osiguranje: 6.38 - Total: 100 - Line of business (2013): - Nonlife premium in 2013: KM 127 million (about 80 percent of total premium). - MTPL accounts for 72 percent of total nonlife premium. - Life premium in 2013: KM 13 million (around 20 percent of total insurance premium in 2013; life was 10 percent in 2009). - Product mix trends (Table 25: Nonlife Insurance Products (In percentage of Total Premium)): - 2011 / 2012 / 2013: - Motor: 7.71 / 17.66 / 7.50 - MTPL: 73.65 / 70.67 / 72.72 - Property: 10.54 / 13.68 / 10.46 - Liabilities (all except MTPL): 0.52 / 0.56 / 0.75 - Accident and health: 7.22 / 7.08 / 7.71 - Others: 0.36 / 0.34 / 0.85 - Asset composition (2013): - Investments account for 56 percent of assets: - Over 55 percent of investments held in bank deposits or cash. - 10 percent in government bonds. - Real estate investments and other real estate assets account for 30 percent of assets. - Receivables: 17.7 percent of assets. - DAC: 8.2 percent of assets. *Source: Authorities.* ### 230. Liquidity risk is not systemic. With 45 percent of illiquid assets on average, the insurance ### _cr15215 - 230. Liquidity risk is not systemic. With 45 percent of illiquid assets on average, the insurance ### Liquidity risk and asset composition - Liquidity risk assessment: - "Liquidity risk is not systemic. With 45 percent of illiquid assets on average, the insurance sector is not exposed as a whole to liquidity risk; however, a few insurers have an important percentage of their assets in real estate and could be exposed to liquidity crunches specially if using excessive valuation for the real estate." - "The increase in DAC is a warning sign that needs special attention and could indicate insufficiency of technical premium." - Nonlife insurance sector assets (Republika Srpska, 2009-2013; In million KM): - Total assets: 208.01 (2009); 216.96 (2010); 217.35 (2011); 243.61 (2012); 257.25 (2013) - Intangible assets: 2.83; 2.15; 1.77; 1.83; 1.97 - Investments: 91.30; 110.72; 109.83; 126.34; 143.87 - Government securities: 0.65; 2.75; 2.82; 8.51; 13.43 - Corporate securities: 0.00; 0.00; 0.00; 0.13; 0.05 - Equities: 11.73; 12.27; 7.12; 3.48; 4.45 - Real estate and real-estate related 1/: 20.31; 27.39; 30.85; 38.92; 45.63 - Cash and bank balances: 58.60; 68.31; 69.04; 75.30; 80.30 - Receivables: 36.00; 31.79; 26.11; 41.11; 30.98 - Intra-group/related company receivables: 11.72; 8.00; 11.12; 11.86; 10.80 - Reinsurance recoverables: 0.08; 0.69; 1.53; 0.86; 5.89 - Other assets: 66.08; 63.61; 66.98; 61.61; 63.75 - Other real estate than investment: 35.75; 40.10; 42.55; 31.61; 30.78 - Differed acquisition costs (DAC): 9.17; 7.57; 9.19; 14.71; 19.07 - Facilities, equipment and advances: 9.27; 9.74; 9.74; 11.57; 9.65 - Non balance assets: 10.51; 4.77; 4.21; 2.80; 2.80 - Other: 1.38; 1.44; 1.29; 0.92; 1.44 - Source: National authorities. - Note: 1/ "Real estate which are only used as investments" - Life insurance sector assets (Republika Srpska, 2009-2013; In million KM): - Total assets: 25.48 (2009); 32.97 (2010); 41.29 (2011); 54.03 (2012); 66.26 (2013) - Intangible assets: 0.00; 0.00; 0.01; 0.13; 0.10 - Investments: 23.71; 29.78; 37.08; 42.10; 54.23 - Government securities: 10.08; 13.11; 14.23; 14.99; 18.12 - Corporate securities: 0.69; 0.00; 0.00; 0.00; 0.00 - Equities: 0.03; 0.03; 0.03; 0.03; 0.03 - Real estate and real-estate related: 0.00; 0.00; 0.00; 0.00; 0.00 - Cash and bank balances: 12.91; 16.64; 22.82; 27.08; 36.08 - Investments supporting unit-linked: 0.00; 0.00; 0.00; 0.00; 0.00 - Receivables: 0.93; 2.20; 3.21; 8.71; 9.00 - Intra-group/related company receivables: 0.00; 0.00; 0.00; 0.00; 0.00 - Reinsurance recoverables: 0.10; 0.13; 0.13; 0.20; 0.17 - Other assets: 0.73; 0.86; 0.87; 3.01; 2.86 - Other real estate than investment: 0.25; 0.22; 0.08; 0.24; 0.00 - Differed acquisition costs (DAC): 0.44; 0.62; 0.76; 2.34; 2.47 - Facilities, equipment and advances: 0.04; 0.03; 0.03; 0.25; 0.23 - Non balance assets: 0.00; 0.00; 0.00; 0.00; 0.00 - Other: 0.00; 0.00; 0.00; 0.17; 0.16 - Source: Authorities. ### Reinsurance use and retention - Usage summary: - "The usage of reinsurance is low but effective. With only less than 12 percent of the premium reinsured, most of the insurance risk is retained by the sector (table 28)." - "The MTPL does not require a large