|
Browse Profiles > Hungary > Insurance Core Principles |
| Score | Rank | |
| Standards Compliance Index | 66.67 out of 100 | 4 |
| Business Indicator Index | 10.98 out of 12 | 3 |
Hungary|
Insurance Core Principles
Insurance supervision in Hungary exhibits a high level of compliance with the Insurance Core Principles (ICPs) promulgated by the International Association of Insurance Supervisors in 2003, as noted by a 2005 International Monetary Fund (IMF) assessment and a 2005 self-assessment prepared by the Hungarian Financial Supervisory Authority (PSZAF). Since its accession to the European Union (EU) in 2004, Hungary has been part of the EU regulatory framework, and is also an active participant in the EU level deliberations on financial sector supervision. The laws pertaining to insurance supervision and activities have been completely overhauled since 2000, and have helped to push Hungary closer to full compliance with ICPs. The areas where Hungary is found deficient by the PSZAF self-assessment are the PSZAF's power to issue binding regulations; fit and proper testing; internal control; risk assessment and management regulations; insurance activity; investments and the use of derivatives; capital adequacy and solvency; and consumer protection. The 2005 IMF assessment also identifies as a weakness the PSZAF's lack of the power to issue conditional licenses. The assessment, however, notes that Hungary will improve its compliance in the areas of corporate governance, internal control, comprehensive risk assessment and management, and capital adequacy and solvency as EU directives and regulations in these areas, including the Solvency II framework, are implemented. General Overview The International Monetary Fund (IMF) conducted a Financial System Stability Assessment (FSSA) of Hungary in 2000 and published a Report on the Observance of Standards and Codes (ROSC) on Insurance Supervision in 2002. According to the 2002 ROSC, Hungary was "broadly compliant with most of the insurance supervisory principles" (p. 45) promulgated by the International Association of Insurance Supervisors (IAIS) in 2000. The 2002 ROSC enumerated a few areas where there was room for improvement. They included the need for the supervisor to have legal authority to (1) enforce corporate governance codes in insurance companies; and (2) ensure that insurance companies and intermediaries had adequate knowledge, skills and integrity when interacting with their customers. Other recommendations of the ROSC were: (1) grant legally binding powers to the PSZAF; (2) extend fit and proper testing to officials other than owners and senior management, including the supervisory board and foreign owners; (3) develop internal control guidance manual for domestic as well as foreign large companies; and (4) introduce standard asset valuation rules. The 2002 ROSC noted that Hungary was taking steps to align its insurance sector laws with EU directives either by January 2003 or when it acceded to the European Union (EU).The Principles
The 2005 IMF ROSC observes that "Hungary meets the conditions necessary for effective insurance supervision" (p. 26). The 2005 PSZAF self-assessment also finds ICP 1 "observed" (p. 5). The only area of deficiency is that supervisory decisions cannot be appealed against through administrative procedures, but only in the court of law.
The 2005 IMF ROSC observes that "the principle objectives of insurance supervision are clearly defined" (p. 26). The 2005 PSZAF self-assessment also finds ICP 2 "observed" (p. 5), adding that two essential criteria are not applicable in the Hungarian context because the PSZAF does not deviate from its stated objectives, and therefore does not need to explain the deviation. Also, since there are no contradictions in the defined objectives, no corrections are required.
The 2005 IMF ROSC observes that the PSZAF has "a range of supervisory and enforcement powers" (p. 26); however, it does not have the power to issue binding regulations, which is the prerogative of the Ministry of Finance (Pénzügyminisztérium). The PSZAF issues resolutions and guidelines, and though they are non-binding, they have been seconded by some court rulings, enhancing their clout. The insurance sector also finds the PSZAF resolutions and guidelines beneficial for their relevant guidance they provide to help companies avoid sanctions. Per the 2005 PSZAF self-assessment, ICP 3 is "largely observed" (p. 5). The PSZAF observes all essential and advanced criteria of this principle, but only partly observes two, both relating to the fact that the PSZAF cannot issue binding rules or regulations.
