In 2004, the International Monetary Fund (IMF) concluded the Financial System Stability Assessment (FSSA) of Jordan which aimed at identifying strengths and vulnerabilities of the Jordan's financial system and determining policy responses and technical assistance strategies. The circulation of the final FSSA report was highly limited and it has never been published. However, as stated in the report by the Independent Evaluation Office of the IMF and other publications by the Fund, the FSSA noted that regulation of the insurance sector in Jordan generally followed international standards in insurance supervision, although some legal and regulatory challenges existed. It was recommended to increase the independence of the Insurance Commission of Jordan (IC) from government, and to ensure that companies maintain adequate reserves. Other sources also confirm these findings. Realizing the need for changes, in 2004 the IC announced its plan to revise the existing Insurance Regulatory Act of 1999 with the aim of laying down foundations and principles governing legal relationships between the insurance sector participants.

General Overview

In 2004 the International Monetary Fund (IMF) concluded its Financial System Stability Assessment (FSSA) of Jordan, aimed at identifying strengths and vulnerabilities of the Jordan's financial system and determining policy responses and technical assistance strategies. The circulation of the final FSSA report was highly limited and it has never been published. However, as stated in the 2005 report by the Independent Evaluation Office of the IMF and other IMF publications, the FSSA noted that insurance supervision in Jordan generally followed international standards, although some legal and regulatory challenges existed. It was recommended to increase the independence of the Insurance Commission of Jordan (IC) from government, and to ensure that companies maintain adequate reserves.

Vayanos and Hammoud, contributors to the Arab World Competitiveness Report released in 2007, note that the insurance sector in the Middle East and North Africa (MENA) region was traditionally underdeveloped, compared to the rest of the financial sector, due to the sensitivity of the issue from the Shari'a point of view, low awareness of insurance products, and almost non-existence of financial products that require life insurance to offset future liabilities in the event of death. The supply of insurance products in the region is characterized by a large number of small players as measured by the capital employed and limited presence of foreign insurers. The authors concluded that given the low demand and the low supply of insurance products, there is a significant potential for growth in the region which will require regulators to attend to the "underlying enablers of growth," (p. 102) under which they understand legal framework, regulatory bodies, nature of competition, skills and training, and market led-initiatives.

The authors concurred with the findings of the IMF by concluding that the legal framework in Jordan follows international standards and is generally in line with Insurance Core Principles (ICPs) promulgated by the International Association of Insurance Supervisors (IAIS). The IC has succeeded in following the IAIS principles in its activities and is taking on-going measures to improve compliance with the best practices. Dimitri Vittas in his 2004 paper on insurance supervision in Jordan also comments on the progress made by the IC in strengthening insurance supervision: "The new Commission [IC] has made considerable progress in its short life in expanding its staff, undertaking a wide-ranging training program to upgrade skills, and implementing a multi-year action plan aiming at modernizing the regulatory framework and enhancing the efficiency of the sector. Its basic developmental objectives are to expand the contribution of the insurance industry to the economy and increase the public's awareness of the benefits of both life and general insurance" (p. 2). Vittas further notes that the new regulations adopted by the IC rely on the modern concepts of risk-based supervision. The issues covered by the new regulations include licensing, solvency margin, market conduct reserves and reinsurance cover among others. However, despite all the progress, some challenges still remained in the area of corporate governance, shortage of qualified actuaries, implementation of fair value accounting rules and other important aspects of insurance business.

Prior to 1999, the insurance industry in Jordan was regulated by the department of the Ministry of Industry and Trade (MIT) which, according to Vittas, was "under-staffed and largely ineffective" (p. 21). In 1999, the IC was created under the Insurance Regulatory Act which governs the insurance sector in Jordan along with other regulations and papers of the IC. In 2004, the IC announced its intention to develop a new, more comprehensive insurance law. According to the 2004 IC Annual Report, the proposed law was expected to differ in substance and objectives from the 1999 Act which covers mainly requirements for insurance companies and their operations. The new law was expected to "establish the foundations and the main principles governing the legal relationships between the parties to the insurance contract" (p. 3). As of May 2007, there was no publicly available information on whether the law had been enacted.

According to the FIRST Initiative website, in 2004 the Jordanian insurance sector was composed of 26 companies, 1 life insurer, 7 general insurers, and 18 composite firms. The life insurance market - which is a small part of the overall sector (only 14%) - was dominated by the American Life Insurance Company (ALICO), a foreign firm which holds approximately 59% of all policies.

The Insurance Commission is a member of the International Association of Insurance Supervisors (IAIS). (IAIS website)

The Principles

ICP 1 Conditions for effective insurance supervision

II

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

ICP 2 Supervisory objectives

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There is insufficient publicly available information as to Jordan's compliance with this principle. The website of the IC states that the aims of the IC are "to regulate the local insurance sector and supervise it to avoid the environment suitable for its development and enhance its role through upgrading the efficiency of the insurance institutions operating in the market and improve their performance." The IC has adopted a strategy and defined annual work plans to realize its goals.