amount of reinsurance since the largest claims are covered by the green card guarantee fund. Here the retention is as high as 91.3 percent." - "Property is not well developed and flood and earthquake protection is an additional coverage that is infrequently bought." - "Notwithstanding the low usage of reinsurance, the reinsurance programs appear to be effective." - "Noting that the green card accident is automatically covered by its guarantee fund, of the top 10 claims with one exception, between 62 and 100 percent of the claims were reinsured (Table 29)." - Retention ratios (Republika Srpska, In percentage of the written premium): - Motor: 99.88 (2011); 99.86 (2012); 99.68 (2013) - MTPL: 97.41; 97.44; 91.30 - Property: 73.61; 51.87; 64.95 - Liabilities (all except MTPL): 88.62; 90.75; 63.51 - Accident and health: 99.19; 99.36; 91.34 - Others: 89.44; 67.12; 63.31 - Average: 95.15; 91.39; 88.73 - Source: Authorities. - Top ten claims and reinsurance participation (Republika Srpska): - MTPL (Zelena karta) 1,513,328 — Participation of reinsurers: 67 (In percent) - MTPL (Zelena karta) 1,315,369 — 63 - Osiguranje imovine 1,035,231 — 85 - Osiguranje imovine 1,032,864 — 100 - MTPL 947,979 — 78 - MTPL 858,090 — 81 - Osiguranje imovine 702,935 — 83 - MTPL 617,575 — 68 - MTPL 601,464 — 28 - MTPL 511,533 — 0 - Source: Authorities. ### Profitability, solvency, and technical provisions - Profitability: - "The insurance sector has been slightly profitable." - Nonlife sector average ROE (five years): 2.71 percent. - Life sector ROE declined from 3.26 percent (2009) to 1.25 percent (2013). - Investment income: nonlife 5.71 (average), life 6.01 (average). - Table of returns (Republika Srpska; In percentage, 2009-2013): - Nonlife Investment income: 4.91 (2009); 6.90 (2010); 3.95 (2011); 8.48 (2012); 4.29 (2013); Average 5.71 - Nonlife ROE (after tax): 0.28; 3.32; 2.77; 4.35; 2.82; Average 2.71 - Life Investment income: 5.48; 5.65; 5.79; 6.91; 6.19; Average 6.01 - Life ROE (after tax): 3.26; 3.33; 2.42; 2.34; 1.25; Average 2.52 - Source: Authorities. - Drivers and risks to profitability: - "The profits have been eroded by the high costs shown in the financial statements and are partly supported by increased DACs and liberal valuations of real estate and loans." - "The technical provision as a percentage of premiums in nonlife has significantly increased in 2013 probably reflecting deterioration of the claims experience (table 31)." - "The combined ratios (net claims and expenses over net premium, but without reinsurance commission) are above or close to 100 percent, indicating the need for investment’ yields to show profits." - "The corporate tax of 10 percent supports net profits notwithstanding that only 20 percent of the technical provision in nonlife can be deducted as expenses." - Technical provisions (Republika Srpska; As a percentage of premium in nonlife): - Gross premiums: 112.03 (2009); 113.68 (2010); 121.05 (2011); 128.12 (2012); 127.13 (2013) - Technical provisions: 98.73; 99.50; 105.82; 114.59; 120.46 - Ratio: 88.13; 87.53; 87.42; 89.43; 94.75 - Combined ratio 1/: 1.07 (2009); 1.11 (2010); 1.00 (2011); 0.93 (2012); 0.98 (2013) - Source: National authorities. - 1/ "The reinsurance commission is not considered." - Solvency positions (nonlife, 2013–June 2014; insurers listed by solvency ratio): - Insurer 1: Solvency ratio 2013: 1.04; Solvency ratio 2014Q2: 1.06 - Insurer 2: 1.08; 1.08 - Insurer 3: 1.19; 1.30 - Insurer 4: 1.28; 1.00 - Insurer 5: 1.30; 1.35 - Insurer 6: 1.47; 1.69 - Insurer 7: 1.63; 1.74 - Insurer 8: 1.79; 0.74 - Insurer 9: 2.46; 2.25 - Insurer 10: 2.49; 2.20 - Insurer 11: 2.68; 1.41 - Insurer 12: n.a.; 1.00 - Source: Authorities. - Observations on solvency and market structure: - "Five companies accounting for 40 percent of the nonlife market have solvency margins that are close to the point at which they will require supervisory measures." - "Currently, one insurer accounting for 3.7 percent of the market is insolvent and two insurers accounting for 13.3 percent of the market have solvency ratios of 100 percent." - "Five insurers accounting for 23 percent of the market have a solvency ratio between 101 percent and 110 percent." - "The resilience of the sector could be even worse given that Solvency I requirements do not fully allocate capital