Insufficient Information Summary

According to a Financial System Stability Assessment (FSSA) conducted by the International Monetary Fund (IMF) and the World Bank in 2001, the Czech Republic did not comply with most of the Insurance Core Principles (ICPs) promulgated by the International Association of Insurance Supervisors (IAIS) in 2000. The key deficiencies identified by the FSSA included corporate governance, licensing, changes in control, use of derivatives, reinsurance, market conduct, and lack of independence and transparency of the regulator. However, in 2003, the IAIS revised its ICPs and the related methodology. In addition, the IMF assessed the then existing insurance regulator, the Office for Supervision of Insurance and Supplementary Pension Insurance (ÚDPP) of the Ministry of Finance, which was replaced by a unified financial sector supervisor, the Czech National Bank (CNB) in April of 2006. Given the revision of the ICPs in 2003 and the establishment of a new regulator, there is insufficient information publicly available as to the compliance of the new supervisory regime with the revised, more stringent ICPs. The CNB, however, states in its mission that it is committed to the implementation of “internationally recognized standards in the field of financial market regulation and supervision.” According to the 2008 Financial Market Supervision Report by the CNB, the new Insurance Act was expected to pass the first reading by the end of 2009.

General Overview

The Czech National Bank (CNB) has been the unified supervisor for the Czech financial markets, including the insurance market, since April 1, 2006. According to the 2009 CNB’s Financial Market Supervision Report, from January 2008, a functional organizational structure with three new supervisory departments with new responsibilities replaced the then existing three division financial market supervisory breakdown that consisted of the banking, capital market and insurance supervision sector divisions. The three new departments are the Financial Market Regulation and Analysis Department, the Licensing and Enforcement Department, and the Financial Market Supervision Department. The CNB website states that all responsibilities of the Ministry of Finance (MoF) under the 2006 version of the 1999 Insurance Act were transferred to the CNB, effective April 1, 2006..The CNB is listed as a member on the website of the International Association of Insurance Supervisors (IAIS).

The 2001 joint International Monetary Fund (IMF) and World Bank (WB) Financial System Stability Assessment (FSSA) assessing the Czech Republic’s then existing insurance regulator, the Office for Supervision of Insurance and Supplementary Pension Insurance (ÚDPP), concluded that the Czech Republic did not comply with most of the Insurance Core Principles (ICPs) in effect at that time. The key deficiencies identified by the FSSA included some important areas such as corporate governance, licensing, changes in control, use of derivatives, reinsurance, market conduct, and lack of independence and transparency of the regulator. In 2002, the IMF published an update of the 2001 FSSA that pointed out that almost no progress had been observed since 2001. However, at the time of the update a new insurance law was in the works that was expected to enhance the independence of the supervisor. It was observed that the number of actual inspections had increased dramatically due to the increase in staffing of the ÚDPP. In 2003, the IAIS revised the ICPs and the related methodology, and there is little subsequent information publicly available as to the Czech Republic's compliance with the revised, more stringent ICPs of 2003.

A 2006 World Bank Pilot Assessment of Governance of the Insurance Sector enumerated the principal laws relating to the insurance sector in the Czech Republic. The 1999 Insurance Act, as amended, regulates the legal form of insurance companies. The 2004 amendment to the Insurance Act harmonized it with the European Union (EU) framework by transposing the European Commission (EC) Directives on life and non-life insurances. In addition, the 2005 Act on Insurance Contracts imposes disclosure requirements on insurers. The 2004 Act on Insurance Intermediaries and Loss Adjusters harmonized Czech legislation on intermediaries with EU legislation and defined the principles of consumer protection. The 2004 amendment to the 1999 Act on Motor Third Party Liability Insurance implements the fourth EU automobile insurance directive. The 2005 Act on Financial Conglomerates covers the supervision of financial conglomerates. The World Bank report noted that the Bankruptcy and Composition Act was being amended, and in its final form will implement the EU directives on the winding up of financial institutions. Other relevant pieces of legislation for insurance companies are the Commercial Code, the Civil Code, and the Accounting Act. According to the 2008 CNB Financial Market Supervision report, a new Insurance Act bill is in discussion. The government approved it in July 2008, but as of December 2009, there is no information as to whether it was passed into law.

