The insurance market in Ukraine is still underdeveloped, according to Michael Noel et al. in their 2006 World Bank working paper. However, it is the fastest growing segment of the financial services market, and among the principal participants in the Ukrainian securities market. As noted in the European Bank for Reconstruction and Development (EBRD) 2005 Strategy report, although the insurance sector does not represent a systemic source of vulnerability for the financial system, its sound development is important to the stability of the financial system in the long term. However, important gaps and inconsistencies remain in the legal framework, and the EBRD, in its 2005 report, recommends amending the Law on Insurance to bring it in line with international standards and practice. According to Noel et al., the responsibility for insurance supervision was transferred on April 4, 2003 from the State Committee for Insurance Supervision and a special Department of Insurance Supervision at the Ministry of Finance to the State Commission for the Regulation of Financial Services Markets (State Commission). Although the State Commission has made substantial progress in developing its regulatory capacity, it still lacks financial autonomy and enforcement measures. Hence, Noel et al. urge the State Commission to increase its investigation powers, and ensure compliance of insurance companies with capital adequacy requirements. Noel et al. also advise the government of Ukraine to reform the legal and regulatory framework, as well as strengthen enforcement measures, in order to bring them in line with international standards and practices, and increase transparency and protection of insurance policy holders' rights. However, there is insufficient information publicly available as to Ukraine's compliance with the Insurance Core Principles promulgated by the International Association of Insurance Supervisors in 2003.

General Overview

According to Michael Noel et al. in their 2006 working paper prepared for the World Bank, although the insurance market in Ukraine is still underdeveloped, it is the fastest growing segment of the financial services market, and among the principal participants in the Ukrainian securities market. In its 2005 Strategy Report, the European Bank for Reconstruction and Development (EBRD) asserted that the insurance sector does not represent a systemic source of vulnerability for the financial system, but cautioned that its sound development is important to the long-term stability of the financial system. Shortcomings in the insurance sector, according to the United States Agency for International Development (USAID) 2004 Financial Sector Review, are related to the severe undercapitalization of most firms, low liquidity and creditworthiness, and issues of solvency and corporate governance. Overall, according to Noel et al., development in the insurance sector is hampered by low levels of transparency, weak consumer protection, and tax avoidance schemes.

As noted in the 2005 EBRD report, some measures have been undertaken in recent years towards the improvement of the insurance legal environment, such as the Law of Ukraine on Financial Services and State Regulation of Financial Markets, the Civil and Commercial Codes, new laws on money laundering, and the introduction of the Law on Mandatory Auto Insurance on January 1, 2005. Nevertheless, the EBRD still finds important gaps and inconsistencies in the legal framework, and recommends amendments to the Law on Insurance to bring it into line with international standards and practice.

Noel et al. report in 2006 that, on April 4, 2003, insurance supervisory authority was transferred from the State Committee for Insurance Supervision and a special Department of Insurance Supervision at the Ministry of Finance (MoF) to the State Commission for the Regulation of Financial Services Markets (State Commission). Although the State Commission has made substantial progress in developing its regulatory capacity, it still lacks financial autonomy and enforcement measures. Therefore, Noel et al. urge the State Commission to increase its investigation powers and ensure compliance of insurance companies with capital adequacy requirements. Further, the authors advise the government of Ukraine (GoU) to reform the legal and regulatory framework, as well as strengthen enforcement measures, in order to increase transparency, and protect the rights of insurance policy holders. Important reforms would include the enactment of a new insurance law compatible with European Union (EU) directives, the enforcement of accounting and reporting standards in line with International Accounting Standards (IASs) and International Financial Reporting Standards (IFRSs), the establishment of audit functions, and the review of the existing taxation system. Concerning international cooperation, the League of Insurance Organizations of Ukraine (LIOU) was given observer status at the European Insurance and Reinsurance Federation (CEA) on June 10, 2005. Ukraine is also an observer of the International Association of Insurance Supervisors (IAIS). As indicated on the League of Insurance Organizations of Ukraine website, the EU provides assistance to Ukraine to develop its insurance sector through the Technical Aid to the Commonwealth of Independent States (TACIS) project.