according to the risks assumed." - "The fragmented nonlife insurance market with premium well distributed among the participants has increased competition. This has led in some cases to insufficient premium for the risks assumed." - "Market participants bypass regulation that fixes not only the tariff but also the commissions by assuming additional non-regulated expenses, for instance in the areas of administration and servicing." ### FSAP recommendations (Republika Srpska) — priority and timeframe highlights - Governance, supervision, and institutional arrangements: - Establish regular and formalized information sharing process (Coordinating Committee). Priority: High. Timeframe: Immediate. - Consider establishment of an integrated supervisor (RS-ISA and government). Priority: Medium. Timeframe: Medium Term. - Include RS-ISA in the SCFS (Government/Parliament). Priority: Medium. Timeframe: Near Term. - Introduce position of Deputy director and consider full time managing board for RS-ISA as market grows (Government/Parliament). Priority: High. Timeframe: Immediate. - Revise fee basis considering line of business (Government/Parliament). Priority: Medium. Timeframe: Near Term. - Update law allowing RS-ISA to be sued as institution and clarify defence costs for staff (Government/Parliament). Priority: High. Timeframe: Near Term. - Capacity, systems, and supervision tools: - Outsourced IT should be constantly monitored by an in-house expert (RS-ISA). Priority: High. Timeframe: Immediate. - Create internal audit function (RS-ISA). Priority: High. Timeframe: Near Term. - Market-wide targeted actuarial reviews should be regularly carried out (RS-ISA). Priority: High. Timeframe: Immediately. - Develop early warning system and introduce stress testing at company and market level; capacity building required (RS-ISA). Priority: High. Timeframe: Near Term. - Introduce basic group supervision implementing secondary regulation as in article 71 (RS-ISA) and article 72 (FBiH-ISA) of LIC. Priority: High. Timeframe: Near Term. - Introduce comprehensive group supervision framework in law and training (Government/Parliament). Priority: High. Timeframe: Near Term. - Introduce macroprudential supervision framework as market develops (RS-ISA). Priority: Medium. Timeframe: Medium Term. - Consider assigning development of macroprudential tools to BiH-IA and grant implementation powers to ISAs. Priority: Medium. Timeframe: Medium Term. - Fit and proper, governance and intervention: - Require fit and proper for all governance board members and internal auditor (RS-ISA). Priority: High. Timeframe: Near Term. - Introduce interviews for candidates to control functions (RS-ISA). Priority: Medium. Timeframe: Medium Term. - Apply assessment requirements for applications to increase shareholdings to over 50% similar to new licenses. Priority: High. Timeframe: Medium Term. - Incorporate supervisory power to void voting rights of non-approved qualified shareholder and consider enforcement on disposal of shares (Government/Parliament). Priority: High. Timeframe: Medium Term. - Clarify interplay between laws including role of Protection Fund in MTPL winding up (ISAs). Priority: Medium. Timeframe: Near Term. - Solvency, risk-sensitive capital, and governance strengthening: - Regulate investments via prudent person principle and move to a total balance sheet supervisory approach (RS-ISA). Priority: High. Timeframe: Near Term. - Update solvency regime by gradual incorporation of risk elements; start with credit risk capital surcharges and differentiated factors by line of business (RS-ISA). Priority: High. Timeframe: Near Term. - Once risk-sensitive solvency and early warning in place, develop ladder of intervention with prompt corrective actions (RS-ISA). Priority: High. Timeframe: Medium Term. - Update governance requirements: board structure, committees, governance standards, board composition and assessment, remuneration, duties of individual board members, timely communication with RS-ISA and stakeholders. Priority: High. Timeframe: Medium Term. - Strengthen regulation on internal controls, risk management and corporate governance; require internal audit, actuarial, risk management, and compliance functions with specified duties and independence; enact regulation on outsourcing with