In 2002, the International Monetary Fund conducted a Financial System Stability Assessment, including a Report on the Observance of Standards and Codes on Insurance Regulation. According to the report, Croatia either observed or broadly observed nine of the 17 Insurance Supervisory Principles (later renamed Insurance Core Principles, or ICPs) promulgated by the International Association of Insurance Supervisors (IAIS). Three principles were partly observed, four were not observed, and one principle was found to be inapplicable. Croatia did not comply with principles related to corporate governance, internal controls, on-site inspection, and reinsurance. Because Croatia made insufficient resources available for supervisory purposes, the principle on the organization of the insurance supervisor was assessed as partly observed. In 2003, however, the IAIS revised the ICPs. Moreover, in January 2006, a new Insurance Law and a new Act came into effect. The latter created the Croatian Financial Services Supervisory Agency (CFSSA) as the unified securities and insurance sector regulator, which thereby replaced the Insurance Company Supervisory Authority (ICSA) as the insurance sector regulator. There is insufficient publicly-available information regarding the compliance of the new legal and supervisory framework with the revised ICPs promulgated in 2003.

General Overview

The International Monetary Fund (IMF) reported in its 2002 Financial System Stability Assessment (FSSA) that Croatia observed or broadly observed nine of the 17 Insurance Core Principles (ICPs) promulgated by the International Association of Insurance Supervisors (IAIS), partly observed three, and did not observe four. One principle was determined to be inapplicable. The non-observed principles related to corporate governance, internal controls, on-site inspections, and reinsurance. Because Croatia had made insufficient resources available to the supervisory function, the principle on the organization of the insurance supervisor was assessed as partly observed. However, the IAIS revised the ICPs in 2003, and in 2006 Croatia implemented a new Insurance Law and a new Law on Croatian Financial Services Supervisory Agency (CFSSA). There is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs issued in 2003.

The Insurance Act provides the legislative basis for the insurance system. In 2004, the European Commission (EC) remarked in its Opinion on Croatia's Application for Membership of the European Union that "a significant amount of further work" (p. 62) will be required to bring this legislation in line with European Union (EU) directives on life insurance, non-life insurance, and vehicle insurance, given that the Insurance Act is only partially harmonized with these directives. In 2006, the EC noted in its Croatia Progress Report that, with the adoption of new insurance laws, which entered into force in 2006, the Insurance Act and the Act on Compulsory Insurance within the Transport Sector "largely comply" with EU insurance legislation (p. 33). Prudential requirements, especially where solvency calculations and supplementary supervision of insurance groups are concerned, however, exhibit gaps between the Insurance Law and EU legislation. The EC further noted that the new Law on Insurance, which came into force in January 2006, designated insurance companies as either life or non-life insurance companies, with exemptions for health and accident insurance.

The Law on the Croatian Financial Services Supervisory Agency (CFSSA) was passed in November 2005 and came into force in January 2006. According to the Law, the CFSSA supersedes the Insurance Company Supervisory Authority (ICSA) as the regulator of the insurance sector. The EC's 2006 Progress Report notes that the CFSSA is the single supervisory agency for the non-banking sector. Although an independent agency, the EC regarded the CFSSA as having inadequate staffing and called for the strengthening of non-bank supervision. According to the IAIS website, the CFSSA is a member of this organization.

PricewaterhouseCoopers breaks Croatia's insurance sector down into seven non-life, five life, eleven composite, and two re-insurance companies as of 2006. Croatia Osiguranje, a state-owned enterprise, dominates the non-life market with about 50% market share.

The Principles

ICP 1 Conditions for effective insurance supervision

II

In 2003, the IAIS revised the ICPs, and there is insufficient publicly-available information regarding Croatia's compliance with these revised principles. In its 2002 report, the IMF notes that the Commercial Code, which was amended in 2002 and provides for the terms of incorporation of insurance companies, was expected to enhance corporate governance among general-purpose corporations. Since the IMF team judged that the interests of policyholders were not sufficiently protected, the team suggested including special provisions in the Insurance Act that laid out the responsibilities and roles of Directors. Further, the IMF observes that, aside from the general Law on Accounting, special regulations pursuant to the (then) Insurance Act and the Law on Accounting apply to insurance companies, which also harmonize insurance companies' accounts with EU Insurance Directives. Auditors and actuaries are required to submit reports along with financial returns. Actuaries are also required to report to the authorities any potential situation involving derivatives that may negatively impact the ability of a company to meet its obligations. The actuary must be licensed by the Ministry of Finance (MoF) and attain membership in a local actuarial society.

