In 2002, the International Monetary Fund (IMF) published a Financial System Stability Assessment (FSSA) assessing Latvia's compliance with the International Association of Insurance Supervisors (IAIS) Insurance Core Principles (ICPs) established in 2000. The assessment found that the country largely observed the international standards, but noted some shortcomings with respect to reinsurance and corporate governance practices of Latvian insurance companies. In addition, requirements for protecting the interests of policyholders and accountholders in financial institutions were viewed as inadequate. The FSSA was undertaken when Latvian insurance supervision was administered by the Insurance Supervision Inspectorate (ISI). That institution merged in 2001 into the Financial and Capital Market Commission (FCMC), a unified financial sector regulator overseeing insurance, banking and securities regulation. A self-assessment of Latvia's compliance with the ICPs, undertaken by the FCMC as a part of the IAIS self-assessment exercise, found that the agency "observed" twenty five of the twenty eight revised ICPs (effective as of October 2003) and "largely observed" the remaining three. Areas of less than full compliance included information, disclosure and transparency towards the market and group-wide insurance supervision. The FCMC self-assessment did not address the issue of compliance with the related legislation.

General Overview

In 2002, the International Monetary Fund (IMF) published a Financial System Stability Assessment (FSSA) of Latvia's compliance with the International Association of Insurance Supervisors (IAIS) Insurance Core Principles (ICPs), established in 2000. The FSSA found that the country largely observed international standards, but noted some shortcomings with respect to reinsurance and corporate governance practices by Latvian insurance companies. In addition, requirements for protecting the interests of policyholders and accountholders in financial institutions were viewed as inadequate. The FSSA was undertaken when Latvian insurance supervision was administered by the Insurance Supervision Inspectorate (ISI). That institution merged in 2001 into the Financial and Capital Market Commission (FCMC), a unified financial sector regulator overseeing insurance, banking and securities regulation. In 2004, the FCMC undertook an IAIS self-assessment exercise to evaluate its compliance with the ICPs and found that the agency "observed" twenty five of the twenty eight revised ICPs (effective as of October 2003) and "largely observed" the remaining three. The Latvian FCMC is a member of the IAIS (IAIS website).

The IMF's 2002 FSSA report was fairly positive, stating that Latvia almost fully complied with the European Union (EU) Insurance Directives. Financial reporting, it added, conforms to the EU Directive for insurance companies. The report also noted that the ISI was relatively free from political influence, but lacked sufficient financial independence. The IMF found that the ISI cooperated and exchanged information with supervisors in other jurisdictions, and predicted that, with the establishment of the FCMC, the insurance regulator would enjoy enhanced operational independence and additional resources allocated for supervision. Furthermore, arrangements for information sharing and cooperation among domestic financial supervisory agencies would likely be improved.

Latvia's insurance sector is based on the Law on Insurance Companies and Supervision Thereof, the Law on the Insurance Contract and some sections of the Joint Stock Companies Law. The 2002 IMF FSSA found that this legal framework has undergone significant changes since the creation of the FCMC in 2001. More recent legislation includes the 2005 enactment of the Law on Activities of Insurance and Reinsurance Intermediaries and the Law on Financial Conglomerates. Latvian insurance supervision has also made advances in the realm of capital adequacy and solvency measures, the IMF averred, including amendments to the Regulations on Capital Adequacy Calculation. The mission concluded that the FCMC's efforts to ensure the stability of the country's financial and capital market and protect the interests of investors, depositors and the insured helped foster the conditions for effective insurance supervision.

The Principles

ICP 1 Conditions for effective insurance supervision

EN

Historically, regulation and supervision of insurance companies in Latvia were undertaken by the Insurance Supervision Inspectorate (ISI). The now defunct ISI was replaced in 2001 by the Financial Capital Markets Commission (FCMC), which aims to protect the interests of investors, depositors and insured persons. The commission, an umbrella agency in charge of supervising Latvia's insurance, banking and financial sectors, also ensures the stability and development of the financial and capital markets, according to the Law on Financial Capital Markets Commission.

