September 2000

1. Executive Summary

2. Introduction

3. Comments on Development in Insurance Legislation in India

4. Part – I Licensing Standards

Introduction

a) Legal form of the company
b) Location of the Head / Corporate office
c) Objectives of the company
d) Specialisation
e) Minimum capital requirements
f) Deposit
g) Business plan
h) Suitability of owners
i) Suitability of Directors and/or Senior Management
j) Affiliation contracts and Outsourcing
k) Product design and Premium rates
l) Articles of Incorporation
m) Actuaries and Auditors
n) Reinsurance

Annexures:

I) List of Members

II) A Brief History of Development of Insurance Legislation in India

III) International Association of Insurance Supervisors

IV) Organisation of Economic Cooperation & Development

V) Insurance Classes for Authorisation in European Countries and Submission of Returns to the Supervisory Authority

VI) The Twenty Insurance Guidelines of OECD

The Standing Committee on International Financial Standards and Codes (Chairman: Dr. Y.V.Reddy) constituted the Advisory Group on Insurance Regulation (Chairman: Shri R. Ramakrishnan) "…to chalk out a course of action to achieve the best practices…" in the field of insurance regulation in India. The Group deliberated on the Indian insurance legislation at present in light of standards and codes prescribed by the International Association of Insurance Supervisors (IAIS) and the twenty Insurance Guidelines issued by the OECD for its members.

Insurance regulation can be classified into two, viz., a) licencing of new companies and b) supervision of existing companies. Part I of the Report, which was submitted on September 23, 2000, deals with licencing of new companies in India. The major findings of the Group are as follows:

• Regarding the legal form of insurance companies, in India, the joint stock company route is followed, which is not inconsistent with the international practice. However, with a view to spreading insurance business in rural areas, the role of co-operatives may not be ruled out in future (Para I.a.4).

• Superannuation business comes under the definition of life insurance business in India. To protect the interests of the members of the superannuation funds, it is, therefore, necessary to bring these funds under some form of clear regulatory arrangements/mechanisms. There are many methods of achieving this. One such method could be through the formation of the Occupational Pension Board, as in the UK (Para I.a.8).

• An insurance company can be a domestic or a foreign company. The foreign company can operate either through a branch or on a services basis. This is the practice in most of the countries. Even though foreign companies are not allowed to operate directly, they are permitted through joint venture arrangements with an Indian company with a shareholding not exceeding 26 per cent in the paid-up capital of the company. Hence, this departure from the standard international practice of allowing foreign companies to operate either through a branch or a service basis need not be considered as a material one (Para I.a.12).

• Regarding the location of head/corporate office, at present, India’s position is consistent with international practice although with globalisation, integration of markets and developments in communication networks, this stipulation may not be effectively implementable in future (Para I.b.4).
• With a view to conform to the international practice, a section similar to Section 6(2)(h) of the LIC Act could be considered for incorporation in the IA 1938, which would enable Indian insurance companies to provide similar allied services to their customers (Para I.c.4).

• In the field of specialisation, "life" and "non-life" businesses are to be conducted by separate companies. IRDA has also decided not to permit formation of composite companies. However, it would be advisable to place an explicit restriction on the formation of composite companies (Para I.d.3).

• It may be desirable to take a fresh look at the developments in other countries and consider introduction of a more elaborate classification of life and non-life insurance business (Para I.d.6).

• At present, the minimum capital requirement is more than adequate as compared with best international practices (Para I.e.5). The minimum capital levels may be fixed for each class of business on a scientific and on a more transparent basis (Para I.e.9).

• The Indian practice in respect of deposit requirements is in conformity with the best international practice (Para I.f.3).

• The business plan required to be submitted along with the application for licence is quite comprehensive in India at present and is consistent with the international best practice (Para I.g.3).

• With a view to enhancing transparency, the regulator may, as a general rule, ascertain the names of the natural and legal persons holding a direct or indirect qualifying participation in the applicant company and more importantly, make this knowledge public while granting the licence (Para I.h.3).

