In a 2002 Report on the Observance of Standards and Codes (ROSC), which is based on Insurance Core Principles (ICPs) and the methodology developed by the International Association of Insurance Supervisors (IAIS) in 2000, the International Monetary Fund (IMF) concluded that the legislative framework in Lithuania was characterized by important gaps in corporate governance, internal controls, and market conduct, and that the sanctioning framework showed excessive discretion. According to the same report, the legislative framework did not give sufficient powers to the supervisory authority to fully discharge its responsibilities. Furthermore, Lithuanian authorities needed to ensure the financial and organizational independence of the regulator. Following the IMF assessment, the Financial Sector Reform and Strengthening (FIRST) Initiative launched a "Post FSAP Insurance Supervision" project for Lithuania, which was completed in October 2004. As a result of the project's implementation, relevant second-tier legislation was put in place, deficiencies relating to the supervisory authority were dealt with, and an on-site inspection manual was developed. The Law on Insurance, which incorporated most of the recommendations of IMF, was enacted in 2003. However, the IAIS revised ICPs in October 2003, and the FIRST Initiative concluded that the Insurance Supervisory Commission (ISC) needed to conduct a self-assessment against the new ICPs. According to the ISC's 2005 Annual Report, in 2004 the ISC carried out a self-assessment and submitted it to the IAIS. The self-assessment revealed that 94% of ICPs were "fully" implemented and 6% were only "partially" implemented. A 2006 European Bank for Reconstruction and Development (EBRD) Report on a Strategy for Lithuania also confirmed these findings. According to the EBRD, insurance legislation and regulation in Lithuania "almost fully meet" IAIS standards, although there is a need to further enhance the capacity of the ISC.

General Overview

In a 2002 Report on the Observance of Standards and Codes (ROSC), which used the Insurance Core Principles (ICPs) based on the 2000 International Association of Insurance Supervisors (IAIS) methodology, the International Monetary Fund (IMF) concluded that "the legislative framework has important gaps in areas such as corporate governance, internal controls, and market conduct" (p.58). According to the same report, the legislative framework did not give sufficient powers to State Insurance Supervisory Authority (SISA), which was reorganized into the Insurance Supervisory Commission (ISC) in 2004, to fully discharge its responsibilities. Furthermore, there was an excessive use of discretion in the sanctioning framework, and Lithuanian authorities needed to ensure the financial and organizational independence of the supervisory authority. Consequently, the IMF concluded that "as a result, the supervisory process lacks transparency [and] objectivity and may be less than fully effective" (p. 58).

Following the assessment, the Financial Sector Reform and Strengthening (FIRST) Initiative launched a "Post FSAP Insurance Supervision" project for Lithuania, which was completed in October 2004, and reported upon in 2005. The aim of the project was to incorporate the IMF's recommendations and to establish a regulatory and supervisory framework in accordance with ICPs issued by the IAIS and complying with European Union (EU) requirements. As a result of the project's implementation, relevant second-tier legislation was put in place, deficiencies in the ISC were dealt with, and an on-site inspection manual was developed. The Law on Insurance, which incorporated most of the IMF's recommendations, was enacted in 2003. However, the IAIS revised its ICPs in October 2003, and the FIRST Initiative report concluded that the ISC needed to conduct a self-assessment against the new IAIS ICPs to ensure compliance. In its 2005 Annual Report, the ISC announced that it had carried out a self-assessment to determine whether the new IAIS ICPs were observed in Lithuania. The results of this self-assessment were submitted to the IAIS, and the ISC "fully" implemented 94% of the ICPs, with 6% of them deemed to be only "partially" implemented. According to a 2006 European Bank for Reconstruction and Development (EBRD) report on strategy for Lithuania, insurance legislation and regulation in Lithuania "almost fully meet" IAIS standards.

