Intent Declared Summary

The International Monetary Fund's (IMF) 2001 Financial System Stability Assessment (FSSA) found Slovenia compliant with 11 of the 17 International Association of Insurance Supervisors Core Principles promulgated in 2000. At the time of the assessment, the oversight of insurance and pensions was in transition as a new independent supervisor, the Insurance Supervisory Agency (ISA), was being established. In 2004, the IMF issued an FSSA update to compare Slovenia's insurance supervisory framework against the revised and more demanding Insurance Core Principles (ICPs) of 2003. In the update, Slovenia's rating was downgraded in a number of areas. The insurance sector was found to lack transparency and the ISA was judged to have limited independence. The IMF recommended strengthening ISA's autonomy - both administratively and budgetarily - from the government, giving supervisors protection from legal action, and enhancing the technical skills of the staff. A more recent (2006) report by the European Bank for Reconstruction and Development (EBRD) attests that insurance regulation and supervision in Slovenia is used as a model for other countries and that Slovenia is also taking EBRD assistance to increase ISA's regulatory capacity and to bring about insurance sector reforms. Per information in the ISA's 2007 annual report, a 2007 amendment to the country's key insurance law, the Insurance Act, has brought it in line with the European Union (EU) acquis (body of laws). Further, the ISA's budgetary autonomy has improved, and it has strengthened supervisory cooperation with other agencies, embarked on risk-based supervision, and is actively participating in implementing the EU Solvency II.

General Overview

According to the Financial System Stability Assessment (FSSA) conducted by the International Monetary Fund (IMF) in 2001, Slovenia observed 11 of the 17 International Association of Insurance Supervisors (IAIS) Core Principles promulgated in 2000. During that year, major changes were being made in the way that oversight of insurance and pensions was conducted. Of note was the creation of a new independent supervisor, backed up by a new regulatory framework. The Slovenian Insurance Act was largely based on European Union (EU) directives, which did not ensure adherence to all criteria set by the IAIS. The 2001 FSSA pointed out that arrangements for licensing, corporate governance, internal control, derivatives, and market conduct had to be strengthened. Another key issue was a regulatory gap with respect to investment guidelines for insurance companies. In its 2004 FSSA update, the IMF reported that this gap had been closed.

The IMF's 2004 FSSA update revisited Slovenia's insurance supervisory framework in the light of the new and more demanding methodology adopted in 2003. The new assessment yielded a downward revision of Slovenia's ratings in a number of areas. Among the problems noted was a lack of transparency in the insurance sector, and the limited independence of the Insurance Supervisory Agency (ISA) vis-a-vis the government. To counter these difficulties, the IMF suggested that Slovenia strengthen its administrative and budgetary autonomy and that it provide supervisors with protection from legal action. Further, the technical skills of staff needed to be addressed. The 2004 IMF staff was also concerned about the "clear gap in the supervision of the pensions sector, which is split between the securities market and the insurance supervisors" (p. 4).

The IMF's main recommendation in 2004 was to clarify the role of the Supervisory boards and establish audit and risk committees; institute a risk based formal early intervention regime supported by relevant law and regulation; amend the law to incorporate the derivatives and structured instrument requirements of the relevant IAIS core principle; and strengthen the ISA's powers regarding the withdrawal of legal person intermediary licenses and imposition of insurer responsibility for information exchange at the consumer interface. A 2006 report of the European Bank for Reconstruction and Development (EBRD) attests that "insurance regulation and supervision in Slovenia is now generally used as a model for other countries" (p. 7). Further, the country has also embarked on two EBRD-assisted consultation projects in the previous five years to enhance the capacity of the ISA through the introduction of a web based insurance regulatory reporting system. Further, the EBRD has engaged with the Slovenian government to hash out measures to reform the state-dominated insurance sector.

