Portugal is highly observant of the Insurance Core Principles (ICPs) promulgated by the International Association of Insurance Supervisors in 2003, attests the 2007 detailed assessment published by the International Monetary Fund (IMF), with 22 of the 28 ICPs being fully observed and the remaining 6 being largely observed. The supervisory authority and practices of the Insurance and Pension Funds Supervisory Authority of Portugal (ISP) also meet high international standards. Areas of less than full compliance include the financial autonomy of the ISP, fit and proper criteria, corporate governance and internal control framework, consumer protection, and insurance fraud. Key recommendations made by the assessment are to relieve the ISP of the task of managing Guarantee funds so that it can focus on its supervisory objectives, to strengthen internal control procedures, and to more clearly define suitability of persons. The IMF, however, notes that some of the shortcomings are already on their way to being addressed with Portugal approving pertinent legal amendments pertaining to internal control and consumer protection. A 2008 IMF report provides an update on further progress made by Portugal and states that the ISP has forwarded proposals to strengthen its budgetary autonomy. Draft laws laying down fit and proper requirements for senior management, establishing a business conduct code, setting up a complaints function and an Ombudsman in every insurance undertaking, and requiring insurers to prevent, detect and report insurance fraud, are also under the consideration of the government.

General Overview

In the words of the International Monetary Fund's (IMF) 2006 Financial System Stability Assessment (FSSA), "the level of observance of the ICPs [Insurance Core Principles] in Portugal is high and several planned measures and legal changes, not yet fully implemented at the time of the assessment, will likely address most of the remaining issues" (p. 34). Further, the supervision of the insurance sector, entrusted to a very professional Insurance and Pension Funds Supervisory Authority of Portugal (ISP), is "active, well organized, and highly compliant with international standards" (p. 26). The detailed assessment that was published in 2007 as a result of the 2006 Financial Sector Assessment Program (FSAP) elaborates that Portugal fully observes 22 of the 28 ICPs issued in 2003 and largely observes the remaining 6 ICPs. Nevertheless, the assessment does point out several areas of weaknesses in insurance sector supervision. For instance, the ISP does not possess complete financial autonomy since the Ministry of Finance and Public Administration (MFAP) must approve its budget. Also, the staff resources of the ISP may not be optimal to fully implement Solvency II. Further, fit and proper requirements for senior management, external auditors and other key officials of insurers are not clearly articulated in the law resulting in little authority to the ISP to enforce such requirements. The law is also weak and inexplicit in defining the specific responsibilities of the governing body of the insurer, or setting up audit committees, or granting independence to the actuaries. In addition, it does not specifically address the issue of insurance fraud thereby making compliance sketchy. Finally, although internal control and consumer protection regulations are in place or awaiting approval, they have not been fully implemented.

Secondary recommendations of the IMF for principles where Portugal gets a full compliance rating are hereby included. Firstly, the ISP should be relieved of the responsibility of managing the Guarantee funds and claims and allowed to concentrate on fulfilling its core supervisory objectives. Second, insurance investments should be made based on formal ratings of corporate debt to make them more reliable. Thirdly, capital adequacy requirements need to be made risk-sensitive and the ISP must adopt a risk-based approach to supervision in anticipation of Solvency II. The ISP should further consider relieving some of its administrative burden of supervising the large number of insurance intermediaries by charging some administrative fee from foreign applicants seeking to open business in Portugal. Finally, information disclosure should be enlarged in scope in keeping with Pillar III of Solvency II. In the context of the critique and recommendations proffered by the IMF, the Portuguese authorities responded by iterating that they "will continue to work towards their progressive implementation, both by drawing up regulatory measures and by preparing proposals for the amendment of existing laws" (IMF 2007, p. 61).

