Compliance in Progress Summary

Despite strong growth in the insurance sector in 2003 and 2004, Italy remains relatively under-insured with low market penetration in comparison to the EU average. In 2006, the International Monetary Fund (IMF) conducted a detailed assessment of Italy, in which insurance supervisory practices were benchmarked against Insurance Core Principles (ICPs) and the Methodology revised by the International Association of Insurance Supervisors (IAIS) in October 2003. Accordingly, more than two-thirds of the ICPs were assessed as being observed or largely observed. The remaining principles were assessed as partly observed. Shortcomings were identified regarding legal protection of supervisory staff, formal information sharing agreements with non-European Union/European Economic Area supervisors, on-site inspections, investment policies, disclosure requirements, and intermediaries. The IMF report noted that improvements in the level of observance in these areas would be facilitated by changes in legislation. The Supervisory Authority for Private Insurance Undertakings and Insurance Undertakings of Public Interest (ISVAP), which acts as the independent supervisory authority for the insurance sector in Italy pursuant to Law No. 576 of 1982, was also encouraged to publish entity-specific financial information on its website. The IMF's 2006 report stated that the ISVAP was moving toward a more risk-based supervisory approach to promote better risk management practices by insurers. Furthermore, a draft consolidated insurance code, which was expected to improve the structure and clarity of the Insurance Law, came into force on January 1, 2006. The Code, according to publications in 2005 and 2006 by David Braghini and Bruno Giuffre respectively, contains updated regulations on matters like reinsurance business, insurance mediation, and new provisions regarding access to the insurance market, investments, disclosure obligations, and consumer protection. The Code also significantly strengthens the ISVAP’s supervisory and regulatory powers.

General Overview

Italy's system of insurance supervision is a component of the supervisory framework for the financial services sector that is organized around four independent authorities, namely the Supervisory Authority for Private Insurance Undertakings and Insurance Undertakings of Public Interest (ISVAP) for the insurance industry, the Supervisory Authority for Pension Funds (COVIP) for pension funds, the Bank of Italy (BoI) for the banking industry, and the National Commission for Listed Companies and the Stock Exchange (CONSOB), together with the BoI, for the securities industry. The ISVAP acts as an independent supervisory authority for the insurance sector in Italy under Law No. 576 of 1982 (hereafter referred to as "Insurance Law"), which was consolidated with other insurance laws in 2005, as the Code of Private Insurance (Insurance Code). The ISVAP is a member of the International Association of Insurance Supervisors (IAIS). According to a 2008 ISVAP annual report, Italy’s insurance sector saw a number of developments to its legal framework. First, the 2005 Insurance Code was amended by Legislative Decree No. 56 of 2008, which implemented European Union Directive 2005/68/EC of 2005, Legislative Decree No. 173 of 2008, and Article 123bis of the Consolidated Law on Financial Intermediation. In addition to the Insurance Code, ISVAP influenced the passing in November 2008 of Legislative Decree on Anti-Financial Crisis Measures No. 185 (Now Law No. 2 of 2009) to reduce the impact of the financial global crisis on Italy’s insurance sector. Other laws that were amended include legislation affecting cross-border mergers, and anti-money laundering.

In February 2006, the International Monetary Fund (IMF) published a detailed assessment of Italy, in which insurance supervisory practices were benchmarked against Insurance Core Principles (ICPs) and Methodology revised by the International Association of Insurance Supervisors (IAIS) in October 2003. The assessment concluded that more than two-thirds of the ICPs were observed or largely observed. The Italian supervisory system namely observed seven ICPs, largely observed thirteen ICPs, and only partly observed eight ICPs. Weaknesses remained with regards to legal protection of staff involved in the supervisory process, formal agreements for information sharing with non-EU/EEA supervisors, on-site inspections, investment policies, disclosure requirements, and legal framework for registered intermediaries. There was also a lack of explicit requirements regarding the overall assessment and management of risk by insurers. The IMF's 2006 report also stated that the ISVAP was moving toward a more risk-based supervisory approach to promote better risk management practices by insurers. The Insurance Code, which was expected to improve the structure and clarity of the Insurance Law, came into force on January 1, 2006. The Insurance Code, according publications by David Brighani and Bruno Giuffre in 2005 and 2006 respectively, contains updated regulations on reinsurance business, insurance mediation (implementing the EU Insurance Mediation Directive 2002/92/EC) as well as the indemnification of the insured under motor insurance policies. In addition, the Insurance Code introduces new provisions regarding access to the insurance market, investments, disclosure obligations, and consumer protections. The Insurance Code also significantly strengthens the ISVAP’s supervisory and regulatory powers.

According to a 2008 ISVAP annual report, as of December 31 2008, Italy had 166 companies operating in the insurance and reinsurance sector. 65 companies were in the life insurance business, 80 pursued non-life insurance, 17 were composites, and 1 company was a specialized reinsurer.