board approval, due diligence, written documentation, periodic review (RS-ISA). Priority: High. Timeframe: Medium Term. - Reinsurance, intermediaries, and consumer protection: - Enhance reinsurance supervision and regulation: annual analysis of reinsurers' financial stability; register reinsurers with basic information and contact; specify risk transfer requirements; include cash call clause for catastrophic events; prohibit side letters (RS-ISA). Priority: Medium. Timeframe: Near Term. - Update training material on insurance intermediation regularly (RS-ISA). Priority: Medium. Timeframe: Medium Term. - Require registration of foreign and reinsurance brokers for oversight (RS-Government). Priority: Medium. Timeframe: Medium Term. - Introduce corporate governance requirements for insurance intermediaries according to size and complexity (RS-Government). Priority: Medium. Timeframe: Medium Term. - Provide significant additional resources and staff; promote Ombudsperson function and proper mandate discharge (Government/Parliament). Priority: High. Timeframe: Near Term. - Publish detailed statistics per company on Ombudsperson complaints handled (Ombudsperson). Priority: High. Timeframe: Immediately. - Move consumer protection forward by issuing regulations to ensure products consider different client profiles; impose insurance-specific marketing requirements; develop fair treatment of customers regulation; require insurers and intermediaries to establish fair treatment policies; increase Ombudsperson resources; grant small-claims adjudication or establish small claims court; boost RS-ISA resources for consumer protection and insurance literacy strategies (RS-ISA and Government/Parliament). Priority: High. Timeframe: Near Term. - Fraud, AML-CFT, and other operational recommendations: - Require insurers and intermediaries to take measures to deter, prevent, detect, report and remedy fraud and formally analyze large claims in supervision (RS-ISA, Parliament). Priority: Medium. Timeframe: Near Term. - Establish a centralized database for MTPL claims to prevent fraud (RS-ISA). Priority: Urgent. Timeframe: Near Term. - Increase training and resources in RS-ISA for AML-CFT supervision and enforcement (RS-ISA). Priority: High. Timeframe: Near Term. - Facilitate establishment of quality control committees for auditing work (Chamber of auditors). Priority: Medium. Timeframe: Immediately. - Timing note: - "Immediate" is within one year; "near-term" is 1–3 years; "medium-term" is 3–5 years. *Source: National authorities; Authorities; National authorities; Authorities (as cited in the provided IMF content).* ### Appendix I. Progress on 2006 FSSA Recommendations ### Appendix I. Progress on 2006 FSSA Recommendations ### 2006 Main Recommendations and Implementation Status - Issue the necessary technical regulations as soon as possible. - Implementing Agency: Insurance agencies - Status of Implementation: Implemented. The bylaws on solvency, technical provisions and the guarantee fund have been issued. Both entities have implemented Solvency I regimes. - Set up a mechanism to enforce and to supervise the tariff for compulsory Motor Third Party Liability insurance. - Implementing Agency: Insurance agencies - Status of Implementation: Not implemented. A project to liberalize tariffs is in advanced stage. - Upgrade the institutional structure and enforcement capacity of insurance supervision in both entities. - Implementing Agency: Insurance agencies - Status of Implementation: Implemented. The budget and the staff have been increased. Operational infrastructure has been established. The powers of the ISAs have been regulated in bylaws and used. *Source: _cr15215 - Appendix I. Progress on 2006 FSSA Recommendations* --- ### Appendix II. Report on Indicators of Prompt Liquidity ### Synthetic accounts and stocks on the day - 1 Monetary funds on business accounts in domestic currency — 241, 242 - 2 Monetary funds on foreign currency accounts (according to exchange rate at the date of calculation) — 244, 245 - 3 Cash in hands (both in local and foreign currencies) — 243, 246 - 4 Demand deposit — 232 - 5 Share of Loan Commitments Unused — 88 - 6 Term deposits maturing within 7 days, except deposits used to cover technical provisions — 033, 034, 035, 038 - 7 Extended loans maturing