In 2004, the FCMC conducted a self-assessment against the revised ICPs--which took effect in 2003--concluding that Latvia "observed" all criteria of the ICP on conditions for effective insurance supervision relating to the financial policy framework. The FCMC drew this conclusion based on enactment of the Law on Insurance Companies and Supervision Thereof and the Law on Financial and Capital Market Commission. In terms of financial market infrastructure, the FCMC self-assessment concluded that Latvia had "largely observed" the ICP criteria based on enactment of the Law on Financial and Capital Market Commission, Law on Judicial Power, International Accounting Standards/International Reporting Standards, International Standards on Auditing, Law on Accounting and Law on Sworn Auditors.

In its 2005 annual report, the FCMC noted that it exercised its mandate to supervise the activities of banks, credit unions, insurance companies and insurance brokers, financial instruments market participants as well as private pension funds. These supervisory activities which were to ensure the stability of Latvia's financial and capital market and protect the interests of investors, depositors and the insured, helped create the conditions for a effective insurance supervision.

A series of new laws were drafted that aimed to enhance conditions for effective insurance supervision. In 2005, Latvia drafted and implemented the Law on Activities of Insurance and Reinsurance Intermediaries and the Law on Financial Conglomerates, according to the FCMC's 2005 annual report. The FCMC further claimed that the results of its annual client survey found that the Commission's work was evaluated as "good," but the survey respondents' recommendations were also reviewed and implemented to improve the Commission's future operations The Law on Financial Conglomerates, drafted in 2005, transposes requirements of the EU Directive 2002/87/EC on the supplementary supervision of credit institutions, insurance undertakings and investment brokerage firms in a financial conglomerate.

The IMF's 2002 FSSA evaluated of Latvia's compliance with the ICPs promulgated by the IAIS in 2000. It found that the country largely observed those international standards. The mission found that Latvia's legal system is similar to that of Germany. At the time of the assessment, Latvian companies were incorporated according to the Law on Joint Stock Companies. The IMF mission claimed that the legal framework for insurance in Latvia was wanting in the area of corporate governance. "Existing corporate law for general purpose corporations in Latvia does not follow modern best practices in this area, which effects the situation of insurance companies; although the [Law on Insurance Companies and Supervision Thereof] contains several clauses that are designed to clearly establish the governance responsibilities of the board of directors" (pp. 42-43). The mission found also that the provisions were not adequate in protecting the interests of policyholders and accountholders in financial institutions.

According to the 2002 FSSA, the regulatory system for insurance companies was mostly compliant with European Union (EU) Insurance Directives, and financial reporting followed the EU Directive for insurance companies. The authorities made a substantial effort to conform legislation and other statutory instruments set for European Union member countries through the various directives issued by the EU. Accounting and auditing rules were also relevant for the performance of the insurance sector, according to the 2002 FSSA.

ICP 2 Supervisory objectives

EN

The FCMC's 2004 self-assessment for the IAIS concluded that the authorities had observed the international insurance principles to the extent that they were relevant to the Latvian insurance regulatory system. The Law on the Financial and Capital Market Commission describes the supervisory objectives of the FCMC, which are meant to promote stable, efficient and equitable insurance markets.

ICP 3 Supervisory authority

EN

The FCMC's 2004 IAIS self-assessment concluded that it had observed ICP 3 on supervisory authority. According to the report, all relevant criteria was covered under the Law on the Financial and Capital Market Commission, Law on Insurance Companies and Supervision Thereof, Law on Prevention of Conflict of Interest in Activities of Public Officials and Law on Sworn Auditors. A 2001 Bank of Latvia press release announced that the functions and rights of the FCMC are specified in Section II of the Law on the Financial and Capital Market Commission. According to the press release, the commission is guided by the principle of independent supervision and the FCMC top management election procedure, and a council of five members governs the commission.

The IMF's 2002 FSSA, reports that, previously, the ISI enjoyed considerable independence from political influence. Furthermore, the authority could issue or withdraw licenses freely, according to the report. However, many officials grumbled about the lack of financial independence since the agency's budget was at the mercy of both the Ministry and the Parliament's approval. The IMF concluded that supervisory functions might be improved by increasing the authority's independence and resources for staffing and training.

ICP 4 Supervisory process

EN

The FCMC's 2004 IAIS self-assessment concluded that Latvia observed the ICPs on the supervisory process, since all essential criteria for compliance were dealt with in the Law on the Financial and Capital Market Commission, and Law on Insurance Companies and Supervision Thereof and Administrative Procedure Law. According to the Bank of Latvia, in a 2001 press release, the FCMC is required to file an annual report on the financial and capital market conditions with the Parliament and a quarterly summary of relevant information to the Governor of the Bank of Latvia and the Minister of Finance, according to the Law on the Financial and Capital Market Commission. The Commission is also responsible for publishing all information available for public disclosure, including information on its website.

