The insurance sector is an important element of the world economy. Sound regulation and supervision of the insurance market secures efficient functioning of the insurance sector, which contributes to overall financial stability. Insurance regulation and supervision has become even more important recently with the increasingly global nature of insurance activities that require adequate regulatory frameworks in each jurisdiction. Moreover, emergence of complex financial products, increased number of financial conglomerates, and consolidation of financial institutions present new challenges for regulators and require new approaches to supervision. The traditional focus of insurance supervision has been gradually shifting away from policyholders' protection to assessment of risks faced by a company and identifying the risks that are critical to the financial viability of the institution.

International Association of Insurance Supervisors and Its Insurance Core Principles and Methodology

The International Association of Insurance Supervisors (IAIS) is widely recognized as the standard-setter for insurance supervision. Established in 1994, the IAIS promotes cooperation among financial sector regulators and contributes to the development of well-regulated insurance markets and global stability. As of 2007, the IAIS represents insurance supervisors from over 180 jurisdictions in more than 130 countries; more than 80 organizations and individuals have a status of observers in the IAIS. The IAIS collaborates closely with other international regulatory organizations. In particular, the IAIS is a founding member of the Joint Forum, an organization established by the Basel Committee on Banking Supervision, the International Organization of Securities Commissions (IOSCO) and the IAIS to deal with issues common to the banking, securities and insurance sectors. The IAIS is represented on the Financial Stability Forum (FSF), and provides input to the activities of the International Accounting Standards Board (IASB). It also has an observer status in the Financial Action Task Force (FATF).

Standard setting remains the core activity of the IAIS. The first set of principles -- the Insurance Supervisory Principles -- was drafted in 1997 to provide guidance for jurisdictions wishing to strengthen their supervisory regimes. In 1999, the IMF and the World Bank started the Financial Sector Assessment Program (FSAP) which revealed that the Principles of 1997 were not sufficient in providing a comprehensive framework for insurance regulation and supervision. These developments led the IAIS to update and extend the scope of the principles which were issued in 2000 and are now known as Insurance Core Principles (ICPs). The latest version of the principles was adopted at the IAIS General Meeting in Singapore in October 2003, accompanied by a new Methodology. The Insurance Core Principles and the Methodology of 2003 cover a wider scope of issues related to insurance regulation and supervision, reinforce the principles and methodology in several key areas, and apply to the supervision of reinsurance, which was not the case under the 2000 Principles.

The Insurance Core Principles and Methodology comprise 28 essential principles which are organized under 7 categories: (1) conditions for effective insurance supervision; (2) the supervisory system; (3) the supervised entity; (4) on-going supervision; (5) prudential requirements; (6) markets and consumers; and (7) anti-money laundering and combating the financing of terrorism.

Applicability of Insurance Core Principles

According to the IAIS, ICPs are developed for the following purposes. First, ICPs may be used as a guideline for establishing a supervisory regime or improving existing practices. Second, ICPs serve as a benchmark for third-party assessments in order to identify weaknesses and to develop an action plan to improve regulatory and supervisory practices. Third, the Principles are an essential tool for conducting countries' self-assessments to appraise their own supervisory regime. Finally, ICPs form the foundation for the IAIS's own educational and training activities.

The Insurance Core Principles and Methodology 2003, which is intended for use in conducting third-party and self-assessments, consist of essential principles that need to be in place for a supervisory system to be effective, explanatory notes that set out the rationale underlying each principle, and criteria to facilitate comprehensive and consistent assessments. Each ICP lists essential and advanced criteria for conducting an assessment. Essential criteria indicate the minimum level that all jurisdictions should fulfill, while additional criteria are best international practices that jurisdictions should strive towards. Advanced criteria are not used for assessing observance with a principle; rather they are used when commenting on a jurisdiction's supervisory framework and making recommendations. The IAIS recognizes the fact that regulatory and supervisory frameworks are diverse and the ways the principles are implemented will vary across jurisdictions. Therefore, the stage of the development of the financial system, overall macroeconomic conditions, as well as other country-specific circumstances should be taken into account when conducting the assessments.

The most comprehensive source of assessment of countries' compliance with ICPs are Reports on the Observance of Standards and Codes on Insurance Supervision prepared by the International Monetary Fund (IMF) as part of the joint IMF and the World Bank's FSAP. As of May 2006, 42 assessments of the insurance regulatory and supervisory systems based on ICPs have been published; however, only a few of the ROSCs are based on the 2003 Methodology. Other sources include self-assessments and special reports prepared by the insurance supervisors, as well as publications by international organizations and research institutes.

Standard Setting Body

International Association of Insurance Supervisors (IAIS)

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Insurance Core Principles and Methodology, October 2003

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Further Reading

International Monetary Fund, “Experience with the Insurance Core Principles Assessments Under the Financial Sector Assessment Program,” August 2001. Available from International Monetary Fund website.

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International Association of Insurance Supervisors, “Report on Insurance Core Principles Self-Assessment Exercise 2004/2005,” February 2006. Available from International Association of Insurance Supervisors website.

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Thompson, J., “Risk Based Supervision of the Insurance Companies, An Introduction,” Paper prepared for the World Bank, 2001. Available from World Bank website.

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