The Slovenian insurance supervisor is the ISA, which was established pursuant to the Insurance Act and became operational on June 1, 2000. Per information in its 2007 annual report, the ISA is an autonomous entity, directly responsible to the country's Parliament, the National Assembly. Its predecessor was the Office for Insurance Supervision, housed within the Ministry of Finance (MoF) and operational since 1995. The ISA is comprised of the Council of Experts and its Director. The Council of Experts "is responsible for adopting decisions with regard to authorizations, consents and other individual matters on which, unless otherwise stipulated in the Insurance Act, decisions are taken by the Agency; for adopting regulations when the Insurance Act determines that such acts be adopted by the Agency; for adopting general acts of the Agency and performing other tasks within the competence of the Agency, unless it is stipulated by the Insurance Act that another body of the Agency is responsible for those tasks" (ISA 2008, Section 2, p. 1). The entities that come under the ISA's regulatory and supervisory control are insurance undertakings, insurance agencies and insurance brokerage companies, insurance agents and brokers, all legal persons related to insurance undertakings, insurance undertakings within an insurance group, insurance holding companies, joint-venture insurance holding companies, the Nuclear Pool (the Pool for insurance and reinsurance of nuclear risks), and the Slovene Insurance Association - Guarantee Fund. According to the ISA's website, the objective of the ISA is the mitigation and elimination of irregularities in the insurance area, the protection of policy holders' interests, and the facilitation of the functioning of the insurance economy. Its responsibilities, as spelled out in the ISA's 2007 annual report, include "supervision of the players in the insurance market, and granting authorizations in the insurance area and issuing implementing regulations, which constitute the legal base for regulation, control and supervision of the insurance market in the Republic of Slovenia" (Section 2, p. 1). An additional and increasingly important responsibility of the ISA, notes the annual report, is to participate in the activities of the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS), especially as it addresses the Solvency II Project on changes to the capital requirements of insurance undertakings, and their internal and external controls. The ISA is also an active participant in the Financial Requirements Expert Group, set up on the request of the European Commission, to implement measures under Solvency II. The ISA is listed as a member on the IAIS website.

The Insurance Act of 2000 covers issues related to the establishment, operation, supervision, and dissolution of insurance undertakings. It was amended in 2002 and, more extensively, in 2004. According to the ISA's 2005 Annual Report, the Act "has introduced special rules applicable to insurance undertakings which are an important group of non-monetary financial institutions, while, at the same time, insurance undertakings as companies have to comply also with the legislation applying to the operation of companies in general" (p. 2). In November 2007, as the ISA's annual report of the same year mentions, the Act was amended again, and this amendment "ensured the harmonization with the acquis, in particular with the Reinsurance Directive, as well as with already transposed directives which were subject to corrections" (Section 1, p. 5). The report further claims that the original Act also transparently regulated reinsurance activities in Slovenia in line with EU Reinsurance directive, and that the 2007 amendments only amounts to the up-gradation of certain provisions of the Act rather than an introduction of crucial new elements. Other laws which are of particular importance for the operation of insurance undertakings are: the Compulsory Motor Third-party Liability Act (CMTLA), the Health Care and Health Insurance Act (HCHIA-OCT1), and the Pension and Invalidity Insurance Act (PIIA1-OCT2). Furthermore, under the Insurance Act, the ISA may issue regulations addressing the insurance sector. As of 2005, the ISA implemented 28 regulations.

According to the 2005 ISA annual report, Slovenia is a medium developed insurance market when compared to other European countries. In 2005, 201 EU insurance undertakings were authorized to operate in Slovenia. Insurance companies reported net profit in the amount of SIT 9 billion in 2005 compared to SIT 3.3 billion in 2004. Providing further insurance market facts and statistics, the 2007 annual report of the ISA mentions that since the onset of the market economy in the country in the early nineties, the insurance sector has been recording high growth rates that have exceeded growth rates in the overall economy. However, this rate is still below EU rates and fuels expectation of further growth in this sector, with increases in insurance premiums, domestic growth, and expansion in foreign markets, notably the Balkans. Slovenia, per the report, is one of the very few EU countries that have composite insurance companies, i.e. an insurance undertaking can conduct both life and non-life insurance business. Seven out of 14 insurance companies in Slovenia are composite companies. A majority (9) of the insurance companies are also dominant domestic-owned, accounting for 91 percent of the market share. Further, the industry is very concentrated, with the largest insurer maintaining a share of almost 40 percent, and the largest four accounting for 79 percent of the total market share as of the end of 2007. Nevertheless, the report notes, the smaller companies in general increased their respective market share, with the big ones losing some ground in 2007. Insurance premiums also saw an increase in 2007 in terms of their share in the national GDP (5.4 percent), although this is still below the EU average of 9 percent. The culprit is the low level of premiums in the life insurance sector, though they are also slowly posting increases every year. The aggregate net profit posted by the sector in 2007 was 95.1 million euros, and it represented more than double that of the previous year (43.4 million euros). Insurance undertakings exhausted the domestic market for investments, and started seeking access to foreign capital markets. Investments abroad went up 56 percent from 2006, to reach 1,015.8 million euros.