Although an insurance committee sits within the Chamber of Commerce, the IMF reports that there is no insurance trade association in Croatia. Special funds are held by automobile insurance companies to compensate victims of bodily injury or property damage due to vehicular accidents involving uninsured motorists. These special funds are managed by the Croatian Insurance Bureau and also cover liability claims in the event of insolvency of an automobile insurance company. The IMF also claims that the slow pace of settling claims against insurance companies has resulted in problems for both companies and claimants. Consumer confidence in the insurance industry has thus been lacking.

ICP 2 Supervisory objectives

II

According to the IMF's 2002 report, the Insurance Act sets out the institutional framework, roles, responsibilities, and broad objectives of the Insurance Companies Supervisory Authority (ICSA). Further modifications through amendments, supplements, and other decisions are made through the National Gazette. The ICSA does not publish its regulations, which are only communicated to the insurance companies. However, there is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs. Moreover, in November 2005 under the Act on the Croatian Financial Services Supervisory Agency (CFSSA), the CFSSA superseded the ICSA as the regulator of the insurance sector.

ICP 3 Supervisory authority

II

The IMF notes in its 2002 report that the authority to issue licenses lies with the Insurance Companies Supervisory Authority (ICSA), which is generally operationally independent. However, no manuals setting out procedural issues have been prepared. Resources are limited and compensation is based on public service scales. The staff, which has few professionals and no actuary, does not have legal immunity, but is subject to the rules set forth in a Regulation of Professional Secrecy. Although the head of the authority serves a fixed term and can be removed at any time, the circumstances under which the head can be dismissed are not specified. The IMF assessment team remarks that, because the ICSA budget is obligated to collect 90 percent of its revenues from the insurance industry, attracting and retaining enough competent professionals through compensation programs is difficult. The assessment team adds that, under these conditions, the main activities of the ICSA are limited to reviewing information provided by licensed companies. Few on-site inspections are conducted. However, there is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs. Moreover, in November 2005 under the Act on the Croatian Financial Services Supervisory Agency (CFSSA), the CFSSA superseded the ICSA as the regulator of the insurance sector.

ICP 4 Supervisory process

II

The IMF assessment team reports in its 2002 FSSA that Croatia only partly observes most good transparency practices for an open process for formulating and reporting of insurance supervision policies. Although laws are publicly available, decisions by the Insurance Companies Supervisory Authority (ICSA) are not easily accessed. Furthermore, there is limited public consultation on technical changes to the structure of financial regulations. The assessment team notes also that Croatia only partly observes or does not observe most good transparency practices in the areas of public availability of information on financial policies in the insurance sector. Only aggregate sectoral data on the insurance industry are released, and then only annually, through "The Insurance Market of the Republic of Croatia." No analysis or commentary accompanies the report, and no other publication is released by the ICSA. Decisions made by the ICSA are not posted on any official website.

Further, Croatia only partly observes or does not observe most good transparency practices in the area of accountability and assurances of integrity by financial agencies in the insurance area. The ICSA's annual report of its activities is provided only to the Government, to which the ICSA is accountable, and not to the public. In addition, the ICSA does not release financial statements or balance sheets. Finally, no explicit Code of Conduct exists regarding conflicts of interest and standards of personal financial affairs. However, there is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs. Moreover, in November 2005 under the Act on the Croatian Financial Services Supervisory Agency (CFSSA), the CFSSA superseded the ICSA as the regulator of the insurance sector.