As of December 2008, there were 35 domestic insurance undertakings, excluding the Czech Insurers’ Bureau (a professional organization of motor third party liability insurance providers), per the 2008 CNB Financial Market Supervision report. The Czech Republic also had 18 foreign insurance undertakings branches - 17 of these were from EU countries operating in the insurance sector. Foreign shareholders in the Czech Republic dominate the large insurance undertakings market; as of December 2008, foreigners owned 92.8 percent of all shares. According to a 2009 US Department of Commerce (DoC) report on the Czech Republic, the insurance sector grew significantly despite the global financial crisis. Per the report, the insurance sector grew by 6.2 percent from 2007. Life Insurance grew by 6.6 percent. However, the report states that by Western standards, “the Czech Republic is still underinsured” (p. 35). Although it falls short of the EU average, there is potential for growth nonetheless.

The Principles

IIICP 1 Conditions for effective insurance supervision

There is insufficient information publicly available as to the Czech Republic's compliance with ICP 1: Conditions for effective insurance supervision.

IIICP 2 Supervisory objectives

According to the 2001 IMF’s assessment, the Principle on Organization of an Insurance Supervisor was "materially non-observed" (p. 82). However, the assessment was based on the ICPs and related IAIS methodology of October 2000, which were revised by the IAIS in 2003. Also, the insurance supervisor changed from the UDPP to the CNB, and therefore there is insufficient information publicly available as to the compliance of the new supervisory regime with the more stringent ICPs of 2003. According to the CNB’s 2008 Financial Market Supervision report, the CNB supervisory objective for the insurance sector is to examine insurance companies’ compliance with “relevant legal rules as well as their solvency and financial management from the point of view of their ability to fulfill their obligations” (p. 42). The CNB’s aims to achieve its objectives by inspecting supervised entities’ and their activities, verifying methods of application of technical provisions and financial placement of assets that arise from technical provisions; verifying supervised entities’ compliance with the CNB’s decisions, as well as verifying the accounting procedures and effectiveness of control systems.

IIICP 3 Supervisory authority

The 2001 IMF’s assessment concluded that the Principle on Organization of an Insurance Supervisor of 2000 was "materially non-observed" (p. 82) as the then existing regulator lacked independence and transparency. A 2002 Update to the 2001 assessment did not report any progress as far as the indepenece of the supervisor was concerned although it was noted that a new insurance law was in works that was expected to address this shortcoming. However, there is insufficient information publicly available as to the compliance of the new supervisory regime with the more stringent ICPs of 2003.

According to the CNB’s 2008 Financial Market Supervision report, the CNB works closely with the MoF and other states authorities to “create a single strategy and unified rules applying to financial market regulation and supervision” (p. 15), and both cooperate together in preparing primary legislation. The CNB is responsible for secondary legislation preparation, and implements legal rules through decrees. The report further states that the CNB has the authority to make decisions on license applications, and has the power to undertake inspections, collect and enforce information needed to perform its supervisory duties, impose remedial measures and penalties all “pursuant to special legal rules” (p. 15).

IIICP 4 Supervisory process

According to the 2001 IMF’s assessment, the Principle on Organization of an Insurance Supervisor of 2000 was "materially non-observed" (p. 82). However, there is insufficient information publicly available as to the compliance of the new supervisory regime with the more stringent ICPs of 2003.
The CNB’s 2008 Financial Market Supervision report states that, the CNB supervises operators in the financial market, while working in close cooperation with the MoF and other state authorities like the Central Bank to “create a single strategy and unified rules applying to financial market regulation and supervision” (p. 15). Per the same report, the CNB informs a Financial Market Committee of its supervisory activities bi-annually, while it submits its annual Financial Market Supervision Report to the national legislative body, the Czech government and the public. Despite the above cited information, it does not directly address the Czech Republic’s compliance with this principle.

IIICP 5 Supervisory cooperation and information sharing

According to the 2001 IMF’s assessment, the Principle on Coordination and Cooperation of 2000 was "observed" (p. 83). The CNB’s 2008 Financial Market Supervision report states that, the CNB cooperates with the central banks and authorities supervising the financial markets of other countries, as well as international financial institutions and international organizations that engage in financial market supervision. In 2008, the CNB had several joint inspection exercises with foreign supervisory authorities at the international level, to primarily have a unified methodology within the EU. However, there is insufficient information publicly available as to the compliance of the new supervisory regime with the more stringent ICPs of 2003.

IIICP 6 Licensing

The 2001 IMF’s assessment found that the Principle on Licensing of 2000 was "largely observed" (p. 82). However, there is insufficient information publicly available as to the compliance of the new supervisory regime with the more stringent ICPs of 2003.

IIICP 7 Suitability of persons

There is insufficient information publicly available as to the Czech Republic's compliance with ICP 7, Suitability of persons issued in 2003.

