In 2000, the International Monetary Fund (IMF) published an assessment of insurance supervision in Estonia, in which it concluded that the country either 'broadly' or 'fully' observed 13 of the 14 assessed Insurance Supervisory Principles (ISPs), but did not observe the "Changes in Control" principle. According to the report, the major shortcomings were expected to be resolved by the enactment of the new Insurance Activities Act, which entered into force shortly after the assessment had been completed. The IMF's 2002 update on its 2000 ROSC noted that improvements were made to bring Estonia more in line with the ISPs. However, ISPs were subsequently substituted with more demanding Insurance Core Principles (ICPs). Moreover, in 2002 the Estonian insurance supervisory body changed from the Insurance Supervisory Authority to the Financial Supervision Authority (FSA). There is insufficient information publicly available regarding compliance of Estonia's new supervisory regime with ICPs as revised in 2003. Although the 2006 European Bank for Reconstruction and Development (EBRD) report entitled "Strategy for Estonia" noted that insurance legislation and regulation in Estonia are compliant with the IAIS standards, there is no further information supporting EBRD's statement. Per a 2006 FSA Annual Report, the FSA shifted to a risk-based analysis of insurance activities in 2006 by focusing primarily on insurance- and market-risk analysis, and developing a stress tests methodology. According to the same report, although the life insurance sector has been growing rapidly and competition in the non-life insurance sector has intensified in recent years, Estonia has undergone a slight slowdown in insurance market growth during 2006.

General Overview

In 2000, the International Monetary Fund (IMF) published a report based on an assessment of insurance supervision in Estonia, in which it concluded that the country either 'broadly' or 'fully' observed 13 of the 14 assessed Insurance Supervisory Principles (ISPs), but did not observe the "Changes in Control" principle. According to the report, the major shortcomings were expected to be resolved by the enactment of the new Insurance Activities Act (IAA), which entered into force shortly after the assessment had been completed. A 2002 update by the IMF on its 2000 ROSC assessment notes that improvements were made to bring Estonia more in line with the ISPs. However, ISPs were subsequently substituted with more demanding Insurance Core Principles (ICPs). Moreover, in 2002 the Estonian insurance supervisory body changed from the Insurance Supervisory Authority (ISA) to the Financial Supervision Authority (FSA). There is insufficient information publicly available regarding compliance of Estonia's new supervisory regime with ICPs as revised in 2003. Although the 2006 European Bank for Reconstruction and Development (EBRD) "Strategy for Estonia" report noted that insurance legislation and regulation in Estonia are compliant with the IAIS standards, there is no further information supporting EBRD's statement.

According to the Sorainen 2006 Legal Update, the IAA was enacted with the aim of regulating the incorporation, activity, and liability of insurers and insurance intermediaries. The update added that the new Code of Civil Procedure, which includes some new rules concerning insurers and policyholders, came into force on January 1, 2006. Amendments to the regulations of the Ministry of Finance (MoF), and the Third Party Motor Liability Insurance Act were also enacted in 2006. These amendments were primarily the result of adopting European Union (EU) regulations into Estonian law, as stated in the 2006 FSA Annual Report. The insurance supervisory body changed from the ISA to the FSA in 2002. The FSA is an independent agency which is responsible for banking, insurance and securities market supervision in order to enhance the stability, reliability, transparency, and efficiency of the financial sector. Per a 2006 FSA Annual Report, the FSA shifted to a risk-based analysis of insurance activities in 2006 by focusing primarily on insurance- and market-risk analysis, and on the coverage ratio of technical provisions. To this end, a stress tests methodology was developed and successfully deployed. The same report found that Estonia mainly cooperates with insurance supervisors of Latvia and Lithuania and had concluded cooperation and information-exchange Memoranda of Understanding (MoU) with the supervisory authorities of Germany, Finland, and Switzerland. The FSA also participates in the work of The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS). Furthermore, Estonia is a member of the IAIS.

The life insurance sector has been growing rapidly in Estonia and competition in the non-life insurance sector has intensified in recent years, as noted in the 2006 FSA Annual Report. However, growth in the insurance market slowed down from 25.2% in 2005 to 19.6% in 2006. During the same period, insurance penetration (gross premiums/GNP) increased from 2.29 to 2.32. The Estonian insurance industry consists of 8 non-life insurance companies, 5 life insurance companies, and 5 foreign insurers. With regards to cross-border insurance services, 215 providers of non-life insurance and 58 providers of life insurance have been registered so far.

