THE FRAMEWORK OF SUPERVISION OF INSURANCE AND REINSURANCE COMPANIES

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1 THE FRAMEWORK OF SUPERVISION OF INSURANCE AND REINSURANCE COMPANIES INSURANCE & PENSIONS SUPERVISION UNIT 1

2 TABLE OF CONTENTS 1. INTRODUCTION REGULATED ENTITIES THE INSURANCE AND PENSIONS SUPERVISION BUSINESS UNIT SUPERVISION PREVENTIVE AND CORRECTIVE MEASURES CO-OPERATION AND SHARING OF INFORMATION...10 o o This document has been prepared as an information guide providing a detailed overview of the supervisory process in relation to companies carrying out insurance business. It is not intended to provide an exhaustive list of supervisory actions or obligations relevant to insurance licence holders. Anyone wishing to clarify any matter relating to the content of the Guide may contact the Insurance and Pensions Supervision Unit at MFSA. Legal and professional advice is recommended in determining the nature and the extent of one s obligations as a licence holder. Laws, Rules and Regulations referred to in this Brochure are reproduced in full on the MFSA website [ under the section heading Insurance/Insurers/Legislation. 2

3 THE FRAMEWORK OF SUPERVISION OF INSURANCE AND REINSURANCE COMPANIES INSURANCE AND PENSIONS SUPERVISION UNIT 1. INTRODUCTION The objective of the "Framework of Supervision of Insurance and Reinsurance Companies" is that of providing a detailed description of the approach adopted for the supervision of insurance companies authorised under the Insurance Business Act (Cap. 403) [hereinafter referred to as IBA ]. This document aims at increasing the understanding of how the Insurance and Pensions Supervision Unit conducts its regulatory and supervisory role to safeguard the safety and the soundness of the Maltese insurance sector. Through the supervisory process, problems can be identified in companies and remedial action taken to protect the interests of the industry as a whole, the interests of policyholders and to minimise as far as possible consumer risk. The approach adopted by the Insurance and Pensions Supervision Unit as outlined in this document is consistent with the EU Insurance Directives and the international standards set out by the International Association of Insurance Supervisors. This approach is intended to take into consideration capital and solvency, the nature of the business activities, internal control and quality of management of authorised companies. This document is intended to foster further understanding between the Insurance and Pensions Supervision Unit and the authorised companies to improve the latter's understanding of the supervisory tools and the methodologies applied. Laws, Rules and Regulations referred to in this Brochure are reproduced in full on the MFSA website [ under the section heading Insurance/Insurers/Legislation. 2. REGULATED ENTITIES The persons regulated by the Insurance and Pensions Supervision Unit can be divided in the following categories: 1. Companies licensed under the Insurance Business Act [IBA]. These include insurance companies, affiliated insurance companies, reinsurance companies and protected cell companies. 2. Persons licensed under the Insurance Intermediaries Act. These include insurance agents, insurance brokers, insurance managers and tied insurance intermediaries. 3

4 This document will concentrate on the supervision of companies licensed under the IBA. 3. THE INSURANCE AND PENSIONS SUPERVISION BUSINESS UNIT The IBA and the Insurance Intermediaries Act are two separate but complimentary pieces of legislation which establish the legal and prudential framework for the regulation of insurance business and insurance intermediaries activities in Malta. The two laws 1 are reinforced by regulations and Rules which are issued thereunder to strengthen the regulatory and supervisory process. Within the structure of the Malta Financial Services Authority [MFSA], the Insurance and Pensions Supervision Unit strives to achieve a high level of professionalism, integrity, credibility and impartiality at all times. The Insurance and Pensions Supervision Unit promotes and monitors the integrity, soundness, efficiency and stability of the licence holders it regulates and supervises. This is made possible through the effective application of internationally accepted regulatory and supervisory standards. 4. SUPERVISION Supervision of licensed insurance companies is designed to promote financial strength in the sector, fit and proper management within the individual licensed insurance companies and suitable internal control procedures. Supervision is closely linked to the process of authorisation since the abovementioned requirements related to the authorisation process are ongoing and compliance thereto is continuously monitored. Supervision is exercised over all the operations of the authorised insurance company. In particular, the IBA provides that it shall be the duty of the MFSA to carry out the functions assigned to it by the Act and to ensure that the persons authorised to carry on the business of insurance in or from Malta comply with the provisions of the law and of any Regulation and Insurance Rule made thereunder and with the conditions specified in their respective authorisations 2. The concept of supervision entails that the MFSA is kept informed of the developments in authorised insurance companies and in the markets. In particular, this approach aims at reinforcing the company s responsibility in ensuring compliance with all legal requirements prescribed by law. The MFSA collects information, evaluates it and monitors the way in which the authorised insurance company is carrying out its business. Thus, in the case where any adverse developments are noted, the MFSA is able to intervene in time. The IBA provides for various ways in which the MFSA may collect information on licensed entities. 1 All legislation is available from the MFSA website: 2 Article 4(1) IBA. 4

