As of May 2008, there is paucity of information in the public domain as to Ecuador's compliance with the Insurance Core Principles promulgated by the International Association of Insurance Supervisors (IAIS) in 2003. Under the 1994 General Law on the Institutions of the Financial System and the 1965 General Law on Insurance, the Superintendency of Banks and Insurance (SBS) supervises insurance and reinsurance companies in Ecuador. In 2001, the World Bank, IMF, Inter-American Development Bank, and the Andean Development Corporation disbursed to Ecuador the Financial Sector Technical Assistance (FSTAL) Loan. The objective of the loan was to assist Ecuador in overcoming the consequences of the financial crisis and to strengthen the supervisory authority and capacity of the financial sector's regulators, including those of the SBS. However, as the 2004 World Bank report points out, the overall result of the project's implementation were found to be "unsatisfactory." The FSTAL did not achieve its objective of modernizing the legal framework for the financial sector and its aim of unifying the General Law on the Institutions of the Financial System (which had been amended in a patchwork fashion to cope with the financial crisis).

General Overview

There is scant information publicly available regarding Ecuador's compliance with the Insurance Core Principles promulgated by the International Association of Insurance Supervisors (IAIS) in 2003. A 2004 report jointly prepared by the Center for Latin American Monetary Studies (CEMLA) and World Bank (hereafter referred to as the CEMLA/WB report) observes that the 1994 General Law on the Institutions of the Financial System (that was overhauled in 2001) establishes the duties of the Superintendency of Banks and Insurance (SBS), which is "a technical organ with administrative, economic and financial autonomy" (p. 22). The SBS has the authority to supervise and control public and private financial institutions, as well as insurance and reinsurance companies "established in the Constitution and in the laws" (p. 22). Its governing body is made up of the Banking Board, Superintendent of the SBS, General Manager of the Central Bank of Ecuador (BCE), two members designated by the President, and a fifth member who is designated by the above four members.

In response to the financial crisis in Ecuador in 1999-2000, the World Bank in conjunction with three other international financial institutions - the IMF, the Inter-American Development Bank (IDB), and the Andean Development Corporation (CAF) - disbursed a Financial Sector Technical Assistance Loan (FSTAL) effective 2001 to Ecuador. The loan, according to a 2004 FSTAL implementation completion report by the World Bank (hereafter referred to as the 2004 World Bank report), was "aimed at assisting the Ecuadorian government to manage and confront the deep financial sector crisis faced by the country, and strengthening the regulatory framework and supervisory capacity of the Authorities..." (pp. 2-3). Some of the objectives of the FSTAL were to enhance the institutional capacity of the SBS and establish a basis for an efficient financial system in the long run. However, as the report points out, the World Bank was not satisfied with the overall result of the project's implementation. The FSTAL did indeed succeed in helping the SBS develop on-site and risk-based supervision, s well as increase staff capacity. The FSTAL contribution included the development of a new operational manual for on-site examination and training to the staff, upgraded examination procedures, and tighter off-site monitoring. Nevertheless, the FSTAL did not achieve its objective of modernizing the legal framework for the financial sector and its aim of unifying the General Law on the Institutions of the Financial System (which had been amended in a patchwork fashion to cope with the financial crisis), notes the World Bank report. As a first step in the direction of revamping the law, two papers were commissioned by the FSTAL and the Ecuadorian authorities. These papers later formed the basis of the "Financial Sector Strategy and Action Plan" which outlined proposals for a new financial architecture in Ecuador. The important legal changes recommended by the Action Plan included enhanced legal protection for supervisors, de-politicizing the position of the Superintendent of Banks, and an Early Warning System to detect and deal with weak financial institutions. However, since the second loan amendment for the continuation of the FSTAL was not adopted, all the above strategies and planned actions were shelved. The World Bank report notes that the "SBS is still a relatively fragile institution with an inadequate personnel skill mix, significant technological upgrading requirements and insufficient legal support for its mandate. However, and by all accounts, SBS has come a long way since 1999 and the FSTAL has been instrumental in designing SBS on-site examination practices, many of its regulations as well as the institution's ongoing relevance in the area of corporate debt restructuring, which is cross-feeding into the supervisory process" (p. 13).

Per the 2004 CEMLA/WB report, the SBS's supervisory powers are to "approve the institutions' bylaws and any changes thereof; (2) look after the stability, soundness and correct functioning of the institutions and watch over their compliance with the relevant rules, regulations and laws; (3) establish preventive supervision programs; (4) require the supervised institutions to propose and then implement the corrective measures that are necessary; (5) impose administrative sanctions to the institutions, their directors, and managers and even to debtors if they fail to comply with the applicable rules and regulations; and (6) initiate legal action, if applicable, against the directors and managers of supervised institutions" (p. 23). The 2008 IMF report advises Ecuador to strengthen financial system supervision by providing more autonomy and legal protection to the SBS. The SBS is listed as a member on the IAIS website. As of 2008, the 2008 U.S. Department of State (DoS) report mentions, Ecuador's financial system is comprised of, inter alia, 39 insurance companies.

