Changes in the Regulatory landscape: SHORT TERM INSURANCE

1. Changes in the Regulatory landscape: SHORT TERM INSURANCE P. Togarepi Head: Prudential Supervision INSURANCE AND PENSIONS COMMISSION

2. Outline • Overview on regulatory approaches • Trade-off :Macro vs Micro goals of regulation • Principles of best Regulatory Approaches • Objectives of Ipec • Regulation and Supervision: Integrated Approach • Major elements of Risk-Based Supervision Approach • EMAS FRAMEWORK • Conclusion

3. Regulatory Overview • The dramatic world wide revolution in the financial industry is causing governments and regulators to review their approaches to regulating and supervising the insurance industry • The separation between insurance and other financial services providers such as banks has become porous • The laws that regulate the insurance industry will continue to be loosened by market forces and knew thinking

4. Regulatory Overview Cont’d • Ipec used to be a department in the Ministry of finance but Government has seen it prudent to form an authority which is closer to the industry to regulate insurance and pension business • In developed countries there is a broad consensus on goals of public policy: (a) at the macro level, to protect the stability of the financial system (b) at micro level to protect policy holders

5. WHAT AREAS ARE REGULATED BY IPEC? • Formation and licensing of insurers • Governance • Solvency regulation- Only admitted assets can be shown on an insurer’s balance sheet (Reserves and Surpluses- their implication) • Rate regulation-rates must be adequate-not excessive; undercutting or discriminatory • Policy forms-proposal forms/cover note should approved to avoid misrepresentation/deception • Sales practices and consumer protection-through licensing of intermediaries and prohibition of unethical practices, e.g. rebating; switching etc.

6. Trade offs : Macro vs Micro goals of regulation • If regulators go too far in protecting consumers by establishing strict rules, setting very high standards and take minimum risks it creates a moral hazard that may interfere with the efficient and effective functioning with the insurance industry. • Conversely, should the regulator relax, hoping that the players would self regulate themselves, it could trigger a systemic failure should some players fail as a result of mismanagement, lapses in controls or poor business decision (SFG, JUPITER and SOLID)

7. Trade offs : Macro vs Micro goals of regulation Cont’d • A balancing act between two extremes is needed-strict regulation(old approach) and supervision (a more relaxed/proactive approach)

8. Principles of Best Regulatory Approach • The need to maintain high standards of integrity and sound financial management in regulated entities • The need to shift emphasis from regulation to supervision- rigid rules are usually applied to all entities and have the potential to hinder growth and innovation in good companies-supervision will allow bad and good companies to be dealt with differently

9. Principles of Best Regulatory Approach Cont’d • The attitude towards risk would change as the industry matures- i.e. companies in a way should be allowed to assume risk profiles, which they are comfortable with, within prudential limits. • Focus more attention on systematic risk, rather than protecting individual customers- while Ipec is expected to protect policyholder interest, we see ourselves as enablers to insurance companies taking considered business risks.

10. Principles of Best Regulatory Approach Cont’d • Regulators should allow customers to judge and take business risks for themselves-Business, fraud and mismanagement should be looked at differently-i.e. policyholder should be protected from mismanagement through effective rules and regulation e.g. acting timely against mis-selling or delays or repudiation of legitimate claims. • Ipec relies more on market discipline and full information disclosure to protect customers- we ensure that there is transparency and full disclosure for consumers to choose good players

11. Principles of Best Regulatory Approach Cont’d • Ipec works closely with its regulated- it is normal to keep the industry at arms length-this is to avoid conflict of interest. However our regulated are best placed to help Ipec keep abreast with new developments. • Close cooperation with market Associations is therefore critical to Ipec as sources of market intelligence.

12. MODERN Objectives of Ipec • Protect public interest-ensure the regulated are financially solvent and able to meet obligations • To promote fairness and equity-players should ethical and upright in their dealings. • Foster competence-encouraging high level professional competence and integrity. • Play a developmental role-facilitate industry participation; ease of doing business; growth and development.

13. Regulation and Supervision: Intergrated Approach • The modern approach expects Ipec to ensure the insurance industry get stronger, resilient, through increased financial discipline, disclosures and management efficiency • We are gradually migrating from regulation to supervision because there is need to continually monitor the financial condition of insurers as their risk profiles are rapidly changing: risk based supervision approach: Insurers are monitored by regulators based on how much capital they have relative to their risk-based capital requirements

14. Major Elements of Risk-based Supervision Approach • Dynamic off-site surveillance-early detection of problems • Effective planning and scoping to customize examinations to suit the size, activities and risk profiles of regulated entities • Monitor compliance with prudential requirements such as minimum paid-up capital and solvency requirements • Augment offsite with on-site examinations-data verification and information submitted

15. EMAS Framework-IPEC VIEW • EMAS- • earnings capacity: quality and trend of the insurer’s earnings-on the basis of both underwriting and operating profits compared to the industry performance • management quality-the strategic vision, tract record and risk appetite of management is critical to the performance of the insurer • Asset quality: rating for quality, liquidity and mix of the insurer’s portfolio of assets • solvency and capital adequacy

16. EMAS Framework Cont’d • Solvency and Capital adequacy • It is critical to assess the quantity and quality of the capital supporting the solvency margin • A short term company assets should be biased towards more liquid assets for ease convertibility in the event of a claim

17. Conclusion • In the modern approach it is exceedingly important that Ipec benchmarks the soundness, management and compliance of insurers to best practices • This to ensure that the conduct of insurers is at least at par with world class standards • There is a paradigm shift on Ipec’s regulatory approach so that we allow innovation and development though close supervision cannot be substituted.

18. Conclusion Cont’d • Ipec encourages industry to enhance underwriting skills- hence IIZ critical. • Ipec encourages insurers to enhance their public image through consumer education- this will dispel many misconceptions and unrealistic expectations of insurance policyholders and improve market penetration. • The ultimate goal of ensuring that the interests of policyholders are protected and confidence in the industry is grows will remain key to IPEC.

19. Questions

20. THANK YOU Asante Sana