Isle of Man Insurance and Pensions Authority

Isle of Man Insurance and Pensions Authority Annual Report 2012

CONTENTS Contents INTRODUCTION Foreword by the Chief Executive 2 REGULATORY OBJECTIVES, FUNCTIONS AND SUPERVISORY APPROACH Regulatory objectives 5 Functions of the Authority 6 Supervisory approach 7 Cooperation and coordination in supervision 9 Regulatory developments 11 Key objectives 12 MARKET ANALYSIS AND STATISTICS Sector size and performance 14 Authorisations and registrations 15 Long-term insurance business 16 Non-life insurance business 16 Retirement benefits schemes 17 STRUCTURE, OPERATIONS AND FINANCIAL REPORT APPENDICES The Board of the Authority 19 Organisation of the Authority 21 Financial and operational report 22 Income and expenditure account for the year ended 31 March 2012 23 Useful contacts 25 INTRODUCTION Annual report 2012 Page 1 Annual report 2012

FOREWORD BY THE CHIEF EXECUTIVE Foreword by the Chief Executive This demonstrates again the sector s importance to the Island s economy and therefore the importance of it having a regulatory framework for such business that appropriately reflects its risks and continues to enable the Isle of Man to demonstrate compliance with the relevant international standards. In October 2011 the International Association of Insurance Supervisors adopted an updated version of its Insurance Core Principles ( ICPs ), which are used by the International Monetary Fund when it assesses the Island s regulatory framework for insurance business in its periodic examinations. It is therefore very important that the Island takes these changes in international standards into account as it plans the ongoing development of its own supervisory framework. I am pleased to introduce the Insurance and Pensions Authority s annual report for the year ended 31st March 2012. The report sets out the Authority s statutory responsibilities, its activities during the period and comments upon the issues facing the Authority, the businesses it regulates and the Isle of Man during the period under review and in the future. The national income statistics published by the Isle of Man Treasury during the year confirmed that Island s insurance and pensions sector was the largest single contributor to its GDP. A major part of the IPA s work during the period has therefore been the undertaking of a detailed assessment of the implications of the updated ICPs, including a gap analysis to understand where the Island s existing regulatory framework for insurance business might fall short of the new standards. This matter is discussed in greater detail later in this report, but it is clear that in order for the Island to continue to achieve the high levels of observance with the international standards to which it remains committed, the existing regulatory framework will need to be significantly enhanced. Many other jurisdictions will face the same issues and, in developing its work programme to address the gaps identified, the Authority will have close regard to the work being undertaken in those jurisdictions to ensure a consistent and proportionate approach. Annual report 2012 Page 2 Annual report 2012

FOREWORD BY THE CHIEF EXECUTIVE In addition to its work in relation to the updated Insurance Core Principles, the Authority is continuing to monitor the progress of the European Union s Solvency II framework for insurers. In particular, it is assessing the relevance and implications of the concept of Equivalence for the regulatory framework and market of third countries such as the Isle of Man. This includes taking into account the possibility of bifurcation, whereby a third country jurisdiction might be able to obtain an equivalence finding in respect of a tightly-defined segment of its insurance industry. For the Isle of Man, such an approach could be appropriate because of the diverse nature of its insurance sector. In all of this work we will be continuing to work closely with Government, including in particular the Treasury and the Department of Economic Development, and our licenceholders. The updating of the ICPs, the continuing examination of the implications of Solvency II and other initiatives, combined with the need for us to be able to respond in a timely fashion to the innovation which will be needed in the Isle of Man in order for its economy to expand, will require the Authority to continue to upgrade its capabilities in several areas. We are fortunate to have in place a team which has been able to respond to these challenges in a positive way in order to prepare the way for further development. On behalf of the Board of the Authority I should to thank all of them for their contribution to our work. D A Vick Chief Executive Annual report 2012 Page 3 Annual report 2012

REGULATORY OBJECTIVES, FUNCTIONS AND SUPERVISORY APPROACH Annual report 2012 Page 4 Annual report 2012

REGULATORY OBJECTIVES Regulatory objectives The Regulatory objectives (of the Authority) are: - The securing of an appropriate degree of protection for policyholders; - The maintenance of confidence in the Island s insurance industry in the Island and elsewhere; and - The reduction in the extent to which it is possible for any insurance business to be used in connection with the commission of financial crime. [Section 1 of the Insurance Act 2008] Annual report 2012 Page 5 Annual report 2012

