On 12 April 2010, the IAIS published a guidance paper on the “treatment of non-regulated entities in group-wide supervision” (the Guidance), which is available here.
The Guidance aims to encourage effective international supervision of all the entities in an insurance group, particularly in light of the recent financial crisis. It discusses non-regulated holding companies and operating companies. The key risks they pose are identified as relating to:
- governance
- financial and reputational damage spreading from the non-regulated entities to the rest of the group
- capital adequacy at group and entity level
- the lack of supervisory reach over non-regulated entities.
The “indirect approach” that certain jurisdictions take to supervising non-regulated entities, including the UK and other EU jurisdictions which apply the Insurance Groups Directive, is identified as having drawbacks in terms of supervising group governance, risk management and intra-group transactions.
The key features of an effective international supervision regime are identified as:
- a comprehensive group-wide supervisory approach
- understanding regulated entities’ exposure to non-regulated entities
- assessing capital adequacy on a group-wide basis
- assessing fitness of senior management on a group-wide basis
- obtaining accurate information about non-regulated entities in a group
- cooperating with other supervisors internationally
- being flexible enough to capture emerging risks from non-regulated entities
- considering risk mitigation and ring-fencing measures to protect the regulated entities in the group.
