This ICP focuses on the general processes and procedures supervisors should have in place with respect to macroprudential supervision, as part of the overall supervisory framework (see ICP 9 Supervisory Review and Reporting). A jurisdiction’s macroprudential supervision processes and procedures should be proportionate to the nature, scale and complexity of its insurance sector’s exposures and activities.

Macroprudential supervision consists of data collection, market and trend analysis, systemic risk assessment, supervisory response and transparency. It identifies and, where necessary, addresses both vulnerabilities of individual insurers and the insurance sector to shocks (inward risks) and the build-up of systemic risk at the individual insurer level or the sector as a whole (outward risks). Inward risks include insurance and financial market developments, which may impact the insurance sector. Outward risks refer to the risks that individual insurers or the insurance sector may pose to the financial system and the real economy. Macroprudential supervision contributes to financial stability by minimising the incidence and impact of externalities on the financial system and real economy generated or amplified through the distress or default of individual insurers or common behaviours.

• sector-wide vulnerabilities and common exposures in the insurance sector; and
• the risk of amplification and transmission of shocks to the financial system and real economy caused by:
  • the size, complexity, lack of substitutability and/or interconnectedness of a distressed or failing insurer; or
  • collective actions or distress of a sufficiently large number of insurers undertaking similar activities and thus exposed to common risks.

Systemic risk may be defined as the risk of disruption to financial services that is caused by an impairment of all or parts of the financial system and has the potential to have serious negative consequences for the real economy. Systemic impact may originate from individual or sector-wide exposures to liquidity risk, interconnectedness (macroeconomic and counterparty exposure) or lack of substitutability as well as from other risks. These risks may spread to other parts of the financial system via asset liquidation, exposures or critical functions.

Macroprudential supervision can help identify the need for supervisory measures. In its macroprudential supervision, the supervisor should also take into account the material risks that non-insurance legal entities and activities may pose to insurance legal entities, insurance groups and the wider financial system.

The supervisory framework should allow the supervisor to respond in a timely manner to findings from the analysis performed as part of its macroprudential supervision.

To support the assessment of liquidity risk, the supervisor should collect data that provide sufficient indications on possible liquidity mismatch between assets and liabilities both at individual and sector-wide level. Reporting requirements on liabilities should include, but not be limited to, information on the surrender value of insurance products, product features that increase or decrease the propensity for early pay outs under certain circumstances (such as penalties or delays in the ability to access the cash value of a policy), and the maturity or redemption structure of non-insurance liabilities. On the asset side information on the degree of liquidity of the assets and on the potential margin call on derivatives should be collected.

• Efficiency of data collection: the supervisor should examine costs and benefits when considering data collection. Data collections should be aligned with their respective usage. The supervisor should first make use of all available data sources and then calibrate its data requests and data processing capabilities;
• Data validation: before analysing data and providing recommendations on the findings, the supervisor should validate data used in its assessment;
• Data quality assurance: the supervisor should regularly evaluate the appropriateness of data collected and data needs to capture market developments and address deficiencies in:
  • the type of data collected;
  • its ability to process data in a timely and/or complete way; and;
  • its ability to collect ad hoc data in a timely manner.
• Scope: for sector-wide assessments, data collection should cover a representative sample of the respective market or risk;
• Consistency: regular data collections of a standardised set of information should remain consistent over time in order to analyse trends. The supervisor should, however, consider the evolving nature of the relevant exposures; and
• Ad hoc data collection: in order to address emerging risks, the supervisor should have processes in place that allow for ad hoc data collections.

To support the assessment of macroeconomic exposure, the supervisor should collect data that is sufficiently granular to enable an analysis of an insurer’s, as well as the insurance sector’s vulnerability to macroeconomic shocks (such as sensitivity to interest rate movements) and general market movements (such as sensitivity to equities and fixed income asset movements).

To support the assessment of counterparty risk, the supervisor should collect data that includes the concentration of the assets and liabilities, with regard to counterparties, markets (such as equity or debt), sectors (such as financial or real estate), and geographical areas.

The supervisor should collect microeconomic data, such as insurance pricing, underwriting, expenses, claims inflation, reinsurance, intra-group transactions, and general developments in the insurance sector (for example, the development of claims, earned and guaranteed interest rates, reserves, pandemics, and changes in morbidity and mortality, longevity, changes in the frequency and severity of catastrophes changes in medical expense inflation and changes in law). In addition, the supervisor may collect data on both the asset and the liability structure of insurers, including those that are related to non-insurance activities. The supervisor should consider having established processes and communication channels on microeconomic data collection with other involved supervisors when an insurer operates in multiple jurisdictions.