The progress made by Portugal in implementing the FSAP recommendations is outlined in the 2008 Article IV report by the IMF. The report finds that the country is on its way to removing all the shortcomings pointed out by the FSAP. For instance, a draft law to transfer the management of Guarantee funds from the ISP to a new public company is under consideration by the government after a period of public consultation. Another draft law setting fit and proper requirements for insurers' senior management and authorizing the ISP to demand the removal of a senior manager who is no longer deemed fit and proper is also under government consideration. The draft law will also oblige insurance undertakings to put in place standards of business conduct and ethical behavior codes and monitor their staff's conduct on those yardsticks. Further, the law will establish an Ombudsman position as well as an independent compliant management function in every insurance undertaking. Lastly, the law will mandate insurance undertakings to have a policy on preventing, detecting, and reporting insurance fraud. This law is under consideration by the government after a period of public consultation.

The supervisory system in Portugal, mentions the IMF, is a "combination of a traditional sectoral approach with a partially integrated functional approach" (2006, p. 26), wherein the Bank of Portugal (BdP) is the ultimate prudential regulator and supervisor of banks, while the Portuguese Securities Market Commission (CMVM) is charged with the cross-sectoral supervision of the market conduct of financial intermediaries. As mentioned above the ISP supervises the insurance sector. Coordinated supervision is ensured through bilateral memoranda of understanding (MoUs) as well as a high-level committee, the National Council of Financial Supervisors (CNSF), which has representatives from the ISP, BdP, and the CMVM. The IMF notes that "this framework has worked well in general, and it will be important that in coming periods there is no distraction from the key tasks of implementing major supervisory initiatives such as Basel II and Solvency II" (2006, pp. 26-27).

Elaborating on the powers and responsibilities of the ISP, the 2007 IMF detailed assessment states that the ISP "is responsible for the regulation, inspection and supervision of the businesses of insurance, reinsurance, insurance intermediaries and pension funds, as well as related or complementary activities" (p. 11). It carries out this function through its Supervision Directorate. The ISP is an autonomous public body under the overall authority of the MFAP. However, this authority is confined by the terms set out in the ISP's Charter. The Charter further stipulates that the ISP must carry on its supervisory duties in accordance with the national as well as European Union (EU)-level legislative framework so as to ensure a smooth functioning of the market, and the protection of the market as well as the insurance creditors. Its powers in this regard are extensive, notes the IMF. The key law providing the legal framework to taking up and pursuing the business of insurance as well as defining and detailing the supervisory tasks and responsibilities of the ISP is the Decree-Law No. 94-B of 1998. Other pertinent laws are Decree-Law No. 475 of 1999 governing the creation and management of pension funds and management companies, and Decree-Law No. 388 of 1991 governing insurance intermediation. Additionally, the ISP can issue binding regulations and instructions to its supervised entities. The ISP is listed as a member on the International Association of Insurance Supervisors (IAIS) website.

According to a 2008 report published on the ISP website, in 2007, premium income of insurance undertakings from direct business reached a value of €14,000 million, reflecting a 7 percent increase in the life insurance sector and only 0.7 percent growth in the non-life business. Profit before taxes, however, declined approximately 11 percent to total €838 million. In 2007, the number of insurance undertakings grew from 76 to 86, and that of insurance intermediaries grew from 377 to 414. As the IMF detailed assessment adds, insurance market in Portugal is dominated by personal lines products, life, and pensions, and they are to a large extent (80 percent) distributed by associated banks. The general insurance market is relatively underdeveloped, mostly confined to motor and workers compensation, and distributed through personalized intermediaries, the IMF notes.

The Principles

ICP 1 Conditions for effective insurance supervision

FC

This principle is observed, per the 2007 detailed assessment by the IMF, as "good conditions for effective supervision are in place" (p. 17). High quality professional resources are available for effective supervision and the market infrastructure is also conducive to efficient management of the sector. Insurance entities have a wide range of operational services at their disposal to enable them to focus on the technical aspects of the business. The ISP practices risk-based supervision and makes extensive use of actuaries. The detailed assessment makes no recommendations for this principle.