IIICP 8 Changes in control and portfolio transfers

In assessing the former insurance sector regulator, the UDPP, the 2001 IMF assessment found the Principle on Changes in control to be "materially non-observed" (p. 82). However, there is insufficient information publicly available as to the compliance of the new supervisory regime with ICP 8, Changes in control and portfolio transfers issued in 2003.

IIICP 9 Corporate governance

According to the 2001 IMF’s assessment, the Principle on Corporate governance was "non-observed" (p. 82). However, there is insufficient information publicly available as to the compliance of the new supervisory regime with ICP 9, Corporate governance issued in 2003.

IIICP 10 Internal control

The 2001 IMF’s assessment concluded that the Principle on Internal Control of 2000 was "non-observed" (p. 82). According to the CNB’s 2008 Financial Market Supervision Report, the CNB generally inspects and examines supervised entities’ systems in place for internal audits, compliance with rules and regulations in place, as well as for the detection and remedy of shortcomings, to ensure proper management of risks. However, there is insufficient information publicly available as to the compliance of the new supervisory regime with the more stringent ICPs of 2003.

IIICP 11 Market analysis

There is insufficient information publicly available as to the Czech Republic's compliance with ICP 11, Market analysis issued in 2003.

IIICP 12 Reporting to supervisors and off-site monitoring

The 2001 IMF’s assessment concluded that the Principle on Financial Reporting of 2000 was "observed" (p. 83). Off-site monitoring in the insurance sector, according to the 2008 CNB’s Financial Market Supervision Report, is conducted through regularly assessing the financial situation of insurance companies, which includes their compliance with prudential rules, and imposing remedial action where shortcomings are discovered. However, the above cited information does not directly address the Czech Republic’s compliance with this principle as issued in 2003.
In line with the European Commission (EC) Regulation No. 1606/2002, listed insurance companies in the Czech Republic are required to prepare consolidated accounts in accordance with the International Financial Reporting Standards (IFRSs) as adopted by the European Union. The 2008 EC report on the implementation of Regulation No. 1606/2002 states the Czech Republic also mandates application of IFRSs in the annual accounts of listed companies and permits IFRSs in the consolidated accounts of all other companies. Companies that are not required or choose not to apply the international standards, have to follow Czech Generally Accepted Accounting Principles (GAAP) which are primarily contained in the Accounting Act, supplemented by the Ministry of Finance Provisions on Accounting and Czech Accounting Standards for entrepreneurs, banks, insurance, non-profit organizations, and other governmental entities. According to a number of publications on the subject, Czech GAAP differ from the international standards in many respects. The 2009 PricewaterhouseCoopers’ report on the implementation of IFRSs throughout the world states that the national standard-setter has not announced any convergence plans.

IIICP 13 On-site inspection

According to the 2001 IMF’s assessment, this Principle was found to be "materially non-observed" (p. 83). However, there is insufficient information publicly available as to the compliance of the new supervisory regime with the more stringent ICPs of 2003.

According to the 2008 CNB’s Financial Market Supervision Report, on-site inspections are generally conducted in compliance with the State Inspection Act, which is the current legislation in force. Inspections focus mainly on verifying supervised entities’ compliance with regulatory rules “under the legal and implementing regulations pertaining to the activities under examination” (p. 44). Per the report, the CNB lays extreme emphasis on evaluating systems used to identify, monitor, and regulate risks that supervised entities face in the inspected areas. This method is usually considered when inspection teams are being put together, with the risk specialization of team members in mind. The report further states that if shortcomings are discovered, measures are imposed for correction; compliance with the imposed measures is monitored and evaluated systematically.

In the insurance sector, the CNB conducts on-site inspections by evaluating each supervised entities situation and examining their risk management systems, counterparty and liquidity risk management systems. According to the 2008 Financial Market Supervision report, inspection in 2008 focused on supervised entities’ compliance with “the requirements from the Act on Insurance and its implementing decree, and management of legal and operational risk” (p. 48). The CNB also inspected entities’ accounting methods, solvency management and calculation methods, as well their internal audit functions. Shortcomings were detected with supervised entities’ technical provisions such as their liquidity risk management, internal control environment, and internal auditing; however, none posed a serious threat to companies and or their ability to fulfill obligations.

IIICP 14 Preventive and corrective measures

According to the 2008 CNB’s Financial Market Supervision Report, the CNB uses tools such as remedial measures, and issues penalties where it detects shortcomings. In the insurance sector, remedial measures in the insurance sector is introduced or imposed where CNB find that supervised entities have shortcomings detected in their financial conditions, as well as in their compliance with prudential rules and regulations. However, the above cited information does not directly address the Czech Republic’s compliance with this principle as issued in 2003.

