THEME 2. STATE REGULATION OF THE INSURANCE MARKET Iryna Nyenno, Doctor of Economics, Odessa I.I. Mechnikov National University

1.International standards and EU Regulation 2.Regulation of financial stability. 3.Regulation of Italian Insurance Market – IVASS report 4.The activity of Insurance Associations – ANIA (Italy), LIO (Ukraine) Plan

3 International Standards International Insurance Supervision Association (IAIS) Stress testing of insurance companies International Monetary Fund (IMF) Stress Testing Financial Systems: A Brief Overview of FSAP Problems, Methodologies, and Experience International Monetary Fund (IMF) and World Bank (WB) Financial Sector Assessment Program (FSAP) FSAP analytical tools Introduction to Applied Stress Testing

EU Insurance Regulation Risk Management - common rules to facilitate the activities of insurance companies across the EU, ensure that they can survive in difficult times, and protect policyholders. Insurance distribution - EU laws improving the way insurance products are sold. Motor Insurance Reorganisation procedure Occupational pension funds are financial institutions that manage collective retirement schemes for employers, in order to provide benefits to employees. Insurance guarantee schemes (IGS) provide last-resort protection to consumers when insurance companies are unable to fulfil their contractual commitments. They protect people against the risk that claims will not be met if their insurer becomes insolvent. The Commission is examining how to strengthen the capacity of the insurance sector to insure against natural and man-made disasters. Source: management-and-supervision-insurance-companies-solvency-2_enhttps://ec.europa.eu/info/business-economy-euro/banking-and-finance/insurance-and-pensions/risk- management-and-supervision-insurance-companies-solvency-2_en

REGULATION OF FINANCIAL STABILITY For the assessment of financial stability, EIOPA (European Insurance and Occupational Pension Aithority) has included the following elements in their Financial and Stability report: key developments regarding market risk and other threats (external risks); changes in own funds, profitability (ROE, ROI, ROA); solvency, future legislation changes; and risk assessment by SCRs (Solvency Capital Requirements), investments; and EU-wide stress test results. Source:

REGULATION OF FINANCIAL STABILITY Ratings: - Standart & Poor's (S & P) - Moody's Investors - Fitch Ratings - Duff & Phelps In order to assign a company to this or that rating, is used incredibly large number of financial indicators. Taken into account also managerial accounting, marketing policy, company strategy regarding selling policies, risk management, organizational and managerial structure, investment policy and a number of other factors. Stress-testing – testing of the ability to maintaining the normative level of solvency) and efficiency of activities. Source: Wang, Y., & Carson, J. M. (2014). Rating drift in property-liability insurer rating transitions. Journal of Insurance Issues, 37(1), 59–76.

7 Purpose of stress-testing Insurance Company Improving corporate governance Better understanding of risk Development of an appropriate risk mitigation strategy Monitoring the adequacy of reserves Supervisor Solvency Monitoring Estimation of the adequacy of reserves Asset allocation Asset and Liability Management (ALM)

REGULATION OF FINANCIAL STABILITY For the assessment of financial stability, EIOPA (European Insurance and Occupational Pension Aithority) has included the following elements in their Financial and Stability report: key developments regarding market risk and other threats (external risks); changes in own funds, profitability (ROE, ROI, ROA); solvency, future legislation changes (external risk); and risk assessment by SCRs (Solvency Capital Requirements), investments; and EU-wide stress test results. Source:

State Regulation - Ukraine Solvency I structure of capital requirements was based on simple factor measurement approach and was easy to apply. Market risks were not included in this structure; therefore, companies could do high risk investments without facing direct capital charge.

Insurance Regulation – European Union Solvency and Financial Condition reports (SFCR) in 2016 were published first time by non-life insurance companies in European Union. Solvency II came into effect in 2016, and these reports have been prepared using the new requirements of the Solvency II framework. All non-life insurance companies are required to have eligible own funds at least equal to solvency capital requirement (SCR) in order to avoid supervisory intervention (own funds divided by SCR are required to be at least 100 %). The SCR is based on well known risk measure value at risk with 99.5 % confidence level over a one-year time horizon.

ITALY: IVASS the Institute for the Supervision of Insurance IVASS is a body endowed with legal personality under public law whose goal is to ensure adequate protection of insured persons with a view to the sound and prudent management of insurance and reinsurance undertakings and their transparency and fairness towards customers. IVASS pursues the stability of the financial system and markets. IVASS exercises its supervisory functions over insurance and reinsurance undertakings, insurance groups, financial conglomerates in which undertakings are included, subjects who perform functions partly included in the operational cycle of undertakings as well as insurance and reinsurance intermediaries. To secure its institutional objectives IVASS exercises its supervision (the so called micro-prudential supervision) through assets/liabilities, financial and technical controls over corporate governance and shareholdings and performs supervisory functions over the system's stability (the so called macro-prudential supervision). Source:

Analysis of development of insurance market Problems associated with the development of insurance business: - insufficient solvency of the population, - distrust of domestic insurers, - low level of insurance culture, - insufficient level of introduction of information products into insurance, - use of insurance as an instrument of tax optimization instead of its direct function - protection against risks.