within 7 days or shares of loans (annuity) maturing within the following seven days, corrected for adjusted value — 03 - 8 Securities and shares that can be immediately converted to cash, i.e., maturing within 7 days. — 0 - 8.1. Graded until maturity date — 036 - 8.2. Graded as available for sale — 037 - 8.3. Graded by fair value in Income statement — 236 - 8.4. Shares — 030, 031, 032 - 9 Receivables maturing within 7 days secured with appropriate instruments (bill of exchange, bank guaranteed, mortgage, lien etc.) — 20 - 10 Expected earnings from insurance premium, i.e., reinsurance in the following 7 days, given the average daily earnings in the previous years, as of the incorporation date, if no data available for previous year. - 11 Expected earnings from reinsurance share in claims maturing within 7 days ### Totals and ratios (as presented) - I TOTAL LIQUID ASSETS (1 TO 11) — 0 - 12 ST financial liabilities due — 42 - 13 Due liabilities related to claims and insurance contracts — 43 - 14 Due liabilities for premium and specific liabilities — 44 - 15 Due liabilities for wages and allowances — 45 - 16 Other due liabilities from operations — 46 - 17 Due liabilities for taxes and contributions — 47 - 18 ST financial liabilities maturing within 7 days — 42 - 19 Liabilities related to claims and insurance contracts maturing within 7 days — 43 - 20 Liabilities for premium and specific liabilities maturing within 7 days — 44 - 21 Liabilities for wages and allowances maturing within 7 days — 45 - 22 Other liabilities from operations maturing within 7 days — 46 - 23 Liabilities for taxes and contributions maturing within 7 days — 47 - II TOTAL LICENSE/DUE LIABILITIES (12 TO 23) — 0 - III LIQUIDITY COEFFICIENT (I/II) — 0 *Source: _cr15215 - Appendix II. Report on Indicators of Prompt Liquidity* --- ### Appendix III. CARMEL Analysis ### Group labels and Indicator Subgroups (Nonlife insurance) - C (Capital-related) - C1 Premium in retention / Total capital - C2 Total capital minus losses / Total assets - СЗ Total capital minus losses / Technical reserves - C4 Guarantee Fund / Solvency margin - A (Asset-quality related) - A1 Intangible investment + real estate + receivables / Total assets - A2 Receivables for premium / Total invoiced premium - A3 Share in capital / Total assets - A4 Coverage of technical reserves with stipulated forms of assets - A5 Coverage of technical reserves with stipulated forms of assets 1 - R (Reinsurance / retention) - R1 Earned premium in retention / Total earned premium - R2 Technical provisions in retention / Average settled claims in retention over the past 3 years - R3 Technical provisions in retention / Average premium in retention over the past 3 years - M (Management / efficiency) - M1 Total contracted premium / number of employees - M2 Total assets / Number of employees - M3 Costs of earnings / Premium in retention - E (Earnings / profitability) - E1 Earned claims in retention / Earned premium in retention - E2 Insurance acquisition costs / Earned premium in retention - E3 Investment profit / Earned premium in retention - E4 Combined 1 - Е1 + Е2 indicator - E5 Combined 2 - Е1 + Е2 - Е3 indicator - E6 Net result / Average total capital - E7 Net result / Number of employees - E8 Net result / Total assets - E9 Net result / Total income - L (Liquidity) - L1 Cash and cash equivalents / Short-term liabilities - L2 (Operating assets - stocks) / Short-term liabilities - L3 Liquid assets / Short-term liabilities - Note: 1 As of December 31, 2013. *Source: _cr15215 - Appendix III. CARMEL Analysis* --- ### Appendix IV. Calculation of Liquidity Ratio ### Daily-fill table of items and synthetic accounts - No / Date (to be filled in for every workday Day) - Description / Account (synthetic) / Standing - 1 Funds in the transaction account - 2 Funds at foreign currency accounts - 3 Cash in hand - 4 Demand deposits - 5 Term deposits that are unconditionally withdrawn - 6 Securities that can be cashed immediately - 7 TOTAL LIQUID ASSETS (1–6) - 8 Obligations due under insurance contracts - 9 Obligations due from financing activities - 10 Other obligations due - 11 TOTAL OBLIGATIONS DUE (8–10) - Liquidity ratio (7/11) *Source: _cr15215 - Appendix IV. Calculation of Liquidity Ratio* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15215.pdf_