• With regard to suitability of owners, the Group is of the view that the sound reputation of owners may be ensured on a continuous basis (Para I.h.6).

• While discussing the suitability of directors and/or senior management, the Group observes that although the present position in India is different from that of the current international practice, necessary steps could be taken, in future, to ensure the fulfillment on a continuing basis. Accordingly, the information system needs to be modified and maintained (Para I.i.4).

• Regarding outsourcing, it is the Group’s view that it would be desirable to follow the international practice as also other Indian industrial practices, by considering outsourcing of various functions of an insurance company in view of the economies of scale and scope (Para I.j.7).

• There is no uniform international practice as regards the design of products. The Group is of the view that the certificate, including the basis of premium, given by the actuary may be treated as a public document and be made available, on demand, to other companies and any practising actuary. Further, the premium rate table and the benefit design may also be treated as "Published Information". A similar procedure could be considered for group business and also for general insurance business (Paras I.k.3 and 4).

• The Group considers that with a view to ensuring uniformity in the design of products, terms and conditions and marketability and also to bring about a level playing field between insurance companies and mutual funds, there is a need for co-ordination between regulators of these two segments of the financial sector (Para I.k.6).

• It is recommended that the regulator may make available a recommendatory standard format of articles of incorporation (Para I.l.3).

• The Group is of the view that a firm of consulting actuaries may be considered for acting as appointed actuaries as per the practice obtaining in most countries. Furthermore, the condition that a "certificate of practice" has to be obtained each year from the professional body is not present in respect of any other profession. The Group feels that this needs a relook (Para I.m.6).

• In the field of reinsurance, the Group feels that i) the stipulations regarding reinsurance appear to be adequate for ensuring healthy reinsurance arrangements and are mostly in line with international practices (Para I.n.6); ii) the possibility of reinsuring only on risk premium basis may be explored (Para I.n.7); iii) the Indian prescription of having compulsory cession of risks to local reinsurers may appear to be against the recommendation of the IAIS. However, this prescription may be continued till a satisfactory solution is found for the problem of international reinsurers converting local insurance companies into brokers (Para I.n.12); and iv) since it would take quite some time to develop necessary international contact and build a reliable database on the activities and strengths of various reinsurers, the existing domestic expertise could be nurtured and strengthened for this purpose (Para I.n.14).

• To study the present status of applicability and relevance and compliance in India of the relevant standards and codes,
• To review the feasibility of compliance and the time frame within which this can be achieved, given the prevailing legal and institutional practices in India,
• To compare the levels of adherence in India vis-à-vis in industrialised countries and also emerging economies, particularly to understand India's position and promote actions on some of the more important codes and standards and,
• To chalk out a course of action to achieve the best practices.

• Was there really any deficiency in the legislative measures adopted?
• Was there any deficiency in the method of supervision? and
• What steps should be taken now to rectify the deficiencies, if any?

• Licensing of new companies, and
• Supervision of existing companies.

• Distribution channels for business,
• Products to be marketed,
• Investment of funds,
• Capital adequacy requirements,
• Accounting practices, and
• On-site inspections.

1. Legal form of the company,
2. Location of the Head/Corporate office,
3. Company's objectives,
4. Specialisation, if any,
5. Minimum capital,
6. Business plan,
7. Suitability of owners,
8. Suitability of Directors and / or Senior Management,
9. Affiliation contract and outsourcing,
10. Product design and premium rates,
11. Articles of incorporation,
12. Actuaries and Auditors, and
13. Reinsurance.

• The amount of minimum capital should take into account the type of risk that is intended to be covered. If the applicant company proposes to write several classes of business, the minimum capital can be fixed either as the highest of the amounts fixed for individual classes or as the sum of the amounts of the individual classes.
• The minimum capital should not be used for covering setting up costs.
• It should be uncommitted so as to be available if any unforeseeable losses are to be covered.
• Proof of the minimum capital and the elements making it up, should be submitted to the supervisor.