Analysis of development of insurance market Creating a full-fledged insurance market following measures should be taken: maintenance of normal functioning, that is, the implementation of the current insurance activity with the creation of sufficient insurance reserves and reimbursement of insurance events while maintaining a certain level of profitability, that is, creating a real financial support function; the creation of such a financial potential that would enable an insurance company to build up financial assets and ensure competitiveness, that is, the creation of financial development support.

State regulation of the insurance market The main task of state authorities is to use the risk function of insurance capital to protect financial and entrepreneurial activity and risk management of individuals, especially vulnerable groups of the population. Licenses for carrying out insurance activity are indefinite. The minimum amount of equity of an insurer must be paid exclusively in cash. The formation of the equity fund of the insurer for securities issued by the state, at their nominal value, in accordance with the procedure defined by the Financial Services Commission, but not more than 25 percent of the total authorized capital, shall be allowed. It is forbidden to use promissory notes, funds of insurance reserves, budgetary funds, as well as funds received on loans, loans and collateral for the formation of the authorized fund, and to make intangible assets. The total amount of the insurer's contributions to the statutory funds of other insurers cannot exceed 30 percent of its own authorized capital, including the amount of contribution to the statutory fund of a separate insurer cannot exceed 10 percent.

State regulation of the insurance market The direct business of the insurer can be only insurance, reinsurance and financial activities associated with the formation, placement of insurance reserves and their management. The license is issued for the implementation of a separate type of insurance and at the same time gives the right to reinsurance under this type of insurance. An insurer (reinsurer) has the right to accept risks for reinsurance only from those types of voluntary and compulsory insurance for which he has received a license.

State regulation of the insurance market The insurer has the right to start insurance activities in the event that: the accounting and recording system meets the requirements set by the regulatory legal acts; the internal rules of the insurer comply with the requirements of the laws and regulatory legal acts of state bodies that regulate and oversee financial services markets; the professional qualities and business reputation of the personnel correspond to the requirements established by normative-legal acts; Head and Chief Accountant meet Professional requirements for managers and chief accountants of financial institutions, approved by the State Commission

State regulation of the insurance market In order to obtain a license for the right to perform insurance activities, the applicant submits to the Financial Services Commission the documents including the economic substantiation of the planned insurance activity by the established form. After giving the financial institution a license for the right to conduct specific types of insurance, information about the insurer is entered into the Unified State Register of Insurers (Reinsurers).

State regulation of the insurance market The reasons for cancellation of the license are: the insurer's application for the cancellation of the license; the decision to cancel the state registration of the insurer; detection of inaccurate information in documents submitted by the insurer for obtaining a license; decision on the application of the measure of influence; impossibility of the insurer to ensure compliance with the licensing conditions established for the insurance activity, in particular, the start in accordance with the requirements of the regulatory legal acts of the insurer's liquidation procedure; failure by the insurer to carry out insurance activities in accordance with the issued license within 12 months from the date of its issue.

State regulation of the insurance market The requirements for the economic substantiation of the planned activity of the insurer are as follows: 1.The general description of the insurer is the full and abbreviated name, where and where the registration and re-registration were made, the legal address and actual location, information on the provision of premises, office equipment, communications and personnel, including qualified staff, directions (form, views, place) his activities. 2.An overview of the state of the insurance market in the regions and areas of activity of the insurance company (with an assessment of the total number of insurance objects, the competitiveness of the insurance environment, segments of the market, which plans to cover the insurance company, other characteristics of the state and prospects of the insurance market, which determine the choice of activities of the insurance company)

State regulation of the insurance market 3.Types of activities of the insurance company (with the indication of the main specific characteristics of the insurance product company). 4.Marketing strategy (determining the number of objects subject to insurance on a quarterly basis, and measures to promote the company's insurance product market). 5.Organizational structure of the insurer and its development. Legal and audit support of the insurance company's activity, which provides for the presence of appropriate structures within the company, or the relevant legal and audit agreements are concluded.

State regulation of the insurance market 6.Plan of operation of the insurance company, where the forecast of the development of insurance operations for 3 years or more is determined, where the average insurance amounts of individual insurance objects are determined for the first year, the average amount of tariffs, the calculated average insurance payments and the calculated number of collected insurance payments, as well as the amount of insurance payments, maximum liability for a particular object of insurance. Data is summarized in the table. 1.