The 2005 IMF ROSC observes that the PSZAF "conducts its functions in a transparent and accountable manner" (p. 26). Per the 2005 PSZAF self-assessment, all essential and advanced criteria of ICP 4 are "observed".
With respect to ICP 5, the 2005 IMF ROSC recommends that Hungary enter into agreements on information exchange with pertinent non-EU insurance supervisors so as to "complete the coverage of necessary arrangements in this area" (p. 27). Per the 2005 PSZAF self-assessment, the PSZAF observes all criteria of ICP 5, except one, which is not applicable in the Hungarian context.
With respect to ICP 6, the 2005 IMF ROSC recommends that the PSZAF be given the power to set additional prudential requirements or conditions for authorization if it detects deficiencies in the operations of an applicant for an insurance license. However, the Hungarian authorities responded to the ROSC recommendation by stating that this recommendation is "inappropriate" (p. 29), since granting conditional licenses goes against the "fundamental principles of domestic (Hungarian) law" (p. 29). Per the 2005 PSZAF self-assessment, the PSZAF observes all criteria of ICP 6, except one, which is not applicable in the Hungarian context.
The 2005 IMF ROSC recommends the strengthening of the law related to fit and proper testing so that (1) it stipulates that any changes in the fitness and propriety of owners, members of the supervisory board and management board, executive officers and other senior managers be reported to the PSZAF; and (2) it covers all executive officers, including external auditors, of all insurers. Per the 2005 PSZAF self-assessment, ICP 7 is "partly observed" (p. 5). Of the seven essential criteria, the PSZAF observes four and largely observes one, while one criterion is not observed and one is not applicable in the Hungarian context. Criterion b of ICP 7 is largely observed because Hungarian law "does not require that the owners dispose of their interests in cases where significant owners no longer meet fit and proper requirements" (p. 33), nor does it stipulate any specific action to be taken against them. Criterion f is not observed because the Act on Insurance does not deal with the question of holding multiple positions in an insurer that might result in conflict of interest. However, the self-assessment notes that the Act on Business Associations does regulate that members of the board of directors or their immediate relatives may not be elected as a member of the supervisory board of the same company, and vice versa. As for criterion g, which is not applicable, the insurer is not obliged by the Act on Insurance to notify the PSZAF of circumstances that may be relevant to the fitness and propriety of its key officials. The insurer is only obliged to inform the PSZAF of the change in officials without giving the reasons thereof.
The 2002 IMF ROSC informs that any change in ownership of an insurer resulting in potential change of control requires prior preliminary approval of the PSZAF. The application for approval is required to disclose the financial standing, professional reputation and business interest of the applicant. Portfolio transfers to the tune of 10 percent or more of the issued shares also require the PSZAF approval. In the case of changes in control or portfolio transfers to a foreign entity, the PSZAF may contact the home supervisors to ascertain the solvency of the potential investor and the appropriateness of the transfer. Per the 2005 PSZAF self-assessment, the PSZAF observes all essential and advanced criteria that make up ICP 8.
The 2005 IMF ROSC recommends that Hungary further develop its corporate governance framework so that (1) all types of insurers are covered; (2) the relationship between the different governing bodies of the insurer is addressed; (3) the role and responsibilities of governing bodies are clarified; and finally (4) international corporate governance standards are met. The Hungarian authorities respond by stating that the country recognizes the importance of qualitative factors like corporate governance and internal controls and declares that once comprehensive standards are set at the EU level, and the Solvency II framework is implemented, Hungary will also implement "fundamental changes in this field" (p. 29). The authorities, however, explain that introducing corporate governance requirements to nonprofit mutual insurance companies would be infeasible, since they are too small to be able to allocate human or financial resources for such compliance. Per the 2005 PSZAF self-assessment, the PSZAF observes all essential criteria of ICP9.
