A 2004 World Bank report called attention to major institutional weaknesses hindering the development of the Honduran financial system. The report suggested a more risk-oriented approach to supervision of the financial sector, including insurance institutions, by the National Banking and Insurance Commission (NBIC). The report also mentioned an unpublished, joint World Bank-International Monetary Fund (IMF) Financial Sector Assessment Program (FSAP) review in 2003 that provided recommendations on strengthening the Honduran financial system. The 2004 World Bank report noted that Honduras began implementing the 2003 recommendations with assistance from the World Bank, the IMF, and the Inter-American Development Bank. The IMF's 2005 Article IV consultation report points out that Honduras passed a series of laws in 2004 to implement the FSAP's recommended financial sector reforms. These reforms included strengthening prudential norms, enabling consolidated supervision, increasing the supervisory powers of the NBIC, and broadening the NBIC's scope of corrective action. Further, a 2007 IMF report finds that Honduras has revamped its legal, prudential, and regulatory frameworks in recent years, which has resulted in continued improvements in the financial sector. The report advises Honduras to strengthen the supervision of consolidated financial groups. Despite this information, however, there is insufficient information publicly available regarding Honduras's adherence to the Insurance Core Principles promulgated by the International Association of Insurance Supervisors in 2003.

General Overview

There is insufficient information publicly available as to Honduras's adherence to the Insurance Core Principles (ICPs) promulgated by International Association of Insurance Supervisors (IAIS) in 2003, although a number of publications by international organizations provide descriptive information on the state of financial sector supervision in Honduras. A 2007 International Monetary Fund (IMF) report finds that Honduras has revamped its legal, prudential, and regulatory frameworks in recent years. This has resulted in continued improvements in the financial sector. The report advises Honduras to strengthen the supervision of consolidated financial groups. A 2004 World Bank report called for a "more risk-oriented, forward-looking, approach" (p. 67) to supervision by the National Banking and Insurance Commission (NBIC). The report also mentioned an unpublished joint World Bank-IMF Financial Sector Assessment Program (FSAP) review generated in 2003 that provided recommendations on strengthening the Honduran financial system. According to the 2004 report, Honduras began implementing the 2003 FSAP recommendations with assistance from the World Bank, the IMF, and the Inter-American Development Bank (IDB). The 2005 IMF Article IV consultation report points out that Honduras passed a series of laws in 2004 to implement the FSAP's recommended financial sector reforms. These reforms included strengthening prudential norms, enabling consolidated supervision, increasing the supervisory powers of the NBIC, and broadening the scope of corrective action. According to a 2005 report by the U.S. Department of State (DoS), the Financial System Law, enacted in 2004 along with three other laws, aimed at strengthening the Honduran financial sector, reforming the NBIC, and improving the regulatory capacity and effectiveness of the Honduran authorities with respect to the financial sector.

The 2004 World Bank report further notes that the NBIC is the agency responsible for the supervision, monitoring, and inspection of Honduran insurance institutions and, as of 2004, was in the process of developing insurance sector supervisory capacity. The Law on Insurance and Reinsurance Institutions was adopted in 2001, but its effectiveness was contingent on implementing regulation, which was in the works in 2004. The report finds that though the insurance market in Honduras is small in absolute terms, it is still more developed than in other countries with equivalent levels of per capita GDP. The Financial Sector Reform and Strengthening Initiative (FIRST) website adds that an IDB-funded technical assistance project was started in Honduras in 2002 with the expressed aim to "strengthen the regulatory and prudential framework of the insurance sector." Under the project, regulations for solvency margins, technical reserves, reinsurers and reinsurance brokers' registers, insurance intermediaries' registers, foreign branches regulation, adjuster registers, insured debts, and bank assurance and other insurance intermediaries were prepared, and insurance market standards were introduced that would govern the solvency of the insurance companies and the well-being of the market. The website declares that the policy framework proposed by the project has been issued by the NBIC and is now in effect. Honduras is not listed as a member on the IAIS website.

Per the 2007 World Bank report, the insurance industry is comprised of 10 companies, of which two are US-based and one is a subsidiary of Panama's Banistmo. The size of the insurance market in Honduras is very small, with an almost nonexistent life insurance sector. The private pension sector is also very underdeveloped.

The Principles

ICP 1 Conditions for effective insurance supervision

II

There is insufficient information publicly available as to Honduras's compliance with this principle.

