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Chapter 9 Insurance regulation 9/21

Question answers

9.1 The insurance regulator typically performs five distinct oversight functions to achieve its objectives:
regulation, authorisation, supervision, surveillance and enforcement.
• Regulation: the regulator determines the scope of insurance activities that should be regulated, and sets the
rules and standards governing the behaviour of insurance markets and companies.
• Authorisation: the regulator assesses companies that wish to offer insurance services to ensure they
satisfy the necessary authorisation or licensing criteria.
• Supervision: the regulator is responsible for the supervision of insurance companies. It seeks to have a
good understanding of the business to identify potential risks that may impact their safety and soundness.
• Surveillance: the regulator undertakes various kinds of financial surveillance, including: identifying non-
sustainable trends and potential vulnerabilities in the financial system.
• Enforcement: the regulator is empowered to take action against those companies and individuals who
breach prudential and market conduct requirements.

9.2 • Prescriptive-based regulation means specifying the technical means for achieving regulatory goals. These
rules or standards set out the criteria that have to be satisfied for the rule to apply or be complied with.
Prescriptive standards focus on prevention by controlling the processes or inputs that give rise to risk
situations.
• Principles-based regulation means placing greater reliance on principles and outcomes as a means to drive
regulatory aims, with less reliance on prescriptive rules which still apply but to a lesser extent. It means
moving away from dictating through detailed, prescriptive rules and supervisory actions how firms should
operate their business. Firms are given the responsibility to decide how best to align their business
objectives and processes with regulatory outcomes.
• Risk-based regulation evaluates the major risks faced by a company and assesses how well these risks are
being mitigated. This helps both regulators and companies to identify and, importantly, to pre-empt
problems. Well-managed companies have greater flexibility, with less well-managed ones subject to closer
scrutiny. In this type of regulatory system, regulators work with insurers to set standards for market
conduct, and then track a number of key indicators, such as consumer complaints, to determine how well Reference copy for CII Face to Face Training
individual companies are performing against those standards.

9.3 They are:
• Placement: the process of putting cash into the financial system and converting it into other financial
assets.
• Layering: the creation of complex transactions which attempts to conceal the origins of the money.
• Integration: this is where the criminal finally gets access to the money.
9.4 Fraud in insurance may be defined as an act or omission intended to gain dishonest or unlawful advantage for
a party committing the fraud (fraudster) or for other parties. Fraud comes in all shapes and sizes. It may be a
simple act involving one person or it may be a complex operation involving a large number of people from
within and outside the insurer.
Some examples of fraud are:
• misappropriating assets;
• deliberately misrepresenting, concealing, suppressing or not disclosing one or more material facts relevant
to a financial decision, transaction or perception of the insurer’s status; and
• abusing responsibility, a position of trust or a fiduciary relationship. Chapter

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