As reported in the Sorainen 2007 Legal Update, the Law on Insurance was adopted on September 18, 2003, and was last amended in July 2004 in accordance with EU requirements and IAIS standards. According to the same report, the ISC announced that a draft law amending the Law on Insurance and introducing new regulatory requirements for insurance brokers had been submitted to the Lithuanian government on March 9, 2007. The new Law on Markets in Financial Instruments is scheduled to come into effect on November 1, 2007, regulating certain aspects of the insurance industry. In December 2006, a draft law amending the existing 2002 Motor Third-Party Liability Insurance Law, which implements Directive 2005/14/EC of the European parliament, was submitted to the Lithuanian parliament. According to the 2005 ISC Annual Report, although the legal regulation of the Lithuanian insurance market complied with EU requirements upon its accession to the EU, new EU legal acts must be transposed into Lithuanian Law. Furthermore, by December 10, 2007, Lithuania will have to adopt EU Directive 2005/68/EC on reinsurance, which seeks to develop a reliable and rational mechanism for the functioning of the reinsurance sector and to ensure consumer protection.

SISA, which was established in 1996 under the Ministry of Finance (MoF) of Lithuania, was reorganized into the ISC in 2004. The ISC is the competent authority for licensing, regulating and supervising insurance entities. As stated in the 2006 EBRD Report, the capacity of the ISC should be further enhanced in order to ensure effective insurance supervision. The ISC participates in the drafting of the EU Directive on Insurance and Reinsurance Supervision and cooperates with supervisory institutions of other EU member states in order to ensure proper protection of policyholders, as noted in its 2006 Annual Report. It is also a member of IAIS, and the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS), which provides advice to the European Commission, and ensures the implementation and coordination of legal acts in EU Member States.

According to a 2006 Third Round Detailed Assessment on Lithuania conducted by the European Committee on Crime Problems and Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (CDPC & MONEYVAL), the insurance sector consists of nine life insurance and 16 non-life insurance companies, as well as 89 insurance broker companies (dependent intermediaries). In 2006, the Lithuanian insurance market grew at a rate of 31.8%, which is three times greater than the average growth rate in the EU. Nevertheless, the Lithuanian insurance market is still underdeveloped, and lags significantly behind EU member states in terms of insurance penetration and density.

The Principles

ICP 1 Conditions for effective insurance supervision

II

There is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003. As reported in the Sorainen 2007 Legal Update, the Law on Insurance was adopted on September 18, 2003 and was last amended in July 2004 in accordance with EU requirements and IAIS standards. According to the same report, the ISC announced that a draft law amending the Law on Insurance, which introduces new regulatory requirement for insurance brokers, had been submitted to the Lithuanian government on March 9, 2007. The new Law on Markets in Financial Instruments is also scheduled to come into effect on November 1, 2007, regulating certain aspects of the insurance industry. Furthermore, in December 2006, a draft law amending the existing 2002 Motor Third-Party Liability Insurance Law, which implements Directive 2005/14/EC of the European Parliament, was submitted to the Lithuanian parliament. According to the 2005 ISC Annual Report, although the legal regulation of the Lithuanian insurance market complied with EU requirements upon its accession to the EU, new EU legal acts must be transposed into Lithuanian Law. Furthermore, by December 10, 2007 Lithuania will have to adopt EU Directive 2005/68/EC on reinsurance, which seeks to develop a reliable and rational mechanism for the functioning of the reinsurance sector and to ensure consumer protection.

ICP 2 Supervisory objectives

II

There is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003. As noted in its 2006 Annual Report, the purpose of the ISC is "to ensure the reliability, efficiency, safety, and stability of the insurance system and to guarantee protection of the interests and rights of the policyholders, the insured, the beneficiaries, and injured third parties" (p.31).

ICP 3 Supervisory authority

II

According to the IMF's 2002 ROSC, the legislative framework did not give sufficient powers to SISA, which was reorganized into the ISC in 2004, to fully discharge its responsibilities. Furthermore, Lithuanian authorities needed to ensure the financial and organizational independence of the supervisory authority. With regards to the 2000 ICP 15 on cross-border business operations, IMF recommended allowing SISA to refuse the establishment of branches where parent companies were not subject to effective supervision. In the same report, Lithuanian authorities acknowledged the importance of this issue, and the need to incorporate it into the Insurance Law. In its 2006 report on a strategy for Lithuania, EBRD notes that the capacity of the ISC, which has been the competent authority for licensing, regulating, and supervising insurance entities since 2004, needs to be further enhanced in order to ensure effective insurance supervision. Nevertheless, there is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003.

