Insufficient Information Summary

A 2000 Financial Sector Assessment Program (FSAP) mission to Iceland by the International Monetary Fund (IMF) benchmarked the country's insurance supervision against the 1997 Insurance Supervisory Principles (ISPs) promulgated by the International Association of Insurance Supervisors (IAIS) and concluded that Iceland fully observed five ISPs, and largely observed eight. Of the remaining four, three ISPs were materially non-observed and one relating to derivatives was not applicable since Icelandic insurers did not use derivatives. The IMF recommended augmenting the Financial Supervisory Authority's (FME) resources and powers, especially for licensing and de-licensing insurance entities; strengthening corporate governance, internal control, and risk management guidelines; introducing a risk based supervisory approach; issuing fit and proper criteria for owners and senior management; and monitoring interconnectedness among financial entities. However, the IAIS issued revised Insurance Core Principles (ICPs) and related methodology in October 2003, and there is insufficient publicly available information regarding Iceland's compliance with the more stringent ICPs. In 2003, the IMF conducted an Update of its 2001 FSAP and found that the FME had taken active steps to implement the 2001 recommendations by increasing its resources and technical staff strength; moving towards risk-based supervision and enhancing the reporting obligations of insurers; introducing guidance on risk management, internal controls, and board responsibility; and revising the fitness and propriety criteria for owners and managers of holdings. Nevertheless, the FME still lacked licensing authority. A 2007 report by Guðmundsson et al prepared for the FME indicates further progress. Risk based supervision has been institutionalized with the introduction of stress testing, risk classification and management, and early warning systems. Ongoing fit and proper testing, new information requirements, enhanced consumer protection, and better regulation of insurance mediation are other areas of improvement. The 2008 IMF FSAP Update that took place in the midst of the global financial crisis noted the enhancement of the supervisory framework and the FME's resources and powers, including improvement in on-site monitoring and global consolidated supervision. Going further, the IMF advises the FME to make oversight more focused, and enhance cross border supervision and supervisory cooperation.

General Overview

Although the financial sector in Iceland is very large, the share of insurance companies is significantly smaller and they make up only 1.1 percent of the total financial sector assets (as reported in the 2008 IMF FSAP Update). Their assets account for almost 14 percent of the national GDP. In 2007, there were 12 insurance companies in Iceland, of which 4 were life and the remaining were non-life insurance companies. Total assets amounted to Icelandic Krona (ISK) 171 billion (ISK 15 billion for life and ISK 156 billion for non-life sectors). Among the non-life insurers, as a 2007 report entitled "Icelandic Insurance Market from the Perspective of the Financial Supervisory Authority" by Guðmundsson et al, the FME's staff members, mentions, two are in the reinsurance business, and the other two are the European Risk Insurance Company hf., which writes liability insurance only in the U.K., and the State Natural Catastrophe Fund. As for the four life and four non-life insurers not mentioned above, the report notes that they are all parts of consolidation under the country's three largest banks, Landsbanki Íslands hf., Glitnir banki hf. and Kaupthing banki hf. This, per the FME, is a cause for increased vigilance and group-wide supervision spanning all domestic and overseas operations of the three big Icelandic banks. Apart from the insurance companies, there are 6 domestic insurance borkers directly supervised by the FME, and 3,600 foreign insurance brokers/agents authorized to conduct insurance mediation in the country. These foreign brokers come under home country supervision as envisaged under the European Economic Area (EEA) Agreement.

The insurance sector is supervised by the FME, which is the country's integrated financial sector supervisor. It is an independent body that reports directly to the Minister of Industry and Commerce (now the Ministry of Business Affairs, or MoBA). It was established in 1999 by the merger of the then Bank Inspectorate of the Central Bank of Iceland and the Insurance Supervisory Authority (that supervised the insurance markets since 1974), and is governed by the Act on Official Supervision of Financial Operations of 1998 that created it upon entry into force. The FME, as noted in the Guðmundsson et al report, is responsible for the security and stability of the market by ensuring compliance with laws and rules governing insurance activities by the entities it supervises, as well as their financial soundness and good business practices. It is listed as a member on the website of the International Association of Insurance Supervisors (IAIS). The main Icelandic insurance law is the Act on Insurance Activities No. 60 of 1994 and it implements the EU directives as an obligation under the EEA Agreement. It was further amended as a result of the 2006 Agreement between Iceland, Denmark, and the Faroe Islands. Other key legislation includes the Act on Insurance Contracts of 2004, the Act on Insurance Mediation of 2005, and all the implementing regulations.