ICP 5 Supervisory cooperation and information sharing

EN

Latvia's 1998 Law on Insurance Companies and the Supervision Thereof was amended in 2004 and incorporated norms outlining rules on cooperation and information exchange with other supervisory authorities. In its 2004 IAIS self assessment, the FCMC self-assessment determined that, through this law as amended, the country had observed the principle on supervisory cooperation and information sharing. The IMF's 2002 FSSA reports that, prior to the establishment of the FCMC in 2001, the ISI, under the authorization of the Insurance Law, signed a Memoranda of Understanding allowing it to cooperate and exchange confidential information with Supervisors in other jurisdictions.

ICP 6 Licensing

EN

The Law on Insurance Companies and Supervision Thereof allows an insurer to commence operations only upon entry into the Commercial Register given that all requirements of the Law have been met. In its 2004 IAIS self-assessment, the FCMC noted that, through the operation of this Law and the Latvian Code of Administrative Violations, the country observed the ICP on licensing. However, the 2002 IMF FSSA found that, despite the establishment of a comprehensive licensing process, several improvements could be made by the FCMC. For instance, the FCMC could be equipped with the power to refuse licenses based on evidence of illegal transaction or improper connections and denying licenses to insurance companies whose structure impedes proper supervision. Furthermore, the IMF urged that "The licensing review process would be strengthened if it included an assessment of the capacity of the shareholder to augment the capital as that is dictated by future growth or changing circumstances" (p.45).

ICP 7 Suitability of persons

EN

According to the FCMC's IAIS self-assessment of its compliance with ICP 7, the authorities observed the principle on suitability of persons. The claim was supported by a slew of legislation including the Law on Insurance Companies and Supervision Thereof, the Financial and Capital Market Commission's Regulations for Obtaining Permits of the Financial and Capital Market Commission Regulating the Operation of Insurers and Foreign Reinsurers, for Making Notifications, Document Coordination and Information Provision and Financial and Capital Market Commission's Regulations on the Minimum Requirements for the Qualifications of the Chief Actuary of an Insurer. These laws, according to the FCMC encompass all relevant criteria of ICP 7.

ICP 8 Changes in control and portfolio transfers

EN

The Law on Insurance Companies and Supervision Thereof and the Law on Groups of Undertakings cover all criteria relevant to the ICP on changes in control and portfolios transfers, according to the 2004 FCMC self-assessment, which further asserted that Latvia observes the principle. In its 2002 FSSA, the IMF recommended including an assessment of shareholder capacity to augment capital when such action is required in the future due to unanticipated growth or a change in circumstances. There were no established criteria for assessing the suitability of new shareholders following changes in control. In the words of the 2002 FSSA, "The objective was to ensure that parties acquiring shares were subject to similar review as would be applied to an applicant seeking to start a new company" (p.44).

ICP 9 Corporate governance

EN

Since 2001, the FCMC has been responsible for overseeing corporate governance measures as they relate to insurance supervision. The FCMC's 2004 IAIS self-assessment claimed that Latvia observed the ICP on corporate governance as the Law on Insurance Companies and Supervision Thereof, the Commercial Law and the Financial and Capital Market Commission's Regulations on the Safety of Informative Systems of Financial and Capital Market Participants cover all criteria relevant. However, the 2002 IMF FSSA had expressed concerns that corporate governance practices were not well established in Latvian Commercial Law. Nonetheless, the IMF went on to assert that several sections of the insurance legislation did delegate specific responsibilities to the board of an insurance company. The IMF further noted that progress in this area will be contingent upon increased development of corporate governance in Latvian law and business practice and urged that general commercial law be amended to strengthen corporate governance and internal controls.