ICP 4 Supervisory process

II

There is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003. According to the 2002 IMF ROSC, SISA, which was reorganized into the ISC in 2004, put a strong emphasis on disclosure of information, and provided important information regarding the market, inspection activity, and legislative changes within the limits of the regulatory framework existing at the time of the assessment. However, the IMF concluded that "the supervisory process lacks transparency, objectivity and may be less than fully effective" (p. 58).

ICP 5 Supervisory cooperation and information sharing

II

According to its 2006 Annual Report, the ISC participates in the drafting of EU Directive on Insurance and Reinsurance Supervision, and cooperates with supervisory institutions of other EU Member States in order to ensure proper protection of policyholders. The ISC is also part of CEIOPS, which provides advice to the European Commission and ensures the implementation and coordination of legal acts in EU member states. Nevertheless, there is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003.

ICP 6 Licensing

II

In its 2002 ROSC, with regards to the 2000 ICP 2 on Licensing, the IMF recommended tightening regulations on entry and extending the grounds for refusing licenses. It also advised relaxing or eliminating the time limit given to SISA (reorganized into the ISC in 2004) to process an application. As noted in its 2006 Annual Report, the ISC did not issue any licenses to engage in insurance activity in 2006, but cancelled the validity of the licenses of two insurance undertakings. Nevertheless, there is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003.

ICP 7 Suitability of persons

II

There is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by the IAIS in October 2003. In its 2002 ROSC, the IMF recommended introducing stronger fit and proper test in order to improve the insurance supervision framework.

ICP 8 Changes in control and portfolio transfers

II

In its 2002 ROSC, with regards to the 2000 ICP 3 on Changes in control, the IMF recommended amending legislation to require SISA (reorganized into the ISC in 2004) to control outsourcing contracts. In the same report, Lithuanian authorities responded that amendments to the Insurance Law were on track to allow SISA to address this issue. Nevertheless, there is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003.

ICP 9 Corporate governance

II

According to the 2002 IMF ROSC, the legislative framework in Lithuania is characterized by important gaps in corporate governance. Hence in relation to the 2000 ICP 4 on Corporate Governance, the IMF recommended amending legislation to require the board of directors be responsible for policyholders' interests. It also advised requiring the body of directors to establish investment, underwriting risk management, and market conduct committees. In the same report, Lithuanian authorities responded that issues related to corporate governance were to be addressed in the new Law on Insurance. Nevertheless, there is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003.

ICP 10 Internal control

II

There is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003. According to the 2002 IMF ROSC, the legislative framework in Lithuania was characterized by important gaps in internal controls. Hence in relation to the 2000 ICP 5 on Internal Control, the IMF advised requiring insurance companies to establish an ongoing audit function, and appoint an external actuary. In the same report, Lithuanian authorities responded that issues related to internal controls were to be addressed in the new Law on Insurance.

ICP 11 Market analysis

II

There is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003.

ICP 12 Reporting to supervisors and off-site monitoring

II

There is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003. In its 2002 ROSC, with regards to the 2000 ICP 12 on Financial Reporting, the IMF recommended introducing an electronic system for filing financial reports. According to the same report, Lithuanian authorities responded that monitoring and financial reporting were expected to improve substantially in the coming years with the development by SISA (reorganized into the ISC in 2004) of an electronic software for filing financial reports.

According to the 2007 KPMG Investment Guide, beginning in 2004, insurance companies in Lithuania prepare financial statements in accordance with Lithuanian Business Accounting Standards (LBASs), which require less disclosure than the corresponding International Accounting Standards (IASs) and International Financial Reporting Standards (IFRSs). Lithuania complies with European Commission Regulation No 1606/2002, which requires all EU listed companies to prepare consolidated accounts following IFRSs starting January 1, 2005.

ICP 13 On-site inspection

II

According to its 2006 Annual Report, the ISC carried out 12 inspections of insurance companies. On-site inspections of the majority of undertakings engaged in compulsory MTPL insurance were conducted in order to determine the adequacy of insurance technical provisions. Nevertheless, there is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003.

ICP 14 Preventive and corrective measures

II

There is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003.

ICP 15 Enforcement or sanctions

II

According to the IMF's 2002 ROSC, the sanctioning framework was characterized by excessive discretion. Therefore, in relation to the 2000 ICP 14 on Sanctions, the IMF recommended developing a sanctioning manual to ensure objectivity in the sanctioning process. As noted in the 2005 ISC Annual Report, a resolution was passed by the ISC on November 2, 2005 regarding supervision of the implementation of international sanctions. Nevertheless, there is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003.