• Unexpected increase in liability,
• Unexpected decrease in the value of assets,
• Premium rates proving to be inadequate,
• Problems associated with cash flow timings and
• Catastrophes.

1. a paid-up equity capital of rupees one hundred crores in case of a person carrying on life insurance or general insurance or
2. a paid-up equity capital of rupees two hundred crore, in case of a person carrying on exclusively the business of reinsurance".

• values of margins, both implicit and explicit,
• reserves, both disclosed and undisclosed, and
• shareholders' capital

1. In the case of life insurance business, a sum equivalent to one percent of its total gross premium written in India in any financial year commencing after the 31^st day of March 2000, not exceeding rupees ten crore.
2. In the case of general insurance business, a sum equivalent to three percent of the total gross premium written in India in any financial year commencing after the 31st day of March 2000, not exceeding rupees ten crore.
3. In the case of reinsurance business, a sum of rupees twenty crore.

1. The supervisor should know the names of the natural and legal persons holding a direct or indirect qualifying participation in the applicant company, and
2. The licence to operate should be refused if facts exist from which it can be deducted that the holders of a qualifying participation,

• Are in a difficult economic situation,
• Are or ever have been directly or indirectly involved in illegal transactions affecting their suitability, or intend to abuse the insurer for criminal purposes, (for example, money laundering),
• Are connected with the applicant company in a way that would obstruct or render effective supervision impossible

1. the financial condition and the general character of management of the applicant are sound,
2. …
3. The interests of the general public will be served if the certificate of registration is granted to the applicant" …..

1. Directors, and/or Senior Managers must be professionally qualified. Professional qualification means theoretical and practical knowledge of insurance as well as managerial experience.
2. Directors and / or senior Managers must be reliable and of good repute.

• Affiliation contracts through which a joint stock company subjects itself to management of another company (e.g., a holding company), or commits itself to transfer its profits to that company,
• Outsourcing contracts through which certain functions of material importance, (e.g., investment management, distribution accounting etc.) are transferred to another company.

• Insurance companies should not be regulated more than strictly necessary regarding the design of their products,
• The Supervisor should, however, be empowered to call for full and precise information on the design of the product so that he can assess the risks and ensure that the company's managers have the necessary qualification and its organisational structure is suitable for administering the product,
• Information on products may also include the general policy conditions,
• It is to be ensured that the cover offered under compulsory insurance (e.g., motor liability) or contracts replacing coverage under the social security system (substitutive system) is adequate,
• The appropriateness of the technical bases adopted for determining the premium rates is to be checked.

• The qualifications, reliability and good repute of the person to be appointed. Insofar as a legal person is permitted, information should be collected on its experience as well as on the qualification and reliability of the managers of the legal person and
• Ensure that that the actuary, irrespective of whether he is employed by the company or free-lance, has sufficient powers and independence to duly fulfill his role.

• a life insurance company should have an appointed actuary,
• a legal person (i.e., a firm of consulting actuaries) cannot be an appointed actuary,
• the appointed actuary has to be an employee of the company,
• a person cannot be the appointed actuary of more than one company,
• no life insurance company can carry on business, until the appointed actuary is in place, and
• a person eligible to act as an appointed actuary has to obtain a certificate of practice, renewable every year from the Actuarial Society of India.

• Reinsurance arrangements proposed to be entered into have to be specified along with the application for licence,
• The supervisor must be able to review reinsurance arrangements to assess the degree of reliance placed on these arrangements and to determine the appropriateness of such reliance,
• Compulsory cession of risks to local reinsurers, domestic market or discriminatory tax regimes against foreign reinsurance placement should be avoided.

• Adequacy of financial resources,
• Availability of fit and proper persons to control and manage the business, and
• Adequacy of reinsurance arrangements.

• The major point of concern is the financial stability of the reinsurer. Apart from knowing the financial position of the reinsurer, the regulator has also to take into account, the possibility of the reinsurer becoming insolvent when there is a chain of catastrophes, in case he has too much exposure to catastrophes.
• Unsuitable and unequal reinsurance arrangements entered into by inexperienced insurance companies is the next point of concern.
• In some cases, insurance companies use reinsurance contracts only as a means of cash transfer abroad.