ICP 10 Internal control

EN

At present, the FCMC prepares recommendations for establishing an internal control system in accordance with The Law on Insurance Companies. In its 2004 IAIS self-assessment, the FCMC reported that it observed the ICP on internal control, since all relevant criteria was included in Latvian laws, including the Law on Insurance Companies and Supervision Thereof, the FCMC On-site Examiners Manual, the FCMC Procedures for Supervision of Financial and Capital Market Participants and the FCMC Guidelines for Establishing an Internal Control System. Prior to 2001, the ISI had distributed guidance materials informing insurance companies of its expectations regarding internal control. Inspectors reviewed such matters during on-site inspections. However, the 2002 IMF FSSA suggested amendments be made to general commercial law to boost corporate governance and internal controls.

ICP 11 Market analysis

EN

The FCMC's 2004 self-assessment for the IAIS concluded that Latvia had observed the ICP on market analysis based on enactment of the Law on the Financial and Capital Market Commission, the Law on Insurance Companies and Supervision Thereof, the Financial and Capital Market Commission's Regulations on the Preparation of Reports for Life Assurers and Regulations on the Preparation of Reports for Non-life Insurers. All essential criteria for compliance were observed, according to the FCMC, except for the requirement that "the market analysis not only includes past developments and the present situation, but also aims to identify trends and possible future scenarios and issues, so that the supervisory authority is well prepared to take action at an early stage, if required, which was "largely observed" (p.34).

ICP 12 Reporting to supervisors and off-site monitoring

EN

In its 2004 self-assessment for the IAIS, the FCMC established that it observed the principle on reporting to supervisors and off-site monitoring. This statement was based on the claim that all relevant criteria were covered under The Law on Insurance Companies and Supervision Thereof, the FCMC Regulations for Preparing Annual Accounts and Consolidated Annual Accounts of Insurance Joint Stock Companies, Mutual Co-operative Insurance Societies and Non-Member States Insurers Branches, the Regulations on the Preparation of Reports for Life Assurers, the Regulations on the Preparation of Reports for Non-life Insurers and the Procedures for Supervision of Financial and Capital Market Participants.

A 2005 World Bank Report on the Observance of Standards and Codes (ROSC) on Accounting and Auditing found that Latvian Accounting Standards were generally in line with EU directives, but some fundamental differences with International Financial Reporting Standards existed. The IMF's 2002 FSSA stated that, according to local accounting experts, these standards generally conformed to emerging international best practices for insurance company accounting. The IMF mission ascertained that insurance companies' annual statements were reviewed by an external sworn auditor, who is to inform the supervisor of any breach of the law or other circumstance that threatens to impair the company's ability to meet its obligations.

ICP 13 On-site inspection

EN

The FCMC is entitled to conduct on-site inspections to confirm the validity of information submitted by insurance companies, as stipulated by the Law on Insurance Companies and Supervision Thereof. Because of the provisions of this law, as well as the FCMC Procedures for Supervision of Financial and Capital Market Participants and the Supervision Manual, the FCMC's 2004 IAIS self-assessment declared Latvia's observance of the ICP on on-site inspection, as all relevant criteria were covered in these laws. The 2002 IMF FSSA urged further development of "the risk-based approach to on-site inspection work" (pp.44-45). The report also noted that officials in the ISI suggested focusing inspections on compliance checking and the verification of data.

ICP 14 Preventive and corrective measures

EN

The Law on Insurance Companies and Supervision Thereof, the Financial and Capital Market Commission's Regulations on Reports on Insurance Operations and Quarterly Reports for Non-life Insurance Joint Stock Companies and Mutual Co-operative Non-life Insurance Societies cover all criteria relevant to the ICP on preventive and corrective measures, according to the FCMC 2004 self-assessment for the IAIS. The assessment further claimed that the FCMC "has a common and undisputed practice of administrative activities that substantiates full observance of criterions" (p.38).

ICP 15 Enforcement or sanctions

EN

In its 2004 self-assessment for the IAIS, the FCMC maintains that Latvia observed the ICP on enforcement and sanctions. The Law on Insurance Companies and Supervision Thereof and the Law on the Financial and Capital Market Commission cover most relevant criteria. However, the requirement that the insurance legislation "provide for sanctions by way of fines against individuals and insurers where the provisions of the legislation are breached," was only "largely observed," according to the FCMC (p.39). In its 2002 FSSA, the IMF was quite positive, claiming that authorities had a broad range of sanctions at their disposal when confronting issues of noncompliance or financial stress.

