Technical Session IV - N.Srinivasa Rao & S.P.Chakraborty

ICP 18 to 23
Presented in
One day Workshop on Financial
Sector Assessment Program
N. Srinivasa Rao & S. P. Chakraborty

Hyderabad, 29th December, 2010
1


ICP – 18 to 23
Agenda
• Principles
• Essential Criteria for assessment
• Observance of principles/current practice

2


ICP – 18
Risk Assessment & Management
Principle:
The ‘Supervisory Authority’ requires insurers
to recognize the range of risks that they face
and to assess and manage them effectively

3


ICP – 18
Risk Assessment & Management

Essential Criteria for assessment
• Comprehensive risk management policies
• Appropriateness of such policies
• Monitoring and control system
• Review and analysis of impact of external
environment
• Larger insurers establish a risk management
function and a risk management committee.

4


ICP – 18
Risk Assessment & Management

Observance of principles
• Appointed Actuary’s Annual Report
 Provides a framework for prudent
management system
 Experience Analysis
 Projection of future financial condition
 Asset Liability management

risk

5


ICP – 18
Risk Assessment & Management

Observance of principles
• Economic Capital
 Mandatory for all life insurers to submit the
report
 Provide guidance as to various risk
assessment and quantification

6


ICP – 18
Risk Assessment & Management
Observance of principles
• Financial Condition Report for Non-life
Companies
 Analysis of business
 Demonstration of adequacy of premiums and
reserves
 Risk management – Not comprehensive

7


ICP – 18
Risk Assessment & Management
Observance of principles
• Quarterly solvency reporting; If situation
warrants, on monthly basis
• Financial Condition Report for life companies
• Submission of re-insurance programme

• Actuarial Review Committee
• Peer Review system
• Risk Management Committee as per
corporate governance guidance
8


ICP – 19
Insurance Activity
• Principle
Since insurance is a risk taking activity, the
supervisory authority requires insurers to
evaluate and manage risks that they
underwrite, in particular through re-insurance
and to have the tools to establish an adequate
level of premiums.

9


ICP – 19 -Insurance Activity
Essential Criteria for assessment
• Strategic underwriting and pricing policies
• Evaluation of underwriting risks and
adequacy of premium rates; Expense
management.
• Ability of the Authority to review the method
and basis of premium rate computation

10

ICP – 19 -Insurance Activity
Essential Criteria for assessment
• Check
on
adequacy
of
reinsurance
arrangement and ensure that the claims held
by insurers on their reinsurers are
recoverable. This includes that:
 The reinsurance coverage is appropriate to
the level of capital of the insurer and the
profile of the underwritten risks
 Reinsurers protection
• Appropriateness of risk transfer instruments
11


ICP – 19 -Insurance Activity
Observance of principles
• Appointed Actuary System
 Part and parcel of the entire system covering
insurance activity and risk management
 Key responsibilities:
 Actuarial advice to management on
important issues
 Ensure solvency at all times
 Certification

 Whistle blowing
12


ICP – 19 -Insurance Activity
Observance of principles
‘File & Use’ procedure
 Product design – suitability for target market
 Terms & conditions including exclusions,
surrender, foreclosure etc.
 Underwriting policy
 Pricing & Reserving– Methodology and Basis
 Profitability
 Scenario & Sensitivity testing
 Risk of mis-selling – Benefit Illustration
 The insurers review the premium rates on periodic
basis depending on their actual experience thru’
‘F&U’ procedure
13


ICP – 19 -Insurance Activity
Observance of principles
• Non-Life
 ‘File & Use’ procedure
 Required to review rates on regular basis
 Any change in the UW policy to be approved
by the BOD.
 Authority reviews the methodology and basis
used by the insurers to set premium rates.