FUNCTIONS OF THE AUTHORITY Functions of the Authority History The development of the Isle of Man s insurance and pensions sector arose from the Government's decision in the early 1980s to seek to encourage diversification in the finance sector. The Authority was established as the Insurance Authority in 1986 in order to regulate the insurance sector. Following the addition to its responsibilities of the development and implementation of a supervisory framework for pensions schemes in January 1997, it became the Insurance and Pensions Authority. The Authority is a statutory board established under the Insurance Act 2008 and previously under the Insurance Act 1986 (as amended). In exercising its powers, the Authority seeks to ensure that the regulatory framework for insurance and pensions business in the Island continues to meet international standards. It also recognises that the maintenance of an environment that allows high quality business to develop is an important factor for it to consider in its work. Structure of the Authority Under the Insurance Act 2008, the holder of the office known under the Act as the Supervisor, in practice the Chief Executive, is responsible for the general administration of the Insurance Act and the Retirement Benefits Schemes Act 2000, together the Acts. the desirability of insurers being aware of the risk of their businesses being used in connection with the commission of financial crime; and taking appropriate measures (in relation to administration and employment practices, the conduct of transactions and otherwise) to prevent financial crime, facilitate its detection, and monitor its incidence and devoting adequate resources to these matters. Functions of the Authority The statutory functions of the Authority are currently set out in Schedule 1 to the Insurance Act 2008 and are: the making of public documents under the Acts and the Retirement Benefits Schemes Act 2000 ( the Acts ); supervising and keeping under review the administration and implementation of the Acts; supervising and keeping under review the exercise of functions by the Supervisor under the Acts; In carrying out his duties and the supervisory functions of the Acts, the Supervisor is required to exercise his powers in a way that meets the regulatory objectives set out in section 1 of the Insurance Act, having due regard to the following matters in exercising the functions attaching to that role: the need to balance the regulatory objectives; the international character of the insurance industry and its markets and the desirability of maintaining the competitive position of the Island; the responsibilities of insurers; keeping under review the question whether the Supervisor is, in exercising the Supervisor s functions under the Acts, using resources in an efficient and economic manner; considering and making recommendations or issuing directions to the Supervisor as a result of reviews carried out by it or reports made to it by the Supervisor; otherwise giving guidance and directions to the Supervisor as it thinks fit with respect to the exercise or performance of the powers of the Supervisor under the Acts whether generally or in any particular case; and the need to use resources in an efficient and economic manner; the need to promote public understanding of the insurance industry; and determining the general policy and principles by reference to which it performs particular functions. Annual report 2012 Page 6 Annual report 2012

SUPERVISORY APPROACH Supervisory approach Central to the work of the Authority across all sectors for which it is responsible are the regulatory objectives set out in section 1 of the Insurance Act 2008. The Authority continues to develop its approach to regulation, taking into account risk-based principles in accordance with international standards and the evolving and diverse nature of the sectors it regulates. In recognition of this diversity and the different risks inherent in insurance companies and pension providers and administrators, the Authority adopts a sectorial approach in the regulation and supervision of the businesses for which it has responsibility. Supervisory resources within the Authority are split into three main sections: long-term or life assurance, non-life insurance, and pensions. This arrangement means that regulated entities deal with individuals with specialist knowledge of their industry in all aspects of the supervisory process. This approach allows the Authority to maintain a close understanding of the sector as a whole, including the ability to focus on issues in each area as they emerge. The Authority is committed to a transparent regulatory regime that is consistent with international standards and is implemented in a manner which is proportionate and relevant to the insurance and pensions industries on the Island. The framework is assessed on an ongoing basis, taking into account developments in those sectors. Authorisation process Applications for authorisation or registration under the Insurance Act 2008 or the Retirement Benefits Schemes Act 2000 are made in writing by the applicant to the Supervisor. As part of this authorisation process the Authority seeks to ensure that new entrants to the insurance and pensions sectors meet the required minimum standards expected of an Isle of Man regulated entity, thereby protecting the reputation of the Island as a reputable and responsible financial centre. In practice, any application that is received is considered by the supervisory team responsible for the prudential supervision of that sector, and where necessary, additional information is obtained and a recommendation is made to the Supervisor by the team. Authorisations and registrations may be made subject to conditions at any time as required. The documentation required to be submitted as part of the application is defined in regulations and guidance and consists of sufficient information to enable the Supervisor to reach a view as to: the legal and beneficial ownership of the business; whether the key functionaries are fit and proper to undertake their respective roles. In this context key functionaries are those persons who are able to exert influence, control in the stewardship of the entity or who undertake key management and control functions and include: controllers; directors or trustees; appointed or scheme actuary; senior management; company secretary; managers; auditor; money laundering reporting officer; and in the case of pension schemes, the investment manager of the scheme; whether the applicant has adequate financial resources to support the business proposed; whether the business has an appropriate level of management on the Island, with adequate experience of the business carried out; and whether the business has in place an appropriate and effective system of governance that provides for its sound and prudent management. Where the business, its controller, or the individual officers of the proposed business have undertaken regulated activities in the Island or elsewhere, the Authority will ordinarily undertake inter-regulatory communications to exchange information of common interest. Ordinarily, the status of an application may be expected to be determined within six weeks following receipt of all required information, unless particular matters arise which may require further investigation. Where necessary to do so the Supervisor may refuse or approve the application subject to conditions. In any event, the Supervisors decision for approval, with or without conditions attaching, or for refusal is notified to the applicant in writing. Appeal procedures exist whereby should the applicant be aggrieved by the decision of the Supervisor he may submit an appeal to the Insurance Tribunal or Retirement Benefits Schemes Tribunal as the context requires. Annual report 2012 Page 7 Annual report 2012