ICP 2 Supervisory objectives

FC

This principle is observed, per the 2007 detailed assessment by the IMF. However, the IMF advises the transfer of the task of managing Guarantee funds and claims from the ISP to other organizations to allow the former to concentrate on its supervisory objectives. Also, a smooth segregation of responsibilities on a departmental basis is both advisable and possible given the ISP's organizational structure, observes the IMF. In the context of this recommendation, the 2008 IMF report mentions that a draft law to transfer the management of Guarantee funds from the ISP to a new public company is under consideration by the government after a period of public consultation.

ICP 3 Supervisory authority

CP

This principle is largely observed, per the 2007 detailed assessment by the IMF, due to the limits to its supervisory autonomy as a consequence of having its budget approved by the MFAP. The IMF feels that more protection should be accorded to the ISP from inappropriate interference from the executive branches so that it can fully and independently utilize its financial resources. Also, the ISP's staff resources may need to be reassessed to ascertain if it has the capacity to implement Solvency II. In the context of the IMF recommendation relating to the ISP's financial independence, the 2008 Article IV report of the IMF acknowledges the progress made. It states that "the ISP has already submitted to the Government a proposal to amend its Charter in order to replicate the provision that has been included in the State Budget Law since 2006, setting out that the general budgetary and public accountancy rules regarding freezing of funds, carry-over and use of surplus, and the twelfth expenditure system are not applicable to ISP" (p. 36).

ICP 4 Supervisory process

FC

This principle is observed, per the 2007 detailed assessment by the IMF. The legal framework guarantees transparent and consistent supervisory processes and prevents arbitrary or unjustified decisions. A risk based supervisory policy framework is in the works and manuals on supervisory practices and procedures are being expanded to further promote consistent decision-making. The detailed assessment makes no recommendations for this principle.

ICP 5 Supervisory cooperation and information sharing

FC

This principle is observed, per the 2007 detailed assessment by the IMF. The ISP has various cooperation and information sharing agreements with other supervisory authorities within the EU and with non-EU Member States. However, formal agreements are not required for information exchange either domestically or abroad. The ISP is party to several EU protocols that are mentioned on the Committee of European Insurance and Occupational Pensions Supervisors website. Information sharing is subject to professional secrecy obligations. Domestically, too, the ISP has a MoU for cooperation and information exchange with the BdP and is developing a similar one with the CMVM. The detailed assessment makes no recommendations for this principle.

ICP 6 Licensing

FC

This principle is observed, per the 2007 detailed assessment by the IMF. Decree-Law No. 94-B of 1998 defines an insurer and the legal forms they may take, viz., limited companies, mutuals, branches of insurance undertakings, public insurance or public capital companies or insurance companies that adopt the form of a European Company. The ISP is the authority to grant licenses to the insurance undertakings; however, its authorization is not required for an EU insurer to open a branch and provide insurance services in Portugal. Operating without a license is a criminal offense punishable by imprisonment of up to three years. The detailed assessment makes no recommendations for this principle.

ICP 7 Suitability of persons

CP

This principle is largely observed, per the 2007 detailed assessment by the IMF, since "the Law does not address fit and proper requirements for senior management and other key officers to a sufficient extent" (p. 29) and no such requirements exist for the insurers' external auditors. Further, the ISP is also not empowered to demand the removal of significant owners who are no longer deemed fit and proper. The IMF acknowledges, however, that the ISP intends to propose an amendment to the law to formally address fit and proper requirements for senior management and external auditors as well to confer upon the ISP the authority to disqualify unsuitable auditors or senior managers and remove unfit owners. In anticipation, the ISP has also directed the insurers to fall in line with the proposed legislation and has found that none of the entities will need to make changes once the legislation is in effect. In the context of the IMF's recommendation on the suitability of persons, the 2008 IMF report attests that a draft law setting fit and proper requirements for insurers' senior management and authorizing the ISP to demand the removal of a senior manager who is no longer deemed fit and proper is under consideration by the government after a period of public consultation.