IIICP 15 Enforcement or sanctions

The 2001 IMF’s assessment concluded that the Principle on Sanctions was "observed" (p. 83). According to the 2008 CNB’s Financial Market Report, “activity in the penalty proceedings area remained an integral part of the financial market supervision in 2008” (p. 35). This included investigating petitions and making decisions on the opening of administrative proceedings; conducting first instance administrative positions such as imposing fines and remedial measures, revoking licenses and cancelling registrations. In the insurance sector, per the report, penalty proceedings consisted of an investment intermediary’s breach of duties, while the others included a cancellation of an insurance company’s obligation under the extraordinary reporting, and another’s failure to implement remedial measures. However, the above cited information does not directly address the Czech Republic’s compliance with this principle, as issued in 2003.

IIICP 16 Winding-up & exit from the market

There is insufficient information publicly available as to the Czech Republic's compliance with ICP 16, Winding-up & exit from the market issued in 2003.

IIICP 17 Group-wide supervision

There is insufficient information publicly available as to the Czech Republic's compliance with ICP 17, Group-wide supervision issued in 2003.

IIICP 18 Risk assessment and management

The 2008 CNB’s Financial Market Supervision Report mentions that in 2008 there was significant attention given to the monitoring of the financial crisis impact on market developments, particularly how liquidity of insurance companies were affected. Per the report, an early warning system was completed in 2008 to strengthen the CNB’s risk-based supervision. The early warning system assesses recent trends in insurance companies’ development at a “quarterly frequency from regularly obtained statements” (p. 42). The report also underscores the importance of this system to identifying and remedying potential weakness in the insurance sector, especially with regards to liquidity risk. The CNB also increased its information-gathering visits to insurance companies within the sector. To increase analytical procedures for future supervision, “new reports were prepared for insurance companies for 2009” (p. 42) to ensure verify the sufficiency of very significant non-life insurance technical provisions, the analysis of its risk classes. However, the above cited information does not directly address the Czech Republic’s compliance with this principle, as issued in 2003.

IIICP 19 Insurance activity

There is insufficient information publicly available as to the Czech Republic's compliance with ICP 19, Insurance activity issued in 2003.

IIICP 20 Liabilities

The 2001 IMF’s assessment concluded that the Principle on Liabilities of 2000 was "largely observed" (p. 82). However, there is insufficient information publicly available as to the compliance of the new supervisory regime with ICP 20, Liabilities issued in 2003.

IIICP 21 Investments

According to the 2001 IMF’s assessment, the Principle on Assets of 2000 was "materially non-observed" (p. 82). However, there is insufficient information publicly available as to the compliance of the new supervisory regime with ICP 21, Investments issued in 2003.

IIICP 22 Derivatives and similar commitments

The 2001 IMF’s assessment found the Principle on Derivatives and Off-balance Sheet items of 2000 to be "materially non-observed" (p. 83). However, there is insufficient information publicly available as to the compliance of the new supervisory regime with ICP 22, Derivatives and similar commitments issued in 2003.

IIICP 23 Capital adequacy and solvency

The 2001 IMF’s assessment concluded that the Principle on Capital Adequacy and Solvency of 2000 was "observed" (p. 82). However, there is insufficient information publicly available as to the compliance of the new supervisory regime with ICP 23 Capital adequacy and solvency issued in 2003.

The 2007 CNB’s report states that the 1999 Insurance Act, as amended, and the implementing Decree No. 303 of 2004, as amended, lay down specific procedures for calculating solvency in insurance undertakings. According to the 2008 CNB Financial Market Supervision Report, the creation of Solvency II is underway and will be the new system of regulation in the European insurance sector. It further states that the Solvency II system has three pillars that consist of “quantitative requirements for insurance and reinsurance companies, qualitative requirements for risk management and supervisory procedures and reporting and disclosure requirements” (p. 24). Per the report, there are qualitative impact studies (QIS) that are included in Solvency II conducted by the CEIOPS at the European level. 14 insurance companies took part in the fourth QIS, which took place between April – June 2008. The QIS, according to the report, tested “the proposed standard formula for the calculations of capital requirements, and the proposed simplifications and proxies for the calculations of technical provisions and capital requirements” (p. 25). Results from for participants from the Czech Republic had similar results to the European level.

IIICP 24 Intermediaries

According to the 2001 IMF’s assessment, the Principle on Intermediaries was "materially non-observed" (p. 83). However, there is insufficient information publicly available as to the compliance of the new supervisory regime with ICP 24, Intermediaries issued in 2003.