ICP 16 Winding-up & exit from the market

EN

According to the FCMC's 2004 self-assessment for the IAIS, the Law on the Insolvency of Undertaking and Companies and the Law on Insurance and Supervision Thereof cover all criteria relating to the ICP on winding-up and market exit. The latter law sets both the provisions of insurance services and the legal status of the services in winding up procedures.

ICP 17 Group-wide supervision

ID

The FCMC's 2004 self-assessment for the IAIS, reported that it "largely observed" the ICP on group-wide supervision. The FCMC asserted that the criteria for compliance with the principle had been fulfilled because the relevant regulations were embodied in the Law on Insurance Companies and Supervision Thereof and the Financial Conglomerates Law. The FCMC pledged to issue regulations regarding supervision of intra group transactions and group capital adequacy in 2005. In addition, Latvia had signed memoranda of understanding covering information exchange with 17 supervisory authorities of various countries. It also signed the Sienne Protocol relating to the Collaboration of the Supervisory Authorities of the Member States of the European Community and to the Helsinki Protocol regarding group supervision.

ICP 18 Risk assessment and management

EN

The FCMC's 2004 self-assessment for the IAIS claimed that it had observed ICP 18, claiming that the Law on Insurance Companies and Supervision Thereof and the FCMC Guidelines for Establishing an Internal Control System cover all relevant criteria. Although the 2002 IMF FSSA found that Latvia was largely compliant with international standards on insurance supervision, it recommended the promotion of more modern risk management procedures.

ICP 19 Insurance activity

EN

In its 2004 self-assessment for the IAIS, the FCMC found that it had observed the ICP on insurance activity since all relevant criteria was covered by the Law on Insurance Companies and Supervision Thereof, the FCMC Regulations for the Preparing Annual Accounts and Consolidated Annual Accounts of Insurance Joint Stock Companies, Mutual Co-operative Insurance Societies and Non-Member States Insurers Branches, the FCMC Guidelines for Establishing an Internal Control System, the FCMC By-laws of the Supervision Department and FCMC Procedures for Supervision of Financial and Capital Market Participants.

ICP 20 Liabilities

EN

The IMF's 2002 FSSA applauded the Latvian authorities for their efforts at crafting regulations on the establishment of liabilities measures. The mission favored having the supervisor direct companies in their establishment of risk management policies. The FCMC's 2004 self-assessment for the IAIS claimed that the commission had observed the principle on liabilities, which was covered by a series of legislation, including Law on Insurance Companies and Supervision Thereof, the FCMC Regulations on the Establishment of and Methods for Calculation of Technical Provisions for Insurers, the FCMC Regulations for Preparing Annual Accounts and Consolidated Annual Accounts of Insurance Joint Stock Companies, Mutual Co-operative Insurance Societies and Non-Member States Insurers Branches, the FCMC Guidelines for Establishing an Internal Control System, the FCMC By-laws of the Supervision Department, and the FCMC Procedures for Supervision of Financial and Capital Market Participants.

ICP 21 Investments

NC

Since the FCMC was created in 2001, requirements of the ICP on investment have been incorporated into Latvian legislation, according to the 2004 FCMC self-assessment for the IAIS. Relevant legislation included the Law on Insurance Companies the and Supervision Thereof, the FCMC Guidelines for Establishing an Internal Control System, and the FCMC Regulations for Preparing Annual Accounts and Consolidated Annual Accounts of Insurance Joint Stock Companies, Mutual Co-operative Insurance Societies and Non-Member States Insurers Branches. The FCMC claimed that it had largely observed the principle since most of the relevant criteria were included in these laws. However, the supervisory authority only "largely complied" with the requirement for insurers to have in place an overall strategic investment policy, approved and reviewed annually by the board of directors, that addresses the following key elements of investment. The requirement for the supervisory authority to oblige insurers to create effective procedures for monitoring and managing their asset/liability position was only largely observed while the requirement to compel insurers to implement contingency plans to mitigate the effects of deteriorating conditions was not observed at all, according to the FCMC self-assessment. The supervisor also lacked a regular "stress testing system" for insurers to enable them "to assess the appropriateness of asset allocation limits" (p.51).