In November 2000, the Icelandic insurance sector supervision was assessed by the International Monetary Fund (IMF) as part of a Financial Sector Assessment Program (FSAP) mission to Iceland that undertook a comprehensive assessment of the country's compliance with international standards and codes, chiefly in the areas of banking, securities, and insurance regulation; payment and settlement system; and monetary and fiscal policy transparency. The FSAP benchmarked the country's insurance supervision against the 1997 Insurance Supervisory Principles (ISPs) promulgated by the IAIS. It concluded that Iceland fully observed five ISPs, and largely observed eight. Of the remaining four, three ISPs were materially non-observed and one relating to derivatives was not applicable since Icelandic insurers did not use derivatives. The specific recommendations for strengthening insurance regulation and supervision proffered by the IMF included: (1) augmenting the FME's resources and staff; (2) vesting licensing and de-licensing authority in the FME; (3) issuing and/or strengthening the guidelines on corporate governance, internal control, and risk management; (4) introducing risk profiling and stress testing of insurers; (5) making on-site inspections of the FME more proactive and risk-based; (6) analyzing the impact of interconnected loans and investments between financial entities on the capital adequacy of insurance firms; and (7) issuing fit and proper criteria for owners and senior management. However, the IAIS issued revised Insurance Core Principles (ICPs) and related methodology in October 2003, and there is insufficient publicly available information regarding Iceland's compliance with the more stringent ICPs of 2003.

In 2003, the IMF conducted an Update of its 2001 FSAP and found that the FME had taken active steps to implement the 2001 recommendations of the IMF. Firstly, it increased its resources and technical staff strength. Secondly, it moved towards risk-based supervision and enhanced the reporting obligations of insurers. On-site inspections were beefed up and the FME introduced guidance on risk management, internal controls, and responsibilities of the boards of directors. Further, the Act on Insurance Activities was amended to revise the fitness and propriety criteria for holdings and the FME increased vigilance on the qualified holding status of related shareholdings. Nevertheless, the licensing and consumer protection authorities were still segregated between the MIC and the FME, respectively. As for the insurance market, the IMF Update noted that it "remained, on average, profitable and adequately capitalized" (p. 1). The Update called for delegating the FME's consumer protection role to another agency "as this role is not complementary with the FME's primary role of prudential supervision" (p. 25). The IMF published another FSSA Update for Iceland in August 2008. Per the 2008 Update, the financial supervisory framework and powers have been enhanced. Further, "all issues [as regards the supervisory framework and capacity] raised by the 2003 BCP assessment have been addressed" (p. 6). The FME has increased its supervisory capacity and resources, as also the frequency and depth of its on-site monitoring. However, this report did not delve deeper into the evaluation of the insurance regulatory framework in Iceland. With regard to the various IMF recommendations, information provided in the 2007 report by Guðmundsson et al does indicate notable progress. The FME has moved towards greater risk based supervision and introduced stress testing, risk assessment of insurers, and early warning systems. New legislation requires evaluation of the fitness and propriety of the board of directors and senior management during licensing as well as on an ongoing basis by the FME, and the latter has detailed procedures and questionnaires to achieve the same. Consumer protection has been strengthened by new information requirements for insurers vis-à-vis their customers. Insurance mediation has come under reinforced regulation. The report, however, does mention the FME's concerns about the increased consolidation in the insurance sector and the fact that the three largest Icelandic banks are significant or majority shareholders therein. In hindsight, the present financial crisis that has gripped the Icelandic financial system and the entire economy - given that the sector over-dominates the economy - highlights the pitfalls of a concentrated financial system that is too big for the economy to support and rescue in the event of distress. As the FME website reveals, under Act No. 125 of 2008, the FME took over the boards and management of the three banks with the aim of guaranteeing stability and continued investor confidence in the Icelandic financial markets.

