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Chapter 9 Insurance regulation 9/9

In broad terms, if the insurer’s capital resources were to fall below the prescribed capital requirement
(PCR) (see figure 9.1) the regulator would require some action by the insurer to either restore capital
resources to at least the PCR level or reduce the level of risk (and therefore the required capital level).
The minimum capital requirement (MCR) (see figure 9.1) represents the intervention point at which the
strongest actions could be invoked if further capital is not made available*.
These actions could include:

• preventing the insurer from accepting new business;
• withdrawal of authorisation/the insurer’s license; and
• transfer of the portfolio to another insurer.
*Note that this does not preclude such actions being taken by the regulator for other reasons, and even if the MCR is met or exceeded.

D Combating financial crime

The financial services industry is at risk of being misused for money laundering and the financing of
terrorism. Criminals are always looking out or ways of concealing the illegitimate origin of funds and
those involved in organising terrorist acts will look for ways to finance these acts.
Although its vulnerability might be less than other sectors of the financial services industry, the
insurance sector is nonetheless a possible target for money laundering and for those seeking resources
for terrorist acts
This exposes insurance companies to legal, operational and reputational risks, and the sector therefore
must take measures to prevent its misuse.
• Legal risk: the possibility that lawsuits, adverse judgments or contracts that turn out to be
unenforceable disrupt or adversely affect the operations or condition of an insurer.
• Reputational risk: the potential that adverse publicity regarding an insurer’s business practices and
associations, whether accurate or not, will cause a loss of confidence in the integrity of the institution.
• Operational risk: the risk arising from failure of systems, internal procedures and controls leading to Reference copy for CII Face to Face Training
financial loss. Operational risk also includes custody risk.

D1 Money laundering

The goal of a large number of criminal acts is to generate a profit for the individual or group that carries See section D2
out the act. According to the Financial Action Task Force (FATF), money laundering is:
the processing of these criminal proceeds to disguise their illegal origin. This process is of critical importance,
as it enables the criminal to enjoy these profits without jeopardising their source. Illegal arms sales,
smuggling, and the activities of organised crime, including, for example, drug trafficking and prostitution rings,
can generate huge amounts of proceeds. Embezzlement, insider trading, bribery and computer fraud schemes
can also produce large profits and create the incentive to ‘legitimise’ the ill-gotten gains through money
laundering. When a criminal activity generates substantial profits, the individual or group involved must find a
way to control the funds without attracting attention to the underlying activity or the persons involved.
Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are
less likely to attract attention.
Money laundering involves three stages:
Money laundering
involves three stages Chapter
• Placement: the process of putting cash into the financial system and converting it into other financial
assets. 9
• Layering: the creation of complex transactions which attempt to conceal the origins of the money.
• Integration: this is where the criminal finally gets access to the money.
By its very nature, money laundering is an illegal activity carried out by criminals. Along with some other
aspects of underground economic activity, rough estimates have been put forward to give some sense of
the scale of the problem.
The International Monetary Fund, for example, stated in 1998 that the aggregate size of money
laundering in the world could be somewhere between two and five per cent of the world’s gross
domestic product.