SUPERVISORY APPROACH Ongoing supervision On completion of the approval process, the Authority s knowledge and understanding of the regulated entity its activities and the principal risks to which it is exposed are reassessed and appraised by the Authority on an ongoing basis through a combination of desk-based analysis and on-site inspection visits. Regulatory reporting and other desk-based analysis tools The Authority receives information about each regulated entity from a variety of sources, including annual, quarterly and ad hoc regulatory submissions. These contain detailed information in respect of the financial position and results of each regulated entity, the insurance programme or scheme details, and where applicable, information in respect of the actuarial valuation of liabilities. In addition, regulated insurance entities are required to report to the Supervisor on an annual basis, information in respect of the effectiveness of the governance, risk management and control arrangements in place. Meetings are held with insurance entities or their managers as required to address specific issues arising. As many of the larger insurers in the Island are part of wider insurance or financial services groups, bilateral meetings with other regulators or participation within supervisory colleges form an important aspect of understanding how these entities fit within the wider group. These supervisory colleges also consider the intra-group risks and dependencies that may arise from these relationships. On-site inspections The sectorial approach adopted by the Authority allows for close coordination of on-site and desk-based supervision. The Authority s on-site inspection programme complements its desk-based analysis, and may take the format of a routine visit or may focus on a specific area of interest, policy or procedure, including that of compliance with applicable anti-money laundering and prevention of terrorist and proliferation financing legislation. Each on-site inspection is undertaken by the supervisory team with responsibility for the day-to-day supervision of the entity concerned, thereby ensuring continuity and consistency of approach in assessing the individual business, the corporate and management structure, and the activities and the risks to which the company is exposed. An exception to this may be where a company has been required by the Supervisor to undertake remedial action and the Supervisor commissions third party professionals to undertake a review of the work undertaken The cost of such work would ordinarily be met by the company concerned. The on-site inspection process remains a labourintensive one and the Authority is committed to continuing to examine ways to make the process as efficient as possible, both from its own perspective and from the point of view of the businesses visited. Notwithstanding this, the ongoing maintenance and development of this programme is likely to require further consideration of the resources to be focused on this important aspect of the supervisory process. Liaison with industry and trade bodies Local industry representative bodies also have an important role in the gathering of information necessary for effective ongoing supervision of the sectors on a wider basis. The Manx Insurance Association, the Isle of Man Captive Association, the Manx Actuarial Society, the Isle of Man Association of Pension Scheme Providers, the Isle of Man Financial Planners and Insurance Brokers Association, and other relevant bodies, all represent the views of their respective sectors in meetings with the Authority. Matters of common interest, the exchange of views on local regulatory and international developments, and working towards understanding the strengths, opportunities, issues and strains experienced by the industry overall are all discussed. Annual report 2012 Page 8 Annual report 2012

COOPERATION AND COORDINATION IN SUPERVISION Cooperation and coordination in supervision As financial services groups and companies expand global operations and the responsibilities of key functionaries increasingly reach over jurisdictional borders, the safe and effective sharing and communication of relevant information and intelligence between interested supervisory authorities and enforcement agencies becomes of increasing importance in the effective supervision of the activities of those international entities. The Authority is committed to maintaining and developing further its working relationships with other supervisory authorities internationally as well as those closer to home, to allow the appropriate and timely exchange of information to facilitate cross-border and cross-sectorial supervision of regulated entities and to assist in the protection of global financial systems from those who would wish to abuse them to launder money, finance terrorist activities or the proliferation of weapons of mass destruction. Given the international focus of the Island s insurance and pensions companies together with the significant proportion of insurance entities that are members of groups established or operating elsewhere, it is important that the Authority continues to develop these working relationships to ensure a coordinated approach to the regulation of cross border activities and groups, as appropriate. In addition, the Authority believes that responsible and appropriate international cooperation can be an effective and powerful tool assisting both supervisory authorities and law enforcement agencies to combat money laundering and the financing of terrorism and proliferation. International standards for the supervision of insurance and pensions business require that supervisory authorities cooperate and coordinate their work with other relevant supervisors and authorities, subject to the observance of any applicable confidentiality requirements. These standards require supervisors to take steps to put in place adequate coordination arrangements with other relevant supervisors on cross-border issues, on both a legal entity and a group-wide basis, in order to facilitate the comprehensive oversight of these entities and groups. They also require that insurance supervisors cooperate and coordinate their activities with relevant supervisors from other sectors as appropriate. Power to exchange information Similar to other supervisory bodies, the Authority has a statutory duty of confidentiality in respect of information collected in the performance of its functions under the Acts. Such information is classified as restricted information and may only be disclosed to third parties with the consent of the person to whom it relates subject to the statutory gateways set out in Schedule 6 to the Insurance Act 2008. These gateways permit the Authority to disclosure relevant restricted information, subject to certain safeguards, with recognised regulators and other agencies for the valid purpose of insurance or pension supervision or in respect of any criminal proceedings or investigations which have been or may be initiated in the Island or elsewhere. Annual report 2012 Page 9 Annual report 2012