The Principles

IIICP 1 Conditions for effective insurance supervision

The preconditions for effective insurance supervision as enumerated by the 2001 IMF FSSA are strong and enforceable legal rights, low inflation, broad and liquid capital markets, well-developed infrastructure including the legal, accounting, actuarial professions, and payment systems. Other preconditions include a robust insolvency and resolution frameworks, corporate governance, transparent markets, and an overall strong and sustainable macroeconomic environment. Lastly, as the IMF notes, a successful insurance market requires an effective supervisory power and regime. The IMF noted that "there have been major developments in the financial market in Iceland over the last decade toward fulfilling these preconditions" (2001, p. 44). However, the IMF does note that the country still needs to move towards risk-based supervision, emphasize corporate governance and risk management of firms, and give more credibility to professionals such as accountants and actuaries in creating a better insurance market. Iceland is found by the IMF to be working towards this goal. However, there is insufficient information as to Iceland's compliance with ICP 1 Conditions for effective insurance supervision as promulgated in October 2003. Subsequent IMF Updates also provide no description of the country's progress in improving the preconditions for effective insurance supervision as recommended by the 2001 FSSA.

IIICP 2 Supervisory objectives

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003. The 2001 IMF FSSA found that ISP 1 on Organization of a Supervisory Body was largely observed in Iceland. However, it did point out that the role of the FME as a prudential supervisor ran at odds with its role in the field of consumer protection as regards insurance premiums, and called for delegating the FME's consumer protection role to another agency.

IIICP 3 Supervisory authority

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003. The 2001 IMF FSSA found that ISP 1 on Organization of a Supervisory Body was largely observed in Iceland. The FME was an independent supervisor and directly reported to the MIC. However, the IMF recommended an expansion of its powers and resources. It also took exception to the MIC's interference in supervision in the form of issuing rules for the sector and its licensing and de-licensing authority. The 2003 FSSA Update found that the FME's staff resources were increased by 30 percent since 2000 and that its operating budget was increased by almost 50 percent. The FME also hired new financial sector experts and actuaries and introduced staff training for its supervisory staff. Further, the governance issue that was raised in the 2001 FSSA was discounted since the FME, in the words of the IMF, "demonstrated its capacity to act independently and its staff does not believe that FME autonomy is compromised by its governance structure" (p. 26).

The FME website asserts that the Consultative Committee of supervised entities comments on the operating plan of the FME but "does not have power of decision in matters pertaining to the FME." In addition, the website notes that under Act No. 99 of 1999, the sueprvised entities are mandated to pay a special fee that go towards funding the supervisory activities and operational expenses of the FME. The 2008 IMF FSAP Update also points out that "both the budget and the staff of the FME have increased significantly over the last years and it plans to grow to 64 employees from the current 56" (p. 27). The IMF also observes that the FME, the government and all stakeholders recognize the need for expanding the FME in keeping with the growth and expansion of the financial entities it supervises. The 2007 report by Guðmundsson et al mentions that the FME believes that it is adequately staffed and has sufficient powers to conduct its supervisory functions in an effective manner. It has eight dedicated staff working on insurance supervision apart from other support personnel.

IIICP 4 Supervisory process

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003. The 2001 IMF FSSA found that ISP 1 on Organization of a Supervisory Body was largely observed in Iceland.

IIICP 5 Supervisory cooperation and information sharing

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003. The 2001 IMF FSSA found that ISP 16 on Coordination and Cooperation was observed in Iceland. Commenting on the adequacy of the provisions, the IMF stated that "within the framework of the system of home country control and the Insurance Act, the FME has sufficient powers and practice to ensure supervisory coordination and cooperation, and confidentiality" (p. 47). In addition, the 2008 IMF Update notes that the FME has extensive contacts and cooperation arrangements with foreign regulators, including those from the Nordic countries (Denmark, Sweden, Finland, Norway), the EEA countries, and several non-EEA countries through separate MoUs. The FME website also asserts that, as provided in Articles 13-15 of the Act on Official Supervision of Financial Operations No. 87 of 1998 (with subsequent amendments), the FME and all its employees, including its board of directors and the director general, "are bound to full confidentiality concerning any information they may acquire and is relevant to the activities of the FME or the transactions and operations of parties subject to supervision, related parties or others."

