presentation 5 (The 13th Annual Gulf Insurance Forum 2016)
“The role of supervision in controlling the insurance industry to achieve a more stable insurance market”
Regulators’ Panel Keynote Speech – Walid Genadry
13th Annual Gulf Insurance Forum 2016
October 19-20 2016, Dubai
Dear Colleagues supervisors, insurers, and intermediaries
Ladies and gentlemen,
Man’s LIFE was not created with an insurance policy. For thousands of years we have searched to protect ourselves from the material consequences of life’s risks and hazards resulting in property, health as well as life loss; and we had to conglomerate into families, clans tribes to maximize protection. Such insurance schemes were basic, and represented imperfect schemes with little flexibility. They needed to be improved. Nonetheless, insurance or mutual type insurance has always existed, and our Middle Eastern societies are no exceptions.
Attempts at insuring ourselves has always existed, but supervision of insurance did not!
With the development of structured insurance markets and the increased sophistication of insurance products, additional risk protection schemes became needed. We have started to see risks that go beyond the policyholder’s rights to reach an entire sector, if not the economy. Systemic risk became a word we did not hear before.
This has steered the development of both supervision and reinsurance, two activities that have some elements of convergence as both the reinsurer and the supervisor aim at risk mitigation and need to ensure that they are dealing with insurers that are both solvent, properly governed and solid in their going-concern reality.
The Middle East is going through a period of change and evolution where:
1/ Growth is overall high.
2/ Existing companies have to deal with changes they did not necessarily prepare themselves for, such as competition coming from abroad and through new technologies along with new societal demands challenging their level of competence.
3/ Instant market shares are stirred by new compulsory insurances, with the complications that may come with implementing them.
This is to mention just a few parameters and, of course, supervisors jumping from nowhere in the game having to grow rapidly, understand the business, develop expertise in no time and: “they start taking actions”. I will go further: Their actions may have an impact on stability but also possibly on profitability. Prudence and conservatism have a price. But what is a good price?
It is a change management process for all of us, and transitions always bear their share of pain and of thrill.
The supervisory activity
To better address the topic of our panel today: “The role of supervision in controlling the insurance industry to achieve a more stable insurance market” It is Important to start by speaking about the Insurance Supervisory profession and its relation to insurers in the MENA region, from a general perspective.
The emergence of supervisory authorities with increased intervention powers, responsible for both regulation development and supervision, is recent in the Middle East and often an imperfectly understood profession. It is quite a dry profession as it is a supervision activity or in more laymen words a referee or a police function. To like it you have to see it as a mission even more as a cause, because this is what it is!
Recent studies showed that one of insurance companies’ major worries have to do with upcoming regulations, as this may have an impact on their operational activities, if not on their strategies, and their profitabilities.
The last ten to fifteen years saw a marked shift in orientation, with governments in our region increasingly playing their legislative role, by passing new or reviewed laws, in order to establish supervisory authorities with increasing power and independence. This regulatory development came in parallel with increased awareness about the need for insurance and important growth of the insurance business in most markets.
This situation put the MENA region regulators under increasing pressure to deliver appropriate supervision while their supervisory experience was virtually non-existent or at best weak. There was no one to turn to, except to parties out of our own countries (IAIS, World Bank or other supranational expert support …).
In short supervisory experience and know-how were not at the rendezvous, but expectation of results from supervisors and accountability were. Not exactly what we can call a comfortable situation.
Why are there supervisors in the first place and what are they supposed to do for the stability of markets?
Supervisors are here primarily for organizational and ethical reasons because like for any financial sector the risk of mismanagement of funds, that do not necessarily belong to the owners of the managing companies, brings about the need for supervision. The objective is to protect the insurance game and ensure its long term success for both the insurers and the insured. Indeed, with increased complexity of the insurance services and of markets the consequences of unstable markets can be far reaching.
There are a couple of high level theories as to what ought to be supervision’s objective:
1/ Our primary objective is to ensure stable insurance markets (an approach that is more dominant in Anglo-Saxon countries)
2/ Our primary objective is to protect policyholders and stake-holders (an approach that is dominant in France and a number of continental Europe countries)
In fact both approaches lead to the same results: stable markets mean healthy insurance financially which should result in better served customers. Putting emphasis on protecting customers leads naturally to the requirement of having healthy companies as a prerequisite to customer protection.
The definition of IAIS is: “A sound regulatory and supervisory system is necessary for maintaining a fair, safe and stable insurance sector for the benefit and protection of the interests of policyholders, beneficiaries and claimants as well as contributing to the stability of the financial system.”