ICP 5 Supervisory cooperation and information sharing

II

The IMF assessment team in 2002 did not find any agreements or Memoranda of Understanding (MOUs) permitting the staff of the supervisory authority to share information with supervisors in other jurisdictions. This lack of cooperation and information-sharing extended to supervisors of other types of financial institutions. In fact, all information collected during supervisory activities is to be kept confidential. However, there is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 6 Licensing

II

There is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 7 Suitability of persons

II

The IMF assessment team in 2002 reports that foreign investors can acquire domestic companies, establish subsidiaries, or launch a "branch" operation. A special questionnaire arranged by the MoF is used to determine the suitability of owners, the chief executive officer, and the management board, while the clearinghouse of Croatia, ZAP, examines the source of funds. Ownership of more than 15% of the share of an insurance company requires ICSA approval. However, there is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 8 Changes in control and portfolio transfers

II

There is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 9 Corporate governance

II

The 2002 IMF assessment concludes that Croatia does not observe this principle. Although limited corporate governance provisions appear in the Commercial Law that would apply to all companies, including insurance companies, the IMF assessment team states that the responsibilities unique to insurance supervisory boards are not specified in the insurance laws. However, there is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 10 Internal control

II

The 2002 IMF assessment concludes that this principle was not observed in Croatia. Internal control requirements are not specified in insurance legislation, nor does the supervisor receive reports concerning the application of internal control systems. However, there is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 11 Market analysis

II

There is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 12 Reporting to supervisors and off-site monitoring

II

According to the 2002 IMF report, rules concerning the presentation of financial statements are set out in the Insurance Act, which parallels the model specified for insurance companies in the European Union. Section 65 of the legislation provides the supervisor with the authority to inspect insurance companies' operations at any time. There is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 13 On-site inspection

II

The 2002 IMF assessment team concludes that Croatia does not observe this principle. The assessment team reports that the main activities of the Insurance Companies Supervisory Authority (ICSA) are limited to reviewing information provided by licensed companies. Few on-site inspections are conducted. However, there is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 14 Preventive and corrective measures

II

There is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 15 Enforcement or sanctions

II

There is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 16 Winding-up & exit from the market

II

There is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 17 Group-wide supervision

II

There is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 18 Risk assessment and management

II

There is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 19 Insurance activity

II

In 2002, the IMF assessment team notes that no requirements have been set by the insurance supervisor regarding reinsurance. Moreover, no information on agreements arranged by local companies is collected by the insurance supervisor. However, there is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 20 Liabilities

II

The IMF assessment team claims in 2002 that insurance liabilities were strengthened in 1998, when the minimum expectations for the establishment of technical provisions over the adequacy of liability estimates were enhanced through new regulations adopted by the ICSA. However, there is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 21 Investments

II

According to the 2002 IMF assessment, the nature of investments that insurance companies may use to report their liabilities and required capital are governed by provisions in Croatia's insurance legislation. Specific terms for establishing liabilities in support of its obligations to policyholders and rules for computing these liabilities are provided in supporting regulations. However, there is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 22 Derivatives and similar commitments

II

There is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 23 Capital adequacy and solvency

II

According to the 2002 IMF assessment, minimum capital requirements, which are substantial relative to other transition economies, are mandated through the insurance legislation. Solvency margins related to firm size are also specified though this legislation. The insurance legislative regime is broadly in line with that prevailing in the European Union, albeit with some differences, including minimum capital requirements from the date of licensing and solvency testing formulas. However, there is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 24 Intermediaries

II

The IMF assessment team conducting the 2002 assessment reports that company boards are not required by the supervisory authority to establish written policies for fair treatment of policyholders, although insurance intermediaries are legally obliged to establish good conduct and ethics rules for the behavior of sales representatives. Moreover, ombudsman or dispute resolution roles are not invested in the supervisory authority. However, there is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 25 Consumer protection

II

The IMF assessment team conducting the 2002 assessment reports that company boards are not required by the supervisory authority to establish written policies for fair treatment of policyholders, although insurance intermediaries are legally obliged to establish good conduct and ethics rules for the behavior of sales representatives. Moreover, ombudsman or dispute resolution roles are not invested in the supervisory authority. However, there is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 26 Information, disclosure & transparency towards the market

II

There is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 27 Fraud

II

There is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.

ICP 28 Anti-money laundering/ Combating the Financing of Terrorism

II

According to the 2002 IMF report, anti-money laundering legislation requires securities and insurance supervisory authorities, including those in exchange offices, to report suspicious transactions exceeding HRK 105,000 and to ascertain the identities of the parties involved. However, there is insufficient publicly-available information regarding Croatia's compliance with the revised ICPs.