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Risk Based Supervision
Insurance Commission of JordanRana Tahboub
June 2011
Insurance Commission of Jordan
Established in 1999 by virtue of the Insurance Regulatory Act No. (33) of 1999 to: Regulate and supervise the insurance sector Ensure a suitable environment for the development of
the insurance sector and enhancement of the insurance industry’s role in protecting individuals and properties against risks
Public institution aiming at : Protecting the rights of the insured Developing insurance services in the Kingdom
The Jordanian Insurance Sector
28 insurance companies: 11 non-life companies 16 composite companies (life and non-life) 1 life company
2 non-operating foreign insurance companies (regional/ representative office)
The Jordanian Insurance Sector
Providers of insurance supporting services:Insurance Agent 514 Insurance Consultant 2
Insurance Broker 98 Company Administrating Insurance Business
15Reinsurance Broker 11
Loss Adjuster 50 Bancassurance 9
Actuary 13 Foreign Reinsurance Brokers 8
Total (31/12/2010) 770
Providers of insurance supporting services
168 181 184
352
469 495558
622695
770
317
143
0100200300400500600700800900
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Jordanian Insurance Sector Development
99.8
64.0
7.8
104.2
67.7
5.2
120.4
79.8
6.5
146.9
86.0
12.6
171.5
107.7
22.0
191.4
123.9
40.0
219.3
142.8
90.6
258.7
174.5
21.5
291.6
207.6
15.5
333.0
219.0
22.6
365.2
263.0
7.3
408.1
277.3
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
450.0
Mill
ion
USD
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010*Gross Written Premiums Inside Jordan Gross Claims Paid for Premiums written Inside Jordan Net Profit Before Taxes
* Preliminary data
Jordanian Insurance Sector Development
211.0
149.7
85.2
221.0
146.7
85.0
236.6
150.6
88.6
260.5
169.0
90.9
308.5
214.2
124.1
366.1
264.9
161.4
526.2
410.1
277.2
548.0
408.0
285.1
636.6
462.5
330.6
678.0
479.6
355.4
695.5
484.6
359.1
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
Mill
ion
USD
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Total Assets Total Investments Shareholders' Equity
Risk Based Supervision
A structured process aimed at identifying the most critical risks that face each company through a focused review by the supervisor to assess: The company’s management of those risks (in accordance with sound business and financial practices) The company’s financial vulnerability to potential
adverse experience.
Risk Based Vs. Traditional Approaches
Risk based supervision: Identify the higher risk areas. Prevent problems from developing. Focus resources on those higher risks areas (More efficient,
effective).
Traditional supervisory approach: Looking for problems and then attempting to deal with them.
But sometimes, it’s too late to fix it. Takes a lot of resources, expensive, often not very effective.
Why Risk based supervision?
Insurance industry is changing. Convergence of supervisory practices. Pressure to improve the efficiency and the
effectiveness of supervision.
Risk based Supervision (Supervisory ladder)
Adopted by IC in 2006 Criteria to assess risks according to
Capital Asset quality Reinsurance Adequacy of Provisions Management Earnings quality Liquidity and Subsidiaries Related Party Transactions
Through quantitative (financial ratios) and qualitativeassessment
Supervisory attention and intervention based on RISK: Early Warning Test Ratios Other Financial Analysis On-Site Inspections Market Intelligence
CARAMELSCapital Adequacy Adequacy of Claims Provisions Earnings Quality
Financial Ratios Financial Ratios Financial Ratios
Ability to access additional capitalBoard involvement and quality of
policies and procedures for setting up claim provisions
Volatility of profitability over last few years: underwriting/ investment
Dividend paying policy Quality of controls on claim provisioning
Accuracy of financial reporting, conservatism or otherwise
Asset Quality Experience and quality of staff Experience and track record of underwriting team
Financial Ratios Quality of claims accounting system Extent to which earnings generated by related party transactions, extraordinary or unrepeatable transactions Conservatism of asset valuation Adequacy of Claims Provisions
Matching of assets and liabilities Liquidity
Quality of investment controls Management Financial Ratios
Board approved investment policies Financial Ratios Board approved policies for liquidity management
Reinsurance Independence of board and senior management from shareholders
Cash and liquidity management practices including forecasting
Financial RatiosQuality of board oversight and
guidance, management interaction with board
Quality of board oversight and policies Experience and track record of management Subsidiaries, Self-dealing
Quality of reinsurance accounting and documentation Quality of strategic planning Financial Ratios
Quality of reinsurance arrangements & reinsurers
