The International Monetary Fund's (IMF) 2001 Financial System Stability Assessment (FSSA) found Slovenia compliant in 11 of the 17 International Association of Insurance Supervisors Core Principles promulgated in 2000. In 2001, the oversight of insurance and pensions was in transition; a new independent supervisor was being established. This was the Insurance Supervisory Agency (ISA), which has an extensive regulatory mandate. In 2004, the IMF issued an FSSA update to compare Slovenia's insurance supervisory framework against the revised Insurance Core Principles (ICPs) based on a more demanding methodology that had been promulgated in 2003. In the update, Slovenia's rating was downgraded in a number of areas. The insurance sector was found to lack transparency and the ISA was judged to have limited independence. The IMF recommended strengthening ISA's autonomy, both administratively and budgetarily, from the government, giving supervisors protection from legal action, and enhancing the technical skills of the staff. The IMF was also concerned about the unclear responsibilities for the supervision of the pensions sector carried out by the securities market supervisor and the ISA.

General Overview

According to the Financial System Stability Assessment (FSSA) conducted by the International Monetary Fund (IMF) in 2001, Slovenia observed 11 of the 17 International Association of Insurance Supervisors (IAIS) Core Principles promulgated in 2000. During that year, major changes were being made in the way that oversight of insurance and pensions was conducted. Of note was the creation of a new independent supervisor, backed up by a new regulatory framework. The Slovenian Insurance Act was largely based on EU directives, which did not ensure adherence to all criteria set by the IAIS. The 2001 FSSA pointed out that arrangements for licensing, corporate governance, internal control, derivatives, and market conduct had to be strengthened. Another key issue was a regulatory gap with respect to investment guidelines for insurance companies. In its 2004 FSSA update, the IMF reported that this gap was closed.

The IMF's 2004 FSSA update revisited Slovenia's insurance supervisory framework in the light of the new and more demanding methodology adopted in 2003. The new assessment yielded a downward revision of Slovenia's ratings in a number of areas. Among the problems noted was a lack of transparency in the insurance sector, and the limited independence of the ISA vis a vis the government. To counter these difficulties, the IMF suggested that Slovenia strengthen its administrative and budgetary autonomy and that it provide supervisors with protection from legal action. Further, the technical skills of staff needed to be addressed. The 2004 IMF staff was also concerned about the "clear gap in the supervision of the pensions sector, which is split between the securities market and the insurance supervisors" (p. 4).

The IMF's main recommendation in 2004 was to clarify the role of the Supervisory boards and establish audit and risk committees; institute a risk based formal early intervention regime supported by relevant law and regulation; amend the law to incorporate the derivatives and structured instrument requirements of the relevant IAIS core principle; and strengthen the ISA's powers regarding the withdrawal of legal person intermediary licenses and imposition of insurer responsibility for information exchange at the consumer interface.

The Slovenian insurance supervisor is the ISA, which was established pursuant to the Insurance Act and became operational on June 1, 2000. According to the ISA's website, its objective is the mitigation and elimination of irregularities in the insurance area, the protection of policy holders' interests, and the facilitation of the functioning of the insurance economy. As indicated on the IAIS website, the ISA is an IAIS member.

The Insurance Act of 2000 covers issues related to the establishment, operation, supervision, and dissolution of insurance undertakings. It was amended in 2002 and, more extensively, in 2004. According to the ISA's 2005 Annual Report, the act "has introduced special rules applicable to insurance undertakings which are an important group of non-monetary financial institutions, while, at the same time, insurance undertakings as companies have to comply also with the legislation applying to the operation of companies in general" (p. 2). Other laws which are of particular importance for the operation of insurance undertakings are: the Compulsory Motor Third-party Liability Act (CMTLA), the Health Care and Health Insurance Act (HCHIA-OCT1), and the Pension and Invalidity Insurance Act (PIIA1-OCT2). Furthermore, under the Insurance Act, the ISA may issue regulations addressing the insurance sector. As of 2005, the ISA implemented 28 regulations.

According to the 2005 ISA Annual Report, Slovenia is a medium developed insurance market when compared to other European countries. In 2005, 201 EU insurance undertakings were authorized to operate in Slovenia. Insurance companies reported net profit in the amount of SIT 9 billion in 2005 compared to SIT 3.3 billion in 2004.

