Disclosures: Disclosure to the various stakeholders in the market is vital to the supervisory process in any jurisdiction. In an efficient marketplace disclosure is expected to achieve market discipline amongst the participants.
Disclosures take on an added dimension in case of the insurance sector, since the insurer holds the monies of the insured/policyholders in trust. In effect, disclosures pertaining to all aspects of operations gain relevance viewed from the perspective of whichever stakeholder.
Objectives of Disclosures: Broadly, the various objectives proposed to be achieved through disclosures, from the viewpoint of the stakeholders include (i) providing insurance to the public at fair and nondiscriminatory terms; (ii) providing efficient service to policyholders and claimants; (iii) transparency of operations resulting in building up market confidence in the insurance industry; (iv) disclosures are the cornerstones for achieving corporate governance and risk management; (v) ensuring proper and efficient management of insurance funds; and (vi) facilitate industry competition at an effective and healthy level.
Availability of information is also critical to ensure that the needs of both analysts and researchers are met. Insurance Core Principles: The International Association of Insurance Supervisors (IAIS), the association of insurance supervisors across jurisdictions, has also laid emphasis on supervisory bodies ensuring that the disclosures by incumbent regulated entities are relevant, timely, accessible, comprehensive and meaningful, reliable, comparable and consistent over time. ICP 26 Information, disclosure & transparency towards the market, one of the 28 core principles of standards and codes in place, provides The supervisory authority requires insurers to disclose relevant information on a timely basis in order to give stakeholders a clear view of their business activities and financial position and to facilitate the understanding of the risks to which they are exposed.
The emphasis is not only on disclosure but also transparency, which envisages that the recipient of information is able to use it and has a fair degree of understanding of the information provided. Public disclosures need to meet the following ends:
a) Relevant to decisions taken by market participants;
b) Timely so as to be available and up-to-date at the time those decisions are made;
c) Accessible without undue expense or delay by the market participants;
d) Comprehensive and meaningful so as to enable market participants to form a well rounded view of the insurer;
e) Reliable as a basis upon which to make decisions;
f) Comparable between different insurers and other companies; and
g) Consistent over time so as to enable relevant trends to be discerned.
To achieve these ends, disclosures made must necessarily cover, at the minimum, the financial position; financial performance for a specified period; risk exposures and how they are managed; the basis, methods and assumptions upon which information is prepared including the accounting policies; and basic business, management and corporate governance information.
Means of supervision: Transparency in operations, availability of information in the hands of the decision makers and disclosures to the Authority, are all various aspects of ensuring effective supervision within the insurance companies, and for the sector as a whole either through self regulation or through the mechanics of supervisory oversight. Broadly, this oversight may be achieved in different measures through any one or all of the following means:
1. Internal mechanisms in the insurance companies including supervision and active review by the Board; through sufficiently detailed reporting to the Board and active review by the Board; internal and external audit; properly structured delegation of authority; and well defined and adequate lines of reporting back to the Board.
2. Industry self regulation measures, especially in matters of market conduct.
3. Supervisory oversight through reports on market conduct; and financial strength including investment returns, accounts returns and other statutory returns.
4. Supervisory oversight through on-site inspections.
Towards achieving its goal of effective supervision, the Authority has recently undertaken the Business Analytics Project, which is aimed at meeting the data needs and information for analysing insurance companies and for regulatory decision making.
The Solution Development Architecture has already been finalised, and the next step of Implementation of ERP System Stage- I – Short-listing of IT firms for the Technical Bidding (Phase-II) has been initiated by the Authority. The BAP is a comprehensive exercise at covering all aspects of the information needs of the regulator, be it financial and actuarial aspects, investments, the claims and grievance redressal mechanisms, global insurance industry wide information required for policy decision making. The operationalisation of the BAP would build up a huge gap in ensuring transparency of operations of the insurance entities and facilitate in supervision by exception.
Risk management and disclosures: Risk the chance of something happening that will have an impact on objectives. It is measured in terms of likelihood and consequence. It is the circumstance, action, situation or event with the ability or potential to impact the key dependencies that support the core processes of the organisation. Broadly, risks are segregated into financial and non-financial risks. The very crux of enterprise wide risk management rests on availability of information through adequate disclosures and transparency.
