Caroline Bradley: The Commission uses a risk-based approach to the supervision of licensees, which enables us to focus our finite supervisory resources on supervisory activity with a strong emphasis on the business models and governance of the most significant licensees in the Bailiwick.
The general approach to investments by Guernsey insurers is relatively conservative. The market includes captive insurers that are mainly invested in cash or cash equivalents, small commercial insurers for whom liquidity is the main objective rather than investment return, and long-term insurers largely issuing insurance-wrapped investment products where the investment risk rests with the policyholder.
"Insurers are required to submit solvency calculations as part of the
annual return and key risk indicators are used."
The Commission sets out rules and guidance concerning the treatment of investments for solvency purposes and is based on international standards. Insurers may also choose to adopt relevant frameworks such as Solvency II.
Insurers are required to submit solvency calculations as part of the annual return and key risk indicators are used to issue alerts to supervisors where any concerns are identified.
The Commission also conducts on-site risk assessments of significant firms during which capital risk, credit risk, liquidity risk and market risk are considered.
Caroline: The Commission’s mandate does not contain a specific remit to stimulate economic growth but does include the maintenance of financial stability in the Bailiwick and the Commission contributes technical regulatory support as required.
The Commission recognises that innovation is a contributor to economic growth and has introduced the Innovation Soundbox as we are keen to offer our support and help to new or non-regulated financial services businesses in understanding the regulatory framework or legislative landscape.
To aid development of innovative products and services, open communication channels and regulatory certainty for business is essential. To supervise business, a cooperative approach is required to ensure all stakeholders have a working knowledge of each other’s requirements.
Caroline: Insurers (with some exceptions such as captives) are required to perform an Own Risk and Solvency Assessment (ORSA) annually. This includes continuity analysis which must address a combination of quantitative and qualitative elements in its medium and longer-term business strategy and include projections of its future financial position and analysis of its ability to meet future regulatory capital requirements. The rules require insurers to use appropriate forward-looking quantitative techniques such as risk modelling, stress testing including reverse stress testing, and scenario analysis.
"The Commission has issued guidance on the ORSA
methodology, which sets out expectations."
An appropriate range of adverse circumstances and events must be considered, including those that pose a significant threat to the financial condition of the insurer, and management actions must be identified together with the appropriate timing of those actions. The Commission has issued guidance on the ORSA methodology, which sets out expectations and includes the performance of non-cash assets under different economic scenarios as well as the potential non-recovery of reinsurance balances and the security of bank deposits. The ORSA should consider the impact of future changes in economic conditions or other external factors and should include appropriate stress testing.
Caroline: In the insurance area the Commission is focused on consulting on rules for insurers dealing with retail customers to strengthen the regulatory framework in areas such as:
More generally, the Commission is preparing for a Moneyval mutual evaluation of the Bailiwick scheduled for 2024. This evaluation will assess the regulatory framework against the relevant Financial Action Task Force (FATF) standards and also how well firms are applying those regulations.
A new law covering Lending Credit and Finance comes into effect in 2023 and the Commission will need to implement associated rules and guidance early in 2023. This [law] will regulate the credit and finance sector and protect consumers; it and accompanying rules address fintech platforms that operate crowdfunding and peer-to-peer platforms and virtual asset service providers and introduces licensing for activities related to cryptocurrencies and other virtual assets.
Caroline: In 2021, the Commission conducted an external study of the use of reinsurance by Bailiwick insurers. This was undertaken both because of local concerns about the use of unrated reinsurers and because of a global regulatory focus on reinsurance. [It] revealed many examples of good practice; for example, most firms have specific policies and procedures for managing reinsurance. Nevertheless, there were some cases of contracts being either unduly brief and/or remaining unsigned, or of insufficient due diligence being undertaken on a reinsurer on the basis that it had come recommended by a regulated broker.
"The presence of an effective market risk policy ensures that a board
understands and controls market risk even if that risk is limited."
We undertook routine internal peer analysis as part of the risk-based regulatory process. For insurance, this work centred on market risk and on Own Risk and Solvency Assessments (ORSA) and Own Solvency Capital Assessments (OSCA), using samples across all types of Bailiwick insurers. On market risk, the Commission expects an insurer to have a policy agreed at board level that is sufficiently detailed and which the board periodically monitors for compliance.
Our review found some excellent examples of this, but some areas for improvement where policies were inadequate or were rarely monitored. This may, in part, reflect the fact that many insurers have a conservative approach to market risk. For example, general insurers and captives might simply deposit funds in local banks.
The presence of an effective market risk policy – which need not be unduly complex – ensures that a board understands and controls market risk even if that risk is limited.
Caroline: The Commission operates an Innovation Soundbox which we encourage firms to use to discuss potential applications and to meet with us at an early stage. The Soundbox serves as a cross-Commission hub for enquiries regarding innovative financial products and services which may cut across different sectors of the finance sector.
We regularly receive contact from prospective applicants and their advisers, and we recognise the need to have open channels for communication and regulatory clarity. New technologies form a large part of the enquiries we receive but we also have ongoing evolution in existing financial products and services.
Specific guidance is issued from time to time in areas involving advances or innovations in the finance sector. A recent example would be guidance to advise applicants considering applications for funds investing in virtual assets or crypto technologies.
Caroline: Yes, there is a lot of interest in ESG. An industry body, the Guernsey International Insurance Association (GIIA) was created to help its members manage ESG opportunities and risk and deliver ESG impact and introduced its ESG Framework with an accreditation kitemark in May 2021.
"The purpose of the ‘Green Discount’ is to encourage sustainable
investment by life insurers and promote positive environmental outcomes."
In 2020, the Commission issued amendments to the solvency rules for insurers that introduced a specific approach for green assets to help to incentivise investment in green assets by life insurers.
The background to this move followed global political and public debate around environmental matters and a tacit nod that financial services regulators need to do more in ‘greening the industry’. In particular, regulators have a responsibility for financial stability, which includes the need to help mitigate the adverse financial impacts of climate change.
The purpose of the ‘Green Discount’ introduced by the Commission is to encourage sustainable investment by life insurers and thereby help promote positive environmental outcomes. The Commission’s proposal enables insurers to purchase green assets in the knowledge that long-term green assets are considered suitable to meet long-term liabilities whilst maintaining policyholder protection.