The Principles

ICP 1 Conditions for effective insurance supervision

CP

In its 2001 FSSA, the IMF concluded that "the preconditions for effective insurance supervision are manifold, but perhaps most fundamental of all are enforceable property rights, a supportive political environment and an effective and honest judiciary" (p. 40). The IMF's 2004 FSSA update confirmed these findings and stated that "macro management in Slovenia is effective and institutional settings are well developed" (p. 27). The conditions for effective insurance supervision are a sound basis for further development of the insurance and pension sectors. However, the IMF recommends that the actuarial profession should undergo an accelerated development program and an actuarial accounting standard coordination should be established.

ICP 2 Supervisory objectives

II

On its website, the ISA states that its objective is the mitigation and elimination of irregularities in the insurance area, the protection of policy holders' interests, and the facilitation of the functioning of the insurance economy. However, there is insufficient information publicly available as to Slovenia's compliance with this principle.

ICP 3 Supervisory authority

NC

In its 2004 update to the 2001 FSSA, the IMF emphasized the limited independence of the ISA and recommended strengthening the administrative and budgetary autonomy from the government and giving supervisors protection from legal action. Further, the technical skills of staff needed to be addressed. The IMF stated that "while the ISA is notionally independent the reality has proved to be somewhat different. In particular the responsible officer is the President of the Chamber of experts (rather than the Director), and there is no requirement that this person be a full time employee of the Agency" (p. 27). The 2004 update went on to note that a new President of the Chamber had been appointed, drawn from the government's civil service ranks, and that the new president retained his civil service incumbency. It further noted that the government, and not the ISA Council, had effective budgetary control of the ISA. To offset this problem, the IMF recommended that the distribution of powers within the ISA be reconsidered, and suggested that the director of the ISA should have day-to-day supervisory responsibilities. The Council of Experts, on the other hand, should be responsible for policy matters and other important approvals.

ICP 4 Supervisory process

II

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

ICP 5 Supervisory cooperation and information sharing

II

In its 2004 FSSA update, the IMF stated that, even though there has been some improvement since 2001, cross-sector supervisory cooperation needed to be strengthened. Particularly, the gap in the supervision of the pension sector, which is split between the securities market and supervisor and the ISA, should be closed. However, there is insufficient information publicly available as to Slovenia's compliance with this principle.

ICP 6 Licensing

II

According to the IMF's 2004 FSSA update, Slovenia generally observes or largely observes, and in most cases will fully observe (once the amendments to the Insurance Act are implemented) the ICPs related to the supervised entity. The Insurance Act was extensively amended with Slovenia's entry into the EU on May 1, 2004. However, the IMF does not specifically address Slovenia's compliance with this principle.

ICP 7 Suitability of persons

II

According to the IMF's 2004 FSSA update, Slovenia generally observes or largely observes, and in most cases will fully observe (once the amendments to the Insurance Act are implemented) the ICPs related to the supervised entity. The Insurance Act was extensively amended with Slovenia's entry into the EU on May 1, 2004. However, the IMF does not specifically address Slovenia's compliance with this principle.

ICP 8 Changes in control and portfolio transfers

II

According to the IMF's 2004 FSSA update, Slovenia generally observes or largely observes, and in most cases will fully observe (once the amendments to the Insurance Act are implemented) the ICPs related to the supervised entity. The Insurance Act was extensively amended with Slovenia's entry into the EU on May 1, 2004. However, the IMF does not specifically address Slovenia's compliance with this principle.

ICP 9 Corporate governance

II

According to the IMF's 2004 FSSA update, Slovenia generally observes or largely observes, and in most cases will fully observe (once the amendments to the Insurance Act are implemented) the ICPs related to the supervised entity. The Insurance Act was extensively amended with Slovenia's entry into the EU on May 1, 2004. However, corporate governance, according to the IMF, is a major concern in Slovenia. Slovenia provides strong audit and actuarial reporting requirements, but some instances show "that supervisory boards have not been as strong as would ideally be required. In addition, given the territorial ambitions of its leading insurers, Slovenia may wish to take the lead in introducing a cooperation and information exchange protocol in the [Federal Republic of Yugoslavia (FRY)] countries" (p. 27). However, the IMF doe not specifically address Slovenia's compliance with this principle.

ICP 10 Internal control

II

According to the IMF's 2004 FSSA update, Slovenia generally observes or largely observes, and in most cases will fully observe (once the amendments to the Insurance Act are implemented) the ICPs related to the supervised entity. The Insurance Act was extensively amended with Slovenia's entry into the EU on May 1, 2004. However, the IMF does not specifically address Slovenia's compliance with this principle.