The 2005 IMF ROSC indicates that Hungary could further strengthen internal control requirements for insurers. The ROSC recommends that Hungary introduce a resolution on internal control for insurers so that such standards and requirements are clarified to the insurers, thereby creating awareness and consistency in the application of these measures by all insurers. The Hungarian authorities responded by stating that the country recognizes the importance of qualitative factors like corporate governance and internal controls and declares that once comprehensive standards are set at the EU level, and the Solvency II framework is implemented, Hungary will also implement "fundamental changes in this field" (p. 29). Per the 2005 PSZAF self-assessment, ICP 10 is "largely observed" (p. 5). Of the 12 essential criteria, the PSZAF observes 9, largely observes 1, and partly observes 2. The self-assessment elaborates that criterion c is largely met because although there is relevant legislation, not all insurers adhere to them. Larger insurers have audit, actuarial, and compliance functions, but the smaller ones only have internal auditors, and it can be deduced that they cannot afford more differentiated functions. Criteria d and e are partly observed due to the lack of clear regulations on oversight by the supervisory boards of the insurers to identify, measure, monitor, and control all major risks as well as market conduct activities on an ongoing basis. However, the self-assessment observes that in practice all insurers meet these requirements.
The 2005 IMF ROSC concludes that "Hungary meets most ongoing supervision requirements" (p. 26). The ROSC recommends that the PSZAF enhance its market analyses by "considering wider environmental elements of a forward looking nature" (p. 26). Per the 2005 PSZAF self-assessment, the PSZAF observes all essential criteria of ICP 11.
The 2005 IMF ROSC concludes that "Hungary meets most ongoing supervision requirements" (p. 26). The ROSC, however, recommends that the PSZAF further enhance its already well-developed off-site analysis by improving market analysis, refining its risk rating system, and elaborating the methodology for off-site monitoring to include assessments of insurers in trouble against the prudential benchmarks. The 2004 World Bank ROSC states that the financial statements submitted by insurers are required to comply with the stipulations of the Act on Accounting, as well as the Government Decree 192/2000 on Reporting and Bookkeeping Requirements of Insurers, the latter of which "complies with the EU Insurance Accounts Directive" (p. 2). Per the 2005 PSZAF self-assessment, ICP 12 is "observed" (p. 5). However, one criterion of this principle is only largely observed because the PSZAF requires insurers to report to it on a solo basis. The self-assessment, nevertheless, states that Hungary has harmonized its legislation with the EU framework as part of its EU accession and a group-wide reporting system has been in force since May 2004. Also, an Insurance Group Supervision Working Group has been established and its work in the area should help facilitate the development of a group monitoring system.
The 2005 IMF ROSC concludes that "Hungary meets most ongoing supervision requirements" (p. 26). The ROSC recommends that the PSZAF continue honing its on-site supervisory methodology and steer it towards risk-based supervision, so that it is proportionate to the level of risk management and internal controls in the insurance entity. Per the 2005 PSZAF self-assessment, the PSZAF observes all criteria of ICP 13.
The 2005 IMF ROSC concludes that "Hungary meets most ongoing supervision requirements" (p. 26). However, the ROSC has no specific comments or recommendations for ICP 14. Per the 2005 PSZAF self-assessment, the PSZAF observes all criteria of ICP 14.
The 2005 IMF ROSC concludes that "Hungary meets most ongoing supervision requirements" (p. 26). However, the ROSC has no specific comments or recommendations for ICP 15. Per the 2005 PSZAF self-assessment, ICP 15 is "observed" (p. 5). The PSZAF observes all but one criteria of this principle. Criterion d is largely observed mainly due to legal deficiencies in the supervisory power to require an increase in capital, restrict insurer's purchase of own shares, restrict ownership or activities of a subsidiary, and restrict controlling owners from exercising powers over the insurer. However, the self-assessment attests that the PSZAF in practice can and does exercise such powers and "is able to control such situations" (pp. 61, 62). Also, the more stringent capital requirements under the EU Solvency framework will be applicable to Hungary and harmonize the country's capital adequacy framework with the requirements of this principle.