According to the 2006 Noel et al. report, the total volume of insurance premiums increased 2.3 times during the 2002-2005 period, with the total sum of insurance premiums amounting to USD 2.9 billion in 2004. Nevertheless, as noted in the 2004 USAID report, the insurance sector in Ukraine is still relatively small, with a total of 358 licensed companies, and is characterized by a high level of concentration. Indeed, more than half of all insurance premiums in Ukraine are concentrated in the 10 largest insurance companies, according to the 2005 U.S. Department of Commerce (DoC) report on the Insurance Market in Ukraine. The LIOU also stresses that only 5% of insurable risks are covered in Ukraine, compared with 90% coverage in developed countries. Finally, aggregate insurance sector revenues only accounted for about 1.9% of GDP in 2003. In November 2006, as stated in the U.S. DoC 2007 Country Commercial Guide report, the Parliament adopted amendments to the Law On Insurance, giving foreign entities the right to establish 100% foreign-owned insurance companies in Ukraine. There are currently 23 active insurance companies with foreign capital in Ukraine according to the U.S. DoC 2005 report.

The Principles

ICP 1 Conditions for effective insurance supervision

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According to the European Bank for Reconstruction and Development (EBRD) 2005 Strategy report, the National Bank of Ukraine (NBU) needs to strengthen the institutional capacity of the financial sector. The report adds that some measures have been undertaken in recent years towards the improvement of the insurance legal environment, such as the Law of Ukraine On Financial Services and State Regulation of Financial Markets, the Civil and Commercial Codes, new laws on money laundering, and the introduction of the Law On Mandatory Auto Insurance on January 1, 2005. Nevertheless, important gaps and inconsistencies remain in the legal framework, and the EBRD recommends amendments to the Law on Insurance to bring it in line with international standards and practice. The legal and court system is also in need of greater political and financial independence. In relation to financial markets, Ukraine was rated as in "medium compliance" in the 2004 EBRD Securities Markets Legislation Assessment when benchmarked against International Organization of Securities Commissions (IOSCO) Principles. However there is insufficient publicly available information as to Ukraine's compliance with this principle.

ICP 2 Supervisory objectives

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

ICP 3 Supervisory authority

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There is insufficient publicly available information as to Ukraine's compliance with this principle. According to the 2006 Noel et al. report, the responsibility for insurance supervision was transferred on April 4, 2003 from the State Committee for Insurance Supervision and a special Department of Insurance Supervision at the MoF to the State Commission. Although the State Commission has made substantial progress in developing its regulatory capacity, it still lacks financial autonomy and enforcement measures.

ICP 4 Supervisory process

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

ICP 5 Supervisory cooperation and information sharing

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As noted in the 2006 Noel et al. report, the LIOU was given observer status at the CEA on June, 10 2005. Ukraine is also an observer of the IAIS. However there is insufficient publicly available information as to Ukraine's compliance with this principle.

ICP 6 Licensing

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According to the 2005 U.S. DoC report, insurance activities are subject to licensing, and capital must be paid in full prior to applying for a license. Furthermore, risks and classes of insurance for licensing purposes are based on the distinction between voluntary and compulsory insurance, according to the 2006 Noel et al. report,. However there is insufficient publicly available information as to Ukraine's compliance with this principle.

ICP 7 Suitability of persons

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There is insufficient publicly available information as to Ukraine'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 Ukraine's compliance with this principle. In their 2006 report, Noel et al. urge the GoU to require immediate approval for changes of control and portfolio transfers.

ICP 9 Corporate governance

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There is insufficient publicly available information as to Ukraine's compliance with this principle. According to the 2006 Noel et al. report, the corporate governance framework in Ukraine is characterized by incomplete disclosure of ownership and control of traded companies, inadequate shareholder voting rights, unreliable financial reporting and valuation procedures, and weak responsibility and accountability of supervisory boards. Furthermore, weak enforcement capacity of regulators results in low transparency and poor corporate governance. Hence Noel et al. urge the GoU to enact a new insurance law compatible with EU directives, which would notably provide higher requirements for capital and disclosure of information by insurance companies.