ICP 3 Supervisory authority

II

There is not enough publicly available information as to Jordan's compliance with ICP 3. Prior to the establishment of the Insurance Commission (IC) under the Insurance Supervision Act 33 in 1999, the insurance industry in Jordan was regulated by the under-staffed and largely ineffective office that was part of the MIT. According to the World Bank's 2004 Report on the Observance of Standards and Codes (ROSC), the IC is an independent entity in terms of finance and management. Vittas, in his 2004 paper on insurance supervision in Jordan, also notes that the IC has adequate powers to appoint experts and consultants, to issue regulations and instructions covering a variety, and to gather information, inspect, as well as intervene when corrective measures are required. However, the author remarks that operational and budgetary autonomy of the IC is weakened by the following four factors: "the appointment of the MIT as ex officio chairman of the Board of Directors of the IC; the failure to appoint the Director General for a fixed term and to require cause for the termination of this appointment; the transfer of any surplus financial resources to the Public Treasury; and the submission of the IC's budget to the Ministry of Finance (MoF) for review before it is presented to the Council of Ministers for approval" (p. 22). Moreover, the transfer of surplus revenue to the Public Treasury limits the supervisor's independence in terms of hiring and remuneration policy. The author recommends addressing these shortcomings in order to achieve full operational and budgetary autonomy of the regulator.

ICP 4 Supervisory process

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

ICP 5 Supervisory cooperation and information sharing

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

ICP 6 Licensing

II

Dimitri Vittas, in his 2004 paper on insurance supervision in Jordan, notes that the licensing requirements for insurance companies in Jordan are well defined and must be renewed annually. However, the IC does not have the power to investigate the probity and financial standing of founders and large shareholders or to approve changes in control. Moreover, the newly established companies are being treated differently from the existing companies in that very high minimum capital requirements are imposed on the new companies while the existing companies are exempted from these requirements. No further information as to Jordan's compliance with this principle is publicly available.

ICP 7 Suitability of persons

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

ICP 8 Changes in control and portfolio transfers

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There is insufficient publicly available information as to Jordan's compliance with this principle. According to Vittas's 2004 report, the IC is not empowered to approve changes in control in insurance companies.

ICP 9 Corporate governance

EN

Corporate governance practices of insurance companies were introduced by the amendments of the Insurance Regulatory Act of 2002 and were further defined in various instructions issued by the IC. The 2002 instruction on reinsurance emphasized responsibilities of Board of Directors and internal control. However, in 2004, Vittas noted that some important aspects of corporate governance were missing in Jordan..

Aware of these shortcomings, in January 2007, the IC issued regulations on corporate governance which specified responsibilities of board of directors, defined its authority and also stressed the need for audit committees. As it is stated in the press release of the IC, these regulations comply with the IAIS standards. In a 2007 IC press release, Dr. Bassel Hindawi, Director General of the Insurance Commission, noted that "the launch of these regulations came as a result of sustaining prudential control adopted by the IC regulatory framework to regulate the insurance sector within the technical, legal, and financial frameworks that comply with the principles and standards of the International Association of Insurance Supervisors (IAIS)" (p. 2). However, according to Vittas's 2004 report, actual implementation of sound corporate governance practices may be hindered in Jordan by the prevailing business practices which are characterized by the family control and lack of non-executive directors knowledgeable of insurance business.

ICP 10 Internal control

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

ICP 11 Market analysis

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

ICP 12 Reporting to supervisors and off-site monitoring

II

There is not enough information publicly available as to Jordan's compliance with ICP 12. The ICI is empowered to request copies of all relevant documentation from insurance companies and to appoint experts to conduct special audits of the companies based on the results of its investigations. According to Vittas's 2004 report, the IC was in the progress of establishing an Insurance Regulatory Information System that will help identify operationally and financially weak companies. Introduction of this system, according to the author, can improve both off-site and on-site monitoring Overall, the IC is strengthening both its on-site and off-site monitoring by increasing its staff and frequency of the inspections.

The IC regulates financial reporting requirements of insurance companies. Audited consolidated annual statements and other documentation must be presented 2 months after the end of the fiscal year. Insurance companies are required to appoint licensed external auditors (not licensed by the IC) and to comply with international accounting standards.

In 2004, the World Bank conducted an assessment of accounting and auditing practices in Jordan. To evaluate whether actual practices of insurance companies comply with the existing accounting requirements, the World Bank team reviewed consolidated financial statements of two insurance companies. The team concluded that consolidated financial statements prepared with IFRSs were generally adequate. Areas of noncompliance included (1) deferral of bad debt; (2) nonconsolidation of subsidiaries; and (3) disclosure of compliance with IFRS.