The Principles

ICP 1 Conditions for effective insurance supervision

II

In 2002 the insurance supervisory body changed from ISA to FSA. The new IAA entered into force on January 1, 2005, with the aim of regulating the incorporation, activity, and liability of insurers and insurance intermediaries, as noted in the Sorainen 2006 Legal Update report. The new Code of Civil Procedure, which includes some new rules concerning insurers and policyholders, came into force on January 1, 2006. Amendments to the regulations of the MoF, and the Third Party Motor Liability Insurance Act were also enacted in 2006. These amendments were primarily the result of adopting European Union (EU) regulations into Estonian law, as stated in the 2006 FSA Annual Report. Nevertheless, there is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

ICP 2 Supervisory objectives

II

Financial supervision is conducted in order to enhance the stability, reliability, transparency, and efficiency of the financial sector. It also aims to reduce systemic risks, to prevent the abuse of the financial sector for criminal purposes, and to support the stability of the monetary system. Nevertheless, there is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

ICP 3 Supervisory authority

II

According to the 2006 EBRD report, the insurance supervisory body changed from ISA to FSA in 2002. The FSA is an independent agency which is responsible for banking, insurance, and securities market supervision. Nevertheless, there is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

ICP 4 Supervisory process

II

There is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

ICP 5 Supervisory cooperation and information sharing

II

According to the IMF 2000 ROSC, ISP 16 on Coordination and Cooperation and ISP 17 on Confidentiality were "broadly observed," but lacked confidentiality requirements related to information obtained during all state supervision activities. Furthermore the FSA had not signed MoUs with the home country supervisors of foreign insurance companies with affiliates in Estonia. A 2002 update by the IMF on its 2000 ROSC assessment notes that information obtained in the course of the state supervision activities of the FSA is confidential and not subject to disclosure. Confidential information can nevertheless be disclosed to the Bank of Estonia (BoE) and the MoF, as well as to foreign supervisory bodies. Per a 2006 FSA Annual Report, Estonia mainly cooperates with insurance supervisors of Latvia and Lithuania, and has concluded cooperation and information exchange MoUs with the supervisory authorities of Germany, Finland, and Switzerland. Nevertheless, there is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

ICP 6 Licensing

II

According to the IMF 2000 ROSC, ISP 2 on Licensing was "broadly observed," but lacked requirements regarding information on suitability of owners in the process of licensing. A 2002 update by the IMF on its 2000 ROSC assessment notes that the IAA now contains a substantive list of information and documentation required upon licensing. Furthermore, since January 1, 2002, the FSA has been given the right to grant and withdraw licenses. Nevertheless, there is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

ICP 7 Suitability of persons

II

There is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

ICP 8 Changes in control and portfolio transfers

II

According to the IMF 2000 ROSC, ISP 3 on Changes in control was "not observed." The IMF recommended that persons who intend to acquire or increase a qualifying holding should seek prior approval from the FSA. A 2002 update by the IMF on its 2000 ROSC assessment notes that this requirement is now fulfilled. Nevertheless, there is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

ICP 9 Corporate governance

II

According to the IMF 2000 ROSC, ISP 4 was "fully observed" and no further corrective action is required. Issues of corporate governance are adequately covered in the 2000 IAA, which also provides a legal basis for the FSA to remove members of management boards and supervisory boards of insurers. Nevertheless, there is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

ICP 10 Internal control

II

According to the IMF 2000 ROSC, ISP 5 on Internal control was "broadly observed," but lacked internal rules to regulate the activities of managers and employees and the formation of an independent internal audit unit. A 2002 update by the IMF on its 2000 ROSC assessment notes that these issues had been addressed. Furthermore, as stated in the 2006 FSA report, the FSA paid special attention to supervising the organization of internal controls in 2006. Nevertheless, there is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

ICP 11 Market analysis

II

There is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

ICP 12 Reporting to supervisors and off-site monitoring

II

According to the IMF 2000 ROSC, ISP 12 on Financial Reporting was "broadly observed." Nevertheless, there is insufficient publicly available information regarding Estonia's compliance with ICP 12 as revised by the IAIS in October 2003. Per a 2007 KPMG Investment Guide, beginning in 1995, national accounting standards in Estonia were based on International Financial Reporting Standards (IFRS). Furthermore, according to the 2004 World Bank ROSC on Accounting and Auditing, insurance companies in Estonia are required to prepare their consolidated and legal entity financial statements pursuant to IFRSs as of January 1, 2005. Estonia therefore complies with European Commission (EC) Regulation No 1606/2002, which requires all EU listed companies to prepare consolidated accounts following IFRSs as endorsed by the EC starting January 1, 2005.