• Reliability of the reinsurer,
• Type of reinsurance,
• Retention limits, and
• Reinsurance premium rates.

• Full details, including, copies, of the reinsurance treaty arrangements,
• The manner in which reinsurance limits have been established,
• That any overseas reinsurance is placed only with such a reinsurer who has a minimum BBB rating from Standard's and Poor or any similar agency, and
• That the risk is retained to the maximum in the domestic market, as far as possible, while not prohibiting placement of excess risk abroad.

Life insurance in its present form came to India from the United Kingdom with the establishment of a British firm, Oriental Life Insurance Company, in Calcutta in 1818. This was followed by the formation of Bombay Life Insurance Company in 1823, the Madras Equitable Life Insurance Company in 1829 and the Oriental Government Security Life Insurance Company in 1874. The first general insurance company, the Triton Insurance Company Limited, was established in Calcutta in 1850. The shares of this company were held mainly by the British. Till the formation of this company, the general insurance business was being transacted by the British and other foreign companies through their agencies in India. The Indian Mercantile Insurance Company Limited, which was set up in Bombay in 1907, was the first Indian company to transact all classes of general insurance business.

Even though the first life insurance company was established as early as 1818, there was no exclusive legislation to govern the activities of insurance companies during the nineteenth century. The Indian Companies Act passed in 1866 regulated all companies, including insurance companies. Many insurance companies were floated in the latter half of the nineteenth century and early twentieth century, but a good proportion of them could not survive beyond a few years.

In 1912, the Indian Life Insurance Companies Act was enacted to control the operation of life insurance companies. The Act required that Indian insurers make deposits with the Government. The amount of deposit was equal to Rs.25,000 or one third of the income derived from life insurance business whichever was greater, subject to a maximum of Rs.200,000. The interest on the deposit was paid to the company. The foreign insurers were, however, exempted from this provision, thus introducing an element of discrimination, to the disadvantage of Indian insurers. This Act was modeled on Assurance Companies Act, 1909 of U.K. In 1928, the Indian Insurance Companies Act was passed. This Act amended the 1912 Act and provided for collection of statistics concerning insurance business other than life business. It also covered the foreign companies operating in India.

However, as the Era Sezshian Committee in its Report on the working of LIC observed (in para 2.1, chapter 2), "…the ten year period 1929 to 1938 witnessed the establishment of as many as 172 companies (and) also witnessed liquidation of 61 of them, almost all of them even before a valuation was performed…".

This spate of liquidations resulted in the introduction of a comprehensive bill in 1937 for controlling life and general insurance business, and this bill resulted into the Insurance Act, 1938 (IA 1938). This Act provided for, among other things,

• Constitution of a Department of Insurance,
• Compulsory registration of insurance companies,
• Provision for deposits,
• Control on investment of funds,
• Filing of returns on investments and financial condition,
• Licensing of agents,
• Control on commission,
• Prohibition of rebates,
• Filing of policy conditions and premium rates duly certified by an actuary (in the case of life business),
• Periodical valuation of liabilities and
• Provision for policyholders' Directors.

• Minimum capital requirement,
• Stricter control on investments and submission of periodical returns on investments,
• Ceiling on expenses of management and agency commission, and
• Appointment of administrators for mismanaged companies.

In 1968, the IA 1938 was again amended to provide for social control over general insurance business. The amendment provided for

• Regulation of investments,
• Setting up of the Tariff Advisory Committee (TAC),
• Minimum solvency margin requirements,
• Payment of premium before commencement of risk,
• Licensing of Surveyors, and
• Power to Controller to carry out inspection, investigation, and search & seizure of books, … etc.