IIICP 6 Licensing

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003. The 2001 IMF FSSA noted that ISP 2 on Licensing was materially non-observed in Iceland. The MIC was authorized to grant new licenses to insurance entities; however, subsequent extensions and changes in the licenses were the remit of the FME. This arrangement, per the IMF, was not logical and ideally all these functions, including revocation of licenses, needed to be delegated to the FME and the MIC involvement in licensing removed. The 2003 IMF FSAP Update and found that the licensing and consumer protection authorities were still segregated between the MIC and the FME, respectively.

IIICP 7 Suitability of persons

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003. The 2001 IMF FSSA noted that the FME had no guidelines detailing the fit and proper criteria for qualifying shareholders. Per the 2003 IMF FSAP Update, the fit and proper criteria have been revised by the amendment of the Act on Insurance Activities. In this regard, the FME website explains that the FME does have elaborate procedures for evaluating them. It performs a "special assessment" to examine the eligibility of the board members and managing directors of insurance companies that are already licensed or are applying for a license, as well as those that are having their licenses changed. The implication is that the evaluation of the fitness is on an ongoing basis.

IIICP 8 Changes in control and portfolio transfers

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003. The 2001 IMF FSSA noted that ISP 3 on Changes in control was observed in Iceland. However, it did note that the FME had no guidelines detailing the fit and proper criteria for qualifying shareholders. In this regard, the FME website explains that the FME does have elaborate procedures for evaluating them. It performs a "special assessment" to examine the eligibility of the board members and managing directors of insurance companies that are already licensed or are applying for a license, as well as those that are having their licenses changed. The implication is that the evaluation of the fitness is on an ongoing basis.

IIICP 9 Corporate governance

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003. The 2001 IMF FSSA noted that ISP 4 on Corporate governance was materially non-observed in Iceland. It also observed that the FME needed to publish additional corporate governance guidelines, particularly covering areas of risk management, such as underwriting, provisioning, assets, and reinsurance. It also needed to enforce and monitor their implementation by companies during on-site inspections. The IMF suggested utilizing the external auditors to report on and certify the companies' compliance with the corporate governance standards.

IIICP 10 Internal control

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003. The 2001 IMF FSSA noted that ISP 5 on Internal control was materially non-observed in Iceland. Again, although authorized to do so, the FME had not issued internal control guidelines for insurance companies. Nevertheless, the FME was working on a project to create rules on risk management and internal control. The IMF recommended that these rules be issued on a priority basis and that they include a focus on insurance companies and their special situations. It also suggested utilizing the external auditors to report on and certify the companies' compliance with the FME rules on internal control. The 2003 IMF FSAP Update notes that the FME has issued internal control guidance.

IIICP 11 Market analysis

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003.

IIICP 12 Reporting to supervisors and off-site monitoring

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003. The 2001 IMF FSSA noted that ISP 12 on Financial Reporting was largely observed in Iceland. However, the FME focused unduly on rules-based supervision so that financial reporting by companies was not risk-focused. The IMF recommended that the FME require insurance companies to report more risk-based information in their statutory reporting. This recommendation, per the 2003 IMF FSAP Update, has been implemented. The 2007 report by Guðmundsson et al mentions that the FME has transitioned from paper based reporting to online reporting and also from manual data processing and filing to automatic transmission of information to the databases so as to minimize delays and errors. The introduction of the early earning system was also underway, as of 2007, and was expected to make supervision more targeted and efficient. The 2003 IMF Update noted that Iceland was trying to bring its accounting rules more in line with international standards (International Accounting Standards - IASs). Also, the rules relating to specific provisioning were being made more stringent. The 2008 FSAP Update mentions in this regard that in 2005, Iceland transposed all International Financial Reporting Standards (IFRSs) into domestic law.

IIICP 13 On-site inspection

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003. The 2001 IMF FSSA noted that ISP 13 on On-site Inspections was largely observed in Iceland. Again, the IMF noted that not only were on-site inspections not conducted on a regular basis as part of a routine supervisory process but they were also focused on rules-based compliance by firms to the detriment of risk-based supervision. The 2003 IMF FSSA Update notes in this regard that the FME had enhanced its on-site inspections and made them more risk-focused.

IIICP 14 Preventive and corrective measures

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003.