ICP 8 Changes in control and portfolio transfers

FC

This principle is observed, per the 2007 detailed assessment by the IMF. The ISP's supervision in this area is sound as is attested by the fact that since 2000 no mergers, qualifying holdings and portfolio transfers have required rejection by the ISP or posed other problems. The detailed assessment makes no recommendations for this principle.

ICP 9 Corporate governance

CP

This principle is largely observed, per the 2007 detailed assessment by the IMF. This is because non-executive directors constitute a small minority on the governing bodies, whose responsibilities are also not clearly defined in the areas of business conduct and ethical behavior, conflicts of interest, fair treatment of customers, and information sharing with stakeholders. Also, many insurers do not have audit committees and actuaries are neither independent from the insurers nor do they have direct access to the governing body. The IMF does observe various steps taken by the ISP to achieve closer compliance with this principle. For instance, the ISP conducted an inquiry in 2005 to assess the governance structure, internal control, and risk management systems of insurance undertakings. It has also intended proposing a law in 2006 to remove the shortcomings in the organization and functions of governing bodies as noted by the IMF assessment. As for the weaknesses in statutory audits, they should be addressed, per the IMF, when Portugal transposes the EU Directive on statutory audit of annual accounts and consolidated accounts (Directive 2006/43/EC), preparation for which is already underway. In the context of the IMF's recommendation on the suitability of persons, the 2008 IMF report attests that a draft law setting fit and proper requirements for insurers' senior management and authorizing the ISP to demand the removal of a senior manager who is no longer deemed fit and proper is under consideration by the government after a period of public consultation. The draft law will also oblige insurance undertakings to put in place standards of business conduct and ethical behavior codes and monitor their staff's conduct on those yardsticks. Lastly, the law will establish an Ombudsman position as well as an independent compliant management function in every insurance undertaking. With respect to Directive 2006/43/EC, a 2008 self-assessment by the Portuguese Institute of Public Accountants (OROC) points out that the Directive has been enacted and effective May 2006, and since, all statutory audits of annual and consolidated accounts must be carried out on the basis of International Standards on Auditing (ISAs) as adopted by the European Commission (EC). EU member states were to adopt and publish the provisions necessary to comply with this Directive before June 29, 2008. However, member states have the option to impose additional requirements relating to the statuary audits of annual and consolidated accounts for periods expiring on June 29, 2010.

ICP 10 Internal control

CP

This principle is largely observed, per the 2007 detailed assessment by the IMF, but only during the transition period when the new regulation on internal control (Regulatory Norm No. 14 of 2005) that is approved and in force in anticipation of the Solvency II project is fully implemented in the country.

ICP 11 Market analysis

FC

This principle is observed, per the 2007 detailed assessment by the IMF. The ISP clearly lays down in its Charter that it will collect, process, and publish all statistical data on insurance, reinsurance, and pension funds as well as publish all annual reports on these markets, its own financial condition, and its position in the national economy. It will also promote technical studies related to its supervisory performance. All the above will be made available to the insurance industry and other interested parties through publications and on the ISP website. The detailed assessment makes no recommendations for this principle.

ICP 12 Reporting to supervisors and off-site monitoring

FC

This principle is observed, per the 2007 detailed assessment by the IMF, and the ISP "may request from all government departments and other public bodies, as well as from any private bodies, any information that is deemed relevant for ISP to fulfill its duties" (p. 35). It reviews the annual accounts of insurance entities, assesses their technical provisions, and can require adjustments. It also monitors compliance of entities with prudential rules and applicable legislations. The detailed assessment makes no recommendations for this principle.

ICP 13 On-site inspection

FC

This principle is observed, per the 2007 detailed assessment by the IMF. The ISP has the power to request information, conduct reviews and on-site examinations of all supervised insurers, insurance intermediaries, and other companies to which the supervised entities outsource their functions. During on-site inspections, the ISP supervisors have access to the physical premises of the entities, identify breaches and the entities charged with those breaches, and can request assistance from administrative or judicial authorities for further action. On-site inspections are on average held every four years. The detailed assessment makes no recommendations for this principle.