• Cooperate to ensure improved supervision of the insurance industry on the domestic as well as international level in order to maintain efficient, fair, safe and stable insurance markets for the benefit and protection of policyholders,
• Develop practical standards for insurance supervision that members may choose to apply,
• Liaise / cooperate with other international entities,
• Provide mutual assistance to safeguard the integrity of markets, and
• Exchange information on each member's experience in order to promote the development of domestic insurance markets

• The Technical Committee
• The Emerging Markets Committee, and
• The Budget Committee

The IAIS issues statements on global insurance principles, standards and guidance, provides training and support on issues related to insurance supervision, and organises meetings and seminars for insurance supervisors. It holds an Annual Conference where insurance supervisors, insurance industry representatives and other insurance professionals discuss topics affecting insurance regulation.

The original member countries of the Organisation were Austria, Belgium, Canada, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The following countries became Members subsequently through accession at the dates indicated in the brackets: Japan (April 28, 1964), Finland (January 28, 1969), Australia (June 7, 1971), New Zealand (May 29, 1973), Mexico (May 18, 1994), the Czech Republic (December 21, 1995), Hungary (May 7, 1996), Poland (November 22, 1996) and Korea (December 12, 1996). The Commission of the European countries takes part in the work of the OECD (Article 13 of the OECD Convention).

The Convention was signed in Paris on December 14, 1960 and came into force on September 30, 1961. Article 1 of the Convention states that OECD shall promote policies designed :

• To achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy ;
• To contribute to sound economic expansion in Member as well as non - member countries in the process of economic development, and
• To contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance with international obligations.

1. Life & annuity: Effecting and carrying out contracts of insurance on human life, or contracts to pay annuities on human life, but excluding (in each case) contracts within class III below.
2. Marriage & birth: Effecting and carrying out contracts of insurance to provide a sum on marriage or on birth of a child, being contracts expressed to be in effect for a period of more than one year.
3. Linked long term: Effecting and carrying out contracts of insurance on human life or contracts to pay annuities on human life, where the benefits are wholly or partly to be determined by reference to the value of, or the income from, property of any description (whether or not specified in the contracts) or by reference to fluctuations in, or in an index of, the value of property of any description (whether or so specified).
4. Permanent health: Effecting and carrying out contracts of insurance providing specified benefits against risk of persons becoming incapacitated in consequence of sustaining injury as a result of an accident or of an accident of a specified class or of sickness or infirmity, being contracts that –

1. contracts to manage the investment of Pension Funds,
2. contracts of the kind mentioned in (a) above that are combined with contracts of insurance covering either conservation of capital or payment of a minimum interest.

1. Accident: Effecting and carrying out contracts of insurance providing pecuniary benefits or benefits in the nature of indemnity (or a combination of both) against risks of the person insured or, in the case of a contract made by virtue of section 140, 140A or 140B of the Local Government Act 1972, a person for whose benefit the contract is made -

1. Sickness: Effecting and carrying out contracts of insurance providing fixed pecuniary benefits or benefits in the nature of indemnity (or a combination of the two) against risks of loss to the persons insured attributable to sickness or infirmity, but exclusive of contracts falling within class IV above (permanent health).
2. Land vehicles: Effecting and carrying out contracts of insurance against loss of or damage to vehicles used on land, including motor vehicles but excluding railway rolling stock.
3. Railway rolling stock: Effecting and carrying out contracts of insurance against loss of or damage to railway rolling stock.
4. Aircraft: Effecting and carrying out contracts of insurance upon aircraft or upon the machinery, tackle, furniture or equipment of aircraft.
5. Ships: Effecting and carrying out contracts of insurance upon vessels used on the sea or on inland water, or upon the machinery, tackle, furniture or equipment of such vessels.
6. Goods in transit: Effecting and carrying out contracts of insurance against loss of or damage to merchandise, baggage and all other goods in transit, irrespective of the form of transport.
7. Fire and natural forces: Effecting and carrying out contracts of insurance against loss of or damage to property (other than property to which classes 3 to 7 above relate) due to fire, explosion, storm, natural forces other than storm, nuclear energy or land subsidence.
8. Damage to property: Effecting and carrying out contracts of insurance against loss of or damage to property (other than property to which classes 3 to 7 above relate) due to hail or frost or to any event (such as theft) other than those mentioned in class 8 above.
9. Motor vehicle liability: Effecting and carrying out contracts of insurance against damage arising out of or in connection with the use of motor vehicle on land, including third party risks and carrier's liability.
10. Aircraft liability: Effecting and carrying out contracts of insurance against damage arising out of or in connection with the use of aircraft, including third party risks and carrier's liability.
11. Liability for ships: Effecting and carrying out contracts of insurance against damage arising out of or in connection with the use of vessels on the sea or on inland water, including third party risks and carrier's liability.
12. General liability: Effecting and carrying out contracts of insurance against risks of the persons insured incurring liabilities to third parties, the risks in question not being risks to which class 10, 11 or 12 above relates.
13. Credit: Effecting and carrying out contracts of insurance against risks of loss to the persons insured arising from the insolvency of debtors of theirs or from the failure (otherwise than through insolvency) of debtors of theirs to pay their debts when due.
14. Suretyship: Effecting and carrying out –