The 2005 IMF ROSC concludes that "Hungary meets most ongoing supervision requirements" (p. 26). However, the ROSC has no specific comments or recommendations for ICP 16. Per the 2005 PSZAF self-assessment, the PSZAF observes all criteria of ICP 16.
The 2005 IMF ROSC concludes that "Hungary meets most ongoing supervision requirements" (p. 26). However, the ROSC has no specific comments or recommendations for ICP 17. Per the 2005 PSZAF self-assessment, the PSZAF observes all criteria of ICP 17.
The 2005 IMF ROSC notes that Hungary needs to move towards a risk based supervisory framework, both by developing a new methodology itself and by ensuring risk management policies and practices of the insurers. The PSZAF acknowledges the need to move to risk based supervision, but states that this move will depend on the requirements of the EU Solvency II framework. Per the 2005 PSZAF self-assessment, ICP 18 is "partly observed" (p. 5). Of the 4 essential criteria, the PSZAF largely observes one, and partly observes the remaining three. The self-assessment notes that though the PSZAF mission as well as guidance papers dwell on comprehensive risk management policies and systems in place at all insurance companies, there are many sector-specific risks that defy measurement. Further, corporate governance is also not comprehensively addressed in the evaluation system. Supervisory inspection put more emphasis on whether each law has been obeyed rather than on whether each risk has been effectively managed. The PSZAF has guidance on the adequacy of the risk management policies and practices at the insurers that cover all material risks, but there is still room for improvement. Lastly, the insurance industry is too complex to have similar prerequisites for all entities. Small companies lack the awareness or the resources to factor in and manage all risks, whereas some subsidiaries of foreign insurers are bogged down by excessive rules resulting in competitive disadvantage.
The 2005 IMF ROSC suggests that "an inherent part of the development from a compliance oriented approach towards risk based supervision would be to include a review of strategies and policies for underwriting and reinsurance" (p. 28). Per the 2005 PSZAF self-assessment, ICP 19 is "largely observed" (p. 5). Of the 6 essential criteria, the PSZAF observes 4, largely observes 1, and partly observes 1 criterion. Criterion a is partly observed because insurers are not legally required to have board-approved strategic underwriting and pricing policies in place. Nevertheless, the self-assessment notes that the PSZAF regularly reviews business plans during on-site inspections. Criterion e is largely observed for two principal reasons: there are no quantitative benchmarks on the adequacy of reinsurance arrangements; and the PSZAF cannot directly supervise reinsurers of Hungarian insurers since they are, almost exclusively, foreign entities.
The 2002 IMF ROSC notes that the Act on Insurance and insurance regulations clearly spell out the composition of liabilities, eligible claims, and sufficient reserves to cover liabilities. Insurers are also required to submit annual actuarial reviews, report their actuarial assumptions, justify their internal calculations, and have an agreement with, if not employ, an actuary. There is, however, no manual explaining the methodology for setting actuarial reserves. Per the 2005 PSZAF self-assessment, ICP 20 is "observed" (p. 5). However, one essential criterion is only largely observed due to the lack of "standards that stipulate general limits for the valuation of the amounts recoverable under reinsurance arrangements with a given reinsurer for solvency purposes, taking into account the ultimate collectability and the real transfer of risk" (p. 77). In addition, although a new provision addressing this issue has been added to the Act on Insurance, it has not been applied in supervisory intervention.
