Changes in supervision coming for insurance industry

Catherine Kumar, Inspector of Banks at the Central Bank recently addressed a breakfast seminar at the Hilton Trinidad. Her theme, “Central Bank and Preparation for Integrated Supervision” hinted at some of the plans of the Central Bank for the insurance industry. “I would like to thank the FLMI Society of TT and the TTII for inviting me to present on this very important topic ‘The Central Bank and Preparation for Integrated Supervision.’ “Your presence this morning certainly shows your Society’s proactive posture in keeping its members informed about changes happening around your industry. “You are the administrators of this very important industry and you therefore, need to be aware and involved as far as possible, of how the changes will (notice I did not say may) impact the way you manage your companies.  The rules we operate within are the nucleus of our sound financial industry. 

We all know that without the rules of the game there will be chaos. “We also know that even where there are rules if no one ensures compliance, there are those who will get into the game for a ‘quick take.’ “Trusteeship is at the heart of the insurance industry and as regulator, the Central Bank has to be ever more vigilant without fear of those who may criticise the laws or the enforcement of the laws as being too burdensome.  As administrators and managers you need to ensure that the spirit of the law is followed and build a culture of compliance within your organisations. “The focus of my address to you this morning is to indicate what is going on with the integration of insurance and pensions supervision with that of banks, how this integration will impact on the way your industry is regulated and supervised and some of the implications for the operational management of insurance companies. “The financial system in Trinidad and Tobago is diverse in that those of us who save and invest have access to a wide array of products and services provided by various types of banking, non-banking and insurance financial institutions. These range from large commercial banks and their affiliated trust and merchant banking associates to mutual funds, insurance companies and credit unions. “Our financial institutions play a significant role within our economy and are also very active in the regional environment.  This places a heavy responsibility on both the industry and the regulators to ensure that these institutions are financially strong, that there is stability in the system and that all adhere to best practices.

“You have probably all heard about ‘integrated supervision’ but what is this new concept to us here this morning. “As a first step, and as part of a larger strategy towards reinforcing safety and soundness, regulation of the banking, insurance and pensions industries is being integrated so that there will be one regulator for these three key areas of the financial sector.  The Central Bank already has responsibility for supervision of commercial banks and what we call non-banking financial institutions (finance houses, investment banks and trust companies).  The Insurance Act will now be amended to transfer responsibility for insurance and pension funds supervision from the Supervisor of Insurance to the Central Bank. Through this, the Central Bank will deliver proactive, responsive and consistent financial sector supervision in line with international standards. “At this time there is an Insurance (Amendment) Bill that has been finalised with arrangements being made to have it go through the Parliamentary process within the month.  This Bill in the main provides for the Central Bank to be the regulator for insurance and pensions and assume responsibility for administration of the Insurance Act.

“This means that the Bank will address all reporting, registrations, approvals and so on and will also be responsible for ensuring that all those companies and individuals that are subject to the Act comply with its requirements.  When the Act is amended, the Office of the Supervisor of Insurance as well as the position of Supervisor of Insurance will no longer legally exist.  The position of Inspector of Banks at the Central Bank will become the Inspector of Financial Services with responsibility for the Bank’s new role as integrated regulator. “As I indicated before, the main objective in amending the Act now is to have the Central Bank be the regulator.  No major amendments will be made now to the Act to change the regulatory framework or the requirements for companies. This will take place in 2004. What the Bank will seek to do however is to administer the existing provisions of the Act more effectively.  It will not be business as usual.  In addition, some of the supervisory measures that now obtain for banks will be extended to insurance companies. “While it is clear that the Act requires changes to bring it in line with the current realities of insurance business, there are many provisions of the Act which, if complied with, will enhance the financial strength and capabilities of companies and consequently promote protection of policyholders’ interests.

“The industry can therefore expect changes in the manner in which the existing provisions of the Insurance Act are administered and in this regard the Central Bank is counting on the support and co-operation of all companies and industry professionals. The Bank is reviewing current supervisory procedures with a view to streamlining administrative mechanisms to improve efficiency in the way the regulator interfaces with the industry.  We will seek to address requests, approvals and other similar matters in an organised, transparent and expeditious fashion.  In the same vein we will expect companies to treat with all issues raised by the Bank with due diligence and expediency. “A case in point is the filing of statutory returns.  Adequate and timely information is the lifeblood of an effective regulatory system.  Given the fact that these returns are due six months after the year-end, they already reflect dated information.  It is therefore necessary that companies comply strictly with the filing requirements if they are to be useful.  The Bank will accordingly expect returns to be filed on time. Proactivity on your part will ensure that you begin looking at your systems and procedures to allow you to file returns within three to four months after your year end. “It is equally important that the returns are complete.  Returns filed with missing, incomplete or inaccurate and inconsistent information do not provide the minimum information for supervision and cannot be treated as meeting the requirements of the law. In such cases the returns will not be deemed to be submitted until they are complete.