1. contracts of insurance against risks of loss to the persons insured arising from their having to perform contracts of guarantee entered into by them,
2. contracts for fidelity bonds, performance bonds, administration bonds, bail bonds or custom bonds or similar contracts of guarantee.

1. Miscellaneous financial loss: Effecting and carrying out contracts of insurance against any of the following risks, viz.,

1. risks of loss to persons insured attributable to interruptions of the carrying on of business carried on by them or to reduction in the scope of business so carried on,
2. risks of loss to the persons insured attributable to their incurring unforeseen expense, and
3. risks neither falling within (a) or (b) above nor being of a kind such that the carrying on of the business of effecting and carrying out contracts of insurance against them constitutes the carrying on of insurance business of some other class.

1. Legal expenses: Effecting and carrying out contracts of insurance against risks of loss to the persons insured attributable to their incurring legal expenses (including costs of litigation).
2. Assistance:

The above 17 classes of non-life insurance business have been reduced to eight accounting classes as below for submission of periodical returns to the supervisory authority.

Two more accounting classes relate to proportional treaty reinsurance and non-proportional treaty reinsurance business.

TWENTY INSURANCE GUIDELINES OF OECD

RULE No.1 Adequate prudential and regulatory provisions should be enforced in order to ensure the soundness of the insurance markets, the protection of the consumers and the stability of the economy as a whole. Over-regulation should be avoided. The insurance regulatory framework must be adapted to the characteristics of individual countries and encourage the stability, whilst maintaining the necessary flexibility to meet developments in the market.

RULE No.2 Sufficiently strict licensing criteria should govern the establishment of insurance companies. Among these criteria, the testing of the nature and adequacy of the financial resources of insurance companies, in particular through analysis of business plan and the requirement for a minimum level of capital (taking account of inflation) deserves particular consideration. Other key requirements are related to the assessment of the ability of the company to meet legal, accounting and technical requirements and last but not least requirements for a competent management (fit and proper provisions).

RULE No.3 The underwriting of insurance risks should be restricted to the insurance companies, which may transact insurance (and connected) operations only. Life and non-life activities should be separated (in distinct companies), so that one activity cannot be required to support the other. The distribution of insurance products by entities from other sectors may be authorised. Tasks associated with the activities and the structure of financial conglomerates should be adequately monitored.

RULE No.4 Establishment of foreign insurance companies should be based on prudential but non-discriminatory rules. Liberalisation of cross-border operations, at least concerning reinsurance and international risks, should be encouraged.

RULE No.5 Adequate insurance contract laws should be established. Rules governing contractual rights and obligations as well as related sanctions, are essential for the protection of both contractual and third parties and indispensable for the development of legal stability. In the absence of contract laws, the approval of policy conditions by the supervisory authority may prove all the more necessary.

RULE No.6 Due to crucial economic and social role of insurance in the development of an economy, consideration should be given to tax facilities in the life insurance and pensions field in the economies in the transaction.