COOPERATION AND COORDINATION IN SUPERVISION Memoranda of Understanding ( MoUs ) The legal powers enabling the Authority to co-operate with other regulatory organisations both domestically and internationally, are supported by a number of MoUs with regulatory authorities world-wide. In addition, during the year the Authority submitted its application for accession to the International Association of Insurance Supervisors ( IAIS ) Multilateral Memorandum of Understanding ( MMoU ). This MMoU establishes a formal basis for cooperation and information exchange between the signatory authorities regarding the supervision of insurance companies on a solo and group basis, where crossborder aspects arise, including AML/CFT matters. In order to become a signatory to the MMoU the Authority had to undergoes a rigorous validation process of the insurance regulatory framework and procedures in place for the exchange of information to ascertain whether the minimum standards of the MMoU are satisfied, including those of professional secrecy and valid purpose. Shortly after the end of the period under review, the Authority s application was approved and its accession to the IAIS MMoU confirmed. Group supervision A number of the companies that the Authority supervises are subsidiaries of entities that are regulated in other jurisdictions, and several of its regulated entities have branch operations in other jurisdictions. In order to understand fully the nature, scale and complexity of such entities, their activities and the risks to which they may be exposed, it is necessary to understand the intra-group relationships and dependencies that may exist. Cooperation in domestic supervision In carrying out its functions, the Authority maintains a close working relationship with the Isle of Man s Financial Supervision Commission ( Commission ), the regulator of the Island s banking, fund, corporate services and trust services sectors. The Authority meets regularly with the Commission and works in conjunction with it to ensure a consistent approach where financial services groups contain licenceholders of the Commission who also hold authorisations or registrations from the Authority, and in other appropriate circumstances. In developing further the Authority's legislative framework in respect of anti-money laundering and combating the financing of terrorism, the Authority liaises about matters of common interest with the Commission, the Department of Home Affairs, the Isle of Man Financial Crime Unit, and Customs and Excise. Its Chief Executive is also co-chair of the Island s Joint Anti-Money Laundering Advisory Group. In addition, the Authority s responsibilities in relation to the supervision of pension schemes and administrators mean that it is important for the Authority to maintain a dialogue on such matters with the Department of Social Care and the Treasury s Income Tax Division. The Acts also make provision for the Authority to share information with the Financial Services Ombudsman and the Isle of Man Pensions Ombudsman where appropriate. These bodies are responsible for the Island s independent dispute resolution service for customers with a complaint against an Isle of Man financial services entity or a retirement benefits scheme, its trustees or registered schemes administrator respectively. The Authority is a member of and participates in a number of supervisory colleges in respect of groups of which Isle of Man insurers are members and liaises with supervisors in the Isle of Man and elsewhere about matters of common interest including systemic risk, group-wide solvency and group crisis management plans. Annual report 2012 Page 10 Annual report 2012

REGULATORY DEVELOPMENTS Regulatory Developments The Island s regulatory framework for insurance supervision is set out in the Insurance Act 2008. In addition, the Insurance Core Principles (ICPs) of the IAIS are the international standards against which the insurance framework of the Island will be assessed by the IMF as part of its ongoing Financial Sector Assessment Programme. The participation of the Island in this programme of assessment is important if the Island is to maintain its reputation as a responsible international jurisdiction. In October 2011, the IAIS adopted updated ICPs and these revised standards represent a significant enhancement of the previous framework. These revised ICPs introduce significant enhancements to the risk based capital and solvency assessment regimes expected together with the introduction of detailed requirements to assist in the effective supervision of insurance groups and more detailed and extensive disclosures to provide greater transparency to policyholders, investors and beneficiaries of insurance contracts. In the light of this, during the past year the Authority has undertaken a comprehensive gap analysis of its framework against the revised ICPs and is currently working towards the publication of a detailed roadmap in mid 2013. This roadmap will set out the rationale for the proposed changes, the main components of the project, the overall approach and anticipated key milestones planned over the next three to four years. The Authority believes that the challenge facing the Island is to develop a revised regulatory framework which addresses current international standards and, at the same time, remains proportionate to the risks inherent in the Island s insurance industry and thereby avoids placing any inappropriate regulatory burdens on licenceholders. This will be a demanding and complex task, with sometimes competing demands, which will require extensive interaction between the Authority and the market to devise and implement what is anticipated to be the most significant update of the Island s dedicated insurance framework since the introduction of the Insurance Act in 1986. It is envisaged that this work will deliver not only the necessary enhancements to the insurance framework without compromising the Authority s ability to react quickly to new market developments, but will also enable it to develop and implement a new data management and support system to ensure it to work in a coordinated and efficient manner. This will deliver real value across all sectors supervised by the Authority by enabling electronic returns, risk and data analysis and statistical reporting for both internal and external use. In addition, the development plans of the Authority incorporate a review of international developments in the pensions industry in conjunction with a detailed consideration of the Retirement Benefits Schemes Act 2000 to ensure that regulatory changes are implemented where it is appropriate to do so. Prevention of money laundering and countering the financing of terrorism In February 2012, the Financial Action Task Force published its revised recommendations setting out the International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation ( the FATF Recommendations ). These revised standards consolidate the previous 40 plus 9 special recommendations whilst strengthening the requirements for higher risk situations, allowing jurisdictions to take a more focused approach in areas where high risks remain or implementation could be enhanced. The recommendations previously focusing on terrorism are now integrated throughout the revised recommendations. In the forthcoming period the Authority will be reviewing the revised standards with a view to implementing any changes necessary to ensure continued compliance against the revised international standards for AML/CFT. At the same time it will be important for licenceholders also to understand the nature of the revisions to the Recommendations. Annual report 2012 Page 11 Annual report 2012

