Access to Insurance Through Regulation and Supervision

Adequate regulation and supervision enhance policyholder protection. That is the ultimate objective of insurance supervision and regulation according to the International Association of Insurance Supervisors (IAIS). Two features of insurance are important to understand.

First, insurance entails a transfer of risk from client to insurer (for example the risk of falling ill and needing medication, or the risk of death of the provider in the family). Second, as a policyholder you pay now and the insurer will “deliver” later (known as the inverse production cycle). These features are often not well understood which is why there is a need to both actively promote the benefits of insurance and also to ensure that the legitimate claims of policyholders are met promptly.

Insurance is a complex business and the solidity of an insurer can sometimes be unclear. For example, while an insurer is still paying claims it can already be insolvent and unable to meet its commitments in the long-run, making supervisory intervention necessary. If regulation and supervision are adequate consumers will be protected, their claims honoured and they can recover better from (financial) set-backs and, in emerging markets and developing economies, work toward an escape from poverty.

Insurance as a trust-based product

There is a Dutch saying that trust arrives on foot and leaves on horseback. It means that it takes considerable time to build up trust but it takes just one negative incident to make it disappear. More than the loss of money, the failure of an insurer may cause loss of trust in the entire insurance industry, causing a big part of the population to turn away from insurance and therefore lose an important financial opportunity to manage risks and protect assets. This loss of trust can also occur if a policyholder has a different expectation of his or her insurance cover. This means that the knowledge and understanding (financial literacy) of the policyholder should be sufficient. Also, the policyholder should be treated fairly by the insurer. This means that the information and advice provided by the insurer should be complete, correct and suitable for the needs of that specific customer. Also, claims settlement should be arranged quickly and on fair terms without misusing the small print in the policy. Each of these highlights the reason for adequate regulation and supervision.

IAIS Insurance Core Principles as basis for adequate regulation and supervision.

The IAIS published its revised Insurance Core Principles (ICPs) in October 2011. These provide a framework with the essential elements that must be present in a supervisory regime to promote a financially sound insurance sector and create an adequate level of policyholder protection. The ICPs cover various issues including licensing, corporate governance, capital adequacy, risk management, investment, reporting, supervisory powers of intervention, market conduct and winding up of insurers.

The ICPs apply to insurance supervision in all jurisdictions regardless of the level of development of the insurance markets and the type of insurance products or services being supervised. At the same time, they recognise that supervisors need to adjust certain supervisory requirements and actions in accordance with the nature, scale and complexity of risks posed by individual insurers (the “proportionality principle”).

In October 2012, the IAIS adopted the Application Paper on Regulation and Supervision Supporting Inclusive Insurance Markets that provides guidance on how to best apply the ICPs in a manner that supports access to insurance products for the underserved while applying this “proportionality” principle. The paper provides examples of practical application of the principles and standards. Furthermore, it provides specific guidance in areas relevant for improving access, such as the need to formalise informal providers, using where needed transitional measures, facilitate innovations that help overcome barriers for access to insurance, and regulate the use of pilot schemes.

“Proportionality” in practice does not mean the introduction of systematic, or automatic, simplifications or exemptions for certain insurers. Administrative or technical requirements, or licenses, can be made simpler, but only after consideration of the nature, scale and complexity of the insurer’s business. For example, with complex financial products, like investment linked life insurance products, information needs to be more specific and technical to provide all necessary information to policyholders than in the case of a policy against loss of life stock. If an insurer because of its (small) size is not allowed to invest in derivatives, its reporting on investments need not be very detailed.

These requirements should not just be lighter, but rather different for developing economies. If an insurer uses mobile technology for payments, it should be monitoring its operational risk in this area more closely than usual. Also, if family involvement is a cultural fact in decision making then this needs to be recognised.

What’s next?

The IAIS does not think its work in the area of micro-insurance and financial inclusion is done. It is closely cooperating with the Access to Insurance Initiative (A2ii) to assess the compliance of its member jurisdictions with the Application Paper. The A2ii is also developing a training module to implement this Paper. The cooperation with the A2ii is intensified to offer the member supervisors assistance in supervisory development. An important initiative is also the development of an Issues paper on Market Conduct, Distribution and Consumer Protection in Inclusive Insurance. This is done with the help of the Microinsurance Network’s Regulation, Supervision and Policy Working Group. Once we have identified problems in these areas we intend to address these in our future projects.