The supervisor should collect macroeconomic data to complement information mainly gathered as a result of supervisory reporting. Data may include general domestic and international macroeconomic variables (such as interest rates, exchange rates, inflation or balance of payments, as well as data on market structure and competitiveness) which could identify macroeconomic instabilities and sources of risk both in the domestic and the global economy. Macroeconomic data may be used to assess the exposure of insurers’ portfolios of both assets and liabilities to economy-wide factors. For insurers operating in multiple jurisdictions, the supervisor should consider collecting relevant macroeconomic data for material jurisdictions.

To enable macroprudential supervision, the supervisor should have processes and procedures in place that would allow for analysis on insurance sector trends that could potentially result in externalities to the wider financial system and/or adversely impact the insurance sector. These trends include changes in economic conditions and technology, as well as environmental, social and governance developments. Such processes and procedures should also recognise that changes in the exposures of insurers can potentially have macroprudential risk implications.

Quantitative analysis includes identifying trends, outliers, interconnectedness and/or risk concentrations of existing or newly identified vulnerabilities. Typical methods of quantitative analysis may include

•  horizontal reviews;
•  descriptive statistics;
•  trend analysis; and
•  statistical modelling using past data.

Qualitative analysis includes performing assessments based on judgment, experience, information and any other factors that either cannot be measured or quantified with typical methods. Qualitative analysis may be particularly relevant for the assessment of low probability high impact type of events with limited quantifiable data available.

The supervisor should conduct horizontal reviews to reveal the range of practices among insurers relevant to a common subject (for example, the assessment of the appropriateness of insurers’ assumptions used for reserving). A horizontal review may help to determine which insurers are outliers, and as such provides the supervisor with a reference for potential further actions. A horizontal review may provide an aggregated view of the risks linked to certain exposures and/or activities and may also help determine whether industry practice as a whole is effective enough to address the risks embedded in the activity.

• where peer groups are used, the choice of the peer group can have an impact on the outcome of the review. The supervisor should carefully consider the criteria for including insurers in a peer group;
• when reviewing an insurer operating in multiple jurisdictions, the group-wide supervisor should form a group-wide perspective. Such a perspective can build on analyses performed by a peer authority or a third party (including international organisations such as the IAIS, IMF and World Bank);
• the results of horizontal reviews performed within a single jurisdiction can be beneficial to the supervisory community as a whole, especially as they may relate to systemic risk to the insurance sector. The supervisor may also consider suitable fora for the communication of information that is not necessarily insurance or insurer specific; and
• horizontal reviews need not always be complex exercises. Simple horizontal outlier analysis on readily available insurer reports can often provide helpful supervisory insight. Simple analysis of some of these reports, including trends and peer comparisons, may help the supervisor to identify areas of potential risk and help it to target future work.

The supervisor should have in place an appropriate form of stress testing, which is applied to the insurance sector as a whole or to a significant sub-sample of insurers, selected according to the exposures to specific risks to be assessed. Outcomes of insurance sector and financial market analysis should be considered in the development of severe but still plausible scenarios to be tested in such exercises. Scenarios should reflect the current market environment and potential unfavourable evolutions in terms of changes in markets and insurance specific risk exposures. In order to contextualise the results, the supervisor should take into account the characteristics of the supervisory framework and the structure of the insurer’s assets and liabilities. Following a stress test exercise, the supervisor should discuss potential vulnerabilities and potential mitigating actions with the relevant insurers.

While many data items are backward looking, insurance sector analysis should be forward looking, to the extent possible, when developing scenarios to capture potential future developments. Stress scenarios should take into account ways that market dynamics have changed, which may make historical data less relevant.

The supervisor should use stress tests to identify vulnerabilities and risks and assess the impacts to the insurance sector and for individual insurers. Additionally, stress scenarios should be used to identify how those potential impacts may spread.

When assessing both inward and outward risks, the supervisor should assess insurers’ exposures to liquidity risk, interconnectedness (macroeconomic and counterparty exposure), lack of substitutability and other risks. Assessing inward risks refers to the extent insurers may be exposed to, or vulnerable to, a certain risk within the insurance sector, whereas the outward risk refers to the situation in which these vulnerabilities would generate externalities which may then propagate to other financial markets or the real economy.

The supervisor should monitor the liquidity of an insurer’s invested assets relative to its insurance liabilities based on their characteristics. Additionally, the supervisor should analyse the potential that a large insurer’s operations could require it, or a sufficiently large number of insurers, to engage in asset sales of a significant size. The supervisor should assess the funding structure of insurers and their reliance on short term funding.