ICP 13 On-site inspection

II

According to Vittas in 2004, "the IC has adequate powers of inspection and investigation as well as intervention in cases that require corrective action, including delicensing, rehabilitation or liquidation of companies" (p. 22). Further, as of 2004, the IC was in the process of hiring and training new staff with the aim of expanding its capacity in this area to increase frequency of inspections and to focus on internal controls of weak companies. However, no further information on Jordan's compliance with ICP 13 is publicly available.

ICP 14 Preventive and corrective measures

II

According to Vittas in 2004, the IC has adequate powers of intervention in cases that require corrective action, including delicensing, rehabilitation or liquidation of companies. The Insurance Regulatory Act specifies measures that the IC can undertake when insurance companies experience financial difficulties as well as range of offences and provisions on the rehabilitation or liquidation of companies. The IC has the power to appoint and supervise liquidators. Vittas also noted that the IC had started to work on a Supervisory Ladder that would define objectives and clear criteria of regulatory actions to avoid unnecessary interventions. However, there is no further information publicly available as to Jordan's compliance with ICP 14.

ICP 15 Enforcement or sanctions

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

ICP 16 Winding-up & exit from the market

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

ICP 17 Group-wide supervision

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

ICP 18 Risk assessment and management

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

ICP 19 Insurance activity

II

There is insufficient publicly available information as to Jordan's compliance with ICP 19. Vittas (2004) notes that supervision of reinsurance companies "is based on modern principles... [and] provides a good example of the flexibility of the IC and the impact of its wide consultation with insurance companies and other parties" (p. 28). Prior to the 2003 amendment of the Reinsurance Instruction that regulates reinsurance business in Jordan, there were restrictions on the proportion of cessions to different reinsurance companies depending on their rating. As Vittas notes, this situation raised concerns among local insurers and regional reinsurance companies, but the 2003 amendments addressed these issues.

ICP 20 Liabilities

II

There is insufficient publicly available information as to Jordan's compliance with this principle. According to Vittas in 2004, the IC requires general insurance companies to maintain technical provisions for unearned premiums, unexpired risks, outstanding and incurred but not reported claims, and catastrophic risks. Life insurance companies must maintain provisions for unearned premiums and outstanding claims. ompanies are required to report to the IC their methods and assumptions for calculating reserves and making changes to them. The IC does not have powers to veto certain assumptions made by actuaries but in practice can influence them. In setting their reserves, the companies must use internationally approved actuarial methods.

ICP 21 Investments

II

There is insufficient publicly available information as to Jordan's compliance with this principle. Writing in 2004, Vittas reports that there were no limits on the types of admitted assets and their investment and there were no provisions on asset segregation. Insurance companies were permitted to invest abroad but few companies chose to do so. The IC intended to stress the need for strong internal controls as the insurance companies were unlikely to meet the challenging requirements. Moreover, the IC was going to issue instructions on investment policies "that will emphasize the importance of adequate diversification, security, liquidity, and fair valuation and will address the responsibilities of the Board of Directors in setting and monitoring investment policies" (p. 26).

ICP 22 Derivatives and similar commitments

II

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

ICP 23 Capital adequacy and solvency

II

There is insufficient publicly available information as to Jordan's compliance with ICP 23. According to Vittas (2004), the IC's approach to capital adequacy and solvency requirements is based on that of Canada where different capital weights are applied to different class of assets depending on their risk, or the so-called risk-based capital (RBC) approach. The effectiveness of this approach in Jordan is yet to be tested.

ICP 24 Intermediaries

II

In his 2004 report, Vittas noted that, in Jordan, a code of conduct on insurers and intermediaries was under preparation and was to be issued in 2004. However, no further information as to Jordan's compliance with ICP 24 is publicly available.

ICP 25 Consumer protection

II

There is insufficient publicly available information as to Jordan's compliance with ICP 25. According to Vittas (2004), the IC has established an office for mediation of disputes between policyholders and insurance companies. The companies are not obliged to follow the decisions of the office. The insurance Act was amended to introduce to concepts of the Ombudsman and Alternative Dispute Resolution in insurance. Companies will have to comply with the decisions of the Ombudsman. As of 2004, the establishment of an Alternative Dispute Resolution Center was in the process with the assistance of the American Bar Association.

ICP 26 Information, disclosure & transparency towards the market

II

There is insufficient publicly available information as to Jordan's compliance with this principle. In 2004, Vittas reported that audited consolidated annual statements and other documentation must be presented 2 months after the end of the fiscal year. Insurance companies are required to appoint licensed external auditors (not licensed by the IC) and to comply with international accounting standards.

ICP 27 Fraud

II

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

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

II

In its 2007 Narcotics Report, the U.S. Department of State states that there is no comprehensive anti-money laundering law (AML) in Jordan. The draft AML law was approved by the lower house of Parliament and was expected to be finally approved by the beginning of 2007. However, sources of assessment do not directly address the issue of AML requirements for insurance companies.