“We also intend to use developments in technology as far as possible to allow for more efficient processing of the returns and providing timely feedback to the industry.  In this regard for example we will be requesting companies to support this effort by submitting an electronic copy of the annual returns. We have already written to ATTIC making this request for year end 2003 returns. “It is also likely that insurers will be asked to assist in improving the effectiveness of the supervisory process by furnishing information in addition to what is currently required by Law.  It is not intended to increase the information burden on companies and any additional information requested would generally be part of what should be currently produced for management’s use. “An important element of the new thrust to be introduced by the Bank is the implementation of continuous onsite visits and examinations of insurance companies.  Supervision will no longer be limited to satisfying the statutory requirements. A financial services regulator cannot properly discharge its function without a comprehensive evaluation of the financial and operational characteristics of the entities it supervises. 

The returns are filed annually and provide limited information to assess some of the risks to which insurers can be exposed. It is necessary for the regulator to come onsite to get information, identify and review systems and have a basis to evaluate the company. “The Bank will introduce a risk-based approach to supervision. What does this mean to you?  In the past, in whatever limited way supervision was carried out, it involved, inter alia, checking the returns, finding errors no matter how immaterial and reconciling statutory  fund and deposits. After the event the regulator may identify a problem and try to have the organisation fix it. Sometimes it is too late and the policyholders suffer loss.

“The new approach entails identification of the risks to which insurers are exposed and a review of the measures adopted by the company to manage those risks. This attempts to prevent problems from developing rather than trying to fix the problem. Resources will be focused on where they will do most good to the industry as a whole.
“Comprehensive risk assessment requires review of:
* Effectiveness of board oversight and management compliance referred to as ‘corporate governance,’ a term we are hearing a lot about today.
* Adequacy of internal controls,
* Risk identification and management within the company
* The existence of and adherence to appropriate policies and procedures.

“The focus will be on companies’ financial condition and future viability and not just on whether there appears to be adequate funds to meet policyholders’ liabilities at a point in time. “Onsite examinations will entail among other things, Central Bank’s staff coming to companies’ premises and holding meetings with management, interfacing with company staff and reviewing records. Their activities may be similar to those of auditors, but they serve a different objective.  This we know will be a new experience for insurers who are not accustomed to regulators being so close, however we anticipate that with time the industry will be quite comfortable with this aspect of the supervisory process. “In addition to onsite visits, companies will also be subject to off-site monitoring. This involves monitoring of all events and transactions in which the company is involved or which impact the company. Thus the Bank will address the company on such matters with a view to confirming the nature and impact on the company as well as to afford a basis to review any effects on the company’s risk exposures.

“Another area to which the Bank will direct its attention is market conduct practices in the industry. I would like to spend a little time on this as this is an area of significant weakness at this time and is not being addressed.  Some of these concerns were also addressed by the Governor in his presentation to TTAIIFA members a month ago. “We are all very aware of the need for prompt and adequate settlement of claims.  In fact this is considered one of the main indicators of the weaker companies.  However, policyholders’ legitimate expectations from the industry and good market conduct extend beyond claims settlement. “The manner in which products are marketed and new business is achieved are also important elements of market conduct.  Are you clear and specific in your advertising?  Does your marketing material inform on all the relevant factors?  Do your agents explain all the fine print to your clients?  Do they make sure that the client understands what they are buying?  Would your financial advisers advise a client against buying a policy that would bring him high commission if it is not suitable for the client?  These are some of the pertinent issues. “Fair marketing practices also relate to product pricing.  Currently there is an array of pricing mechanisms.  Premium rates for the same coverage vary widely. 