KEY OBJECTIVES Key objectives The Insurance Act 2008 sets out the Authority s statutory objectives and the Authority sets its key ongoing operational objectives in the context of these and, where appropriate, of Government s overall strategic policy and aims. In line with Government s stated policy, that the Island s regulatory frameworks for financial services continue to be able to demonstrate a high degree of compliance with applicable international standards, the Authority has completed a comprehensive gap analysis of the Island s existing insurance framework against the revised ICPs. Utilising this gap analysis, the Authority will be able to identify and evaluate the work required to deliver a framework that is capable of complying with these enhanced standards but which is applied in a proportionate manner recognising the differing needs of each sector. The priorities of the Authority in the short to medium term include: the implementation of a programme of regulatory development over the next 3 5 years to achieve an appropriate degree of compliance with the revised International Standards for Effective Insurance Supervision issued by the International Association of Insurance Supervisors, including: the publication of a Roadmap, highlighting key milestones in the delivery schedule; the development and implementation of a new supervisory support system; the continued development of a robust supervisory risk assessment methodology which is able to be applied in an appropriate and proportionate manner to each regulated sector; the ongoing development of its programme of on-site inspections, as well as its offsite reviews and analysis; the monitoring of developments in respect of the implementation of the EU s Solvency II framework and taking appropriate action; the review and, if appropriate, amendment of the Authority s legislation to assist continued compliance with the revised International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation (The Financial Action Task Force Recommendations); the monitoring of international developments in the pensions industry and implementing regulatory changes if and as appropriate; In addition, the Authority is committed to communicating effectively and openly with the insurance and pensions markets and its other stakeholders and otherwise maintaining demonstrably high standards of conduct. In this regard, it will: seek to ensure that any legislation and guidance that it introduces is transparent, that its aims are understood and that consultation thereon is adequate and appropriate; continue to develop the Authority s website as a centre for information on the insurance and pensions sectors; continue to develop the Authority s established risk identification and mitigation process; and continue to maintain registers of Members interests and to manage effectively any potential conflicts of interest arising. Consistent with the Government s policy to protect and promote the Island s international relations, the Authority will also continue to work to develop constructive relations with international organisations. Annual report 2012 Page 12 Annual report 2012

MARKET ANALYSIS AND STATISTICS Annual report 2012 Page 13 Annual report 2012

Gross Premiums bn Funds under management bn SECTOR SIZE AND PERFORMANCE Sector size and performance In 2011/12 the Island s insurance and pensions sectors continued to demonstrate resilience against the backdrop of continued European economic volatility, with total assets under management increasing by 0.5% to 57.2 billion. 80% of the registrations in force are in respect of retirement benefit schemes registered with the Authority, whereas the assets managed within these arrangements represent only 3.3% of the total sector assets, up from 3.0% the prior year. Conversely, the life sector, whilst representing only 1% of the authorisations issued, contributes 49.8 billion of assets under management, 87% of the industry total. Funds under management in respect of the non-life sector have increased by 2.6% to 5.5 billion on the previous year, representing 9.7% of the industry total. Since 2006, premium levels have fluctuated due to a number of factors, including uncertainty in the global economic markets most notably within the life sector. Combined sector funds under management 60.0 Insurance sector - No of Licences 300 1.2 5.1 32.3 1.5 5.2 37.7 1.3 6.0 36.7 1.4 5.8 41.3 1.7 5.4 49.9 1.9 5.5 49.8 50.0 40.0 30.0 20.0 10.0 Pensions sector Insurers - Non Life Insurers - Life 38 24 20 166 35 23 19 159 36 23 19 155 36 21 17 144 33 21 15 140 33 21 15 132 250 200 150 100 50 General insurance intermediaries Insurance Managers Permitted insurers Authorised Insurers - Non Life Authorised Insurers - Life - 17 17 17 16 16 16-31-Dec-06 31-Dec-07 31-Dec-08 31-Dec-09 31-Dec-10 31-Dec-11 31-Mar-07 31-Mar-08 31-Mar-09 31-Mar-10 31-Mar-11 31-Mar-12 Combined sector - funds under management Insurance sector - Gross Premiums 12.0 49.8bn 87% 5.5bn 10% 1.9bn 3% Insurers - Life Insurers - Non life Pensions sector 1.1 9.4 1.4 8.5 1.2 8.0 1.7 5.8 1.2 8.9 1.2 7.7 10.0 8.0 6.0 4.0 2.0 Insurers - Non Life Insurers - Life - 31-Dec-06 31-Dec-07 31-Dec-08 31-Dec-09 31-Dec-10 31-Dec-11 Annual report 2012 Page 14 Annual report 2012

AUTHORISATIONS AND REGISTRATIONS Authorisations and registrations Insurance sector Whilst the value of assets under management continues the upward trend of net investment into the sector, 2011/12 saw a net decline of eight insurance sector authorisations and registration. This is largely due to the continuing trend of consolidation in the captive insurance industry. Seven insurers surrendered their authorisations following the termination and settlement of their insurance liabilities in full. One surrender was attributable to the insurer redomiciling outside of the Isle of Man. Recent years have seen a slight yet steady decline across the sector in authorisations, however local industry representative organisations continue to work with the Isle of Man Government s Department of Economic Development to determine strategic plans to further develop the industry and attract new sectors. Pensions sector During the year, the Authority has seen a growth in the use of master trust arrangements whereby a single scheme is registered which has a number of individual arrangements within it, thereby increasing the average value of authorised schemes. In addition, a small number of international companies where the individual pension arrangements set up in respect of employees were re-evaluated and rationalised, resulted in 275 individual international arrangements winding up. After adjusting for the 275 schemes noted above, the Authority continues to see strong growth in the pensions sector with a net increase in domestic and international scheme numbers of 59 and 7 respectively with the average funds under management per authorised scheme increasing from 1.2 million to 1.7 million. As international companies continue to restructure their master trust arrangements we will continue to see the number of authorisation reduce although the number of members and assets continues to increase. Summary of registrations 31 Mar 12 31 Mar 11 Authorised insurers Life 16 16 Authorised insurers Non Life 132 140 Permitted insurers 15 15 Insurance Managers 21 21 General insurance intermediaries 33 33 Total insurance sector 217 225 Summary of registrations 31 Mar 12 31 Mar 11 Professional administrators 26 26 In-house administrators 42 44 International schemes 384 691 Domestic schemes 761 702 Total pensions sector 1,213 1,463 80% Summary of registrations 1% 9% 5% 5% Authorised Insurers - Life Authorised Insurers - Non Life Other Retirement Benefit Schemes Administrators Retirement Benefit Schemes Pension sector - No of Licences 761 653 702 691 664 687 655 634 534 466 108 45 47 49 17 18 21 48 25 44 26 800 700 600 500 384 400 300 200 100 42 26 - Professional Administrators Inhouse Administrators International schemes Domestic schemes 31-Mar-07 31-Mar-08 31-Mar-09 31-Mar-10 31-Mar-11 31-Mar-12 Annual report 2012 Page 15 Annual report 2012