ICP 2 Supervisory objectives

II

There is insufficient information publicly available as to Honduras's compliance with this principle.

ICP 3 Supervisory authority

II

The 2004 World Bank report notes that the NBIC is the agency responsible for the supervision, monitoring, and inspection of insurance institutions in Honduras and, as of 2004, was in the process of developing insurance sector supervisory capacity. The Law on Insurance and Reinsurance Institutions was adopted in 2001 through Decree No. 22, but its effectiveness was contingent on implementing regulation that was still in the works in 2004. However, there is little further information publicly available on which to base Honduras's compliance with this principle.

ICP 4 Supervisory process

II

There is insufficient information publicly available as to Honduras's compliance with this principle.

ICP 5 Supervisory cooperation and information sharing

II

There is insufficient information publicly available as to Honduras's compliance with this principle.

ICP 6 Licensing

II

There is insufficient information publicly available as to Honduras's compliance with this principle.

ICP 7 Suitability of persons

II

There is insufficient information publicly available as to Honduras's compliance with this principle.

ICP 8 Changes in control and portfolio transfers

II

There is insufficient information publicly available as to Honduras's compliance with this principle.

ICP 9 Corporate governance

II

There is insufficient information publicly available as to Honduras's compliance with this principle.

ICP 10 Internal control

II

There is insufficient information publicly available as to Honduras's compliance with this principle.

ICP 11 Market analysis

II

There is insufficient information publicly available as to Honduras's compliance with this principle.

ICP 12 Reporting to supervisors and off-site monitoring

II

The government of Honduras, in a Letter of Intent to the IMF in 2004, declared that the NBIC "will train staff to enhance on- and off-site inspections." The World Bank, in a 2007 assessment of Honduran accounting and auditing practices, commends Honduras's efforts to improve financial reporting standards and notes that continued national initiatives were required for further alignment with international standards. The 2004 Law on Accounting and Auditing Standards (A&A Law) mandates the application of International Financial Reporting Standards (IFRSs) beginning January 1, 2008, with earlier adoption permitted. In addition to the A&A Law, financial institutions must follow accounting requirements laid out by the NBIC and relevant provisions of the Commercial Code. In case any of the legislation is in conflict with NBIC rules, the latter takes precedence. Supervision is conducted via on-site and off-site monitoring and insurance companies must submit financial statements monthly, quarterly, and annually to the NBIC. Additionally, NBIC-regulated companies must publish their annual and quarterly financial statements in two main Honduran newspapers. Non-compliance with any of these requirements can lead to sanctions, including warnings, fines, and suspensions. The assessment observes that NBIC-compliant financial statements are of "lesser quality" specifically, in the area of disclosures. Despite the above descriptive information, there is insufficient information publicly available as to Honduras's compliance with this principle.

ICP 13 On-site inspection

II

The government of Honduras, in a Letter of Intent to the IMF in 2004, declares that the NBIC "will train staff to enhance on- and off-site inspections." There is, however, insufficient information publicly available as to Honduras's compliance with this principle.

ICP 14 Preventive and corrective measures

II

The 2004 World Bank report recommends that the NBIC expand the scope of its preventive and corrective instruments, and enact regulations clearly stating the circumstances triggering the use of such instruments. There is, however, insufficient information publicly available as to Honduras's compliance with this principle.

ICP 15 Enforcement or sanctions

II

The 2004 World Bank report recommends that the NBIC expand the scope of its preventive and corrective instruments, and enact regulations clearly stating the circumstances triggering the use of such instruments. There is, however, insufficient information publicly available as to Honduras's compliance with this principle.

ICP 16 Winding-up & exit from the market

II

There is insufficient information publicly available as to Honduras's compliance with this principle.

ICP 17 Group-wide supervision

II

The 2004 World Bank report had observed that the NBIC "lacks the authority to implement consolidated supervision in a meaningful way" (p. 67). In a Letter of Intent to the IMF in 2004, the Government of Honduras announced its intent to introduce regulatory measures by December 2004 to enable consolidated supervision, train the supervisory staff at the NBIC to conduct consolidated supervision from June 2005 onwards, and to require consolidated statements by all financial institutions regulated by the NBIC by December 2006. The 2006 IMF report notes that Honduras enacted several laws and regulations in 2004 per the 2003 FSAP recommendations, thereby enabling consolidated supervision of affiliates, subsidiaries and offshore branches of Honduran banks. Despite the above descriptive information, there is insufficient information publicly available as to Honduras's compliance with this principle.

