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9/2 W01/March 2018 Award in General Insurance

Introduction

In this chapter, we examine the role that a regulator plays in the insurance industry, the functions of the
International Association of Insurance Supervisors (IAIS), as well as the importance of an insurer’s
capital adequacy and its relation to solvency control levels.
We also outline the growing importance of combating financial crime, and the role of the Financial Action
Task Force (FATF) in the development and promotion of national and international policies to combat
money laundering and terrorist financing.
Lastly, we consider the issue of fraud and how insurers manage it.

Key terms

This chapter introduces the following terms and concepts:
Capital adequacy Customer due diligence Cyber crime Financial Action Task Force
(FATF)
Fraud prevention International Association of Money laundering Regulatory approaches
Insurance Supervisors
(IAIS)
Role of the regulator Solvency Types of fraud

A Role of the insurance regulator

The main purpose for regulating insurance is to protect the consumer, maintain confidence in the
Regulation of
insurance is to protect financial system and promote the understanding of it.
the consumer
The insurance regulator typically performs five distinct oversight functions to achieve its objectives,
namely regulation, authorisation, supervision, surveillance and enforcement. This is backed up by sound
corporate governance, effective market discipline, a high level of consumer education and a basic safety
net for consumer compensation.
Regulation
The regulator determines the scope of activities that should be regulated, and sets the rules and
standards governing the behaviour of insurance markets and institutions. Prudential regulation focuses
on the safety and soundness of insurance companies, seeking to safeguard the value of the assets that
underpin their ability to fulfil insurance policies. Market conduct regulation focuses on how financial
firms and their representatives carry out business with consumers and seeks to promote fair dealing.
Authorisation
The regulator assesses any prospective provider of insurance services to ensure that the company
satisfies the necessary authorisation or licensing criteria. These include having the relevant track record,
adequate financial resources and sound operational processes to ensure fair conduct of business. The
regulator also assesses whether insurance companies and their representatives meet the fit and proper
criteria to conduct regulated activities. This is an ongoing process (see ‘Supervision’ below).

Supervision
Insurance supervision includes identifying potential risks that may impact the safety and soundness of
insurance companies. The regulator relies on a variety of supervisory tools to carry out this work, which
9 include on-site inspections as well as continuous off-site supervision such as reviewing audit reports
Chapter and regulatory returns, and monitoring key indicators and business developments.

The regulator also supervises the business conduct of companies and their representatives, to ensure
that they adhere to sound market conduct practices, including giving adequate product information and
providing customers with appropriate advice that suits their needs and risk profile.