According to the 2009 CNB’s report, the CNB’s powers were fundamentally affected by an amendment to Act No. 36/2008 Coll., on Consumer Protection, promulgated on February 12, 2008, under which supervision of compliance with the consumer protection rules by regulated financial market entities was assigned fully to the CNB. This also had implications for the CNB’s organizational structure and resulted in the establishment of a new Consumer Protection Department.

IIICP 25 Consumer protection

According to the 2001 IMF’s assessment, the Principle on Consumer Protection was "materially non-observed" (p. 83). However, there is insufficient information publicly available as to the compliance of the new supervisory regime with ICP 25, Consumer protection issued in 2003. See also ICP 24.

IIICP 26 Information, disclosure & transparency towards the market

There is insufficient information publicly available as to the Czech Republic's compliance with ICP 26, Information, disclosure & transparency towards the market issued in 2003.

IIICP 27 Fraud

There is insufficient information publicly available as to the Czech Republic's compliance with ICP 27, Fraud issued in 2003.

IIICP 28 Anti-money laundering/ Combating the Financing of Terrorism

The 2007 report by the United States Department of State on the Czech Republic noted that the Financial Analytical Unit (FAU) is the country's financial intelligence unit (FIU), and it is a part of the MoF. The FAU has the statutory authority to enforce Anti-Money Laundering/ Combating the Financing of Terrorism (AML/CFT) laws on supervised entities, which include insurance companies. In this exercise, the CNB cooperates well with the FAU. According to the 2007 MONEYVAL’s assessment, the Czech Republic is partially compliant with R 5 relating to customer due diligence (CDD) and non-compliant with R 6 relating to politically exposed persons (PEPs). The assessment highlighted the fact that the then existing AML Act, did not include full CDD requirements. However, as per the 2009 MONEYVAL progress report, the new AML/CFT Act articulates with regard to CDD requirements, that “the obliged entity, should it be a party to a transaction exceeding EUR 1,000 shall always identify the customer prior to the transaction, unless stipulated otherwise by this Act” (p. 9). The Act also adds to the Criminal Code, definitions of “Politically Exposed Persons” based on the Third EU Directive and their corresponding enhanced CDD measures, addressing the Czech Republic’s assessed non-compliance with R 6. The 2007 MONEYVAL evaluation assigns a largely compliant rating to both R 13 on suspicious transaction reports (STRs), SR IV on STR reporting, and R 14 on protection and no-tipping off policies. Relating to R 13 and SR IV, the evaluation recommends an outlining of explicit requirements for reporting a suspicious transaction as well as extending the scope of STR reporting requirements to “those who finance terrorism.” The evaluation also observes that “the protection against the consequences of reporting to the FAU does not extend explicitly to the disclosure of information (although it covers the suspension of transactions), beyond the obliged entity, to its management and staff” (p. 6). The Czech Republic was on the other hand, found to be fully compliant with R 19 on other forms of reporting, but non-compliant with R 25 on guidelines and feedback. It was found that due to strict confidentiality requirements, the FAU did not provide feedback. However, according to the 2009 MONEYVAL follow-up report, the FAU seems to have since intensified their cooperation with other regulatory bodies in strengthening guidelines and feedback mechanisms.

According to the 2008 Financial Market Supervision Report, the CNB conducts it work focusing on checking “the operation and effectiveness of the AML system” (p. 46). Compliance with “Know your customer policies, suspicious transaction reporting (STR) systems, as well as adequate measures in vetting persons are also assessed against Act No. 253/2008 Coll., Act on the Performance of International Sanctions No. 69/2006, and CNB Decree No. 281/2008 Coll., among others. With regards to STRs, the CNB works closely with the MoF’s Financial Analytical Unit to design supervision methodology. Per the same report, there were shortcomings in the “manner of determining information about customers, and assessing relevant risk factors; in the classification of customers; in the sharing of existing information on risky customers, in the scope of checking against lists of persons on which sanctions have been imposed, in the formalities of evaluation reports, and in training. The report also mentions that “the Act on Certain Measures Against Money Laundering and Terrorist Financing No. 253/2008 Coll., and the accompanying Amendment No. 254/2008 Coll., were promulgated on 8 July 2008; the new AML Act reacts to the Third Money Laundering Directive” (p. 17). Per the same report, this act will lower client identification threshold “from EUR 15,000 to EUR 1000” (p. 17) and extends the possibility of client identification taken over from another person.