ICP 22 Derivatives and similar commitments

NC

The FCMC's 2004 self-assessment for the IAIS maintained that Latvian authorities had largely observed the requirements of this principle. The report states that "Requirements have been prescribed by the Law on Insurance Companies and Supervision of Thereof, the FCMC Regulations for Preparing Annual Accounts and Consolidated Annual Accounts of Insurance Joint Stock Companies, Mutual Co-operative Insurance Societies and Non-Member States Insurers Branches and the FCMC Guidelines for Establishing an Internal Control System approved by Decision No. 24/7 of the FCMC Board on 21.12.2001" (p.53).

The FCMC's 2004 self-assessment asserted that most of the essential criteria are largely observed. However, the regulation that "the supervisory authority requires insurers using derivatives to have in place an appropriate policy for their use that must be approved and reviewed annually by the board of directors" and that "the supervisory authority requires that the board of directors ensure that the insurer has the appropriate capability to verify pricing independently where the use of 'over-the-counter' derivatives is permitted under the insurer's policy" are only partially observed. Only the criteria on the use of derivatives in the law or in supervisory rules are fully observed. The self assessment further states that for Latvian insurers, transactions in derivative financial instruments are negligible. "Regulatory enactments," the report declares, "determine general requirements for insurer investment activities including for transactions in derivative financial instruments" (p.53).

ICP 23 Capital adequacy and solvency

EN

According to the FCMC's 2004 IAIS self-assessment the principle on capital adequacy and solvency is observed. "Criteria for the compliance with principles have been fulfilled for the relevant norms have been incorporated into the Law on Insurance Companies and Supervision Thereof, the Regulations on the Calculation of the Required Solvency Margin and the Available Solvency Margin for Life Assurers, the Regulations on the Calculation of the Required Solvency Margin and the Available Solvency Margin for Non-life Insurers, the Regulations on the Permissible Deviations in Matching Insurance Liabilities to Technical Reserve Investments by Currencies, the Regulations on the Volume and Structure of an Actuarial Valuation of Life Assurance Joint Stock Companies and Mutual Co-operative Life Assurance Societies, and the Regulations on the Establishment of and Methods for Calculation of Technical Provisions for Insurers" (p.55).

The FCMC's 2005 Annual Report noted that the Commission drafted and approved new regulations related to capital adequacy and solvency measures and amended a number of existing regulations. The report mentions an option to use internal value-at-risk models in calculating market risk capital charge which was granted by an amendment to the Regulations on Capital Adequacy Calculation. The regulations, the report adds, are accompanied by a section on provisions for using internal models and a list of documents required in order to obtain permission to use the internal value-at-risk models. The 2002 IMF FSSA praised the previous Latvian insurance regulator's work on creating rules for the establishment of capital adequacy and solvency measures.

ICP 24 Intermediaries

EN

The Law on Insurance Companies and Supervision Thereof states that "an insurance brokerage firm shall only carry out insurance intermediary operations and other business activities directly related to insurance intermediary operations." In addition, the FCMC's 2004 IAIS self-assessment claimed that the commission had observed the principle as all relevant criteria were covered in the Latvian Code of Administrative Infringements and the Cabinet Regulations on Activities of Insurance and Reinsurance Intermediaries. That law was enacted to establish legal regulation of insurance (reinsurance) mediation and to comply with the EU Directive 2002/92/EC on Insurance Mediation. According to the FCMC 2005 Annual Report, the Law outlines a model for cooperation between a customer and insurance intermediary that seeks to increase the protection of customer interests. There are three categories of insurance intermediaries established by the law: insurance brokers (brokerage firms), insurance agents and tied insurance agents. Insurance brokers, the 2005 report stated, have the exclusive right to perform the professional activity of reinsurance intermediary, while a tied insurance agent may not receive insurance and reinsurance premiums or other payments in accordance with an entered-into insurance contract.

ICP 25 Consumer protection

EN

The FCMC's 2004 self-assessment for the IAIS states that it has observed the requirements for the principle on consumer protection because all essential criteria were met: "The Law on Insurance Companies and Supervision Thereof, the Consumer Rights Protection Law, the Cabinet Regulations on Activities of Insurance and Reinsurance Intermediaries, the Financial and Capital Marker Commission's Regulations on the Safety of Informative Systems of Financial and Capital Market Participants cover all relevant criteria. The Financial and Capital Market Commission has a common and undisputed practice of administrative activities that substantiates full observance of criterions" (p.58).