ICP 11 Market analysis

II

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

ICP 12 Reporting to supervisors and off-site monitoring

II

According to the 2004 IMF FSSA update, Slovenia "made a good start with a relatively active off and on site inspection regime (although there is some evidence that this has been, at least in part, audit rather than risk based)" (p. 28). However, there is insufficient information publicly available as to Slovenia's compliance with this principle.

ICP 13 On-site inspection

II

According to the 2004 IMF FSSA update, Slovenia "made a good start with a relatively active off and on site inspection regime (although there is some evidence that this has been, at least in part, audit rather than risk based)" (p. 28). However, there is insufficient information publicly available as to Slovenia's compliance with this principle.

ICP 14 Preventive and corrective measures

NC

In its 2004 update to the 2001 FSSA, the IMF states that the ISA's "management is well aware of market developments; however, the current legal structure does not allow the ISA to intervene early enough" (p. 28). The IMF recommends, therefore, that a regulatory ladder comparable to the ones in fully risk based regimes, such as Canada or Mexico, should be adopted.

ICP 15 Enforcement or sanctions

II

According to the 2004 IMF FSSA update, "notwithstanding constraints on early intervention, the ISA has been successful in enforcing a number of difficult decisions including changing managements and requiring increases in subscribed capital and reinsurance capital support" (p. 28). However, there is insufficient information publicly available as to Slovenia's compliance with this principle.

ICP 16 Winding-up & exit from the market

II

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

ICP 17 Group-wide supervision

ID

According to the 2004 IMF FSSA update, Slovenia is well prepared for group and conglomerate supervision; however, it could allocate more resources to this issue. Moreover, given the emergence of three potential financial conglomerates and the fragmentation of pension supervision, a more coordinated supervisory approach is necessary.

ICP 18 Risk assessment and management

NC

In its 2004 FSSA update, the IMF finds the interaction of insurer accounting and prudential management principles deficient. Slovenia follows the EU prudential approach, which, according to the IMF, is inadequate if not supplemented with other requirements. According to the IMF, "the main line of defense in practice is the appointed actuary, who under the various regulations has to allow for the full balance sheet position of the insurer when setting provisions" (p. 28). The IMF commends Slovenia for the fact that "that a pleasing degree of professional maturity is already emerging" (p. 28), but recommends an accelerated development program of the local actuarial profession supported by a senior advisor from a risk based jurisdiction with a long established actuarial profession.

ICP 19 Insurance activity

II

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

ICP 20 Liabilities

II

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

ICP 21 Investments

NC

In its 2001 FSSA, the IMF found Slovenia materially noncompliant with this principle. Particularly, the IMF pointed to a regulatory gap with respect to investment guidelines for insurance companies. The 2004 IMF update to the FSSA followed up, and reported that the regulatory gap was closed. The 2004 update further stated that "a recently introduced standard on the valuation of listed assets has had a potentially perverse impact, given that liability valuation has not changed in practice, relevant ISA guidelines notwithstanding" (p. 28).The IMF recommends the introduction of balance sheet resilience testing.

ICP 22 Derivatives and similar commitments

NC

According to the 2004 IMF FSSA update, the Insurance Act does not cover derivatives and structured instruments sufficiently.

ICP 23 Capital adequacy and solvency

II

According to the 2004 IMF FSSA update, the Insurance Act does not cover derivatives and structured instruments sufficiently.

ICP 24 Intermediaries

EN

According to the 2004 IMF FSSA update, the market conduct regime is relatively strong. The IMF points out, however, that the ISA should have greater specificity and powers regarding the withdrawal of a legal person intermediary license. In 2004, a draft law addressed this issue.

ICP 25 Consumer protection

NC

The 2004 IMF FSSA update found the market conduct regime to be relatively strong. It noted that "further regulation is required to ensure that insurers have procedures in place to ensure fair treatment of consumers. The industry itself is well advanced in this regard with the recent introduction of various claims resolution procedures and a related concordat" (p. 29).

ICP 26 Information, disclosure & transparency towards the market

NC

In its 2004 update to the 2001 FSSA, the IMF concluded that the "insurance sector lacks transparency and needs to develop the capacity to set pricing, provisioning and capital at appropriate levels" (p. 4).

ICP 27 Fraud

EN

In its 2004 update to the 2001 FSSA, the IMF concluded that Slovenian law addresses fraud and money laundering issues. However, the IMF recommended enhancing the administrative and supervisory procedures at the ISA.

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

EN

In its 2004 update to the 2001 FSSA, the IMF concluded that Slovenian law addresses fraud and money laundering issues. However, the IMF recommended enhancing the administrative and supervisory procedures at the ISA.