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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. 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.

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.

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 for ways to conceal 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 risks: 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 risks: 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 risks: the risks arising from failure of systems, internal procedures and controls leading to
financial loss. Operational risk also includes custody risk.

D1 Money laundering
The Financial Action Task Force (FATF) provides a clear explanation of money laundering, which we FATF explained in
section D2
reproduce here:

The goal of a large number of criminal acts is to generate a profit for the individual or group that carries out the act.
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 Chapter
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: 9
Money laundering
involves three stages
• Placement: the process of putting cash into the financial system and converting it into other financial
assets.
• 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.