ICP 14 Preventive and corrective measures

FC

This principle is observed, per the 2007 detailed assessment by the IMF. Decree-Law No. 94-B of 1998 empowers the ISP to take timely preventive and corrective measures if an insurer is in breach of legal and regulatory requirements or is operating contrary to sound business practices. The detailed assessment makes no recommendations for this principle.

ICP 15 Enforcement or sanctions

FC

This principle is observed, per the 2007 detailed assessment by the IMF. The ISP can issue binding instructions to and take all necessary measures against entities that are found to be in breach of regulations or have other irregularities. Further, any activity engaged in by an insurance entity against these instructions is considered invalid. Entities obstructing supervisory action by the ISP are deemed to be committing a serious administrative offence and fined accordingly. Overall, the IMF assessment notes, the ISP has "a wide set of powers" (p. 40) to protect insurance holders and beneficiaries and ensure the smooth functioning of the insurance market. The detailed assessment makes no recommendations for this principle.

ICP 16 Winding-up & exit from the market

FC

This principle is observed, per the 2007 detailed assessment by the IMF. Winding up situations for insurance undertakings and the concomitant procedures have been specified in the Portuguese law. The winding up system in Portugal, per the IMF, lays special emphasis on the protection of the rights and entitlements of policy holders and their beneficiaries. The detailed assessment makes no recommendations for this principle.

ICP 17 Group-wide supervision

FC

This principle is observed, per the 2007 detailed assessment by the IMF. Decree-Law No. 94-B of 1998 provides for group-wide supervision, defines what constitutes being part of a group and clarifies what types of companies will come under the scope of group-wide supervision. Another legislation addressing the supervision of financial conglomerates has been prepared in collaboration with the BdP and the CMVM and approved by the executive. The detailed assessment makes no recommendations for this principle.

ICP 18 Risk assessment and management

FC

This principle is observed, per the 2007 detailed assessment by the IMF. Both the regulatory framework and the large insurance companies identify risk management and internal control as necessary preconditions for prudent and sound operation of the companies, and therefore although specific regulations have only recently been put into place, in practice most large companies already operate on the basis of a risk management perspective. Insurance companies that form part of a financial conglomerate are also subject to the banking sector's risk management regulations. The detailed assessment makes no recommendations for this principle.

ICP 19 Insurance activity

FC

This principle is observed, per the 2007 detailed assessment by the IMF. The activities of insurers must be analyzed by the responsible actuary and an annual report submitted verifying the suitability, sufficiency and conformity of those activities with the established legislation and their associated income and costs. Reinsurance treaties entered into by insurers also must be submitted to the ISP annually to enable ongoing supervision of reinsurance policies of insurers. The Chart of Accounts for Insurance Companies has to be followed in preparing financial statements to account for all risk transfers as a result of reinsurance. The detailed assessment makes no recommendations for this principle.

ICP 20 Liabilities

FC

This principle is observed, per the 2007 detailed assessment by the IMF. Decree-Law No. 94-B of 1998 stipulates that all insurance companies must have technical as well as non-technical provisions to meet the commitments deriving from insurance contracts. Liabilities are clearly defined in the law, as are suitable provisions to be maintained by insurers. ISP regulations further prescribe the rules and methodologies to be used to calculate technical as well as non-technical provisions. The detailed assessment makes no recommendations for this principle.

ICP 21 Investments

FC

This principle is observed, per the 2007 detailed assessment by the IMF. However, the IMF does note that insurers have significant investments in corporate debt that are un-rated. This might mask the exposure to weak debt. The IMF also takes issue with the absence of ratings and the fact that corporations avoid getting rated.