The 2005 IMF ROSC recommends that the PSZAF strengthen supervision of the investment policies and practices of insurers. The PSZAF is advised to introduce a recommendation or guidance on risk management and internal control which focuses on investments and spells out the responsibilities of key officials with regard to management and control of investments. Per the 2005 PSZAF self-assessment, ICP 21 is "partly observed" (p. 5). Of the 10 essential criteria, 5 are observed, 3 are largely observed, and 2 are partly observed. Criterion c is largely observed because although the Act on Insurance has basic principles on investments, "the risk profile of the insurer and the determination of the strategic asset allocation, that is, the long-term asset mix over the main investment categories are not regulated directly" (p. 81), and the recommendations cited in the Supervisory Guide on Asset-Liability Management have not been extensively used. Criterion d is partly observed because the Act on Insurance and the Supervisory Guide on Asset-Liability Management contain only broad requirements for the management of market risk, credit risk, liquidity risk, and risk pertaining to safe-keeping of assets. Criterion j is partly observed because insurers are not regulated for their contingency plans, except IT contingency plans in accordance with the Control Objectives for Information and related technology principles. As for criteria h and i, the self-assessment has not elaborated on the reasons why the PSZAF achieves less than full compliance.
The 2005 IMF ROSC finds that the PSZAF has not issued any recommendations on the use of derivatives since insurers do not use them. However, when the insurers start using derivatives, this area will need to be regulated and supervised. Per the 2005 PSZAF self-assessment, ICP 22 is "partly observed" (p. 5). Of the 9 criteria that make up this principle, the PSZAF observes 2, largely observes 2, and partly observes 2, while 3 criteria are not observed. The self-assessment observes that Hungarian insurers do not use derivatives in practice and therefore the need to enact legislation on them has not been considered necessary till very recently. However, the 2003 Act on Insurance contains regulations for the use of derivative instruments, the Act on Accounting - as amended - sets new rules on derivatives, and the Government Decree on the Reporting and Bookkeeping Requirements of Insurers No. 192/2000 as modified by Decree No. 235/2003 gives detailed rules on the accounting principles of derivative transactions.
The 2005 IMF ROSC observes that Hungarian capital adequacy requirements are based on the EU directives and will follow the EU Solvency II framework, which in its final form will "very likely allow the introduction of internal models in the setting of the capital buffer, affecting liability valuation, asset liability matching and the calculation of the buffer itself" (p. 28). The ROSC asserts that the new framework will call for adequate skills on the part of the PSZAF to cope with the new supervisory requirements. Per the 2005 PSZAF self-assessment, ICP 23 is "largely observed" (p. 5). Of the 9 essential criteria of this principle, the PSZAF observes 7, largely observes 1, and partly observes 1 criterion. Criterion b is only partly observed because "partner risk is currently no factor either in the calculation of capital requirement or in the valuation of provisions" (p. 88), and criterion d is largely observed because the solvency regime in Hungary, in anticipation of the Solvency II framework, does not take into account all the risks inherent in insurance operations (e.g. asset risk).
The 2005 IMF ROSC observes that "insurance supervision in Hungary meets the requirements for...insurance intermediaries" (p. 27). Insurance intermediaries are supervised by the PSZAF, and per the 2005 ROSC, are required by the latter to "take the necessary measures to prevent, detect and remedy insurance fraud" (p. 27). The ROSC also observes that the PSZAF is planning to establish a specialized body to resolve disputes on financial contracts and also have the power to make binding resolutions. Per the 2005 PSZAF self-assessment, the PSZAF observes all criteria of ICP 24. The 2006 PSZAF annual report states that the PSZAF places emphasis on the supervision of the insurance intermediaries, and continuous supervision "is justified by the lack of transparency and potential financial risks, and the information not always completely provided to consumers" (p. 44).
The 2005 IMF ROSC observes that "insurance supervision in Hungary meets the requirements for...consumer protection" (p. 27). The ROSC also observes that the PSZAF is planning to establish a specialized body to resolve disputes on financial contracts and also have the power to make binding resolutions. Per the 2005 PSZAF self-assessment, ICP 25 is "largely observed" (p. 6). The PSZAF observes all but one essential criteria of this principle. Criterion b is largely observed; however, the self-assessment does not elaborate on the deficiencies in the system that keep the PSZAF at less than full compliance with this criterion.