Concretely that means supervisors work on three fronts to ensure stability of markets:
1/ Prudential supervision primarily concentrated on Financial control to insure that companies are financially healthy and solvent. Such assessment and enforcement activities can extend to the sector as a whole; particularly where systemic risks might exist. Requirements on solvency regimes, stress testing, Asset/liability and currency matching, premium and claims reserving conditions to mention a few.
2/ Market conduct control to ensure that the relation between the insurer and the policyholder passing by the intermediaries and the loss adjuster is properly functioning. In that we have to ensure proper contract design, respect of legal obligations, suitability of persons, transparency, management of complaints and others…
3/ Ensure that proper Governance is achieved at all levels. Indeed, proper financial situation and customer servicing can only be sustained through solid governance and in that, supervisors impose various requirements from strategy establishment, Enterprise risk management processes, internal audit requirements, to remuneration policies, to name a few.
Our markets are for the most part what we call "developing countries" markets, which is a polite expression to say imperfect markets and countries where a number processes and conducts do not function by the book. So there is always that temptation on the part of the market to put undue expectations and also pressure on the supervisor, but also on the part of the supervisor to put on himself some goals that in fact are not his but those of other parties who are not necessarily doing their job; be it the judiciary system, the police, the consumer defense, other ministries, insurers or insurance associations or others…
My favorite definition of what the supervisor should do is the following:
“Supervisors are risk assessors and as a result of risk assessment they must act as risk mitigators”
Risk mitigation is what supervisors are here for; mitigation to protect the policyholders; mitigation to protect the insurance companies; mitigation for the sake of the stability of the financial sector; and to succeed in this supervisors need to look at the company from the eyes of its CEO, and not the eyes of an auditor. This is a big challenge for a supervisor!
The biggest challenge and difficulty resides in doing a proper risk assessment, and the second one is in convincing the private sector that the subsequent mitigation actions supervisors take are relevant and fair.
Risk assessment is insurers' responsibility too and as a result insurers have to act as effective risk managers. The dilemma for both insurers and supervisors is in the risk assessment part. What is a fair risk assessment? Where do they meet?
From an industry perspective the risk assessment is often between wanting to take too much risk and having to choose a more conservative stance.
Where do we draw the line then? When is it that a supervisor is going far in terms of prudence requirements? When is an insurer going far in terms of entrepreneurial initiatives to the point of putting at risk the company? The optimization of a healthy insurance game lies, in fact, in that duality between private sector entrepreneurship and supervisory prudence.
This is where excellence becomes crucial. But excellence takes time to develop and supervisors are still growing and developing. The insurers in the MENA region are developing also and are regularly short of adequate know-how and experienced people to address modern markets challenges. So both sides are in it and need to understand that they need each other to develop a vibrant and solid insurance sector in our region.
Supervisors expect insurer to play the game by the book. Indeed the competition landscape is not easy and temptations to not play by the book are high, but such a behavior is a risk to the whole sector.
The International supervisory scene
At the international arena despite the fact that the latest crisis that erupted in 2008 was primarily a banking one, the threat perceived on the international financial stability has pushed increasingly the “International Association of Insurance Supervisors” IAIS to go broader and in more depth in addressing the challenges posed by that crisis. This situation pushed IAIS, while having the standards setting activity at the heart of its concerns with an update on the Insurance Core Principles, to deal with financial stability issues and focus increasingly on the systemic impact of financial institutions on stability.
At another level the G20 leaders have been stressing the importance of proper implementation of standards and processes in a comprehensive rigorous and timely way.
Concretely this will increasingly mean pressure on the supervisory authorities to implement these principles and standards, which means increasing application of these standards by insurers. At this level I would advise insurers to get acquainted with the Insurance Core Principles developed by IAIS to understand better, at least, the high level philosophy that supervisors are increasingly expected to abide by. This will certainly improve mutual understanding between supervisors and insurers.
If new regulation is one of the prime concern and worries of insurers, as demonstrated by several surveys, understanding the IAIS "Insurance Core Principles" provides an answer of where we will all be heading in the future.
In conclusion, those were a few ideas and thoughts I wanted to share with you today to help steer our panel discussion. If we want to make our promising MENA region insurance sector succeed we need not forget that the best supervision will always be the competence and integrity-driven self-supervision on the part of insurers. For the mean time and in order to be up to the coming challenges supervisors, insurers and intermediaries will need to listen with sincerity to each other, and collaborate together without forgetting that the mutual roles are separate and distinct.
Thank you !
Former Head of the Insurance Control Commission, Lebanon
October 19th 2016