What is the basis for this?  Are some companies under pricing? “Companies should also have an efficient mechanism to meet the information needs of policyholders on an ongoing basis.  Information requests or assistance relative to clarifying policy terms and conditions, entitlements, and options should be addressed in an expeditious and customer-friendly manner. Companies will also be expected to have in place a system to handle policyholders’ complaints efficiently and fairly. “Attention will also be paid to the need for professional integrity in so far as this relates to conflicts of interests.  The policyholder is usually in an unequal position relative to the company and its representatives with respect to knowledge and understanding of insurance. “Professionals are expected to resist any temptation to use this asymmetric relationship to their advantage. The companies and their representatives must at all times act honestly and in a straightforward manner with both existing and potential policyholders.

“An obvious prerequisite to good market conduct practices is appropriate technical capacity to serve the needs of policyholders.  Education and training are necessary to equip advisers to properly evaluate the needs of policyholders so as to assess suitability of different products and advise accordingly. 
“I am absolutely sure that no one in this room knows of an agent who has not:
* Sold a policy knowing very well that it would not have served the needs of the policyholder.
* Hidden behind the long term nature of the contract saying ‘I would not be here when the policy matures.’
* Encouraged a policyholder to ‘switch’ to a higher premium paying policy or to another insurance company, that provides no additional benefits.
* Sold policies to ‘lamp posts’ at contests time.

“I am sure you are aware that all of the above are contraventions to the 1980 Insurance Act.  However, unfortunately, enforcement is either non-existent or extremely lax.  As we move toward improved supervision, we plan to pay greater attention to the role and responsibility of professionals and the need for higher standards of market conduct. “Along with the introduction of integrated supervision, the Bank is also formulating more extensive changes to the Insurance Act.  We aim to have a strong, stable yet dynamic insurance industry that can readily respond to competitive and other developments in the financial marketplace.  Integrated supervision by itself cannot achieve this. “There are many areas in which the Act is deficient.  Companies are now more complex and sophisticated and have crossed the boundary from core insurance business into other financial services and products; accordingly they should be subject to a level of supervision that is consistent with these developments; many of the existing provisions are no longer relevant. “Apart from product development and innovation, consolidation and alliances at the corporate strategic level also call for specific regulatory initiatives that are not catered for in the current Insurance Act. “Legislative amendments are therefore necessary to introduce a more modern regulatory framework to bring the supervision of the insurance sector in line with the evolution of the business and current international supervision standards. “So although initially we will work with the Act substantially as it is, we are also engaged in preparing more substantial changes to provide for a more relevant and effective regulatory framework.

“This proposed framework will allow for:
* More appropriate investment rules
* Adequate capital requirements that will factor in the unmitigated risk exposures of the company
* Additional reporting requirements
* A higher level of responsibility taken for professionals such as auditors and actuaries.
“The Bank will also pursue the introduction of comprehensive legislative requirements to afford prudent operation and administration of pension plans.
“What does all this mean for the management and staff of insurers? “The industry will be interfacing with a new regulator and interfacing in new ways. “The new regulatory emphasis on good corporate governance and Board and executive management oversight as principal drivers in achieving and maintaining financial strength and long term viability means that companies will need to formalise and document many of the policies and procedures that may now be informal and unwritten.  I refer here to policies for underwriting, investing and claims settlement among others. Functioning internal control and compliance mechanisms and adequate internal reporting systems are also key areas that companies will need to address. 

“Arrangements will also be necessary to accommodate regulatory staff on onsite visits. Company staff will need to be sensitised to this new regulatory phenomenon, what to expect and what will be required of them in terms of facilitating these exercises. “The duration of these visits will vary with the company and the issues to be addressed, however every effort will be made to have these visits as short as possible.  Cooperation by the company in providing complete relevant information in a timely manner will significantly shorten the time span of these visits. “Offsite monitoring by the Bank will result in requests for new types of information.  Such requests may not relate to specific requirements under the Act, however the Bank anticipates cooperation of all companies in its efforts to introduce more effective supervision. “Integrated supervision and the new supervisory approach both in the short and longer term represent new ground, both for the Bank and the industry.

The Bank has embraced the challenge, very cognisant of the need for such integration and the many opportunities it brings for promoting a well-regulated, strong and vibrant financial sector. We are confident that the industry shares our sentiments and will demonstrate this by its support. “A recent Resource magazine states:
‘...the legal, regulatory and business environment in which insurers must compete is changing.’ “It is up to you and societies like yours to stay informed and hence be able to deal with the challenges as they come your way. “Thank you for giving me the opportunity to make my maiden speech as Regulator to this group who I feel so close to.”