The Principles

ICP 1 Conditions for effective insurance supervision

II

The 2004 World Bank report notes that the 2001 FSTAL did not achieve its objective of modernizing the legal framework for the financial sector and its aim of unifying the General Law on the Institutions of the Financial System (which had been amended in a patchwork fashion to cope with the financial crisis) was not achieved. As a first step in the direction of revamping the law, two papers were commissioned by the FSTAL and the Ecuadorian authorities that later became the "Financial Sector Strategy and Action Plan" outlining proposals for a new financial architecture for Ecuador. However, since the second loan amendment for the continuation of the FSTAL was not adopted, all the above strategies and planned actions were shelved. Another report (an article published in the 2006 Economic Review (third quarter report) by the Federal Reserve Bank of Atlanta), nevertheless, points out that the 1994 General Law on the Institutions of the Financial System was indeed revamped in 2001. There is little further information publicly available as to Ecuador's compliance with this principle.

ICP 2 Supervisory objectives

II

There is insufficient information publicly available as to Ecuador's compliance with this principle.

ICP 3 Supervisory authority

II

There is insufficient information publicly available as to Ecuador's compliance with this principle. The 2004 CEMLA/WB report observes that the 1994 General Law on the Institutions of the Financial System (that was overhauled in 2001) establishes the duties of the SBS, which is "a technical organ with administrative, economic and financial autonomy" (p. 22). The SBS has the authority to supervise and control public and private financial institutions as well as insurance and reinsurance companies "established in the Constitution and in the laws" (p. 22). Its governing body is made up of the Banking Board, Superintendent of the SBS, General Manager of the BCE, two members designated by the Ecuadorian President and a fifth member who is designated by the above four members. Per the 2004 CEMLA/WB report, the SBS's supervisory powers are to "approve the institutions' bylaws and any changes thereof; (2) look after the stability, soundness and correct functioning of the institutions and watch over their compliance with the relevant rules, regulations and laws; (3) establish preventive supervision programs; (4) require the supervised institutions to propose and then implement the corrective measures that are necessary; (5) impose administrative sanctions to the institutions, their directors, and managers and even to debtors if they fail to comply with the applicable rules and regulations; and (6) initiate legal action, if applicable, against the directors and managers of supervised institutions" (p. 23).

The 2001 FSTAL disbursed to Ecuador by the World Bank in conjunction with the IMF, the IDB, and the CAF succeeded in helping the SBS develop on-site and risk-based supervision as also greater staff capacity. As for improvements in supervision, the FSTAL contribution included the development of a new operational manual for on-site examination and training to the staff, upgraded examination procedures, and tighter off-site monitoring. The World Bank report notes that the "SBS is still a relatively fragile institution with an inadequate personnel skill mix, significant technological upgrading requirements and insufficient legal support for its mandate. However, and by all accounts, SBS has come a long way since 1999 and the FSTAL has been instrumental in designing SBS on-site examination practices, many of its regulations as well as the institution's ongoing relevance in the area of corporate debt restructuring, which is cross-feeding into the supervisory process" (p. 13). The 2008 IMF report advises Ecuador to strengthen financial system supervision with more autonomy and legal protection to the SBS.

ICP 4 Supervisory process

II

There is insufficient information publicly available as to Ecuador's compliance with this principle.

ICP 5 Supervisory cooperation and information sharing

II

There is insufficient information publicly available as to Ecuador's compliance with this principle.

ICP 6 Licensing

II

There is insufficient information publicly available as to Ecuador's compliance with this principle.

ICP 7 Suitability of persons

II

There is insufficient information publicly available as to Ecuador's compliance with this principle.

ICP 8 Changes in control and portfolio transfers

II

There is insufficient information publicly available as to Ecuador's compliance with this principle. A 2005 World Bank report titled "Ecuador Investment Climate Assessment" mentions that the 1993 Foreign Investment Law liberalized investment procedures in Ecuador and eliminated the 49 percent ceiling on foreign ownership in the financial sector and insurance holdings.

ICP 9 Corporate governance

II

There is insufficient information publicly available as to Ecuador's compliance with this principle. The 2004 World Bank Report on the Observance of Standards and Codes (ROSC) on Accounting and Auditing observes that Ecuadorian law requires the appointment of comisarios in insurance companies, and the SBS requires external auditors to issue the comisario's report. However, the ROSC observes that comisario as a governance body is not "in line with more recent improvements in corporate practices on an international level" (p. 6). The ROSC, therefore, calls for the establishment of legal requirements for governance mechanisms in insurance companies. The ROSC notes that the creation of audit committees within insurance companies in 2004 by the SBS is a step in the right direction, as they can effectively monitor the auditing process, and the auditor's compliance with independence requirements.

ICP 10 Internal control

II

There is insufficient information publicly available as to Ecuador's compliance with this principle.

ICP 11 Market analysis

II

There is insufficient information publicly available as to Ecuador's compliance with this principle.