The supervisor should monitor interconnectedness with the financial system (for example, via intra-financial assets and liabilities or derivatives). As these exposures can be on a cross-jurisdictional and cross-sectoral basis, the supervisor should cooperate with supervisors in other relevant jurisdictions and sectors.

Macroeconomic exposure in insurance liabilities depends on the characteristics of applicable investment guarantees as well as other contractual provisions and the complexity of the underlying risks. Monitoring of macroeconomic exposure should recognise the relationship between the assets and liabilities of the insurer. Stress tests can be used to support monitoring of this exposure.

The supervisor should take a total balance sheet approach (see ICP 16 Enterprise Risk Management for Solvency Purposes) when considering the potential systemic importance of an insurer. When analysing systemic risk stemming from the insurance sector, the supervisor should at least consider common exposures and activities.

The supervisor should consider the type of policies underwritten by insurers and the activities insurers are engaged in, such as the degree of engagement in derivatives activity and reliance on short-term market activity. The supervisor should also consider the interconnectedness with other financial institutions, and the role of the insurance sector within the broader financial system.

As part of its assessment, the supervisor should consider emerging developments that may affect the insurance sector’s risk exposures. Additionally, the supervisor should cooperate and coordinate with other financial sector supervisors (such as banking, securities and pension supervisors, central banks and government ministries) to gain additional perspectives on the potential change in the risk exposures of insurers stemming from evolutions of other markets.

The supervisor should communicate the findings of its assessment as appropriate, to either individual insurers or the sector. The supervisor should require insurers to take action necessary to mitigate any particular vulnerabilities that have the potential to pose a threat to financial stability.

A macroprudential perspective in the development and application of supervisory requirements may help limit the build-up of systemic risks and contribute to the resilience of the financial system. The supervisor should ensure that there is an appropriate interaction between its macroprudential analysis and assessment activities, on the one hand, and microprudential supervision, on the other hand.

As part of introducing supervisory requirements into its supervisory framework, the supervisor should consider implementing supervisory measures based on macroprudential concerns. Many macroprudential tools are, in effect, microprudential instruments developed or applied with a macroprudential perspective in mind. By mitigating risk exposures, some measures that are intended to protect policyholders may also contribute to financial stability by decreasing the probability and magnitude of any negative systemic impact.

The supervisor should determine the depth and level of supervision based on its assessment of the systemic importance of individual insurers or the insurance sector (see ICP 9 Supervisory Review and Reporting). The supervisor should act to reduce systemic risk when identified within its jurisdiction through an appropriate supervisory response. In jurisdictions where one or more insurers have been assessed as systemically important, or a number of insurers are contributing to systemic risk, the supervisor should have supervisory requirements targeted at those insurers to mitigate systemic risk. The supervisor should extend certain requirements as necessary to an insurer and/or a number of insurers that it has assessed to be systemically important.

• requirements on insurers:
  • enterprise risk management (see ICP 16 Enterprise Risk Management for Solvency Purposes);
  • disclosures (see ICP 20 Public Disclosure);
• preventive or corrective measures (see ICP 10 Preventive Measures, Corrective Measures and Sanctions); and
• crisis management and planning:
  • crisis management, including crisis management groups (see ICP 25 Supervisory Cooperation and Coordination); and
  • recovery and resolution planning (see ICP 12 Exit from the Market and Resolution and ICP 16 Enterprise Risk Management for Solvency Purposes).

Supervisory requirements may be intended to mitigate the potential spill-over effects from the distress or disorderly failure of an individual insurer or from the common exposures or behaviours of a group of insurers or across the sector. In the latter case, supervisory requirements may have different effects during different phases of the economic, underwriting or credit cycle. Therefore, the supervisor may develop requirements that are time-varying in nature, depending on the economic environment. The activation of such time-varying requirements could be rules-based (for example triggered automatically given a pre-defined condition) or discretionary (ie upon explicit decision by the supervisor). A rules-based approach may be more transparent but requires regular assessments of its adequacy under changing conditions affecting the insurance business.

The publication of data and statistics by the supervisor may enhance market efficiency by allowing market participants to make more informed decisions and reducing the cost to the public of acquiring insurance sector information. Moreover, the publication of data may serve as a market disciplining mechanism by facilitating comparisons of an individual insurer to the sector as a whole.

The supervisor may provide access to sufficiently detailed data either by publishing data itself or by providing others with adequate means for publishing data. This could be achieved by engaging a government statistical office or cooperating with the local insurance sector; provided the supervisor is satisfied with the accuracy, completeness, frequency and timeliness of such publication.