5 5.1. OFF-SITE SUPERVISION An authorised insurance company is required to report on a periodical basis so as to enable the MFSA to monitor the company s compliance with the requirements imposed by law. An authorised insurance company shall provide for immediate notification to the MFSA in the following cases: Requirement to notify change in control: The IBA provides the MFSA with the power to grant or refuse approval to any proposed changes in control since these could have an indirect effect on the contractual commitments of the insurer and the policyholders. Therefore, the IBA provides for immediate notification to the MFSA in the case of: (a) acquisition, whether direct or indirect of a qualifying shareholding in an authorised company; (b) increase, whether direct or indirect, of an existing holding which is not a qualifying shareholding so as to cause it to become a qualifying shareholding in an authorised company; (c) increase, directly or indirectly, a qualifying shareholding, so as to cause it to equal or exceed, 20% or 33% or 50% or to cause the authorised company to cease to be that person s subsidiary; (d) reduce, directly or indirectly, a qualifying shareholding so as to cause it to cease to be a qualifying shareholding; (e) divest itself, directly or indirectly, of a qualifying shareholding. Furthermore, an authorised insurance company or the directors thereof are bound to notify the MFSA upon becoming aware that any person intends to take any of the actions referred to above 3. Similarly the written consent of the MFSA shall be required before an authorised company may: (a) lawfully merge with any other company whether authorised or not under the IBA; (b) undergo any reconstruction or division; (c) increase or reduce its nominal or issued share capital or effect any material change in voting rights. Business or Portfolio Transfers: The IBA also makes provision for business transfers with the aim of safeguarding the interests of the policyholders both of the transferor and the transferee company. Insurance business transfers are subject to Part VIII of the IBA and shall be approved by the MFSA in the case of transfers of general business and the Financial Services Tribunal 4 in the case of long term business under Articles 33 et seq. These provisions set out the requirements for publicising the proposed schemes and for notifying interested parties directly. Transfers of business have the effect of enabling authorised insurance companies to manage their business more effectively both for their own benefit and for the benefit 3 Article 38(4) IBA. 4 The Financial Services Tribunal is established under Article 21 of the MFSA Act. 5

6 of policy holders. However, these transfers may impinge on the relationship between the customers and the insurance company. For this reason the approval by the MFSA/ Financial Services Tribunal represents the adequate protection required. Appointment of directors, controllers or senior management: No company shall appoint a person as director, controller or senior manager unless the company has notified the MFSA of its decision to appoint such person and submits a Personal Questionnaire in that regard. These documents shall be submitted at least 21 days in advance of the date when the company would like the person to take up appointment. A company shall notify the MFSA in writing where any person ceases to be a director, senior manager or controller of the company. Notice shall be given before the expiration of 14 days starting with the day following that on which the person concerned ceases to hold his post in the company. Custody of the assets: The MFSA, may with respect to assets which a non-eea authorised company is required by the IBA to maintain in Malta, impose an additional requirement that the whole or a specified proportion of such assets be deposited with and held in custody for the company s account by a person as prescribed by the Insurance Business (Assets and Liabilities) Regulations. Reinsurance companies are excluded from this requirement. The MFSA has the right to demand from such person any information it may require to ensure that the provisions of the IBA are being complied with. Obligations of auditors and actuaries: If a person, in his capacity as auditor or actuary respectively of a company, or due to a direct request by the MFSA made under the IBA, such person becomes aware of any matter which relates to and may have a serious adverse effect on the insured, the policyholder, or any other interested person of the company or of the branch in Malta or of the company whose head office is in a country outside Malta, he is to immediately inform the MFSA through the company s management or if the circumstances so warrant directly to the MFSA. The law provides that a matter which relates to or may have a serious adverse effect includes any matter which: (a) is likely to lead to a serious qualification, or refusal of, the auditor s report on the accounts of the company; or (b) gravely impairs the company s ability to continue as a going concern; or (c) may be prescribed by the Minister. An auditor or actuary, as the case may be, of an authorised company, similarly has the duty to report to the MFSA any facts or decisions which relate to or have a serious adverse effect on the insured, the policyholder or any other interested person, relating to the company, or of the branch in Malta of a company whose head office is outside Malta, of which he becomes aware in his capacity as auditor or actuary to a company having close links. Companies ceasing to carry on business: An insurance company which intends to cease wholly or partly to carry on the business it is authorised to carry on, is required by not later than 6 months before the 6