State regulation of the insurance market 7.Estimation of the solvency and risks of the insurance company at the end of each calendar year and approaches to reinsurance (with the calculation of the normative stock of solvency and solvency ratio, risk factor and coefficient of probability of the deficit of the insurance company's funds). Table 1 Forecast of insurance operations development on ___________ Types of insurance Number of contracts Rate,% Average insured amount, UAH million Average insurance payment, UAH million Sum of insurance premiums for the quarter, UAH million Standard of payments for this type of insurance,% Amount of insurance payments, UAH million Maximum liability for a separate insurance object 6789

State regulation of the insurance market 8.Financial plan for not less than 3 years, where quarterly for the first year and beyond for each year indicated: - the size of own funds; - number of contracts (for personal insurance - the number of insured); - the amount of insurance premiums; - amount of insurance payments; - the size of the created technical (mathematical) reserves (technical reserves are taken equal to the volume of unearned insurance premiums); - expenses for the insurance activity, including commission for agents (brokers), and for reinsurance; - the expected profit, including: - the size of the available reserves; - net profit. The basic data for drawing up the financial plan is the data from Table 2. The financial plan is summarized in the table. 2.

State regulation of the insurance market Table 2 Types of insurance Size of own funds (net assets), UAH million Number of insurance contracts (for personal insurance - the number of insured persons) Total amount of insurance payments receipts, UAH million Amount of insurance payments, UAH million The size of (technical) mathematical reserves, ), UAH million Costs for insurance activity, UAH million Expected profit amount, UAH million Size of free reserves, UAH million Profit, mln. UAH

State regulation of the insurance market Table 3 1 q.2 q.3 q.4 q.In a year Income (revenues) The aggregate amount of insurance payments New capital Credits Revenue from asset placement Sale of assets Other income Total revenues Costs (payments) Insurance payments Insurance reserves, including technical reserves Fee for the placement of insurance policies Rental or maintenance of buildings Transport and communications Service (service) Settlements with banks Advertising Salary Charges on salary Taxes Dividends Purchase or rent equipment Total cost Balance (+/-) 9.The balance of incomes and expenses of the insurance company (not less than 3 years) in the form of the table. 3:

Criteria of evaluation of insurance company amount of equity capital; cash and cash equivalents less liabilities; return on equity; the level of payment of insurance indemnity in relation to the earned insurance premium; amount of insurance indemnity payments for certain types of insurance;

Criteria of evaluation of insurance company the size of insurance payments for certain types of insurance; number of affiliates and representative offices located in Ukraine; risk reinsurance programs; structure of the insurance portfolio;

Criteria of evaluation of insurance company experience in conducting certain types of insurance; availability of international official ratings of financial stability, including founders' insurers (in cases where the insurer-founder has more than 51% of shares); availability of the insurer in the financial and industrial groups; insurance assistant programs by type of insurance; presence of cooperation with survey companies; call center performance; the procedure for carrying out the examination of the harm caused in the event of the occurrence of an insurance event.

Criteria of evaluation of insurance company 1.does the company have a license for this type of activity and how long it works in the market; 2.what place the company takes in different ratings; 3.what is its share in the auto insurance market (if the company specializes in other types of insurance - aviation, "circuit", etc., it may not be interested in retaining customers from other segments);

Criteria of evaluation of insurance company 4.what level in general and by types of insurance (high-paying companies are usually members of the National Insolvency Club); 5.who are the shareholders of the company (foreign shareholders, as a rule, are more loyal to the payments, using the Western principle "ALL for the customer"); 6.Whether the company had problems with non-payment (you can find out about insurance brokers that are more focused on the interests of clients and usually carry black lists of unscrupulous insurers);

The standard list of documents The standard list of documents, which in most cases should be provided by the insurer for preliminary analysis of the client, is: a completed form "Information about the insurance company" signed by the authorized person and sealed; duly certified registration certificate; duly certified licenses for the introduction of insurance; duly certified copy of the Statute; a duly certified copy of the power of attorney per person who will sign the package of documents - a proposal if the signature right is not provided for in the Insurer's Charter;

The standard list of documents auditor's report at the latest date (for joint-stock companies); a document of the bank (or other third-party organization) confirming the payment or increase of the authorized capital (with indication of the amount of the transfer); duly certified copies of the insurer's income and expenditure reports (with all sections and explanations); duly certified copies of financial statement(Forms No. 1 and No. 2); description of the programs of obligatory reinsurance (reinsurers, type of agreement, the actual content (priority), quotas, the capacity of the contract, the size of the cash loss, the warning on the settlement of losses over cash, etc.); letters of confirmation from reinsurers of the existence of bond reinsurance contracts or other document confirming the existence of such an agreement; documents on the appointment of a manager, chief financial officer, chief underwriter and person responsible for settling losses in the company; promotional materials.

QUESTIONS TO THE SEMINAR 1.Name the main standards for insurance company regulation. 2.What re the main areas for EU insurance regulation? 3.What is rating approach and stress-testing in the insurance market regulation? 4.List the main criteras for the insurance company choice.