Funds under management bn Gross Premiums bn Funds under management bn Gross Premiums bn INSURANCE BUSINESS Long-term insurance business The life assurance sector in the Isle of Man consists predominantly of unit linked long-term insurance business, with non-unit linked technical reserves representing just over 1% of the total. Therefore, very often the principal risks facing the Island s life sector lie not in market and insurance risk but rather in managing the operational and expense risks. Where companies sell internationally, there may also exist exposure to foreign exchange risk. As with all unit linked businesses, the volume of business written is particularly sensitive to the performance of global financial markets, and maintaining market share in the increasingly competitive markets continues to be a focus for many of the Island s life companies. However, the sector continues to perform strongly, in comparison to the world s markets, with funds under management remaining constant at 49.8 million. Included within the 2010 gross premiums for the life sector of 8.9bn was a one off reinsurance transaction of 1.4 billion. The 2011 gross premiums have increased by 2% on the prior year after excluding this exceptional item. Gross premium income continues to recover reversing the low point observed at the height of the financial crisis in 2009. Funds under management Gross premiums 50.0 10.0 40.0 8.0 30.0 6.0 32.3 37.7 36.7 41.3 49.9 49.8 20.0 10.0 Insurers - Life 9.4 8.5 8.0 5.8 8.9 7.7 4.0 2.0 Insurers - Life - - 31-Dec-06 31-Dec-07 31-Dec-08 31-Dec-09 31-Dec-10 31-Dec-11 31-Dec-06 31-Dec-07 31-Dec-08 31-Dec-09 31-Dec-10 31-Dec-11 Non-life insurance business The non-life sector consists of non-life authorised insurers (66%), general insurance intermediaries (16%), insurance managers (11%), and permitted insurers (7%). The non-life authorised insurers are predominantly captive in nature, in the broadest sense of the term, and as the soft commercial insurance market and wider economic downturn continues, the effect can be seen in the slight increase of 3% in the year of funds under management taking the total to 5.5 billion at the year end. In contrast to the life sector, entities within the Isle of Man s non-life sector tend to maintain a conservative asset mix that is high in cash and cash equivalents. Funds under management 6.0 Accordingly, total assets were affected little by the continued economic uncertainty. The local industry body for captive insurers, the Isle of Man Captive Association, remains positive in its outlook and continues to work actively with the Isle of Man Government s Department of Economic Development to develop further opportunities within the non-life sector. Gross written premiums have risen marginally in the year to 1.22 billion, as compared to 1.19 million in 2009. Gross premiums 2.0 5.0 1.5 4.0 5.1 5.2 6.0 5.8 5.4 5.5 3.0 2.0 Insurers - Non Life 1.1 1.4 1.2 1.7 1.2 1.2 1.0 0.5 Insurers - Non Life 1.0 - - 31-Dec-06 31-Dec-07 31-Dec-08 31-Dec-09 31-Dec-10 31-Dec-11 31-Dec-06 31-Dec-07 31-Dec-08 31-Dec-09 31-Dec-10 31-Dec-11 Annual report 2012 Page 16 Annual report 2012

Funds under management bn RETIREMENT BENEFITS SCHEMES Retirement benefits schemes The pensions sector in the Isle of Man continues to show growth with pension fund values continuing the upward trend reaching 1.9 billion of assets under management in 2011, representing an increase of 11% over the prior year. The regulatory regime provides a framework which recognises the diversity of the Island s pension sector. Additional growth in 2011 was stimulated by the introduction of changes to domestic taxation arrangements, known as 50C. The changes were brought about to reflect UK legislation and to enable the Island to participate more fully in the QROPS market, which has seen steady growth worldwide since 2006. Pensions sector 2.0 1.8 1.6 1.4 1.2 1.0 1.7 1.9 0.8 Pensions sector 1.2 1.5 1.3 1.4 0.6 0.4 0.2-31-Dec-06 31-Dec-07 31-Dec-08 31-Dec-09 31-Dec-10 31-Dec-11 Annual report 2012 Page 17 Annual report 2012

STRUCTURE, OPERATIONS AND FINANCIAL REPORT Annual report 2012 Page 18 Annual report 2012