IIICP 15 Enforcement or sanctions

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003. The 2001 IMF FSSA noted that ISP 14 on Sanctions was largely observed in Iceland. It had no further comments for the principle. The 2007 report by Guðmundsson et al reveals that the 2007 Act No. 55 has increased the FME's ability to decide administrative fines against the supervised entities.

IIICP 16 Winding-up & exit from the market

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003.

IIICP 17 Group-wide supervision

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003.

IIICP 18 Risk assessment and management

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003. However, in 2001, the IMF FSSA found that "the insurance law and regulations clearly address most of the criteria under the prudential heading" (p. 46). The IMF did suggest stricter risk-based assessment of insurers' liabilities through the introduction of stress testing and the calculation of the risk profiles of insurers. It also recommended a thorough analysis of the interconnectedness in the financial sector and its impact on the insurers' capital adequacy through practices like intra-group transactions and intra-group loans. The FME was also advised to devise new rules for these aspects of the insurance business. The 2003 IMF FSAP Update notes that the FME has issued guidance on mandatory risk management processes and procedures for insurers. In this regard, the 2007 report by Guðmundsson et al reveals that the FME took a notable step towards a risk-based supervisory approach by introducing Guidance No. 1 of 2006, which stipulates standardized stress tests on companies and requires them to disclose their risk measurement and management practices and procedures. The guidance also aims to prepare companies to eventual Solvency II implementation in 2010. The results of the stress tests allow the FME to classify companies on the basis of risk so as to prioritize supervision. Companies that undertake risks that are not captured by the standardized tests are mandated to conduct their own stress tests and were asked to submit their stress testing procedures to the FME by end-2007.

IIICP 19 Insurance activity

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003. However, in 2001, the IMF FSSA found that "the insurance law and regulations clearly address most of the criteria under the prudential heading" (p. 46). The IMF did comment on the need to evaluate the security of reinsurers and advised the FME to examine whether the actual and potential claims by insurers on their reinsurers were recoverable.

IIICP 20 Liabilities

See Principle 18.

IIICP 21 Investments

See Principle 18.

IIICP 22 Derivatives and similar commitments

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003. ISP 9 on Derivatives and Off-balance Sheet Items, per the 2001 IMF FSSA, was not applicable to Iceland, since derivatives were not used by Icelandic insurers.

IIICP 23 Capital adequacy and solvency

See Principle 18.

IIICP 24 Intermediaries

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003. The 2001 IMF FSSA noted that ISP 11 on Market Conduct was observed in Iceland. The 2007 report by Guðmundsson et al. mentions that the Act on Insurance Activities No. 60 of 1994, along with its amendments, brought insurance brokers under regulation and licensing requirements. The Act on Insurance Contracts of 2004 enhanced consumer protection by requiring the insurers and brokers, both domestic and foreign, to provide information to their customers (insured and policyholders). The Act also provided legal status to the Insurance Complaints Committee that has been in existence since 1994. Further, the 2005 Act on Insurance Mediation also places emphasis on the right of the consumer to information and requires insurers to apprise their customers in writing as to why they should enter into a specific insurance contract with them.

IIICP 25 Consumer protection

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003. The 2001 IMF FSSA noted that ISP 11 on Market Conduct was observed in Iceland. However, as regards consumer protection, it advised Iceland to "consider the potential conflict of interests between the FME's role as a prudential supervisor and the role in the field of consumer protection with regard to insurance premiums" (p. 49). The 2003 IMF FSAP Update found that the licensing and consumer protection authorities were still segregated between the MIC and the FME, respectively. The Update called for delegating the FME's consumer protection role to another agency "as this role is not complementary with the FME's primary role of prudential supervision" (p. 25). The 2007 report by Guðmundsson et al mentions that the Act on Insurance Contracts of 2004 enhanced consumer protection by requiring the insurers and brokers, both domestic and foreign, to provide information to their customers (insured and policyholders). The Act also provided legal status to the Insurance Complaints Committee of the FME that has been in existence since 1994. Further, the 2005 Act on Insurance Mediation also places emphasis on the right of the consumer to information and requires insurers to apprise their customers in writing as to why they should enter into a specific insurance contract with them.

IIICP 26 Information, disclosure & transparency towards the market

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003.

IIICP 27 Fraud

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003.

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

There is insufficient publicly available information regarding Iceland's compliance with the revised ICPs issued by IAIS in October 2003.