ICP 16 Winding-up & exit from the market

II

There is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003. According to a 2002 ROSC conducted by the IMF, the liquidation process is slow and Lithuanian courts can choose a liquidator outside the list provided by SISA (reorganized into the ISC in 2004). The IMF recommended amending legislation to address these shortcomings.

ICP 17 Group-wide supervision

II

There is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003.

ICP 18 Risk assessment and management

II

There is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003. According to the 2005 ISC Annual Report, the transposition of new EU legal acts into Lithuanian Law will be favorable to insurance companies in terms of harmonization of risk management and accounting requirements.

ICP 19 Insurance activity

II

In its 2002 ROSC, with regards to the 2000 ICP 10 on Reinsurance, the IMF recommended allowing SISA (reorganized into the ISC in 2004) to require modification in the reinsurance treaties in certain circumstances. According to the 2005 ISC Annual Report, Lithuania will have to adopt EU Directive 2005/68/EC on reinsurance by December 10, 2007. Nevertheless, there is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003.

ICP 20 Liabilities

II

There is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003.

ICP 21 Investments

II

There is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003. In its 2002 ROSC, with regards to the 2000 ICP 6 on Assets, the IMF recommended establishing asset valuation standards. It also advised SISA (reorganized into the ISC in 2004) to monitor the implementation of investment policies required by insurance companies. According to the same report, Lithuanian authorities responded that prudential requirements in investment regulation were expected to be adopted in 2002. They added that issues related to asset valuation were outside the responsibility of SISA.

ICP 22 Derivatives and similar commitments

II

There is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003. According to the 2002 ROSC conducted by the IMF, Lithuania should give more attention to supervising derivatives activity, and the use of derivatives should be regulated by general provisions in the law. With regards to the 2000 ICP 9 on derivatives and off-balance sheet items, IMF advised requiring SISA (reorganized into the ISC in 2004) to conduct consolidated supervision.

ICP 23 Capital adequacy and solvency

II

In its 2002 ROSC, with regards to the 2000 ICP 8 on Capital adequacy and solvency, the IMF recommended allowing SISA (reorganized into ISC in 2004) to required insurance companies to hold capital at higher levels than the minimum capital requirements in certain circumstances. Nevertheless, there is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003.

ICP 24 Intermediaries

II

There is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003. In its 2002 ROSC, with regards to the 2000 ICP 11 on Market Conduct, the IMF advised SISA (reorganized into the ISC in 2004) to monitor implementation of the fair treatment of policyholders required by insurance companies and to develop standards of market conduct. According to the same report, Lithuanian authorities responded that issues related to market conduct should be addressed by self-regulation of the insurance industry. As noted in the 2006 CDPC & MONEYVAL report, the insurance sector in Lithuania comprises 89 insurance broker companies (dependent intermediaries).

ICP 25 Consumer protection

II

There is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003. According to a 2002 ROSC conducted by the IMF, consumer protection in the insurance sector is weak and could be improved by requiring insurance companies' boards of directors to safeguard policyholder's interest. Furthermore, the IMF advised SISA (reorganized into the ISC in 2004) to closely monitor compliance with consumer protection provisions. Per a 2005 ISC Annual Report, Lithuania will have to adopt EU Directive 2005/68/EC on reinsurance by December 10, 2007, with the aim of developing a reliable and rational mechanism for the functioning of the reinsurance sector, and ensuring consumer protection.

ICP 26 Information, disclosure & transparency towards the market

II

There is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003. According to the 2006 ISC Annual Report, the requirement for insurance companies to disclose interim financial statements, following the enactment of ISC Resolution No. 59 in May 2006, will ensure greater transparency in the insurance market.

ICP 27 Fraud

II

There is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003.

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

II

There is insufficient publicly available information regarding Lithuania's compliance with the revised ICPs issued by IAIS in October 2003. Per a 2006 CDPC & MONEYVAL assessment, insurance undertakings and insurance brokers are subject to an anti-money laundering and combating the financing of terrorism regime in accordance with the Law on Prevention of Money Laundering, as amended in November 2003. However, insurance agents (dependent intermediaries) do not directly comply with anti-money laundering and combating the financing of terrorism regulations.