The Principles

CPICP 1 Conditions for effective insurance supervision

In its 2001 FSSA, the IMF concluded that "the preconditions for effective insurance supervision are manifold, but perhaps most fundamental of all are enforceable property rights, a supportive political environment and an effective and honest judiciary. These appear to be largely in place in Slovenia, although there is still some reform and negotiation required..." (p. 40). The IMF's 2004 FSSA update confirmed these findings and stated that "macro management in Slovenia is effective and institutional settings are well developed" (p. 27). However, the IMF recommends that the actuarial profession should undergo an accelerated development program and an actuarial accounting standard coordination should be established.

IIICP 2 Supervisory objectives

On its website, the ISA states that its objective is the mitigation and elimination of irregularities in the insurance area, the protection of policy holders' interests, and the facilitation of the functioning of the insurance economy. However, there is insufficient information publicly available as to Slovenia's compliance with this principle.

NCICP 3 Supervisory authority

In its 2004 update to the 2001 FSSA, the IMF emphasized the limited independence of the ISA and recommended strengthening the administrative and budgetary autonomy from the government and giving supervisors protection from legal action. Further, the technical skills of staff needed to be addressed. The IMF stated that "while the ISA is notionally independent the reality has proved to be somewhat different. In particular the responsible officer is the President of the Chamber of experts (rather than the Director), and there is no requirement that this person be a full time employee of the Agency" (p. 27). The 2004 update went on to note that a new President of the Chamber had been appointed, drawn from the government's civil service ranks, and that the new president retained his civil service incumbency. It further noted that the government, and not the ISA Council, had effective budgetary control of the ISA. To offset this problem, the IMF recommended that the distribution of powers within the ISA be reconsidered, and suggested that the director of the ISA should have day-to-day supervisory responsibilities. The Council of Experts, on the other hand, should be responsible for policy matters and other important approvals. In its 2007 annual report, the ISA stresses that it is financed from fees charged to the supervised entities, and that the structure is laid down in the Tariff on fees, annual fees and lump-sum fees (Tariff - 1) (Official Gazette of the RS, Nos. 89/02 and 74/05). This Tariff is adopted by the Council of Experts, but is effective only when it is approved by the government and published in the official gazette.

IIICP 4 Supervisory process

There is insufficient information publicly available as to Slovenia's compliance with this principle.

IIICP 5 Supervisory cooperation and information sharing

In its 2004 FSSA update, the IMF stated that, even though there has been some improvement since 2001, cross-sector supervisory cooperation needed to be strengthened. Particularly, the gap in the supervision of the pension sector, which is split between the securities market and supervisor and the ISA, should be closed. In its 2007 annual report, however, the ISA asserts that "in discharging its functions the Agency regularly co-operates with all ministries competent in the insurance area, in particular with the MoF, the Ministry of Labor, Family and Social Affairs, the Ministry of Health, as well as the Bank of Slovenia (BoS), the Securities Market Agency (SMA), the Slovenian Institute of Auditors, the Slovene Insurance Association, the Office for Money Laundering Prevention and the Office for Prevention of Corruption" (p. 9). The cooperation among the supervisory authorities in Slovenia is anchored in the Code of Practice, which created the Co-operation Commission, comprising the Governor of the BoS, the director of the SMA, and the Director of the ISA. Further, the enactment of the Financial Conglomerates Act in 2006 introduced the practice of supplementary supervision of regulated entities in a financial conglomerate. Under this system, implementing regulations are issued by the MoF in co-operation with the BoS, the SMA and the ISA. The Act also required the adoption of the new Code of Practice for supervisory cooperation. In terms of international cooperation, the report adds that the ISA co-operates with insurance/financial supervisory authorities from other EU Member States, Croatia, BiH, Serbia, Macedonia, Kosovo, Ukraine and Romania. However, the ISA does not directly address the issue of compliance with ICP 5.

IIICP 6 Licensing

According to the IMF's 2004 FSSA update, Slovenia generally observes or largely observes, and in most cases will fully observe (once the amendments to the Insurance Act are implemented) the ICPs related to the supervised entity. The Insurance Act was extensively amended with Slovenia's entry into the EU on May 1, 2004. However, the IMF does not specifically address Slovenia's compliance with this principle.

IIICP 7 Suitability of persons

According to the IMF's 2004 FSSA update, Slovenia generally observes or largely observes, and in most cases will fully observe (once the amendments to the Insurance Act are implemented) the ICPs related to the supervised entity. The Insurance Act was extensively amended with Slovenia's entry into the EU on May 1, 2004. However, the IMF does not specifically address Slovenia's compliance with this principle.

