Some Current Issues of State Supervision of the Activities of Insurance Companies in Ukraine
The rapid development of the Ukrainian insurance market was suspended in 2009 by the impact of the global financial crisis. This year, insurers had to face a number of major problems, which significantly influenced the solvency of domestic insurance companies. Because of the crisis in the banking system, many banks blocked the money of insurance reserves placed on deposit accounts. Some insurance companies also lost funds invested in real estate and securities.
During the past few years the domestic insurance market was given a huge boost by loan insurance required by banks as well as growth in the volume of car sales. Clearly, the credit market’s collapse resulted in a slump in insurance premiums received by insurers this year. The fall of the hryvnya exchange rate also had a negative impact on insurers as the amount of insurance indemnifications, especially when it comes to car insurance, increased by comparison to what was expected.
In view of the current problems emerging in the domestic insurance market, the improvement of monitoring the activity of insurance companies and state supervision over compliance by insurers with the requirements ensuring solvency became as essential as never before.
State control over the activity of insurance companies is carried out by an Authorized Body — the State Commission for Regulation of Financial Services Markets (the Commission).
The Commission is a special regulatory body established to supervise the activity of domestic financial institutions, including insurance companies, which is aimed at securing conformity with Ukrainian legislation, effective development of insurance services, preventing insolvency of insurers and protecting the interests of insurants.
It is worth mentioning that over the past year the Commission focused mainly on taking measures to address current problems of the insurance market and to strengthen control over fulfillment by insurance companies of their obligations under insurance contracts.
Thus, at the beginning of 2009 the Commission announced that it had begun developing standard rules of insurance over the most widespread types of insurance, the aim of which is to protect the rights of insurance services recipients. The standard rules are supposed to set compulsory conditions for certain types of insurance, in particular regarding the procedure for payment of insurance indemnification as well as prevent insurers from including in an insurance agreement certain “trick conditions”, which would then help such companies to delay or avoid making an insurance payment.
It is worth mentioning, that this initiative on the part of the Commission drew a huge response from the players of the insurance market. The insurers claimed that unification of the conditions of insurance would eliminate competition and the advantage of the different companies would be only the price, which in its turn would result in dumping. Furthermore, the elaboration of such rules requires very careful consideration and is very time consuming. On the other hand, if the new standard rules only set general conditions, then there is no point in elaborating such rules at all.
It should be noted that the Commission had planned to start adopting standard rules of insurance by this autumn.
Anyway, no standard rules have yet been approved by the Commission.
In view of the current situation on the insurance market, some substantial changes aimed at protecting the interests of insurants were introduced to applicable legislation. At the end of 2008, the Verkhovna Rada of Ukraine adopted a law, which envisages that in case of liquidation or bankruptcy of the insurance company, the claims of the insurants under the insurance agreements should be fulfilled in the first turn.
However, the Commission attempted to influence the situation on the domestic insurance market not only by means of introducing changes to legislation and increasing other requirements for insurers, but also by controlling particular insurers.
As a tool for executing its controlling functions, the Commission is entitled to impose restrictive measures on insurance companies. Lately, the most applied measures had been prescription to eliminate breaches of law, penalties and the suspension or revocation of an insurer’s license.
Over the recent period, as the result of the inspections conducted by the Commission’s officials, licenses of more than 20 insurers were suspended or revoked.
According to the law, in case of an insurance company failing to fulfill its obligations and not complying with the lawful requirements of the Commission, etc. the Commission is entitled to debar the management of a company from running an insurance company and appoint a temporary administration. It is important to note that in 2009 the Commission even created a new special department of temporary management of financial and credit institutions. The Commission had also issued a number of certificates of temporary administrators of insurance companies.
However, although the legal background for the appointment of a temporary administration exists, such restrictive measure as debarring the management of a company from running an insurance company and appointing a temporary administration may not be effectively applied by the Commission due to the insufficiency of the existing legal framework.
Thus, the inconformity of legislation on financial services with legislation on enforcement proceedings leads to the situation, where the Commission cannot debar the management of a company from running an insurance company and appoint a temporary administration without the company’s management consent. This is so because legislation does not provide for the possibility to initiate enforcement proceedings under a resolution of the Commission.
Still, even in case the management of the insurer agrees with the appointment of the temporary administration, due to the lack of authority, the temporary administrator would not have enough power to significantly influence the situation in the company.
Unlike the temporary administration in banks, the administrations in insurance companies are not vested the right to perform any possible actions, decisions on behalf of the insurance company, to terminate any agreements of the company, which the administrator considers to be unprofitable, to dismiss or transfer to another position any employee or the management of the company, alienate the assets or the obligations of a company, etc. Furthermore, unlike the National Bank of Ukraine, the Commission may not impose a moratorium on satisfaction of a creditor’s demands in insurance companies.
In addition, the Commission’s ability to see the necessity of appointment of the temporary administration to the insurance company is considerably limited due to the fact that the insurers only file quarterly and annual reports to the Commission. Hence, when the decision on appointing the temporary administration is made, it might already be too late for it to make changes in the company’s activity.
It is also worth mentioning that the Commission does not have enough experience of appointing temporary administrations to insurance companies. Before 2009, there was only one case of appointment of a temporary administration to an insurance company and that was in 2004.
In order to address mentioned problems and legislative gaps, two draft acts were submitted to the Verkhovna Rada recently. The first draft act suggests introducing amendments to enforcement proceedings legislation, according to which the resolution of the Commission should be added to the list of enforcement documents.
The second draft act mainly brings under regulation the transfer of the insurance portfolio of an insurance company experiencing financial difficulties. The draft act suggests that the temporary administrator of the insurance company should be entitled to transfer the insurance portfolio of the administrated company in a compulsory manner. According to the Draft Act, either compulsory or voluntary transfer of the insurance portfolio is possible only subject to the insurers consent and after the Commission’s approval. The transfer of the insurance portfolio should also include the transfer of assets securing the obligations under the transferred insurance agreements.
Another significant suggested amendment is that insurers, whose performance indicators essentially change within the reporting period, would be obliged to file reports to the Commission on a monthly basis.
To sum up the above, strengthening state supervision over the insurance market players, which have suffered badly due to the impact of the current global financial crisis, has become one of the most topical and most debated issues. However, the legislative framework regulating the relative issues contains a lot of gaps and needs further improvement.