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To achieve its objectives, the supervisory authority supervises the financial soundness of individual insurers and contributes to the financial stability of the insurance market.

Proper analyses of individual companies, the insurance market, and the national and international contexts are essential to achieve this end.

There are no internationally accepted standards of how to organize market analysis at supervisory authorities. Individual supervisory authorities deal with this matter in very different ways. The following subsections provide a general description of the steps taken by the supervisory authority when preparing and maintaining market analysis.

For some supervisory authorities, this information may serve as a guideline how to establish a market analysis function within their frameworks. Others may use it as a checklist for completeness and evaluation of activities already performed.⁵⁷ To keep it concise and clearly organized, the subsection on the organizing schedule contains only the list of activities, while the following subsection explains individual activities and comments on them.

Organizing schedule

The establishment of market analysis at the supervisory authority should be well planned. The intended nature, scope and purpose of the market analysis function, as well as the market environment (availability of data and availability of analyses from insurance related areas) will significantly influence

• Choice of the person suitable as market analysis coordinator

• Needed staffing levels and capabilities.

Depending on the above conditions, the qualifications required of the market anal-ysis coordinator should be established. Market analanal-ysis performed at the supervisory authority should include:

• Regular preparation of insurance indicators and their development trends

• Regular preparation of indicators from insurance-related areas (such as invest-ment, demofigurey, and road accidents), their development trends, and the evaluation of their importance (influence) for the insurance market

• Ad hoc, irregular analytical reaction to important events (both with respect to insurance events such as natural catastrophes and market environment devel-opment events such as changes of legislation) influencing significantly the mar-ket.

57. For more detailed information see National Association of Insurance Commissioners, Market Analysis Handbook.

The main objectives of the market analysis at the supervisory authority (nature, scope, purpose) will be further fine-tuned during the market analysis establishment process.

1. Appoint a responsible market analysis coordinator.

2. Define data to be collected for market analysis and information to be publicly released.

3. Explore and communicate possible sources of data and data publishers.

4. Establish procedures to check accuracy of data provided.

5. Define indicators to be calculated and market analysis procedures to be per-formed on the basis of data provided.

6. Define tolerance limits for individual indicators.

7. Establish regular schedule of communication with data providers (sources of data) and data publishers, and the schedule of market analysis activities.

8. Draw conclusions with respect to actions to be taken as part of the supervisory process based on results of market analysis.

9. Regularly review and modify scope of market analysis and publicly released data as defined in the paragraph numbers above.

10. Decide on the scope of additional reporting and analysis in case of particular market-wide events of importance for the market’s financial stability.

Comments and explanations

Market analysis is work with information. As with any work that depends on infor-mation, the market analysis will be unsuccessful and not useful if the information is incomplete, delayed, not available, or not used. The features of availability, timelines, completeness, and proper use are particularly important for the exchange of informa-tion within the supervisory authority. Indeed, the insurance supervisors themselves (among others) should supply the data for market analyses and also should obtain the largest benefit from it!

1. The market analysis coordinator should be a:

• Skilled person with experience in the insurance industry and financial mar-kets

• Good organizer and communicator

• Person with mathematical background and good analytical abilities.

Performance of market analysis requires skilled resources, which may not nec-essarily be immediately available at the supervisory authority. Therefore, the market analysis coordinator may think also of using market analyses from

oth-er sources and/or outsourcing some of the required activities. If this is done, confidentiality of information within the particular legal environment must be observed and taken into account. It is the responsibility of the market analysis coordinator to establish sufficient capacities and resources to apply the market analysis results in the supervisory process. From a long-term perspective, these working capacities should be available direct (internally) at the supervisory au-thority, as required in general in ICP 3 - Supervisory Authority.

2. Data:

• Must be clearly and unambiguously defined to enable market-wide compari-son and compatibility

• Will include

– Information required to assess the financial soundness of insurers (that is, data from financial statements of individual insurers)

– Other information collected by the supervisory authority during report-ing and off-site monitorreport-ing

– Data collected during on site inspections – Data collected from other sources.⁵⁸

Information that might be publicly released by the insurance supervisory au-thority or others comprises not only “pure insurance” data but also data de-scribing the general development of the economy (such as GDP, inflation, and interest rates). Publicly released information should contain not only the cur-rently collected data, but also

• Data from previous periods (to show development trends)

• Results of market analysis (analytical indicators) when appropriate

• References to other information sources

• Verbal comments on the development of the insurance market, and on the economic, legal, and financial sector environments

• Evaluation of the period since the previous public release, including the description, comments, and data on particular market-wide events.