ICP 18 Risk assessment and management

II

According to the 2004 World Bank report, risk management is an important area where prudential regulations in Honduras require strengthening. The report also advises the NBIC to move towards a more risk-oriented approach to supervision. It observes that insurance companies in Honduras have a high reinsurance ratio that exposes them to undue credit risk since reinsurance activities are not adequately supervised. Commercial lending is also significant, resulting in a concentration of risk in specific financial groups. In a 2004 Letter of Intent to the IMF, the government of Honduras agreed to establish a legal framework for better risk management practices by financial institutions through the enactment of new regulations. The authorities expected full compliance with such measures by December 2006. Despite the above information, there is insufficient information publicly available as to Honduras's compliance with this principle.

ICP 19 Insurance activity

II

There is insufficient information publicly available as to Honduras's compliance with this principle. The 2004 World Bank report observes that the insurance companies in Honduras have a high reinsurance ratio that exposes them to undue credit risk since reinsurance activities are not adequately supervised.

ICP 20 Liabilities

II

There is insufficient information publicly available as to Honduras's compliance with this principle.

ICP 21 Investments

II

There is insufficient information publicly available as to Honduras's compliance with this principle.

ICP 22 Derivatives and similar commitments

II

There is insufficient information publicly available as to Honduras's compliance with this principle.

ICP 23 Capital adequacy and solvency

II

According to the 2004 World Bank report, the capital adequacy requirement for financial institutions is an important area where prudential regulations in Honduras require strengthening. The 2006 IMF report mentions that several laws enacted in 2004 strengthened prudential norms on capital adequacy. There is, however, insufficient information publicly available on which to base Honduras's compliance with this principle.

ICP 24 Intermediaries

II

There is insufficient information publicly available as to Honduras's compliance with this principle.

ICP 25 Consumer protection

II

There is insufficient information publicly available as to Honduras's compliance with this principle.

ICP 26 Information, disclosure & transparency towards the market

II

The 2007 World Bank report observes that Honduran insurance companies are required to disclose their financial statements to the public. They can meet this requirement by publishing annually their balance sheet, income statement, notes to the financial statements, and the auditor's report in two major newspapers. They are also required to publish their quarterly financial statements in two major newspapers within 10 days of the quarter's end; and the names of their managers, comisarios, and main staff must be published annually. Further, the NBIC publishes on its website the non-audited, monthly balance sheets and income statements of companies it regulates. There is, however, insufficient information publicly available on which to base Honduras's compliance with this principle.

ICP 27 Fraud

II

There is insufficient information publicly available as to Honduras's compliance with this principle.

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

II

As noted by the 2008 U.S. DoS report, anti-money laundering requirements apply to all financial institutions that are regulated by the NBIC, including insurance institutions. Various record-keeping and reporting requirements for financial institutions are contained in Law No. 27 of 1998. Decree No. 45 of 2002 further strengthened the 1998 law expanding the legal framework to combat money laundering and created the financial intelligence unit, the Unidad de Información Financiera (UIF), within the NBIC. Per the report, financial institutions are required to report any suspicious transactions and all transactions over $10,000, or its equivalent to the UIF. The UIF and reporting institutions are required to keep a registry of reported transactions for five years. The Criminal Procedure Code protects officials responsible for filing reports on behalf of obligated entities in their cooperation with law enforcement authorities. However, some officials have alleged that their personal security is at risk if their reported information leads to the prosecution of money launderers. The NBIC has proposed major amendments to the Honduran money laundering law in 2007. These proposed amendments would give the UIF sole oversight and responsibility for collecting all suspicious transactions reports (STRs), as well as the responsibility for STR analysis and submission, when appropriate, for prosecution. The NBIC directs Honduran financial institutions to search for, hold, and report on terrorist-linked accounts and transactions, and if identified can freeze them. The 2008 U.S. DoS report also observes that the "Government of Honduras made progress in 2007 by continuing to implement existing anti-money laundering regulations, and proposing improvements to existing anti-money laundering legislation." Despite the above descriptive information, there is insufficient information publicly available as to Honduras's compliance with this principle.