The 2002 IMF assessment mentions a provision in Latvian legislation establishing a guaranteed fund that served as deposit insurance against losses suffered by policyholders in the event that the insurance company failed. This fund was operational as of July 2001, according to the IMF.

The Law on the Insurance Contract, which supplemented consumer protection measures covered under the older Civil Law, outlined regulations governing the construction of an insurance policy and the relationship between insurance policyholders and their companies. At the time of the 2002 report, the IMF noted that the ISI did not act as ombudsman. The ISI was neither entitled to oblige companies to establish formal policies on fair treatment of their clients nor required companies to establish procedures to deal with conflicts of interest.

The FCMC 2005 Annual Report stated that the Fund for the Protection of the Insured was created in 1999, the assets of which "consist of deductions in the amount of 1% of the gross sum of insurance premiums received from physical persons for the classes of insurance specified by law" (p.9). The FCMC performs collection and compensation payments of the protection fund's assets, the report stated. In addition, the FCMC only offers guaranteed compensation from the Protection Fund following initiation of bankruptcy proceedings over an insurance undertaking, according to the commission's annual report.

ICP 26 Information, disclosure & transparency towards the market

ID

The FCMC's 2004 IAIS self-assessment concluded that the agency had observed this ICP since all relevant requirements have been incorporated into the Law on Insurance Companies and Supervision Thereof and the FCMC Regulations for Preparing Annual Accounts and Consolidated Annual Accounts of Insurance Joint Stock Companies, Mutual Co-operative Insurance Societies and Non-Member States Insurers Branches. However, the requirement for insurers to disclose information on their financial position and the risks to which they are subject was only largely observed, according to the FCMC self-assessment. The report noted that formulation of Regulations on Public Quarterly Reports was to take place in 2005.

ICP 27 Fraud

EN

Article 29 of the Law on Insurance Companies and Supervision Thereof states that, "in order to reduce the risk of the insurers operations, and avoid fraud, an insurer has the right to, directly, or through a specially established authority, exchange information concerning insured persons and valid insurance policies." Moreover, the FCMC's 2004 IAIS self-assessment claimed that the agency had observed the ICP on fraud based on the enactment of the Law on Insurance Companies and Supervision Thereof, Law on the Financial and Capital Market Commission, Latvian Criminal Procedure Code, Criminal Law, Financial and Capital Market Commission's Guidelines for Establishing an Internal Control System. Much of the relevant criteria were covered in these laws. However, several conditions were only largely observed, including the requirement that the supervisory authority be given power and resources to establish and enforce regulations and to communicate as appropriate with enforcement authorities and other supervisors. In addition, the criteria that "the supervisory authority requires that insurers and intermediaries allocate appropriate resources and implement effective procedures and controls to deter, detect, record and, as required, promptly report fraud to appropriate authorities" and that "as required, the supervisory authority ascertains that insurers take effective measures to prevent fraud, including providing counter-fraud training to management and staff" were also only considered largely observed by the FCMC.

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

EN

The FCMC's 2004 IAIS self-assessment stated that the following laws cover all criteria relating to this principle: The Law on Prevention of Laundering of Proceeds Derived from Criminal Activity, the Guidelines for the Formulation of an Internal Control System for the Prevention of Laundering of Proceeds Derived from Criminal Activity and Financing of Terrorism, the Law on Insurance Companies and Supervision Thereof, the Regulations of 21.08.2003 on the Issue of Licenses for Insurance Operations and of Permits for Providing Insurance Services Abroad, the Regulations of 11.06.2003 on the Certification of Brokerage Companies, and the Regulations of 07.12.2001 on the Certification of Insurance Brokers. The self-assessment thus concluded that the FCMC had observed this principle.

In 2004, the IMF reported that, following amendments to Latvian legislation on anti-money laundering/combating the financing of terrorism (primarily the 1998 Law on the Prevention of Laundering of Proceeds Derived from Criminal Activities), Latvian law is in accordance with the international standards and procedures required by the EU. However, the report noted that enforcement of the law remains weak and that the U.S. Treasury department included Latvia in a list of countries considered "deeply involved in money laundering" (p. 9). According to the Law on Insurance Companies and Supervision Thereof, if the requirements of the Law on the Prevention of Laundering of Proceeds Derived from Criminal activities are not observed, the FCMC retains the right to impose a penalty on the insurer a penalty.