Insurance: a highly scrutinized business

Insurers are subject to various types of supervision by regulatory authorities. The aim is to guarantee the financial stability of the insurance ecosystem, the protection of policyholders and the smooth operation of the market.

This control may be exercised a priori or on an ongoing basis. It may be administrative, prudential, accounting and financial, commercial or disciplinary in nature. It may also be carried out on site or through document review.

Prior control

A priori control of insurance companies by the regulatory authorities is a preventive supervision mechanism that comes into play before a company begins operations or launches new products.

It is a mandatory process whereby the supervisory authorities examine and validate some key aspects of a company. It is designed to guarantee the insurance company's compliance with laws and regulations, the solvency of the future entity and the protection of policyholders and beneficiaries.

It is administrative control, prior to the performance of the activity or to some specific operations.

Insurance company licensing

An examination of market entry conditions is carried out before granting a license to the company.

This analysis is very thorough as it covers minimum capital requirements, the business plan adopted by the future insurance company, financial projections, the competence and honorability of management, including background checks.

Approval of insurance products

Some countries require prior approval of insurance contracts before they can be marketed, particularly for sensitive products such as life or health policies.

This stage of the control process involves verifying the clarity of clauses, the proposed pricing and the adequacy of technical reserves, which ultimately determine the insurer's ability to pay future claims.

Controlling strategic operations

A priori control also pertains to the strategic operations of the company or group. For example, the supervisory authority can block a merger if deemed necessary to prevent any threats to competition or market stability. It can also refuse the opening of foreign subsidiaries if they are not consistent with the group's solvency.

In certain cases, the prior agreement of the supervisory authority is required for any change in senior management, such as CEOs, Managing Directors or Administrators.

Prior creditworthiness requirements

Depending on the country or region, a priori control includes verification of compliance with certain standards as in Solvency II, in the European Union (EU), which imposes capitalization ratios before any business is launched. The authorities may also carry out stress tests to assess insurers' resilience to crises.

Prior control is often criticized for causing administrative burdens and creating obstacles for smaller players. However, this step prevents early market failure, reduces the risk of systemic crises, protects consumers in addition to being an effective means of combating money laundering and fraud.

Ongoing assessment

IThis is a non-stop, multi-faceted control applied as soon as an insurer starts business, or upon the launch of product. The aim is to constantly check that insurers and other market players comply with their legal, financial and commercial obligations.

Finally, this control monitors the company's financial health, detecting breaches and correcting deviations through sanctions or remedial measures.

Financial and prudential supervision

This operation refers to all the monitoring mechanisms put in place to ensure that insurance companies maintain a sound financial position.

As part of this process, companies are required to submit their periodic (quarterly/annual) financial statements and solvency calculations to the supervisory authority.

The supervisory authority also examines technical provisions. It may also carry out on-site audits to verify accounting, risk management, etc.

Controlling commercial practices

This system is designed to protect policyholders' rights. The supervisory authority verifies the clarity of contract clauses and information provided, as well as the absence of unfair conditions.

It also checks that claims be properly handled and quickly processed.

Supervision of insurance groups

A posteriori control includes monitoring the overall risks to which insurance groups and their subsidiaries are exposed. Various controls are used to assess the impact of the international activities of insurance groups and reinsurers.

Penalties

In the event of non-compliance with prudential requirements, the supervisory authority initially issues formal notices to the company concerned. This corrective approach is designed to bring the company back into compliance as quickly as possible.

If breaches persist, financial penalties may be levied. In the most serious situations, the supervisory authority has more coercive tools up its sleeves, ranging from banning an executive from the company to suspending an insurer's activities or simply withdrawing the offending company's license to operate.