Should Barbados take further steps to protect customers from insurance risk?
As the Financial Services Commission (FSC) continues to improve the regulatory framework of the sectors within its supervisory ambit, one area it intends to modernise is its capital standards by introducing risk based capital (RBC) standards within the insurance industry.
The context in which the proposed RBC regime will be developed is the passage of time since the challenges faced stemming from the default of an domestic insurance entity. That situation serves as an always constant reminder of the continual need to maintain appropriate levels of financial sector regulation. The intention of implementing any RBC regime is also to lift the industry up to international standards and in particular the International Association of Insurance Supervisors (IAIS) Insurance Core Principles (ICPs) as it relates to regulatory capital allocation.
The FSC and the Barbadian financial system was last evaluated under the IAIS ICPs in 2013 when the results of the IMF – led 2013 Financial Sector Assessment Programme (FSAP) report were released.
This report suggested some ways to improve the insurance sector’s regulation towards fully meeting IAIS Core Principle 17. One recommendation in that report was that the FSC needed to accelerate the implementation of risk-based capital adequacy requirements covering all insurers and insurance groups and promote Enterprise Risk Management (ERM) frameworks.
Such an improvement to current capital requirements would be intended to more adequately capture relevant risks (such as, credit, market, and underwriting risks).
By implementing such a regime risk management requirements could be made more comprehensive and proportionate to the risks that Barbadian insurers face, such as group and catastrophic risks.
With the aforementioned as a basis, the current FSC legislation requires a flat capital assessment irrespective of institutional risk exposure. The current capital requirement is $3 million paid up capital for life and non-life insurance companies and $5 million for a composite company.
However, in order to be a strong and prudent regulator and to better regulate the sector and financial system the risks need to better match the capital allocation. The capital allocation should also be dynamic and responsive to a changing environment and conditions.
For a successful risk-based supervisory system, several improvements in capital requirements should be adhered to, to move to a more dynamic RBC methodology.
The intended RBC standard should also be appropriate and in line with the core insurance principles of the IAIS which constitutes current international best practice. This will allow the capital requirements of an insurance company to be based on the risk inherent in their specific operations such that companies with larger risk exposures hold more capital relative to those exposures when compared to companies with small risk exposures.
In addition, companies that implement appropriate risk management practices to mitigate risk will see their regulatory capital requirements reduced to match the risk exposure thereby rewarding good risk management. It is also expected that a more stringent capitalisation requirement will be developed, thereby ensuring that only companies that are adequately capitalised and solvent relative to the size and complexity of their portfolio continue operations or enter the market.
The expected overall result of having the RBC standard is to enhance the supervisory system to include a more pro-active approach to risk-based supervision, improved corporate governance, and greater disclosure and information sharing with the public and other sectors of the financial system.
Taken from a Financial Services Commission introductory paper on its proposed risk based capital for domestic insurance companies regime.