IIICP 8 Changes in control and portfolio transfers

According to the IMF's 2004 FSSA update, Slovenia generally observes or largely observes, and in most cases will fully observe (once the amendments to the Insurance Act are implemented) the ICPs related to the supervised entity. The Insurance Act was extensively amended with Slovenia's entry into the EU on May 1, 2004. However, the IMF does not specifically address Slovenia's compliance with this principle.

IIICP 9 Corporate governance

According to the IMF's 2004 FSSA update, Slovenia generally observes or largely observes, and in most cases will fully observe (once the amendments to the Insurance Act are implemented) the ICPs related to the supervised entity. The Insurance Act was extensively amended with Slovenia's entry into the EU on May 1, 2004. However, corporate governance, according to the IMF, is a major concern in Slovenia. Slovenia provides strong audit and actuarial reporting requirements, but some instances show "that supervisory boards have not been as strong as would ideally be required. In addition, given the territorial ambitions of its leading insurers, Slovenia may wish to take the lead in introducing a cooperation and information exchange protocol in the [Federal Republic of Yugoslavia (FRY)] countries" (p. 27). However, the IMF does not specifically address Slovenia's compliance with this principle.

IIICP 10 Internal control

According to the IMF's 2004 FSSA update, Slovenia generally observes or largely observes, and in most cases will fully observe (once the amendments to the Insurance Act are implemented) the ICPs related to the supervised entity. The Insurance Act was extensively amended with Slovenia's entry into the EU on May 1, 2004. However, the IMF does not specifically address Slovenia's compliance with this principle.

IIICP 11 Market analysis

There is insufficient information publicly available as to Slovenia's compliance with this principle.

IIICP 12 Reporting to supervisors and off-site monitoring

According to the 2004 IMF FSSA update, Slovenia "made a good start with a relatively active off and on site inspection regime (although there is some evidence that this has been, at least in part, audit rather than risk based)" (p. 28). The 2007 ISA annual report mentions that the ISA conducts ongoing supervision through regular analytical evaluations of the information submitted by the reporting entities and through on-site inspections of their premises, including their head offices. The reports are verified for their timeliness, and accuracy, and the ISA tries to identify any irregularity or misstatements in reporting. On establishment of irregularity, the ISA requests the entity to correct it, and may impose other supervisory measures, as deemed appropriate, including on-site inspections. However, there is insufficient information publicly available as to Slovenia's compliance with this principle.

IIICP 13 On-site inspection

According to the 2004 IMF FSSA update, Slovenia "made a good start with a relatively active off and on site inspection regime (although there is some evidence that this has been, at least in part, audit rather than risk based)" (p. 28). The 2007 ISA annual report mentions that the ISA conducts ongoing supervision through regular analytical evaluations of the information submitted by the reporting entities and through on-site inspections of their premises, including their head offices. On-site inspections may be complete, in which the overall operation is examined, or focused, in which only individual areas of activity are inspected on the basis of information gleaned from off-site evaluations, publicly available information, or at the request of other sectors in relation to the ISA's powers over the entities. On-site inspections also assess if off-site reporting and documentation are compliant, and allow the ISA to obtain additional information, if required. Violations and irregularities invite an order for correction by the ISA.

NCICP 14 Preventive and corrective measures

In its 2004 update to the 2001 FSSA, the IMF states that the ISA's "management is well aware of market developments; however, the current legal structure does not allow the ISA to intervene early enough" (p. 28). The IMF recommends, therefore, that a regulatory ladder comparable to the ones in fully risk based regimes, such as Canada or Mexico, should be adopted. The ISA explains in its 2007 annual report that violations and irregularities by the supervised entities detected in off-site and on-site inspections by the ISA invite orders for correction by the ISA. Other supervisory measures, as deemed appropriate may also be imposed, especially in the case of serious violations of risk management rules. Corrective action taken by the entities as ordered by the ISA is monitored by the ISA inspectors through examination of reports of such actions by the entity or through follow-up on-site inspections to establish the elimination of the violation/irregularity.

IIICP 15 Enforcement or sanctions

According to the 2004 IMF FSSA update, "notwithstanding constraints on early intervention, the ISA has been successful in enforcing a number of difficult decisions including changing managements and requiring increases in subscribed capital and reinsurance capital support" (p. 28). However, there is insufficient information publicly available as to Slovenia's compliance with this principle.

IIICP 16 Winding-up & exit from the market

There is insufficient information publicly available as to Slovenia's compliance with this principle.