ICP 10 Internal control

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

ICP 11 Market analysis

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

ICP 12 Reporting to supervisors and off-site monitoring

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There is insufficient publicly available information as to Ukraine's compliance with this principle. In their 2006 report, Noel et al. urge the GoU to enact a new insurance law compatible with EU directives in order to strengthen the powers of the State Commission in off- and on-site supervision.

ICP 13 On-site inspection

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There is insufficient publicly available information as to Ukraine's compliance with this principle. In their 2006 report, Noel et al. urge the GoU to enact a new insurance law compatible with EU directives in order to strengthen the powers of the State Commission in off- and on-site supervision.

ICP 14 Preventive and corrective measures

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

ICP 15 Enforcement or sanctions

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According to the 2006 Noel et al. report, although the State Commission has made substantial progress in developing its regulatory capacity, it still lacks financial autonomy and enforcement measures. Therefore, Noel et al. advise the GoU to reform the legal and regulatory framework, as well as strengthen enforcement measures, in order to increase transparency, and protect the rights of insurance policy holders. Important reforms would include the enactment of a new insurance law compatible with EU directives, the enforcement of accounting and reporting standards in line with IAS/IFRS, the establishment of audit functions, and the review of the existing taxation system. However there is insufficient publicly available information as to Ukraine'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 Ukraine's compliance with this principle.

ICP 17 Group-wide supervision

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

ICP 18 Risk assessment and management

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

ICP 19 Insurance activity

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

ICP 20 Liabilities

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

ICP 21 Investments

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

ICP 22 Derivatives and similar commitments

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

ICP 23 Capital adequacy and solvency

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According to the 2005 U.S. DoC report, the minimum capital for a life insurance company is €1.5 million and €1 million for non-life insurance. However, many local insurance companies still do not comply, and maintain authorized funds below the established minimum amount. Therefore, in their 2006 report, Noel et al. urge the State Commission to ensure compliance of insurance companies with capital adequacy requirements. The U.S. DoC 2007 report notes that there is a lower minimum capital requirement for domestic insurance companies than insurance companies with foreign shareholders. However there is insufficient publicly available information as to Ukraine's compliance with this principle.

ICP 24 Intermediaries

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There is insufficient publicly available information as to Ukraine's compliance with this principle. In their 2006 report, Noel et al. advise the GoU to reform the legal and regulatory framework for insurance intermediaries. Furthermore, the capacity of financial regulators to trace ultimate beneficial owners of capital market intermediaries should be enhanced.

ICP 25 Consumer protection

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There is insufficient publicly available information as to Ukraine's compliance with this principle. Overall, according to the 2006 Noel et al. report, development in the insurance sector is hampered by low levels of transparency and weak consumer protection. In order to strengthen consumer protection, Noel et al. therefore recommend introducing and enforcing consumer protection rules, as well as implementing alternative dispute resolution mechanisms.

ICP 26 Information, disclosure & transparency towards the market

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There is insufficient publicly available information as to Ukraine's compliance with this principle. Overall, according to the 2006 Noel et al. report, development in the insurance sector is hampered by low levels of transparency. Therefore, Noel et al. (2006) urge the GoU to enact a new insurance law compatible with EU directives, providing higher requirements for capital and disclosure of information by insurance companies.

ICP 27 Fraud

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There is insufficient publicly available information as to Ukraine's compliance with this principle. According to the 2005 U.S. DoC report, insurance in Ukraine is often used as a means to for tax avoidance and illegal capital export, and estimates show that 70-80% of premiums collected are connected to fraud. Therefore, in their 2006 report, Noel et al. recommend the introduction of legal actions to fight market fraud and insider trading.

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

II

According to the IMF's 2003 FSSA report, the GoU must ensure that insurance regulators build the capacity and expertise needed to enforce the rules aimed at combating money laundering and the financing of terrorism. According to the 2006 Noel et al. report, amendments to the Law On Insurance in December 2001 require that all insurance companies meet minimum regulatory requirements by October 2004. During the first year of operation of the State Commission, 36 licenses were withdrawn from insurance companies due to anti-money laundering (AML) activities and other violations, according to the EBRD 2005 report. However there is insufficient publicly available information as to Ukraine's compliance with this principle.