THE BOARD OF THE AUTHORITY The Board of the Authority The Board of the Insurance and Pensions Authority is appointed by the Treasury subject to the approval of Tynwald, for a period of 5 years. The current Board of the Authority was appointed with effect from 1 April 2012. The functions of the Board are set out in Schedule 1 to the Insurance Act 2008. The Board is tasked with providing guidance and directions to its Chief Executive in the exercise or performance of powers provided to him by statute and in other situations as it sees fit. Corporate Governance The Authority is committed to operating and maintaining effective procedures and policies supporting sound corporate governance. In doing this the Authority complies with the provisions of the Isle of Man Government s Corporate Governance Principles and Code of Conduct. In the interests of ensuring the proper and effective operation of the Authority, this code requires there to be in place a framework governing activity and ensuring that: decisions are taken properly; channels of communication are open; performance is monitored; and standards are upheld. Corporate governance is a broad concept and aims to encompass the structures and processes governing all of the activity of the Authority, including aspects relating to its risk management and internal control, as well as its focus on the needs of all of its stakeholders. As part of its strategy for maintaining high standards of governance, the Authority will continue to consult with all stakeholders on matters of regulatory or legislative developments and will continue to foster an environment in which open and constructive dialogue with relevant industry organisations is conducted to the greatest possible extent. The Authority undertakes periodic reviews of its risk profile and is required to provide an annual Statement of Internal Control to support the findings of its internal control assessment procedures. The effectiveness of the internal control environment is periodically tested to ensure that the Authority addresses any threats it may face in the performance of its strategic and regulatory objectives. The Authority s corporate governance procedures are designed to ensure high levels of integrity and openness in the decisions made by the Board. To this end a register of Members interests is maintained in order to help identify and facilitate the management of any potential conflicts of interest. Appropriate procedures are in place to manage such conflicts where they may arise. All decisions and matters before the Board are minuted. Board composition The Authority s Board collectively has experience in the fields of insurance, audit and accountancy, management consultancy, insolvency, and public administration. The Board meets, on average, once every six weeks, with additional ad hoc meetings as required. In respect of the year ended 31st March 2012, the board met on fifteen occasions. On 31 st March 2012, Mr Gelling retired as Chairman to the Board after ten years in the role. The Authority would like to record its thanks to Mr Gelling for his unwavering support and contribution to the work of the Authority and wishes him well in his retirement. Annual report 2012 Page 19 Annual report 2012

THE BOARD OF THE AUTHORITY Back Row: David Stacey, David Vick, Bryan Cooper Front Row: Lillian Boyle, Peter Pell-Hiley Peter Pell-Hiley FCA, BA (Hons) Econ. A member of the Insurance and Pensions Authority since June 2007, Mr Pell-Hiley was appointed as Chairman with effect from 1 April 2012. He is an economics graduate of Exeter University and a Fellow of the Institute of Chartered Accountants in England and Wales. He is former senior partner of KPMG in the Isle of Man. Bryan Cooper FCMA Mr Cooper is a Fellow of the Chartered Institute of Management Accountants whose career was with Sedgwick Risk Management Services, with particular emphasis on captive management both within the British Isles and internationally. He has been a member of the Insurance and Pensions Authority since 1996. David Stacey FCII Mr Stacey joined the board of the IPA in April 2012. Prior to his retirement from full-time employment in 2009 he was managing director of Tower Insurance Company Limited and had previously spent his career in various senior management roles within RSA Insurance Group, Tower s parent. Lillian Boyle LLB, FCII, Chartered FCSI, TEP Ms Boyle was appointed as a Member of the Authority in April 2012. She is a lawyer and a Chartered Insurer. A former President of the UK Chartered Insurance Institute and Chair of its Audit Committee, she was previously Managing Director of Scottish Provident International. She is currently a member of the Conduct Committee of the UK Financial Reporting Council and sits on a variety of boards including investment and financial services companies, 3rd Sector and higher education organisations. David Vick ACII Mr Vick was appointed Chief Executive of the Insurance and Pensions Authority in 2002, having joined the Authority in 1989. He previously worked for one of the Island s captive insurance management companies. He is an Associate of the Chartered Insurance Institute (ACII) and a Chartered Insurance Practitioner, and was President of the Insurance Institute of the Isle of Man in 1994/95. He is a Fellow of the Chartered Insurance Institute and a Chartered Insurer, and holds the Institute of Directors Diploma in Company Direction. He is a non-executive director of a number of companies. Annual report 2012 Page 20 Annual report 2012

ORGANISATION OF THE AUTHORITY Organisation of the Authority The Board of the Insurance and Pensions Authority Chief Executive D A Vick Executive Secretary C Douglas Receptionist D McGovern Head of Supervision Non Life A Rowe Head of Supervision Life Assurance and Pensions F Signorio-Hooper Senior Actuary N Taverner Regulatory Manager Non Life W Sayer Regulatory Manager Life Assurance P Ellison Regulatory Manager Pensions A Pladgeman Regulatory Manager Compliance and Risk Management C McGinley Regulatory Officer Non Life K Ladley Regulatory Officer Life Assurance D Jones Regulatory Officer - Pensions O Hills Top Row: Daniel Jones, Paul Ellison, Cheryl McGinley, Francesca Signorio-Hooper, Neil Taverner Alan Rowe, Andrew Pladgeman Bottom Row: Oriana Hills, Catherine Douglas, David Vick, Wendy Sayer, Karen Ladly, Dianne McGovern (not pictured) Annual report 2012 Page 21 Annual report 2012

