Transcript Document

Seminar on Regulatory
Issues
Investments
Institute of Insurance and Risk Management
(IIRM)
Hyderabad, India
15 November 2005
Arup Chatterjee – Advisor
International Association of Insurance Supervisors
Why supervision of investments is important?
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sound and prudent management of investments
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problem of concentration risk
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technical provisions
solvency margin
identify, measure, report and control main risks
need for liquidity
manage and match assets and liabilities in a number of
currencies and different markets
limited availability of suitable domestic investment vehicles
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Role of supervisory authority
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Ensure standards are established for insurers
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managing investment portfolios
inherent risks
Authority and ability to
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assess risks
potential impact on technical provisions and solvency
Note: Detailed formulation of an insurer’s investment
management policy and internal risk control
methodology is the responsibility of the board of
directors
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IAIS Principles, Standards and Guidance
• Insurance core principles and methodology, October 2003
• Supervisory Standard on Derivatives, October 1998
• Supervisory Standard On Asset , Management By Insurance
Companies, December 1999
• Standard On Disclosures Concerning Investment Risks And
Performance For Insurers And Reinsurers, October 2005
• Guidance Paper On Investment Risk Management , October 2004
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ICP 21 Investments
The supervisory authority requires insurers to comply
with standards on investment activities.
These standards include requirements on
• investment policy
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asset mix
valuation
diversification
asset-liability matching
risk management
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Essential criteria
1. Requirements regarding the management of
investments in place -- law or supervisory rules
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mixture and diversification by type
limits or restrictions on the amount that may be held in
particular types of financial instruments, property, and
receivables
safekeeping of assets
appropriate matching of assets and liabilities
level of liquidity
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Essential criteria
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Investments are valued according to a method
prescribed by or acceptable to the supervisory authority
Overall strategic investment policy, approved and
reviewed annually by the board of directors
– risk profile of the insurer
– determination of the strategic asset allocation
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establishment of limits for the allocation of assets
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long-term asset mix over the main investment categories
geographical area
markets, sectors
counterparties
currency
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Essential criteria
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extent to which the holding of some types of assets is
restricted or disallowed
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conditions under which the insurer can pledge or lend
assets
overall policy on the use of financial derivatives and
structured products that have the economic effect of
derivatives
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illiquid or volatile assets or derivatives
clear accountability for all asset transactions and associated risks
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Essential criteria
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Risk management systems must cover the risks
associated with investment activities that might affect
the coverage of technical provisions and/or solvency
margins (capital)
– main market risk
– credit risk
– liquidity risk
– failure in safe keeping of assets (including the risk of
inadequate custodial agreements)
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Essential criteria
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Check that insurers have in place:
– adequate internal controls to ensure assets are managed
in accordance with the overall investment policy
– compliance with legal, accounting, and regulatory
requirements
– investment procedures are documented and properly
overseen.
– Functions responsible for measuring, monitoring, settling
and controlling asset transactions are separate from the
front office functions (refer to ICP 10)
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Essential criteria
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6.
Oversight of, and clear management accountability for
insurer’s investment policies and procedures with board
of directors regardless of the extent to which associated
activities and functions are delegated or outsourced
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Key staff involved have the appropriate levels of skills,
experience and integrity
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Insurers have in place rigorous audit procedures that
include full coverage of their investment activities:
– timely identification of internal control weaknesses and
operating system deficiencies
– Internal audit independent
of the function being reviewed11
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Essential criteria
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Insurers have in place effective procedures for
monitoring and managing their asset/liability position to
ensure that their investment activities and asset
positions are appropriate to their liability and risk
profiles
10. Insurers have in place contingency plans to mitigate the
effects of deteriorating conditions
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Advanced criteria
• Insurers undertake regular stress testing for a range of
market scenarios and changing investment and
operating conditions in order to assess the
appropriateness of asset allocation limits (refer to ICP 20
AC g and ICP 23 AC j)
– assess the adequacy of capital resources in case
technical provisions have to be increased
– solvency regime provides for periodic, forward-looking
analysis of an insurer’s ability to meet its obligations
under various conditions
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International Association of Insurance Supervisors
Questions and Answers
www.iaisweb.org
[email protected]
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