Risk Based Supervision. Insurance Commission of Jordan Rana Tahboub June 2011

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Megan Burke
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1 Risk Based Supervision Insurance Commission of Jordan Rana Tahboub June 2011

2 Insurance Commission of Jordan Established in 1999 by virtue of the Insurance Regulatory Act No. (33) of 1999 to: Regulate and supervise the insurance sector Ensure a suitable environment for the development of the insurance sector and enhancement of the insurance industry s role in protecting individuals and properties against risks Public institution aiming at : Protecting the rights of the insured Developing insurance services in the Kingdom

3 The Jordanian Insurance Sector 28 insurance companies: 11 non-life companies 16 composite companies (life and non-life) 1 life company 2 non-operating foreign insurance companies (regional/ representative office)

4 The Jordanian Insurance Sector Providers of insurance supporting services: Insurance Agent 514 Insurance Consultant 2 Insurance Broker 98 Reinsurance Broker 11 Company Administrating Insurance Business 1 5 Loss Adjuster 50 Bancassurance 9 Actuary 13 Foreign Reinsurance Brokers 8 Total (31/12/2010) Providers of insurance supporting services

5 Jordanian Insurance Sector Development Million USD * Gross Written Premiums Inside Jordan Gross Claims Paid for Premiums written Inside Jordan Net Profit Before Taxes * Preliminary data

6 Jordanian Insurance Sector Development Million USD Total Assets Total Investments Shareholders' Equity

7 Risk Based Supervision A structured process aimed at identifying the most critical risks that face each company through a focused review by the supervisor to assess: The company s management of those risks (in accordance with sound business and financial practices) The company s financial vulnerability to potential adverse experience.

8 Risk Based Vs. Traditional Risk based supervision: Identify the higher risk areas. Approaches Prevent problems from developing. Focus resources on those higher risks areas (More efficient, effective). Traditional supervisory approach: Looking for problems and then attempting to deal with them. But sometimes, it s too late to fix it. Takes a lot of resources, expensive, often not very effective.

9 Why Risk based supervision? Insurance industry is changing. Convergence of supervisory practices. Pressure to improve the efficiency and the effectiveness of supervision.

10 Risk based Supervision (Supervisory ladder) Adopted by IC in 2006 Criteria to assess risks according to Capital Asset quality Reinsurance Adequacy of Provisions Management Earnings quality Liquidity and Subsidiaries Related Party Transactions Through quantitative (financial ratios) and qualitative assessment

11 Supervisory attention and intervention based on RISK: Early Warning Test Ratios Other Financial Analysis On-Site Inspections Market Intelligence

12 CARAMELS Capital Adequacy Adequacy of Claims Provisions Earnings Quality Financial Ratios Financial Ratios Financial Ratios Ability to access additional capital Dividend paying policy Asset Quality Board involvement and quality of policies and procedures for setting up claim provisions Quality of controls on claim provisioning Experience and quality of staff Volatility of profitability over last few years: underwriting/ investment Accuracy of financial reporting, conservatism or otherwise Experience and track record of underwriting team Financial Ratios Quality of claims accounting system Extent to which earnings generated by related party transactions, extraordinary or Conservatism of asset valuation Adequacy of Claims Provisions unrepeatable transactions Matching of assets and liabilities Liquidity Quality of investment controls Management Financial Ratios Board approved investment policies Reinsurance Financial Ratios Quality of board oversight and policies Financial Ratios Independence of board and senior management from shareholders Quality of board oversight and guidance, management interaction with board Experience and track record of management Board approved policies for liquidity management Cash and liquidity management practices including forecasting Subsidiaries, Self-dealing Quality of reinsurance accounting and documentation Quality of strategic planning Financial Ratios Quality of reinsurance arrangements & reinsurers Experience of staff & sophistication of reinsurance practices including use of modeling compliance function (filings accurate and on time, follow wording and spirit of law, etc), responsiveness to Commission recommendations Consumer complaints, market intelligence Board approved policies for dealing with conflicts of interest Impact of non-arm's length investments and approaches to protect insurer position

13 Financial Ratios (examples) Capital Adecuacy Change in Equity Solvency Ratio Change in Gross Written Premiums Change in Net Written Premiums Equity to Liabilities Gross Written Premiums to Equity Total Investment in Listed Shares to Equity Total Investment in Non-Listed Shares to Equity Management Net Written Premiums to Equity Combined Ratio Asset Quality Total Investment in Property to Equity Net Account Receivables to Equity Account Receivables due for more than 180 days to Equity Account Receivables due for more than 360 days to Equity Overdue A/R & Overdue Un- Collaterized Loans to Equity Loans to Equity Earnings Quality Change in Combined ratio Expense Ratio Gross Loss Ratio Net Loss Ratio Technical Profit (Loss) to Gross Written Premiums Return on Average Equity (profits before tax) Investment Yield (for average investments) BENCHMARKS are developed for each Ratio

14 Assessing Risks A structured approach to consistently assessing risk across insurers: Higher Risk Various categories of risks to be assessed Capital Adequacy Asset Quality Reinsurance Prescribed Regulatory Responses Stronger Response 1.

15 Assessing Risks Risk Level Capital Adequacy Asset Quality Adequacy of Claims, Actuarial Manag -ement Earnings Quality Liquidity Reinsurance Selfdealing, Subsidiaries Supervisory Responses Level 4: Unacceptable Risk. Level 3: Significant Risk. Level 2: Emerging Risk. Level 1: Low Risk.

Typical Progression of Supervisory Responses Normal monitoring: reviewing supervisory filings, reviewing ratio and other financial results, normal on-site inspections Closer monitoring: in-depth

16 Typical Progression of Supervisory Responses Normal monitoring: reviewing supervisory filings, reviewing ratio and other financial results, normal on-site inspections Closer monitoring: in-depth and/or frequent on-site inspections, possibly increased frequency of financial reporting. Meet with Board to describe areas of emerging risk. Business plan? Very frequent on-site inspection? More frequent and detailed reporting? Additional capital? Sanctions or fines if noncompliance? License conditions or undertakings? Special audit or actuarial review with costs to insurer? Adjustment of asset or liability values? Time limit on licence? Additional capital required immediately, license suspension, license withdrawal, winding up

17 Corporate Governance It is management and the board that are in a position to ensure that the company follows sound business and financial practices, not the supervisor Financial institutions obtain public funds so company directors and senior managers have a responsibility to shareholders AND to the public

18 Corporate Governance Governments don't have the resources, nor is it feasible, to try to check everything in a financial institution so there has to be reliance on the board and management (as well as the external auditor and an independent actuary).

19 Thanks

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