FINANCIAL AND OPERATIONAL REPORT Financial and operational report Funding and resources The operating expenditure of the Insurance and Pensions Authority is funded by the Isle of Man Government from general revenue and offset against the authorisation and registration fee income charged to regulated entities. The Authority will continue to examine ways to minimise the extent of the need for such funding, consistent with the need for financial regulators to be, and to be seen to be, independent from central government influence. However, it is also mindful of the importance of ensuring that regulatory fees are maintained at a level which is competitive with other similar jurisdictions, and it is necessary to consider this limiting factor in light of the importance of the insurance and pensions sectors to the local economy when setting future fee levels. The amount of the funding and approved headcount is agreed in advance as part of the Government s overall budget process and the Authority is committed to working to ensure that it operates in a manner that is as cost-efficient as possible. Authorisation and registration fee income The Authority s fee income for the year was 1,065,911, representing a fall of just under 21,000 when compared to the previous year due primarily to a reduction in the total number of authorised insurers. Employee costs and resources Employee costs increased in the year by 50,362, to 807,357 in the year due in the main to the average number of posts in operation increasing to 13 in the year. Overall results The overall expenditure incurred by the Authority for the year was 1,283,720 (2010/11: 1,170,145) taking the net deficit for the year (which is met from the Island s General Revenue Account) to 217,809 (2010/11: 83,250). 2012/13 Outlook Looking forward to 2012/13, projected income is expected to increase to 1.12m. Expenditure for 2012/13 is forecast to increase, due in the main to the fact that the average number of posts in operation is expected to increase to 14 for the year ended 31st March 2013. As a result, the overall budgeted net deficit for 2012/13 agreed by Tynwald as part of the Government annual budgetary process is 385,000, with an approved headcount of 14. Annual report 2012 Page 22 Annual report 2012

INCOME AND EXPENDITURE ACCOUNT Income and expenditure account for the year ended 31 March 2012 Income and expenditure account for the year ended 31 March 2012 Year ended Year ended 31 Mar 2012 31 Mar 2011 INCOME Fee income Authorised insurers 876,361 903,433 Insurance managers 54,500 52,500 Insurance permit holders 30,550 27,450 General insurance intermediaries 36,000 35,000 Pension scheme administrators 68,500 68,512 Total income 1,065,911 1,086,895 EXPENDITURE Employee costs Salaries 792,546 734,469 Travel and subsistence 13,651 18,429 Other 1,160 4,097 807,357 756,995 Infrastructure costs Rent and rates 92,602 90,751 Other 5,795 6,178 98,397 96,929 Supplies and services Professional fees 254,091 183,046 Members fees and expenses 53,497 69,247 Other 70,378 63,928 377,966 316,221 Total expenditure 1,283,720 1,170,145 DEFICIT FOR THE YEAR (217,809) (83,250) Annual report 2012 Page 23 Annual report 2012

APPENDICES Annual report 2012 Page 24 Annual report 2012

APPENDICES Useful contacts The following contact information may prove useful to users of this report. Further information can also be obtained by contacting the Authority directly: Isle of Man Supervisory Bodies and Government Departments Insurance and Pensions Authority Web: www.gov.im/ipa Tel: +44 (0) 1624 646000 Ground Floor Finch Hill House Bucks Road Douglas IM1 3DF Financial Supervision Commission PO Box 58 Finch Hill House Bucks Road Douglas IM99 1DT Web: www.gov.im/fsc Tel: +44 (0) 1624 689300 Isle of Man Government Companies Registry Web: www.gov.im/ded/companies Tel: +44 (0) 1624 689389 Isle of Man Government Department of Economic Development PO Box 345 St George s Court Upper Church Street Douglas IM99 2QS St George s Court Upper Church Street Douglas IM1 1EX Web: www.gov.im/ded Tel: +44 (0) 1624 686400 Financial Services Ombudsman Government Buildings Lord Street Douglas IM1 1LE Web: www.gov.im/oft/ombudsman Tel: +44 (0) 1624 686500 Pensions Ombudsman 11 Belgrave Road London SW1V 1RB Web: www.pensions-ombudsman.org.uk Tel: +44 (0) 20 7630 2200 Financial Crime Unit PO Box 51 Finch Hill House Bucks Road Douglas IM99 2TD Web: www.gov.im/fcu Tel: +44 (0) 1624 686000 Annual report 2012 Page 25 Annual report 2012

APPENDICES Isle of Man Industry Representative Bodies Manx Insurance Association Web: www.mia.org.im Tel: +44 (0) 1624 625431 Isle of Man Captive Association Web: www.iomcaptive.com Tel: +44 (0) 1624 625431 Isle of Man Financial Planners & Insurance Brokers Association Secretariat: Lhergy Dhone Alexander Drive Douglas IM2 3QU Secretariat: Lhergy Dhone Alexander Drive Douglas IM2 3QU c/o 2 Olafs Close Governors Hill Douglas IM2 7AR Web: www.fpiba.com Isle of Man Association of Pension Service Providers Tel: +44 (0) 1624 631084 Manx Actuarial Society Tel: +44 (0) 1624 691334 Association of International Life Offices Secretariat: Millennium House Victoria Road Douglas IM2 4RW Secretariat: Zurich International 43-51 Athol Street Douglas IM99 1EF Secretariat: PO Box 1747 L-1017 Luxembourg Web: www.ailo.org Tel: +352 442 659 Annual report 2012 Page 26 Annual report 2012

APPENDICES International Supervisory Representative Bodies International Association of Insurance Supervisors c/o Bank for International Settlements CH-4002 Basel Switzerland Web: www.iaisweb.org Tel: +41 61 225 7300 International Organisation of Pensions Supervisors Web: www.iopsweb.org Tel: +33 145 24 14 52 Group of International Insurance Centre Supervisors Web: www.ogis.net 2, Rue André Pascal F-75775 Paris, Cedex 16 France Secretariat: Gibraltar Financial Services Commission PO Box 940, Suite 3, Ground Floor Atlantic Suites, Europort Avenue Gibraltar Annual report 2012 Page 27 Annual report 2012