7 date on which it intends to cease to carry on such business, give notice thereof in writing to the MFSA. The IBA also provides for regular reporting requirements. These form part of the on-going supervision by which the MFSA monitors and analyses all the factors which may impinge on insurance companies and the insurance market. Through all the information submitted, the MFSA can identify the potential problems which may crop up and prompt corrective action before these become more serious and detrimental. The MFSA decides what information it requires, in which form, from whom and with which frequency. In setting these requirements it strives to seek a compromise between all the information it necessitates and the administrative burden which may be placed on the authorised insurance companies. Reporting requirements apply to all authorised insurance companies. Authorised insurance companies are required to submit periodic returns. These returns are examined and any weaknesses in the respective companies are identified and tackled. Licence holders are expected to submit to the MFSA the following documents: Annual Financial Statements: In terms of the IBA 5, authorised insurance companies are required to draw up annual financial statements which are required to be audited. These financial statements are to be submitted to the MFSA within 6 months from the end of the financial year. Business of Insurance Statements: The IBA 6 requires licence holders to submit audited insurance business statements within 6 months from the end of the calendar year. These businesses of insurance statements are to be accompanied by a report by the directors and a report by the appointed auditor. In the case of a company which carries on long term business of insurance, the statements are also to be accompanied by a report of the appointed actuary 7. Management accounts: It is a condition of authorisation of every licence holder that management accounts are submitted to the MFSA on a quarterly basis COMPLIANCE VISITS On-site compliance visits are carried out by MFSA Officials on a regular basis or when the MFSA has a specific reason to carry out such a visit also known as targeted on-site inspections. Routine on-site visits cover all areas of operation of insurance companies. These inspections broadly cover the main areas of the organisation including corporate governance, the administrative organisation, financial management, internal control, reinsurance arrangements, control exercised by the company over its sales network, claims handling, claims reserving techniques and complaints handling. The IBA 5 Article 20 IBA. 6 Article Article 5 Insurance Rule 12 of 2007 Business of Insurance Statements. 7

8 provides that the MFSA may, whenever it deems necessary or expedient, appoint one or more inspectors to examine the affairs of an authorised company and to report thereon. Such inspector: (a) shall have and may exercise all the powers conferred on the MFSA to require information, and any requirement made by him shall be deemed to be and have the same force and effect as a requirement of the MFSA; (b) may, and if so directed by the MFSA, make interim reports and on the conclusion of such examination, shall submit a final report to the MFSA. The following are the objectives of routine on-site inspections: a. to appraise the assets and liabilities including off-balance sheet commitments; b. to assess the suitability of the managers and insurers and their fitness and properness to fulfil their roles; c. to evaluate the technical conduct of the insurance business 8 ; d. to evaluate the treatment of customers and to determine whether unlawful or improper activities are undertaken at the expense of policyholders or public in general; e. to assess the accounting and internal control systems, and to form an opinion on the corporate governance; f. to detect problems that may arise from the company's organisation or from its participation in a group. 5. PREVENTIVE AND CORRECTIVE MEASURES The MFSA takes preventive and corrective measures which are timely, suitable and necessary to achieve the objectives of insurance supervision. Where insurance companies fail to meet supervisory requirements or where their continued solvency comes into question, the MFSA may intervene to protect policyholders. In the cases where the problem detected is relatively minor, informal action such as an oral or written communication to management may be sufficient. In other instances, more formal action may be necessary. In accordance with the IBA, an authorisation shall be automatically revoked if the company: (a) does not commence to carry on business following authorisation within 12 months of its issue, or within such other period as may be specified in the authorisation; or (b) is declared bankrupt or goes into liquidation or makes a composition with its creditors or is otherwise dissolved; or (c) has ceased to operate as a result of a merger with another company carrying on business of insurance or for any other reason whatsoever; or (d) is a company whose head office is in a country outside Malta and the overseas regulatory authority in the country of registration, incorporation or constitution withdraws the authorisation from the company. The IBA also provides the MFSA with the power to suspend or revoke the authorisation if: 8 e.g. actuarial methods, commercial policy, reinsurance policy. 8

