The old approach to supervising the financial sector—covering a broad range of issues and devoting considerable energy to verifying data—must be replaced by a more focused approach, getting supervisors to focus on management performance and business strategy in high-risk firms.
The insurance industry is underdeveloped in many of the world's emerging markets and transition economies, sometimes because of restrictive regulations or inadequate supervision of insurance companies. Many countries are considering reforming regulation of their insurance systems and strengthening supervision. Savage's analysis is designed to help them choose the program of regulation and supervision that best fits their circumstances.
He draws on experience in industrial countries that have examined the reasons financial institutions failed. He concludes that the old approach to supervising the financial sector—covering a broad range of issues and devoting considerable energy to verifying data—must be replaced by a more focused approach that targets insurer solvency by getting supervisors to pay attention to management performance and business strategy.
Financial supervisors in jurisdictions that have updated their systems with this approach in mind now see their main task as gauging the financial risk or risk profile of each company and allocating most of their resources to the higher-risk situations.
In doing so, their objective will be to understand a firms's business strategy, to assess the firm management's competence and appetite for risk, and to assess the firm's outlook and financial viability.
Savage highlights the special role played in supervision by industry specialists such as the auditors and actuaries who support insurance companies.
He identifies the priorities needed in the reform of insurance supervision and suggests steps needed for change - and helpful ways for officials to organize.
He discusses not only issues associated with the supervision of solvency and financial strength but ways to protect consumers.
This paper—a joint product of the Financial Sector Development Department and the Infrastructure and Financial Markets Division, Inter-American Development Bank—is part of a larger effort to study policies that promote financial sector development. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Hedia Arbi, room F6P-266, telephone 202-473-4663, fax 202-522-3199, Internet address harbi@worldbank.org. The author may be contacted at lsalawrie@ibm.net. (117 pages)
The full report is available in PDF format.