ICP 12 Reporting to supervisors and off-site monitoring

II

As indicated in the 2004 World Bank ROSC, although based on International Financial Reporting Standards (IFRSs) (formerly International Accounting Standards), the Ecuadorian Accounting Standards (NEC) differ from international standards significantly as they have not been updated since 2000 to incorporate the changes made to IFRSs since then. Also, there is no legally established accounting standard-setting body in Ecuador. Insurance companies follow specific reporting requirements laid down by the SBS in accordance with the General Law on Insurance, including a chart of accounts and Resolution No. JB-2003-574 on the rules on auditors. Insurance companies are required by the General Law on Insurance to appoint an internal auditor. They are also required to publish their consolidated financial statements. Further, the balance sheet, income statement and statement of cash flows of insurance companies are publicly available on the SBS's website. However, enforcement of accounting standards by the SBS remains a concern. The NEC have also not been updated or brought closer to the IFRSs since 2000. The 2004 World Bank ROSC adds that within the SBS, the National Risk Department, with the operational support of the National Intendancy of Banks, carries out the monitoring and supervision of financial institutions. The SBS enforces compliance of insurance companies by "automatically processing the information contained in the companies' financial statements" (p. 10). The ROSC recommends Ecuador to make IFRSs mandatory for all insurance companies. The 2001 FSTAL disbursed to Ecuador by the World Bank in conjunction with the IMF, the IDB, and the CAF helped the SBS develop tighter off-site monitoring, notes the 2004 World Bank report. This descriptive information notwithstanding, there is insufficient information publicly available as to Ecuador's compliance with this principle.

ICP 13 On-site inspection

II

There is insufficient information publicly available as to Ecuador's compliance with this principle. The 2001 FSTAL disbursed to Ecuador by the World Bank in conjunction with the IMF, the IDB, and the CAF succeeded in helping the SBS develop on-site and risk-based supervision as also greater staff capacity. As for improvements in supervision, the FSTAL contribution included the development of a new operational manual for on-site examination and training to the staff, and upgraded examination procedures.

ICP 14 Preventive and corrective measures

II

There is insufficient information publicly available as to Ecuador's compliance with this principle.

ICP 15 Enforcement or sanctions

II

There is insufficient information publicly available as to Ecuador's compliance with this principle. Per the World Bank ROSC, the SBS enforces compliance of insurance companies by "automatically processing the information contained in the companies' financial statements" (p. 10).

ICP 16 Winding-up & exit from the market

II

There is insufficient information publicly available as to Ecuador's compliance with this principle.

ICP 17 Group-wide supervision

II

There is insufficient information publicly available as to Ecuador's compliance with this principle.

ICP 18 Risk assessment and management

II

There is insufficient information publicly available as to Ecuador's compliance with this principle.

ICP 19 Insurance activity

II

There is insufficient information publicly available as to Ecuador's compliance with this principle.

ICP 20 Liabilities

II

There is insufficient information publicly available as to Ecuador's compliance with this principle.

ICP 21 Investments

II

There is insufficient information publicly available as to Ecuador's compliance with this principle.

ICP 22 Derivatives and similar commitments

II

There is insufficient information publicly available as to Ecuador's compliance with this principle.

ICP 23 Capital adequacy and solvency

II

There is insufficient information publicly available as to Ecuador's compliance with this principle.

ICP 24 Intermediaries

II

There is insufficient information publicly available as to Ecuador's compliance with this principle.

ICP 25 Consumer protection

II

There is insufficient information publicly available as to Ecuador's compliance with this principle.

ICP 26 Information, disclosure & transparency towards the market

II

There is insufficient information publicly available as to Ecuador's compliance with this principle.

ICP 27 Fraud

II

There is insufficient information publicly available as to Ecuador's compliance with this principle.

ICP 28 Anti-money laundering/ Combating the Financing of Terrorism

II

The 2008 U.S. DoS report observes that all financial institutions governed by the 1994 General Law on the Institutions of the Financial System (that was overhauled in 2001), including insurance companies and reinsurance companies, are obliged to report all "unusual and unjustified" transactions to the Ecuadorian Financial Intelligence Unit (UIF) within 48 hours. Further, institutions supervised by the SBS report suspicious transactions to the SBS. Other requirements include establishing "know your client" provisions; reporting cash transactions exceeding USD 10,000; and maintaining records of financial transactions for 10 years. Non-compliance with these and other obligations leads to sanctions by the SBS. In addition, the UIF is also authorized to request information from the obligated entities to help analyze suspicious transactions submitted by them, or any case requiring further investigation. The report, however, observes that some provisions of the Bank Secrecy Law and the Criminal Defamation Law conflict with the reporting requirements of banks and financial institutions. Though there are legal methods to bypass the conflict, such as an appropriate warrant issued by a judge, the contradictory legal framework may pose impediments in the cooperation between police, law enforcement authorities and the financial entities whose support is required for effective enforcement of the anti-money laundering regime. In this regard, the U.S. DoS report advises the Ecuadorian government to abolish bank secrecy limitations and potential sanctions for financial institutions for reporting suspicious transactions so as to make its anti-money laundering (AML) regime more effective. The government is also advised to enforce more diligently the reporting requirements and other provisions of its AML legislation. Nevertheless, the above descriptive information is insufficient to assign a level of compliance to Ecuador with respect to this principle.