9 (a) any document/information accompanying an application for authorisation, or any information given in connection therewith, is false, incorrect or misleading in any material particular, or if the authorised company has concealed, or fails to notify the MFSA of any document/information or change therein which it was its duty to reveal or to notify by law; or (b) the authorised company ceases to carry on the business for which the authorisation was issued; or (c) the authorised company suspends payment or is about to suspend payment; or (d) the MFSA considers that the authorised company does not fulfil or comply with the requirements of, or has contravened, any of the provisions of the IBA and any Rules or Regulations made thereunder, or has failed to satisfy or comply with any condition to which it or the authorisation held by it is subject to; or (e) the MFSA considers that any officer who effectively controls the business the company is authorised to carry on is no longer a fit and proper person to ensure its sound and prudent management; or (f) the MFSA receives a written request so to suspend/revoke authorisation from the authorised company; or (g) the authorised company no longer possesses the required own funds; or (h) the authorised company is likely to become unable to meet its obligations or can no longer be relied upon to fulfil or satisfy its obligations towards insureds, policyholders, creditors or other interested persons; or (i) close links 9 exist between the authorised company and another person, and the MFSA is prevented from exercising its supervisory functions effectively either by reason of those close links or by reason of any law, regulation or administrative provision of a country outside Malta governing that other person, or by reason of difficulty in their enforcement. In the cases where the MFSA may suspend or revoke an authorisation, the MFSA may either in lieu of or in addition to any such suspension or revocation, proceed in any one or more of the following manners: (a) require the company to take such steps as the MFSA may consider necessary to rectify or remedy the matter; (b) appoint a person to advise the company in the proper conduct of its business; (c) appoint a person to take charge of the assets of the company, or any portion of them, for the purposes of safeguarding the interests of insureds, policyholders, creditors and shareholders of the company; (d) appoint a person to assume control of the business of the company either to carry on that business or to carry out such other function or functions in respect of such business, or part thereof, as the MFSA may direct; (e) require the company to dissolve and wind up its business or, in the case of a company whose head office is in a country outside Malta, to wind up its business in Malta; (f) appoint a liquidator for the purpose of winding up the affairs of the company and fix the remuneration to be paid by the company thereto; (g) require the company to submit a financial recovery plan if it considers that the interests of insureds, policyholders, creditors or other interested persons are likely to be prejudiced owing to a deterioration in the financial position of the company; 9 Article 8 IBA and as determined by Insurance Rule 18 Close Links. 9

10 (h) do such other act or require the doing of such other thing as it may deem appropriate in the circumstances. The MFSA may, where it feels is in the best interest of the public so to do, make or issue public statements or notices giving warnings or information about any of the following: (a) the suspension, revocation or restriction of an authorisation; (b) the action taken; (c) the carrying out of business of insurance in an unsatisfactory manner and the persons carrying out such business; (d) any other practice or matter which may be detrimental to the interest of insureds, policyholders, creditors or other interested persons; (e) the commission of an offence against this Act; (f) the imposition by the MFSA of an administrative penalty. Where the MFSA intends to suspend or revoke an authorisation, it is required to give the company concerned notice in writing setting out the reasons for its intention to do so. The notice shall state that the company may within such reasonable period after the service thereof as may be stated in the notice 10, make representations in writing to the MFSA giving reasons why the authorisation should not be suspended or revoked and the MFSA shall consider any representations so made before arriving at a final decision. The MFSA is to notify in writing its final decision to the company concerned. The MFSA is given the power to enforce corrective action and where necessary to impose sanctions based on clear and objective criteria that are publicly disclosed. It can also prevent the insurers from issuing new policies. The MFSA can issue formal directions to companies instructing them to take particular actions or to refrain from doing so. The MFSA may also resort to the imposition of administrative penalties. 6. CO-OPERATION AND SHARING OF INFORMATION The Malta Financial Services Authority Act allows the MFSA in specified circumstances to disclose information to foreign regulatory authorities which require its assistance in matters relating to the regulation and supervision of financial services as well to any other body or authority formed or established under Maltese law on matters in relation to which such entity may have a regulatory, supervisory, judicial or licensing function in terms of law. In terms of the IBA, the MFSA may exercise the power to communicate to the overseas regulatory authority information in its possession in the following circumstances: (a) where the assistance is requested by the overseas regulatory authority for the purposes of the exercise of one or more of its regulatory functions; or (b) where so required within the terms of Malta s international commitments; or 10 being a period of not less than 48 hours and not longer than 15 days. 10

11 (c) where so required within the terms of undertakings assumed in bilateral or multilateral agreements for the exchange of information and other forms of collaboration with overseas regulatory authorities including a request under a memorandum of understanding concluded with the MFSA 11. Furthermore, the MFSA has signed a number of bilateral Memorandum of Understandings with foreign regulatory authorities. These MOUs provide an effective framework for regulatory collaboration, investigative assistance and co-operation. 11 Article 55(2) IBA. 11

12 Malta Financial Services Authority Notabile Road, Attard, BKR 3000 Malta Telephone: (+356) Fax: (+356) Website: 12