Session 4 Preventive and Corrective Measures Regional Training Seminar IAIS-ASSAL San Salvador, El...
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![Page 1: Session 4 Preventive and Corrective Measures Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat.](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649ea95503460f94bad217/html5/thumbnails/1.jpg)
Session 4Preventive and Corrective Measures
Regional Training Seminar IAIS-ASSAL
San Salvador, El Salvador, 22-25 November 2010
Takao Miyamoto, IAIS Secretariat
![Page 2: Session 4 Preventive and Corrective Measures Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat.](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649ea95503460f94bad217/html5/thumbnails/2.jpg)
Agenda
2
1. Fundamental Activities– Legal & Operational Capacities
– Ongoing Supervision
2. Methods of Applications– Manuals
– Ladder of Intervention
– Timeliness
3. Examples
4. Other Considerations– IMF Paper
![Page 3: Session 4 Preventive and Corrective Measures Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat.](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649ea95503460f94bad217/html5/thumbnails/3.jpg)
Rationale
3
Conservative approach– Based on extensive and
restrictive regulation
– Protect policyholders from loss but higher costs
– Stifle innovation
Permissive approach– Foster entrepreneurial
behavior
– Excessive risk taking
– Increase failures
– Affordable products
Importance of timely & effective preventive & corrective actions
Importance of timely & effective preventive & corrective actions
Strike a balance…
![Page 4: Session 4 Preventive and Corrective Measures Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat.](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649ea95503460f94bad217/html5/thumbnails/4.jpg)
Fundamental Elements
4
• Legal authorities– Monitor & understand developments in insurers and
industry– Exercise preventive & corrective measures
• Operational capacities– Budget & human resources– Skilled staff – recruitment, constant skill development– Remunerations…?– Mix of long-term career supervisors & experienced mid-
career industry professionals…?
![Page 5: Session 4 Preventive and Corrective Measures Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat.](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649ea95503460f94bad217/html5/thumbnails/5.jpg)
Specific Functions
5
• Obtain well-designed periodical & supplementary supervisory filings – Without timely, accurate, meaningful information, no well-
considered supervisory decisions– Financial information – sufficient to calculate all standard
early warning ratios and solvency positions– Non-financial information (e.g. reinsurance arrangement,
shareholders and related parties, off-balance sheet)– Impose more frequent & detailed reporting– Revise content of reporting
• Carry out onsite inspections– “Eyes and ears” of supervisory agency
![Page 6: Session 4 Preventive and Corrective Measures Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat.](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649ea95503460f94bad217/html5/thumbnails/6.jpg)
Specific Functions
6
• Inspect business plans– Assess risk inherent in plans for coming years– Assess ability to deal with issues that have been raised– Provide insight into depth of management
• Other measures– Impose solvency requirement– Order improvement actions– Impose sanctions & penalties for noncompliance – Withdraw license
![Page 7: Session 4 Preventive and Corrective Measures Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat.](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649ea95503460f94bad217/html5/thumbnails/7.jpg)
Agenda
7
1. Fundamental Activities– Legal & Operational Capacities
– Ongoing Supervision
2. Methods of Applications– Manuals
– Ladder of Intervention
– Timeliness
3. Examples
4. Other Considerations– IMF Paper
![Page 8: Session 4 Preventive and Corrective Measures Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat.](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649ea95503460f94bad217/html5/thumbnails/8.jpg)
Manuals
8
• Develop comprehensive policy & procedural manuals for use of all staff members– Help to ensure transparent, consistent & effective
application of available supervisory mechanisms– Provide understanding of all key supervisory measures &
powers, including criteria for application how & when they would normally invoked
– Set out all key policies so that staff members are fully aware of them and understand importance
• Make (key concepts) available to public– Foster mutual understanding
![Page 9: Session 4 Preventive and Corrective Measures Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat.](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649ea95503460f94bad217/html5/thumbnails/9.jpg)
Ladder of Intervention
9
• “Action plan”– Consider various scenarios in advance – Develop appropriate strategies for supervisory actions in
different situations
• Early prevention is less costly– Can be triggered by high-risk situations that have not yet
given rise to actual situation of noncompliance– Should include reasonable numbers of stages
• Ultimate corrective measures • Make (key concepts) available to public
– Important planning document for insurers– Remove uncertainty & encourage self-governance– Fend off political pressure
![Page 10: Session 4 Preventive and Corrective Measures Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat.](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649ea95503460f94bad217/html5/thumbnails/10.jpg)
Timeliness
10
• Potential time lag– Persons responsible realise symptoms & problems– Communicate to appropriate level– Supervisors receive information by insurers or through
onsite inspections– Examine within supervisory authority & make decision– Insurer’s management formulates & implements actions– Actions take effect
• Timely measures are essential– Situations can change rapidly– Formulate & implement plans within time frame appropriate
to the situation– Set framework for follow-up
![Page 11: Session 4 Preventive and Corrective Measures Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat.](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649ea95503460f94bad217/html5/thumbnails/11.jpg)
Relationship with Industry
11
• Best results can be achieved when supervisors and insurers’ managers share common principles
• Credibility & respect from industry– Constructive & knowledgeable comments of supervisors– Timely & suitable actions in professional & transparent
manner
• Less & less necessary to draw on formal authority• Rather, moral suasion can work well