It is also a fact that in putting in place systems to meet the stipulations on disclosures, entities also move a step closer to the analysis of the same information in-house and simultaneously peer pressures and comparisons ensure that the benefits of market pressures and competitive environment exert influence to improve operational performance on various counts.
It is a fact that better managed enterprises take the initiative of providing disclosures on a voluntary basis and actually make disclosures which go at least a step further from those requisitioned in the regulatory framework.
IRDA’s recent initiatives at enhancing public disclosures: With a view to improving transparency in operations, the Authority has been working towards enhancing disclosures to be made by insurance companies on periodic basis. Another step in this direction has been the issuance of guidelines in January, 2010.
The stipulations on disclosures to be made by insurance companies have been strengthened by the Authority to fill the gap in availability of information in the public domain. These disclosures are required to be made through (i) Publication in Newspapers and (ii) Hosting on the respective company websites, effective from the period ended 31st March, 2010.
This initiative has placed the insurance companies, which are presently not publicly listed entities, at par with the listed entities in the corporate world in terms of public disclosures. Listed corporate entities are governed by the terms of the Listing Agreement, which amongst other things provides for public disclosure of performance on a quarterly basis.
These initiatives have followed deliberations at length both within the Authority and with the various stakeholders. Divergent views have at times been expressed while some have taken the stance that the public at large was not yet ready to fully appreciate the disclosures proposed to be made, others had expressed concerns over possibility of the information provided being exploited to meet devious ends.
There were others who felt that the competitors may get access to confidential information, while some went that extra mile to voluntarily initiate disclosures. How much disclosure and the cost of regulatory burden: How much disclosure is sufficient? is a question which would always be a dilemma to be addressed by the regulator.
While on the one hand the insurance companies would prefer to restrict to quantum of public and regulatory disclosure, frequently on the plea of the attached costs and the regulatory burden, the regulator would want to ensure adequacy of disclosures and transparency. Insurance companies frequently also cite reasons of confidentiality due to the adverse impact of the information being accessed by their competitors.
There is, however, a fine balance which needs to be maintained to ensure that while transparency of operations is achieved, the cost of such disclosures do not outweigh the benefits reaped. There is also the concern about the disclosures resulting in an overflow of information, whereby critical information would be lost in the overwhelming degree of detail. The contents must meet the objectives for which the disclosures are being made.
In a number of jurisdictions, it has been observed that the supervisory bodies work at (i) assessing the costs attached to the increased stipulations being prescribed; and (ii) the objectives proposed to be achieved through the additional stipulations being prescribed by the regulatory authorities.
The way forward: There is frequently a thin line between meaningful and timely disclosure and a plethora of information being provided which may easily result in critical information being lost sight of. In the Indian context, the disclosure requirements are slowly moving towards international benchmarks. It is envisaged that with the levels of disclosures being raised, the stakeholders would be in the position to use the information provided to meet their respective needs be it the regulator, the insurance companies and the intermediaries, the policyholders, the policy makers or the analysts.
As the industry reaches a higher level of maturity, the information needs are also likely to evolve and would have to be addressed on a continuing basis. Already, the next level of challenges include meeting the information needs to handle the concerns relating to supervision of financial conglomerates.
The first set of insurance companies which were granted registration in the year 2000 would be completing ten years of operations in the current financial year. In such a scenario, the capital markets in India could be a witness to Initial Public Offerings (IPOs) in the not too distant a future.
The challenge here is to ensure adequacy of disclosures to facilitate investment decision making by the investor community. As the global economies move towards International Financial Reporting Standards (IFRS) to achieve one global language of presenting the financial statements, the insurance sector is faced with the challenges of convergence towards the said standards, particularly in a scenario where the Accounting Standard for Insurance Contracts still has to be finalised, and to meet the disclosure requirements under the new set of accounting rules.
Overall, these are interesting times where the expectations for information of the various stakeholders are increasing. The issue which needs to be addressed is not how much disclosure but how to make the disclosures made relevant, timely, accessible, comprehensive and meaningful, reliable, comparable and consistent over time.
(Courtesy IRDA Annual Report)