• Appointed Actuary’s certificate on rates are
fair and terms & conditions offered are
workable and sound.
14


ICP – 19 -Insurance Activity
Observance of principles
• The Authority reviews the reinsurance
programme of general insurers with
particular reference to the re-insurance treaty
slips and XOL cover note and analyze the
data submitted thereon
• Appropriate provision for IBNR on Reinsurance accepted portfolio on actuarial
basis

15


ICP – 20 -Liabilities
• Principle
The supervisory Authority requires insurers
to comply with standards for establishing
adequate technical provisions and other
liabilities, making allowance for re-insurance
recoverable. The supervisory Authority has
both the authority and the ability to assess
the adequacy of the technical provisions and
to require that these provisions be increased,
if necessary.

16


ICP – 20 -Liabilities
Essential Criteria for assessment
• Legal provisions are in place to establish
adequate technical provisions and other
liabilities based on sound accounting and
actuarial principles.
• Prescribes/agrees
to
standards
for
establishing such provisions.
• Specific factors to consider when developing
such standards

17


ICP – 20 -Liabilities
Essential Criteria for assessment
• Review of sufficiency of technical provisions (ICP 12
& 13 – Offsite and Onsite inspection)
• Provisions to increase technical provisions, if not
appropriate
• The Authority ensures that the standards stipulate
general limits for the valuation of the amounts
recoverable from the reinsurance arrangements,
sound accounting principles for booking of such

amounts and the credit for the technical provisions
for amounts recoverable under re-insurance
arrangements.
• Requirements to carry out stress testing in case
technical provisions are increased.
18


ICP – 20 -Liability
Observance of principles
• Section 13 & 15 of the Insurance Act, 1938, ARA
and ALSM Regulations
 Prescribes methodology and principles to be
used for setting assumptions
 Prudent - Best Estimate + MAD basis (Life)
 Provisions for ‘Global Reserves’
 Detailed guidelines on computation of IBNR
and IBNER provisions – Non Life
 Provisions for deficiency in premiums – Nonlife
• Insurers may be required to increase the
provisions, if requires.
19


ICP – 20 -Liability
Observance of principles
• Reinsurance
 Liability side – restrictions in computation of RSM
 Asset side – No credit for claims recoverable from
re-insurers due for over 90 days for demonstration of

solvency.
 Amounts recoverable from reinsurers are disclosed
in the financial statements.
• The AAAR requires stress testing on prescribed
basis
• stress testing framework is to be developed in nonlife companies
20


ICP – 23 –Capital Adequacy and
Solvency
Principles:
• Insurers to comply with the prescribed
solvency regime.
• The regime includes capital adequacy
requirements and requires suitable forms of
capital that enable the insurer to absorb
significant unforeseen losses

21


ICP – 23 –Capital Adequacy and
Solvency
Principles:
• The solvency regime addresses valuation of
assets and liabilities, suitable form of capital
and capital adequacy requirements
• Effectiveness
and

security
of
the
counterparty with regard to risk transfer
• Solvency control levels are established
• Inflation of capital through double or multiple
gearing etc.
• Requirements placed upon an insurer
operating through a branch
22


ICP – 23 –Capital Adequacy and Solvency

Observance of principles
• The solvency regime – Two factor formula based
 The minimum solvency capital requirement is 150%
of the required solvency margin (current practice)
 The required capital is capable enough to absorb the
significant unforeseen losses
 IRDA closely monitors the solvency control level on
regular basis so that any corrective action can be
taken well in advance
 Sensitive to line of business and specific features
such as Par, Non-par, guarantee or without guarantee
 Not directly sensitive to specific risk profile of the
insurer
23

ICP – 23 –Capital Adequacy and Solvency

Observance of principles
• Principles of asset valuation are prescribed in the
regulations
• Insurers hold mismatching reserves, if needs
• Risk transfer is only in the form of re-insurance
arrangement
• Minimum credit rating for re-insurers.
• No comprehensive regulations for supervising
reinsurance business.
• Foreign insurers are not allowed to operate in India
thru’ branch
• Form of Capital – Thru’ ordinary shares with single
face value
24


ICP – 21 - Investments
• Principle
The supervisory authority requires insurers
to comply with standards on investment
activities.
These
standards
include
requirements on investment policy, asset
mix, valuation, diversification, asset-liability
matching, and risk management

25