The scope of market-wide, publicly available information might be broadly con-sistent with the information requested for public disclosure by individual insur-ers.⁵⁹

58. Description and analysis of the market, its financial environment, international comparison, and insurance-linked data require numerous sources of diverse data, for example, police (statistics of street accidents), financial analysis institutions (de-velopment of prices), and firemen (fire statistics). For understanding on the variety of collected (and consequently published) information in a developed market see, for example, Insurance Information Institute 2004. Further considerations of data sources data are included in section C.

59. For details see ICP 26 - Information, Disclosure and Transparency toward the Market.

3. As explained in paragraph 2 above, diverse data (and data sources) are needed to enable a comprehensive market analysis and public release of relevant infor-mation. Initial contacts must be made and regular communication established with such sources. It is not necessary that the supervisory authority itself carries out the public release of information. However, even if the release is made by another entity (such as the association of insurers or an independent analyst in-stitution), the supervisory authority is responsible that sufficient market data is available. Therefore, external publishing may be organized in cooperation with the supervisory authority and the minimum scope of published information mutually agreed.

4. Correctness of data (particularly data important to evaluate the financial sound-ness of individual insurers) must be checked to ensure that it will provide a proper basis for the supervisory evaluation and reliable information for con-sumers. Tools and requirements for relevant checking processes are described in other ICPs.⁶⁰ Collected data should be analyzed, combined into indicators, and further processed to enable efficient and transparent use in supervisory processes. This thorough processing requires written clear and unambiguous definitions and descriptions of involved indicators, formulas, methods, and pro-cesses.

5. An important purpose of market analysis is to prompt supervisory intervention as referred to in ICP 14 - Preventive and Corrective Measures. To achieve this end and to act transparently, tolerance limits (limits and thresholds representing

“warning level” and/or “action level” of individual indicators and other results of market analysis) must be defined.⁶¹ Exceeding these limits should trigger an appropriate supervisory reaction as mentioned in paragraph 8 below.

6. To achieve reliable and timely performance of all activities, a detailed schedule (including description of activities, time limits, and responsible persons) must be defined, recorded, and made available for all concerned This schedule should include not only communication with external partners but also communica-tion and data flow among individual departments of the supervisory authority, as well as communication with other concerned financial market authorities, both domestic and foreign.

7. Exceeding the tolerance limits should trigger an appropriate (re)action. This paragraph number has a close link with paragraph 6. The supervisory process

60. See ICP 12 - Reporting to Supervisors and Off-Site Monitoring and ICP 13 - On-Site Inspection for details.

61. “Warning signals” can be, for example, significant change in the consumer ratio, sharp increase or decrease of written pre-mium, significant change in product mix, rapid expansion in new areas, large exposures and concentration of risks, significant changes in management expenses, changes in ownership and key managers, significant changes in provisions not correspond-ing to paid claims, fast changes in claims ratio, and significant deviations from market benchmarks. These “signals,” and particularly threshold values of relevant indicators, may be substantially different depending on particular market conditions.

It is not possible to go into details within the framework of this module.

is a complex issue, and excess of tolerance limit(s) must be considered together with all circumstances. In other words, the excess does not necessarily imply an immediate automatic intervention activity defined in advance but rather a deci-sionmaking process on how to address the current situation. To emphasize this factor, setting the tolerance limits was separated from defining the (re)action.

Comments on timeliness, completeness, and availability of information men-tioned in the introductory paragraph of this section are of highest importance here.

8. All the above activities should be designed in a stable way that does not require frequent changes. However, due to

• Changes in the market

• Development of the skills and capacities of the supervisory activity

• Achieving a higher level of consumer protection

it is necessary to regularly check and review the appropriateness of market anal-ysis activities and publicly released information.

9. It is impossible to predict all possible developments.⁶² Consequently, particular market-wide events that are not sufficiently envisaged in the numbered para-graphs above must be addressed case by case.

62. Examples are the terrorist attack in New York on September 11, 2001 or Central European floods in August 2002.