ICP 13 On-site inspection

II

According to the IMF 2000 ROSC report, ISP 13 related to On-site inspection was "broadly observed," but lacked the legal basis for the supervision of affiliates and companies belonging to the same group. A 2002 update by the IMF on its 2000 ROSC assessment notes that this shortcoming was addressed. Furthermore, on-site inspections were carried out in 2006 with regard to two insurance companies, as stated in the 2006 FSA Annual Report. Nevertheless, there is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

ICP 14 Preventive and corrective measures

II

There is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

ICP 15 Enforcement or sanctions

II

According to the IMF 2000 ROSC, ISP 14 on Sanctions was "broadly observed." The IMF recommended giving the FSA more powers and establishing stronger sanctions. A 2002 update by the IMF on its 2000 ROSC assessment notes that the FSA has been granted more powers to protect the interest of policyholders and insured persons. Nevertheless, there is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

ICP 16 Winding-up & exit from the market

II

There is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

ICP 17 Group-wide supervision

II

There is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

ICP 18 Risk assessment and management

II

There is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003. As stated in the 2006 FSA Annual Report, the FSA shifted to a risk-based analysis of insurance activities in 2006 by focusing primarily on insurance- and market-risk analysis and the coverage ratio of technical provisions. To this end, a stress tests methodology was developed and carried out successfully.

ICP 19 Insurance activity

II

According to the IMF 2000 ROSC, ISP 10 on Reinsurance was "fully observed" and no further corrective action is required. Nevertheless, there is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

ICP 20 Liabilities

II

According to the IMF 2000 ROSC, ISP 7 on Prudential liabilities was "fully observed" and no further corrective action is required. Nevertheless, there is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

ICP 21 Investments

II

As stated in the IMF 2000 ROSC, ISP 6 on Prudential assets was "broadly observed." The IMF recommended establishing restrictions on the use of derivatives. Nevertheless, there is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

ICP 22 Derivatives and similar commitments

II

According to the IMF 2000 ROSC, ISP 9 on Derivatives and off-balance sheet items was "broadly observed." The IMF advised the Estonian Accounting Board to issue draft guidelines on financial instruments. A 2002 update by the IMF on its 2000 ROSC assessment notes that the IAA stipulates requirements related to derivatives. Nonetheless, there is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

ICP 23 Capital adequacy and solvency

II

According to the IMF 2000 ROSC, ISP 8 on Capital adequacy and solvency was "broadly observed." The IMF recommended updating the MoF's instructions on calculating the solvency margin in accordance with the EU's first non-life insurance directive. It also advised the establishment of annual reporting procedures for insurers on the observance with capital adequacy requirements on a consolidated basis. A 2002 ROSC update by the IMF notes that the enactment of the new Decree of the MoF on calculating the solvency margin was implemented on January 1, 2002. Nevertheless, there is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

ICP 24 Intermediaries

II

There is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003. As stated in the 2006 FSA Annual Report, supervision of insurance intermediaries focuses primarily on developing professional standards for brokers. To insure compliance with such requirements, the FSA performed on-site inspections of several brokers in 2006. During the same period, the FSA registered insurance intermediaries who provide cross-border insurance and have received an activities license from other Member States of the EU.

ICP 25 Consumer protection

II

There is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

ICP 26 Information, disclosure & transparency towards the market

II

There is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003. In 2006, the FSA put forward "general requirements for insurance contracts" in order to ensure that the provisions of insurance contracts are transparent and clear, according to the 2006 FSA Annual Report.

ICP 27 Fraud

II

There is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003.

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

II

There is insufficient publicly available information regarding Estonia's compliance with this principle as revised by the IAIS in October 2003. According to the European Committee on Crime Problems, Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (CDPC) 2004 Evaluation Report, the insurance market in Estonia is subject to money laundering vulnerabilities due to its rapid growth. Furthermore, the level of implementation of AML measures is higher in the banking sector than in the insurance sector.