compliance function (filings accurate and on time, follow wording and spirit of law, etc), responsiveness to Commission recommendations
Board approved policies for dealing with conflicts of interest
Experience of staff & sophistication of reinsurance practices including use of modeling
Consumer complaints, market intelligence
Impact of non-arm's length investments and approaches to protect insurer position
Capital Adequacy Adequacy of Claims Provisions Earnings Quality
Financial Ratios Financial Ratios Financial Ratios
Ability to access additional capitalBoard involvement and quality of
policies and procedures for setting up claim provisions
Volatility of profitability over last few years: underwriting/ investment
Dividend paying policy Quality of controls on claim provisioning
Accuracy of financial reporting, conservatism or otherwise
Asset Quality Experience and quality of staff Experience and track record of underwriting team
Financial Ratios Quality of claims accounting system Extent to which earnings generated by related party transactions, extraordinary or unrepeatable transactions Conservatism of asset valuation Adequacy of Claims Provisions
Matching of assets and liabilities Liquidity
Quality of investment controls Management Financial Ratios
Board approved investment policies Financial Ratios Board approved policies for liquidity management
Reinsurance Independence of board and senior management from shareholders
Cash and liquidity management practices including forecasting
Financial RatiosQuality of board oversight and
guidance, management interaction with board
Quality of board oversight and policies Experience and track record of management Subsidiaries, Self-dealing
Quality of reinsurance accounting and documentation Quality of strategic planning Financial Ratios
Quality of reinsurance arrangements & reinsurers
compliance function (filings accurate and on time, follow wording and spirit of law, etc), responsiveness to Commission recommendations
Board approved policies for dealing with conflicts of interest
Experience of staff & sophistication of reinsurance practices including use of modeling
Consumer complaints, market intelligence
Impact of non-arm's length investments and approaches to protect insurer position
Financial Ratios (examples)Change in Equity
Solvency Ratio
Equity to Liabilities
Capital Adecuacy
Change in Gross Written Premiums Change in Net Written Premiums
Gross Written Premiums to Equity
Net Written Premiums to Equity
Combined Ratio
Change in Combined ratio
Expense Ratio Gross Loss Ratio Net Loss Ratio
Management
Technical Profit (Loss) to Gross Written Premiums Return on Average Equity (profits before tax)
Investment Yield (for average investments)
Earnings Quality
Total Investment in Listed Shares to Equity Total Investment in Non-Listed Shares to Equity
Total Investment in Property to Equity
Net Account Receivables to Equity
Account Receivables due for more than 180 days to Equity
Account Receivables due for more than 360 days to Equity Overdue A/R & Overdue Un-Collaterized Loans to Equity Loans to Equity
Asset Quality
BENCHMARKS are developed for each Ratio
Capital Adequacy
4.
3.
2.
1.
Prescribed Regulatory Responses
HigherRisk Stronger
Response
Various categories of risks to be assessed
Asset Quality
Re-insurance
A structured approach to consistently assessing risk across insurers:
Assessing Risks
Assessing Risks
Risk Level Capital Adequacy
Asset Quality
Rein-surance
Adequacy of Claims, Actuarial
Manag-ement
Earnings Quality Liquidity
Self-dealing, Subsid-iaries
SupervisoryResponses
Level 4: Unacceptable Risk.
Level 3: Significant Risk.
Level 2: Emerging Risk.
Level 1: Low Risk.
Typical Progression of Supervisory Responses
Normal monitoring: reviewing supervisory filings, reviewing ratio and other financial results, normal on-site inspections
Closer monitoring: in-depth and/or frequent on-site inspections, possibly increased frequency of financial reporting. Meet with Board to describe areas of emerging risk. Business plan?
Very frequent on-site inspection? More frequent and detailed reporting? Additional capital? Sanctions or fines if non-compliance? License conditions or undertakings? Special audit or actuarial review with costs to insurer? Adjustment of asset or liability values? Time limit on licence?
Additional capital required immediately, license suspension, license withdrawal, winding up
Corporate Governance
It is management and the board that are in a position to ensure that the company follows sound business and financial practices, not the supervisor
Financial institutions obtain public funds so company directors and senior managers have a responsibility to shareholders AND to the public
Corporate Governance
Governments don't have the resources, nor is it feasible, to try to check everything in a financial institution so there has to be reliance on the board and management (as well as the external auditor and an independent actuary).
Thanks
www.irc.gov.jo