IIICP 17 Group-wide supervision

According to the 2004 IMF FSSA update, Slovenia is well prepared for group and conglomerate supervision; however, it could allocate more resources to this issue. Moreover, given the emergence of three potential financial conglomerates and the fragmentation of pension supervision, a more coordinated supervisory approach is necessary. No further information as to Slovenia's compliance with this principle is publicly available.

NCICP 18 Risk assessment and management

In its 2004 FSSA update, the IMF finds the interaction of insurer accounting and prudential management principles deficient. Slovenia follows the EU prudential approach, which, according to the IMF, is inadequate if not supplemented with other requirements. According to the IMF, "the main line of defense in practice is the appointed actuary, who under the various regulations has to allow for the full balance sheet position of the insurer when setting provisions" (p. 28). The IMF commends Slovenia for the fact that "that a pleasing degree of professional maturity is already emerging" (p. 28), but recommends an accelerated development program of the local actuarial profession supported by a senior advisor from a risk based jurisdiction with a long established actuarial profession.

IIICP 19 Insurance activity

There is insufficient information publicly available as to Slovenia's compliance with this principle.

IIICP 20 Liabilities

There is insufficient information publicly available as to Slovenia's compliance with this principle.

NCICP 21 Investments

In its 2001 FSSA, the IMF found Slovenia materially noncompliant with this principle. Particularly, the IMF pointed to a regulatory gap with respect to investment guidelines for insurance companies. The 2004 IMF update to the FSSA followed up, and reported that the regulatory gap was closed. The 2004 update further stated that "a recently introduced standard on the valuation of listed assets has had a potentially perverse impact, given that liability valuation has not changed in practice, relevant ISA guidelines notwithstanding" (p. 28).The IMF recommends the introduction of balance sheet resilience testing.

NCICP 22 Derivatives and similar commitments

According to the 2004 IMF FSSA update, the Insurance Act does not cover derivatives and structured instruments sufficiently.

IIICP 23 Capital adequacy and solvency

Per information in the ISA's 2007 annual report, "capital adequacy is calculated by applying the methodology set out in the Insurance Act and the implementing regulations issued by the Insurance Supervision Agency" (Section 1, p. 30). The ISA requires the supervised entities to demonstrate their capital adequacy on an ongoing basis. If the capital level dips below the minimum requirement, the board of directors of the company is obliged to take immediate measures to reach the required level, or propose that other bodies of the undertaking take appropriate measures to bring the capital level back to its required minimum. "Non-compliance with the minimum capital requirement constitutes a serious violation of risk management rules" (Section 1, p. 30), the annual report asserts. The report goes on to mention that as of December 2007, all life as well as non-life insurance undertakings operating in Slovenia had capital surplus. The capital requirement calculation for the undertakings is done in line with the EU directives since 2001, and 2007 was the first year when no insurance entity showed capital deficit under such calculation, the report claims.

IIICP 24 Intermediaries

According to the 2004 IMF FSSA update, the market conduct regime is relatively strong. The IMF points out, however, that the ISA should have greater specificity and powers regarding the withdrawal of a legal person intermediary license. In 2004, a draft law addressed this issue. Nevertheless, the IMF does not directly address the issue of Slovenia's compliance with ICP 24.

IIICP 25 Consumer protection

The 2004 IMF FSSA update found the market conduct regime to be relatively strong. It noted that "further regulation is required to ensure that insurers have procedures in place to ensure fair treatment of consumers. The industry itself is well advanced in this regard with the recent introduction of various claims resolution procedures and a related concordat" (p. 29). No further information on Slovenia's compliance with this principle is available.

NCICP 26 Information, disclosure & transparency towards the market

In its 2004 update to the 2001 FSSA, the IMF concluded that the "insurance sector lacks transparency and needs to develop the capacity to set pricing, provisioning and capital at appropriate levels" (p. 4).

IIICP 27 Fraud

In its 2004 update to the 2001 FSSA, the IMF concluded that Slovenian law addresses fraud, although enhancing the administrative and supervisory procedures at the ISA was recommended. No further information on Slovenia's compliance with this principle is publicly available.

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

The responsibilities of ISA on the prevention of money-laundering are specified in the Law on the Prevention of Money Laundering. In its 2004 update to the 2001 FSSA, the IMF concluded that Slovenian law addresses money laundering issues, although enhancing the administrative and supervisory procedures at the ISA was recommended. No further information on Slovenia's compliance with this principle is publicly available. .