The supervisor should take a total balance sheet approach (see ICP 16 Enterprise Risk Management for Solvency Purposes) when considering the potential systemic importance of an insurer. When analysing systemic risk stemming from the insurance sector, the supervisor should at least consider common exposures and activities.

The supervisor should consider the type of policies underwritten by insurers and the activities insurers are engaged in, such as the degree of engagement in derivatives activity and reliance on short-term market activity. The supervisor should also consider the interconnectedness with other financial institutions, and the role of the insurance sector within the broader financial system.

As part of its assessment, the supervisor should consider emerging developments that may affect the insurance sector’s risk exposures. Additionally, the supervisor should cooperate and coordinate with other financial sector supervisors (such as banking, securities and pension supervisors, central banks and government ministries) to gain additional perspectives on the potential change in the risk exposures of insurers stemming from evolutions of other markets.

The supervisor should communicate the findings of its assessment as appropriate, to either individual insurers or the sector. The supervisor should require insurers to take action necessary to mitigate any particular vulnerabilities that have the potential to pose a threat to financial stability.

A macroprudential perspective in the development and application of supervisory requirements may help limit the build-up of systemic risks and contribute to the resilience of the financial system. The supervisor should ensure that there is an appropriate interaction between its macroprudential analysis and assessment activities, on the one hand, and microprudential supervision, on the other hand.

As part of introducing supervisory requirements into its supervisory framework, the supervisor should consider implementing supervisory measures based on macroprudential concerns. Many macroprudential tools are, in effect, microprudential instruments developed or applied with a macroprudential perspective in mind. By mitigating risk exposures, some measures that are intended to protect policyholders may also contribute to financial stability by decreasing the probability and magnitude of any negative systemic impact.

The supervisor should determine the depth and level of supervision based on its assessment of the systemic importance of individual insurers or the insurance sector (see ICP 9 Supervisory Review and Reporting). The supervisor should act to reduce systemic risk when identified within its jurisdiction through an appropriate supervisory response. In jurisdictions where one or more insurers have been assessed as systemically important, or a number of insurers are contributing to systemic risk, the supervisor should have supervisory requirements targeted at those insurers to mitigate systemic risk. The supervisor should extend certain requirements as necessary to an insurer and/or a number of insurers that it has assessed to be systemically important.

• requirements on insurers:
  • enterprise risk management (see ICP 16 Enterprise Risk Management for Solvency Purposes);
  • disclosures (see ICP 20 Public Disclosure);
• preventive or corrective measures (see ICP 10 Preventive Measures, Corrective Measures and Sanctions); and
• crisis management and planning:
  • crisis management, including crisis management groups (see ICP 25 Supervisory Cooperation and Coordination); and
  • recovery and resolution planning (see ICP 12 Exit from the Market and Resolution and ICP 16 Enterprise Risk Management for Solvency Purposes).

Supervisory requirements may be intended to mitigate the potential spill-over effects from the distress or disorderly failure of an individual insurer or from the common exposures or behaviours of a group of insurers or across the sector. In the latter case, supervisory requirements may have different effects during different phases of the economic, underwriting or credit cycle. Therefore, the supervisor may develop requirements that are time-varying in nature, depending on the economic environment. The activation of such time-varying requirements could be rules-based (for example triggered automatically given a pre-defined condition) or discretionary (ie upon explicit decision by the supervisor). A rules-based approach may be more transparent but requires regular assessments of its adequacy under changing conditions affecting the insurance business.