The 2005 IMF ROSC observes that "insurance supervision in Hungary meets the requirements for information disclosure towards the market" (p. 27). Per the 2005 PSZAF self-assessment, the PSZAF observes all essential criteria of ICP 26.
Per the 2005 IMF ROSC, insurers and intermediaries are required by the PSZAF to "take the necessary measures to prevent, detect and remedy insurance fraud" (p. 27). As noted by the 2005 PSZAF self-assessment, the PSZAF observes all criteria of ICP 27.
The 2005 IMF ROSC the insurance sector is regulated under the 2003 Act on the Prevention and Impeding of Money Laundering. Further, the PSZAF has also issued a resolution on AML/CFT. The ROSC recommends further steps to help financial institutions better detect suspicious transactions, and introduction of a legal basis obligating financial institutions to report suspicious transactions, especially those related to the financing of terrorism. Per the 2005 PSZAF self-assessment, the PSZAF observes all criteria of ICP 28. |
Jump to other standards 
Sources of Assessment Hungarian Financial Supervisory Authority, "The Self-Assessment of the Hungarian Financial Supervisory Authority against the Insurance Core Principles," November 2005. Available from Hungarian Financial Supervisory Authority website. Accessed on March 3, 2008. (PSZAF 2005) International Monetary Fund, "Hungary: Financial System Stability Assessment Follow-up, including Reports on the Observance of Standards and Codes on the following topics: Monetary and Financial Policy Transparency, Banking Supervision, Securities Regulation, Insurance Regulation, and Payment Systems," Country Report No. 02/112, Washington, D.C.: IMF, June 2002. Available from the International Monetary Fund website. Accessed on March 3, 2008. (IMF 2002) International Monetary Fund, "Hungary: Financial System Stability Assessment Update, including a Report on the Observance of Standards and Codes on Insurance Regulation," Country Report No. 05/212, Washington, D.C.: IMF, June 2005. Available from International Monetary Fund website. Accessed on March 3, 2008. (IMF 2005) Relevant Organizations Association of Hungarian Insurance Companies -- Magyar Biztosítók Szövetsége (MABISZ) Hungarian Financial Supervisory Authority -- Pénzügyi Szervezetek Állami Felügyelete (PSZAF) Ministry of Finance -- Pénzügyminisztérium (MoF) Relevant Legislation/Regulation Act on Insurers and Insurance Activity No. LX, 2003 Act on the Hungarian Financial Supervisory Authority No. CXXIV, 1999 Act on the Right of Association No. II, 1989 Act on Business Associations No. CXLIV, 1997 Act on Bankruptcy, Liquidation and Winding up No. II, 1991 Act on Accounting No. C, 2000 Act on the Prevention and Impeding of Money Laundering No. XV, 2003 Government Decree on the Reporting and Bookkeeping Requirements of Insurers No. 192/2000 Government Decree on the Reporting and Bookkeeping Requirements of Insurers No. 235/2003 PSZAF Guide on Asset-Liability Management EU Directive on the Annual Accounts and Consolidated Accounts of Insurance Undertakings No. 91/674/EEC, 1991 (EU Insurance Accounts Directive) Supplementary Sources Hungarian Financial Supervisory Authority, "Annual Report 2006," Budapest: PSZAF, August 2007. Available from Hungarian Financial Supervisory Authority website. Accessed on March 4, 2008. (PSZAF 2007) International Association of Insurance Supervisors website. Accessed on March 4, 2008. (IAIS website) World Bank, "Hungary: Report on the Observance of Standards and Codes (ROSC) -- Accounting and Auditing," June 20, 2004. Available from World Bank website. Accessed on March 3, 2008. (WB 2004) |