RULE No.7 The establishment of a supervisory body is essential. The supervisors should be professionally independent and properly trained and impartial. The supervisory body should have sufficient personnel and financial resources as well as adequate powers (including sanctions) to carry out its tasks.

RULE No.8 The examination of records and on site inspections of insurance companies are at the core of the work of the supervisor. An adequate reporting system is essential to achieve this task properly. The secrecy of information communication to and between supervisors should be safeguarded.

RULE No.9 Monitoring solvency margins and capital ratios constitute a key element of dynamic supervision. But adequate tariffication and prudent technical provisions backed by reliable and equivalent assets remain the fundamental requirements for maintaining solvency. Adequate business management and reinsurance activities are also indispensable to safeguard the soundness of the companies.

RULE No.10 Initially at least, it may be advisable for economies in transition to request the submission of premium rates and insurance products for prior approval. Supervision of tariffs and products should however be adapted to the particular situation of each country and reassessed at a later stage according to the development and progress of the market.

RULE No.11 Supervisory authorities should take adequate, effective and prompt measures to prevent insurance companies from defaulting, and to arrange an orderly run-off or the transfer of portfolio to a sound company. Appropriate winding up procedures should be enforced. Under certain conditions, and particularly if the national market comprises a sufficient number of potential contributors with a broad spread of risks, the creation of a compensation fund could be considered.

RULE No.12 Standardised accounting rules are essential to ensure the transparency and comparability of the financial situation of insurance companies. Adequate insurance accounting rules and requirements for reporting and disclosure have to be set as a priority action. The compilation of statistical data regarding the frequency and severity of losses is an essential condition for computing tariffs and technical provisions accurately. Tariffs should be based on statistical data. Actuarial techniques area key component of insurance management; the role of the actuarial profession could be encouraged.

RULE No.13 Investment regulation should ensure that both security and profitability requirements are respected. It should promote the diversification, spread and liquidity of investment portfolios as well as the maturity and currency matching of assets and liabilities, although some temporary dispensations to the last principle may be necessary. In any case, account should be taken of the country’s current economic environment. Regulations might include a list of admitted assets on which ceilings may be set and requirements on the way in which investments should be valued.

RULE No.14 Regulation should not restrict free access to international reinsurance markets. Compulsory sessions of risks to domestic/national reinsurers should therefore be avoided. The collection and monitoring of information relating to reinsurance companies should b e established. International co-operation is particularly important to obtain accurate information and should be strengthened.

RULE No.15 Insurance intermediaries should be registered in order to ensure their compliance with selected criteria. Insurance intermediaries should possess appropriate qualifications and provide adequate information to policyholders including disclosure of limits to their independence such as significant ties with insurance companies. Insurance brokers should possess either financial guarantees or professional liability insurance.

RULE No.16 Compulsory insurance may be justified in respect of certain forms of social protection and might be considered in other areas where the risks covered are particularly serious, or where premium payments should be divided on an equitable basis among the policyholders group under consideration. Compulsory insurance is particularly recommended for automobile third party liability. Guarantee funds could be created to compensate victims when there is no insurance cover. Tariffs for compulsory insurance should also be based on statistical data. Adequate monitoring systems should be established. Compulsory insurance should not be restricted to former monopolies or state owned companies.

RULE No.17 Regulations should allow for fair competitions within the insurance and reinsurance market. The process of dismantling monopolies and the privatisation of government owned insurance companies should be strongly encouraged.

RULE No.18 The activities of insurance companies in the pensions and health insurance fields should be encouraged within an appropriate regulatory and supervisory framework. Regulations should endeavour to ensure fair treatment between all private companies operating in these areas.

RULE No.19 Governments should strengthen co-operation in order to exchange information on insurance regulation and supervision, facilitate the monitoring of the activities of foreign insurance and reinsurance companies and promote the development of sound, modern and open insurance markets.

RULE No.20 The insurance industry should be encouraged to set up its own business guidelines and to develop adequate training structures. Self-regulatory principles and organisations, including professional bodies, can complement usefully the public supervisory structure.