– Reduce “getting around laws”
![Page 12: Session 4 Preventive and Corrective Measures Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat.](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649ea95503460f94bad217/html5/thumbnails/12.jpg)
Agenda
12
1. Fundamental Activities– Legal & Operational Capacities
– Ongoing Supervision
2. Methods of Applications– Manuals
– Ladder of Intervention
– Timeliness
3. Examples
4. Other Considerations– IMF Paper
![Page 13: Session 4 Preventive and Corrective Measures Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat.](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649ea95503460f94bad217/html5/thumbnails/13.jpg)
Prompt Corrective Action
13
Class Solvency Margin
Action / Order
1 Less than 200%
– Formulation & implementation of management plan
2 Less than 100%
– Formulation & implementation of plan to improve solvency
– Prohibition & restriction on dividend to shareholders and/or policyholders
– Revision of method, including coefficients, to calculate insurance premiums for new contracts
– Prohibition & restriction on bonuses to directors & senior management
– Restriction on other operating expenses
![Page 14: Session 4 Preventive and Corrective Measures Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat.](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649ea95503460f94bad217/html5/thumbnails/14.jpg)
Prompt Corrective Action
14
2 Less than 100%
– Prohibition & restriction on certain asset management methods
– Curtailment of business at certain existing offices
– Abolition of certain offices except head & main offices
– Curtailment of business activities of subsidiaries
– Disposal of stock of subsidiaries & others
– Reduction & new undertakings of auxiliary business
– Other measures deemed necessary
3 Less than 0 %
– Suspension of whole or part of business
![Page 15: Session 4 Preventive and Corrective Measures Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat.](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649ea95503460f94bad217/html5/thumbnails/15.jpg)
Early Warning System
15
Prompt Corrective Action
Measures to improve Credit Risk Management
Measures to improve Market Risk Management
Measures to improveLiquidity Risk Management
Measures to strengthen Profitability
•In-depth interview for cause & improvement•Request for report•Business improvement order
From standpoint of solvency
From standpoint of liquidity
Early Warning System
![Page 16: Session 4 Preventive and Corrective Measures Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat.](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649ea95503460f94bad217/html5/thumbnails/16.jpg)
Administrative Actions
16
First Step: identify appropriate measures to take• Seriousness & maliciousness of conduct
– Extent of damage to public interests– Extent of damage to customers’ interests– Maliciousness of conduct– Length & frequency of conduct– Existence of intention– Organised involvement– Concealment of conduct– Involvement with antisocial forces
![Page 17: Session 4 Preventive and Corrective Measures Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat.](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649ea95503460f94bad217/html5/thumbnails/17.jpg)
Administrative Actions
17
• Appropriateness of governance & internal control– Recognition & initiatives of board of directors– Establishment & work of internal audit– Effectiveness of compliance & risk management structures– Recognition & education of staff
• Mitigating factors– Whether insurers make efforts in voluntary fashion prior to
administrative responses
Second step: determine actions• Additional considerations
– Whether voluntary efforts is appropriate– Whether intensive efforts & focus is necessary– Whether it is appropriate to allow to continue business
operations
![Page 18: Session 4 Preventive and Corrective Measures Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat.](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649ea95503460f94bad217/html5/thumbnails/18.jpg)
Agenda
18
1. Fundamental Activities– Legal & Operational Capacities
– Ongoing Supervision
2. Methods of Applications– Manuals
– Ladder of Intervention
– Timeliness
3. Examples
4. Other Considerations– IMF Paper
![Page 19: Session 4 Preventive and Corrective Measures Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat.](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649ea95503460f94bad217/html5/thumbnails/19.jpg)
Food for Thought
19
The Making of Good Supervision:
Learning to Say “No” (IMF, 2010)
Ability to act– Legal authority
– Adequate resources
– Clear strategy
– Robust internal organisation
– Effective working relationship with other agencies
Will to act– Clear & unambiguous mandate
– Operational independence
– Accountability
– Skilled staff
– Healthy relationship with industry
– Effective partnership with boards
![Page 20: Session 4 Preventive and Corrective Measures Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat.](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649ea95503460f94bad217/html5/thumbnails/20.jpg)
Citation from IMF Paper
20
• “…we identify two pillars that support good supervision: the ability to act and the will to act. The will to act has been prominently featured in discussions of the supervisory response to crisis, present and past…”
• “…the “ability” to supervise … must be complemented by the “will” to act. Supervisors must be willing and empowered to take timely and effective action, to intrude on decision-making, to question common wisdom, and to take unpopular decisions. Developing this “will to act” is a more difficult task…”
![Page 21: Session 4 Preventive and Corrective Measures Regional Training Seminar IAIS-ASSAL San Salvador, El Salvador, 22-25 November 2010 Takao Miyamoto, IAIS Secretariat.](https://reader035.fdocuments.in/reader035/viewer/2022062423/56649ea95503460f94bad217/html5/thumbnails/21.jpg)
Citation from IMF Paper
21
• “Very simply, there must be a willingness to take action and fulfill the supervisory role. On its face, this seems like an easily obtained consensus; however, supervisors find themselves under almost constant criticism for getting in the way of innovation and for being stodgy and “antimarket.”
• “Supervisors are expected to stand out from the rest of society and not be affected by the collective myopia and consequent underestimation of risks associated with the good times…”
• “…the relationship between supervisors and the financial industry is a unique blend of familiarity (supervisors are in constant dialogue with the industry) and authority (the right and responsibility) to say no.”