ICP 22 Derivatives and similar commitments

FC

This principle is observed, per the 2007 detailed assessment by the IMF. ISP Regulation No. 13/2003-R and Administrative Order No. 299 of 1999 allow the use of derivatives and similar commitments, such as options, futures, and swaps as risk mitigation techniques and financial instruments, "but only to the extent that they contribute to a reduction of the investment risk in such assets or contribute to a more efficient management of the investment portfolio" (p. 50), the assessment notes. Further, specific regulation of the ISP to regulate the use and accounting of derivatives and similar commitments was issued in 1998, and subsequently amended in 2002 by ISP Regulation No. 7/2002-R and No. 9/2002-R. The detailed assessment makes no recommendations for this principle.

ICP 23 Capital adequacy and solvency

FC

This principle is observed, per the 2007 detailed assessment by the IMF. The IMF, nevertheless, does point out that the capital adequacy requirements "are not adequately sensitive to the risks of the insurer’s operations" (p. 52) and that the law "does not set specific requirements regarding the matching of assets and liabilities" (p. 52). It, therefore, recommends the ISP to move towards a risk based approach to establishing solvency and capital adequacy requirements in anticipation of Solvency II.

ICP 24 Intermediaries

FC

This principle is observed, per the 2007 detailed assessment by the IMF. The IMF, however, observes that the large number of personalized intermediaries operating in Portugal pose an administrative burden to the ISP, and many multinational intermediaries would like to provide their services in Portugal, potentially increasing this burden. Although, the IMF feels that EU Directive 2002/92/EC on insurance mediation should lead to a slight reduction in the ISP's responsibilities, it advises the latter to charge foreign intermediaries an administration fee to share some of the administrative costs involved with their supervision.

ICP 25 Consumer protection

CP

This principle is largely observed, per the 2007 detailed assessment by the IMF, but only during the transition period before the new intermediation law that is in the final stages of approval will be implemented. Once the legislation is in place, the IMF avers, there will be "adequate procedures to ensure that an appropriate level of consumer protection will be put in place" (p. 54). In addition, the ISP also intends to introduce policies to ensure fair treatment of customers by insurers, establishment of appropriate systems, and training of employees and salespersons by the undertakings with regard to these policies.

ICP 26 Information, disclosure & transparency towards the market

FC

This principle is observed, per the 2007 detailed assessment by the IMF. However, as the IMF suggests, "the scope of information disclosed could be enlarged and should be reviewed in the context of the outcome of Pillar III of Solvency II" (p. 55).

ICP 27 Fraud

CP

This principle is largely observed, per the 2007 detailed assessment by the IMF, as insurance fraud is not specifically addressed in the Decree-Law No. 94-B of 1998. Insurers and insurance intermediaries are, therefore, not obliged to detect, deter, record and promptly report insurance fraud through effective procedures and adequate allocation of resources. The IMF recommends that training be provided by insurers and intermediaries to their management and other employees regarding fraud and that an information exchange system be set up to compare notes on fraudulent activities as well as those committing fraud. In the context of the IMF's recommendation on setting rules or guidelines to prevent fraud, the 2008 IMF report attests that a draft law that will mandate insurance undertakings to have a policy on preventing, detecting and reporting insurance fraud is under consideration by the government after a period of public consultation.

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

FC

This principle is observed, per the 2007 detailed assessment by the IMF, and "the legal framework sets down several duties for financial institutions, in which the insurance undertakings that carry out 'Life Insurance' activities are included, that are consistent with the FATF’s [Financial Action Task Force] Recommendations" (p. 56). EU Directive 2001/97/EC on prevention of the use of the financial system for the purpose of money laundering has been transposed into Portuguese law by Decree-Law No. 11 of 2004 and ISP Regulation 10/2005-R regulates in more detail the duties and obligations of insurance undertakings to prevent involvement in money laundering. Per the IMF assessment, the ISP also has "adequate powers of supervision, enforcement and sanction" (p. 57) to monitor entities' compliance with their anti-money laundering (AML) obligations. It also has adequate powers to cooperate with both domestic and foreign authorities and financial intelligence units in AML enforcement and other matters.