Newsletter
Brief Analysis of Cases of Administrative Penalties on Insurance Enterprises
According to a press release dated October 13, 2020 issued by the Financial Supervisory Commission (the "FSC"), between 1 January, 2020 and 8 October 2020, the FSC imposed administrative fines of NT$106.4 million in total on insurers for deficiencies listed in the 2019 financial examination reports or discovered in the course of routine supervisory examination. Of the foregoing administrative fines, life insurance enterprises were fined NT$71.5 million, property insurance enterprises were fined NT$9.6 million, and the insurance broker and insurance agent companies were fined NT$25.3 million. As far as the administrative fines are concerned, the highest proportion is due to non-compliance relating to internal control or corporate governance requirements, followed by solicitation, policy underwriting and claims settlement.
In addition to imposing administrative fines exceeding NT$100 million, the FSC has for three consecutive years suspended or dismissed the responsible persons of insurance enterprises. This indicates violations of laws, regulations or hindrance to sound operation of insurance enterprises has worsened. Below is a brief analysis of the types and contents of recent cases of administrative penalties:
I. Internal Control and Audit System
To maintain operational stability and financial soundness of insurance enterprises, Article 148-3 of the Insurance Act provides that insurance enterprises shall establish the internal control and audit system and authorizes the FSC to stipulate the Regulations Governing Implementation of Internal Control and Audit System of Insurance Enterprises (the "Internal Control Regulation"). Pursuant to Paragraph 4 of Article 171-1 of the Insurance Act, the FSC may impose an administrative fine from NT$600,000 to NT$12 million on insurers for failure to establish or implement internal control and audit system.
An insurance enterprise may have violated the Internal Control Regulations if deficiencies were found in organization, personnel and operations when performing self-inspection, regulatory compliance and risk management as well as internal audit. For instance, failure to establish or implement the internal control and audit system covering items such as management of insurance solicitation agents (i.e., insurance solicitors, insurance brokers and insurance agents), insurance product sales management (e.g., aftercare sales service for investment-linked insurance products), and use of funds (e.g., investment decision and selection of real estate appraisal company).
In particular, FSC's administrative penalties relating to suspension and dismissal of responsible persons of insurance enterprises in recent three years were all due to the insurance enterprises' failure to establish or implement the relevant internal control and audit system. This clearly shows the FSC attaches great importance on the establishment and implementation of internal control and audit system.
II. Solicitation, Policy Underwriting and Claim Settlement
Article 148-3 of the Insurance Act provides that insurance enterprises shall establish the internal processing system and procedures for policy solicitation, underwriting and claims settlement and authorizes FSC to stipulate the Regulations Governing Business Solicitation, Policy Underwriting and Claim Settlement of Insurance Enterprises (the "Regulations"). Pursuant to Paragraph 5 of Article 171-1 of the Insurance Act, the FSC may impose an administrative fine from NT$600,000 to NT$12 million on insurance enterprises for failure to establish or implement the abovementioned internal processing system and procedures.
In cases where the policyholder is a legal entity, the deficiencies were commonly found in improper designation of the proposer and beneficiary, insurance product inconsistent with the objectives for which the insurance policy was purchased, incomplete disclosure of actual beneficiary information, operation of policy change and data preservation, and failure to preserve documentary evidence and details of examination record.
In cases where the policyholder is a natural person, the focus in recent years has been on pursuing customers to take out loans or cancel previous policies to purchase new policies, the solicitor's report does not correctly fill in the source of premiums and failure to examine the compatibility between the insurance premium payment and the occupation or financial condition of the policyholder. More than 50% of life insurance enterprises were fined between NT$600,000 and NT$6 million due to the abovementioned deficiencies. The FSC on May 21, 2020 issued another press release emphasizing that the insurance solicitation agents shall clearly identify the source of funds for the insurance premium and shall assign personnel to conduct a telephone interview with policyholders who purchased policies with policy reserve to verify whether the insurance solicitation agent fully understands the customer and whether any inappropriate solicitations were involved.
Following the abovementioned administrative penalties, the FSC amended Articles 6 and 7 of the Regulations to clarify and stipulate detailed requirements for policy solicitation and underwriting. The FSC also issued an order on December 28, 2020 (Ref. No.: Jin-Guan-Bao-Shou-Zi-10904947221) requiring insurance enterprises to ensure regulatory compliance by the soliciting agents. It is clear that the FSC has been placing more emphasis on regulatory compliance of insurance enterprises regarding solicitation, policy underwriting and claims settlement.
III. Use of Funds
Articles 146 to 146-7 of the Insurance Act provide the scope of use of funds by insurance enterprises and authorizes the FSC to stipulate relevant regulations (including Regulations Governing Derivatives Transactions Conducted by Insurance Enterprises, Regulations Governing the Investment in Privately Placement Securities of Unlisted and Non-OTC Companies by Insurance Enterprises, Regulations for Extending Loans by Insurance Enterprises to Interested Parties, Regulations Governing Foreign Investments by Insurance Companies, Regulations Governing Use of Insurer's Funds in Special Projects, Public Utilities and Social Welfare Enterprises, Regulations Governing Investments in Insurance-related Enterprises by Insurance Companies and Regulations Governing Transactions Other Than Loans between Insurance Enterprises and Interested Parties). Pursuant to Paragraph 5 of Article 168 of the Insurance Act, the FSC may impose an administrative fine from NT$1 million to NT$10 million on insurance enterprises or dismiss the responsible persons of insurance enterprises. In case of substantial violation, the FSC may also revoke the license of the insurance enterprise.
In recent years, deficiencies such as the investment or transaction amount exceeding the limitations set out in applicable laws, the counterparty or transaction subject not complying with relevant regulations, or related party transaction without supermajority resolution are commonly found. In addition, nearly one third of insurance enterprises were fined or requested to dispose of their real estate property by the FSC for failing to meet the "available for immediate use and generating income" standards for insurer investment in real estate. To strengthen regulation of real estate investments of insurance enterprises, the FSC has drafted amendments to the Insurance Act and issued a letter dated December 23, 2020 (Ref. No.: Jin-Guan-Bao-Shou-Zi-10904946301). The FSC reiterated its policy that insurer investment in real estate shall be limited to acquisition of ownership or superficies by paying royalties and rent, and the real estate shall be available for immediate use and can generate income. In other words, the FSC's supervision of insurer investment in real estate continues to follow the existing standards and principles.
The FSC's punishment notifications in recent years indicate that, besides general financial inspections, the FSC also conducts specialized inspections on e-commerce system, anti-money laundering, counter-terrorism financing, and anti-weapon proliferation. Starting from 2019, the FSC began to conduct specialized financial inspections on the adoption of IFRS No. 9 "Financial Instruments" and financial consumer protection. Since 2020, the FSC has imposed administrative penalties on insurance enterprises for related deficiencies. With the increase in frequency and scope of financial inspections, it is expected that the cases and amount of FSC's administrative penalties on insurance enterprises will continue to rank first in the financial services industry. Insurers should be more vigilant in respect of corporate governance, regulatory compliance, and establishment and effective implementation of internal control and audit system.