This ICP focuses on the general processes and procedures supervisors should have in place with respect to macroprudential supervision, as part of the overall supervisory framework (see ICP 9 Supervisory Review and Reporting). A jurisdiction’s macroprudential supervision processes and procedures should be proportionate to the nature, scale and complexity of its insurance sector’s exposures and activities.

Macroprudential supervision consists of data collection, market and trend analysis, systemic risk assessment, supervisory response and transparency. It identifies and, where necessary, addresses both vulnerabilities of individual insurers and the insurance sector to shocks (inward risks) and the build-up of systemic risk at the individual insurer level or the sector as a whole (outward risks). Inward risks include insurance and financial market developments, which may impact the insurance sector. Outward risks refer to the risks that individual insurers or the insurance sector may pose to the financial system and the real economy. Macroprudential supervision contributes to financial stability by minimising the incidence and impact of externalities on the financial system and real economy generated or amplified through the distress or default of individual insurers or common behaviours.

• sector-wide vulnerabilities and common exposures in the insurance sector; and
• the risk of amplification and transmission of shocks to the financial system and real economy caused by:
  • the size, complexity, lack of substitutability and/or interconnectedness of a distressed or failing insurer; or
  • collective actions or distress of a sufficiently large number of insurers undertaking similar activities and thus exposed to common risks.

Systemic risk may be defined as the risk of disruption to financial services that is caused by an impairment of all or parts of the financial system and has the potential to have serious negative consequences for the real economy. Systemic impact may originate from individual or sector-wide exposures to liquidity risk, interconnectedness (macroeconomic and counterparty exposure) or lack of substitutability as well as from other risks. These risks may spread to other parts of the financial system via asset liquidation, exposures or critical functions.

Macroprudential supervision can help identify the need for supervisory measures. In its macroprudential supervision, the supervisor should also take into account the material risks that non-insurance legal entities and activities may pose to insurance legal entities, insurance groups and the wider financial system.

The supervisory framework should allow the supervisor to respond in a timely manner to findings from the analysis performed as part of its macroprudential supervision.