Relevance to Stability and Development
Sound and effective regulation and supervision is important in sustaining a sound operating sector that protects and maintains the confidence of policyholders and, therefore, plays an effective role in overall economic development. Supervision of the insurance sector is not an end in itself. Rather, insurance supervision, when properly conducted, plays a critical role in facilitating that sector’s contribution to the effective management of risks for the wider economy; the mobilization of long-term savings, particularly in the life insurance sector; and the allocation of investment in long-term fixed interest and equity markets, as well as in infrastructure and venture capital.
Sound regulation and supervision can also guard against the consequences of insurer failure for policyholders. The traditional focus of supervision on policyholder protection is increasingly giving way to broader financial stability concern as activities of insurers in financial markets expand. Failure can have catastrophic consequences for the individual policyholder, particularly because the choice of insurer may not be subject to market forces in all cases (e. g., third-party claimants) and may not be easily diversified. Some insurance contracts are not suitable for the insured party to take out contracts with several providers—in the same way that many hold deposits with several institutions. The ICPs seek to protect policyholders, both as a group (by focusing on the institutional integrity of the insurance companies) and individually (by promoting good marketing practices, adequately disclosing information about contracts to customers and potential customers, and handling consumer complaints). At the same time, the increasing financial market activities of insurers, including a growing role in credit risk transfer, has raised a question about the implications for financial stability arising from insurer’s failures and the implications for insurance supervision (see IMF 2002, 2004b).
Insurers have a role to play in guarding against fraud, money laundering, and terrorism financing. The ICPs recognize this role through a comprehensive set of requirements and good practices in the custody and management of assets, corporate governance, and internal controls. Specific obligations with respect to the fitness and propriety of those who act as custodians (in a legal sense or otherwise) of the community’s savings are recognized as critical to the maintenance of a sound insurance sector.