The Principles

CPICP 1 Conditions for effective insurance supervision

This principle was largely observed, as stated in the IMF's 2006 report. Italy's system of insurance supervision is a component of the supervisory framework for the financial services sector that is organized around four independent authorities, namely the ISVAP for the insurance industry, the COVIP for pension funds, the BoI for the banking industry, and the CONSOB, together with the BoI, for the securities industry. According to the same report, insurance supervision in Italy occurs within an extensive body of laws and regulations, which incorporate the relevant EU Directives. Per the same report, Italy has a well developed judicial system, financial markets, and alternative dispute resolution mechanisms available to consumers. Furthermore, accounting and auditing standards are based on the EU Directives. It was recommended that a specialized alternative dispute resolution mechanism be established to deal with complaints of insurance consumers. Steps should also be taken to improve the timeliness and consistency of the legal process. The IMF's 2006 report stated that the ISVAP was moving toward a more risk-based supervisory approach to promote better risk management practices by insurers. According to a 2005 article by Davide Braghini, titled “New Insurance Code”, the Italian government approved the Code of Private Insurance No. 209 (also known as Insurance Code) on September 2, 2005, which went into effect on January 1, 2006. Braghini explains that the insurance code “unifies almost all the current insurance legislation and entrusts the ISVAP to issue new organized regulations to implement specific technical provisions within two years from [January 1], 2006” (p. 1). A 2006 publication entitled “New Insurance Code Reinforces Regulator’s Powers” by Bruno Giuffre noted that, while there were some changes in insurance legislation, the relevant provisions of the Italian Civil Code remained the same.

CPICP 2 Supervisory objectives

This principle was largely observed, as stated in the IMF's 2006 report. The IMF report noted that the supervisory objectives of the ISVAP include the promotion of sound and prudent management of insurers, and the monitoring of disclosure and fair behavior of insurers and intermediaries. The ISVAP is also responsible for the "stability and efficiency of the insurance sector, the solvency of each insurer, consumer information, and protecting the interests of policyholders and beneficiaries" (p. 9), per the IMF report. However, the ISVAP's objectives are not explicitly described in its annual reports. In this regard, per the same report, it is recommended that the ISVAP "explicitly communicate the principal objectives of insurance supervision and explain how its plans and activities support these objectives" (p. 9). According to a 2009 presentation document by an ISVAP Director, Maria Cavina, entitled, “New Instruments of Consumer Protection in Motor Insurance”, the ISVAP’s supervisory objectives are to stabilize the insurance sector, to ensure solvency of insurance companies, and protect policy holders.

NCICP 3 Supervisory authority

According to the IMF's 2006 report, this principle was only partly observed. The ISVAP acts as an independent supervisory authority for the insurance sector in Italy under the Insurance Law, and is responsible for supervising both the solvency and market conduct of insurance companies and intermediaries. The ISVAP reports directly to Parliament on its activities, although it operates under the Minister of Production Activities with regards to legislative initiatives and withdrawal of licenses. There is, however, a lack of legal protection for staff involved in the supervisory process. In its 2006 report, the IMF recommends that "both the board of directors and staff of ISVAP be protected against lawsuits for actions taken in good faith while discharging their duties" (p. 11). The ISVAP should also establish and enforce a code of conduct. It was further advised to revise the cost assessment and financial reporting processes to enhance the ISVAP's independence from government, access to funding, and accountability. The IMF report noted that "improvements in the level of observance in these areas would be facilitated by changes in legislation, although ISVAP can also take steps, such as publishing entity-specific financial information on its website" (p. 5). According to Bruno Giuffre’s 2006 article, the Insurance Code, which came into force on January 1, 2006, has further strengthened and extended the ISVAP’s powers. Of particular note are the powers to intervene and call meetings, the power to enquire and investigate (inspection and controls), and disclosure powers.

According to the 2009 ISVAP presentation document, the ISVAP was set up under the Insurance Law No. 576 of 1982, and has full autonomy in the “juridicial, financial, accounting, organization, and management field” (p. 2). Cavina’s presentation mentions that the ISVAP supervises undertakings pursuing insurance and reinsurance business, as well as all related parties operating and participating in the insurance sector. Additional functions include authorizing supervised entities to pursue insurance/reinsurance business, taking corrective and preventative measures against entities’ etc.

CPICP 4 Supervisory process

This principle was largely observed, as stated in the IMF's 2006 report. Detailed requirements on supervisory processes, including licensing and the review of solvency, are defined under legislation. The ISVAP also publishes some information regarding supervisory processes on its website. According to the IMF report, the ISVAP is moving toward a more risk-based supervisory approach. In this regard, the IMF recommended that ISVAP "develop criteria for assessing the overall risk of an insurer and define the nature of supervisory action corresponding to various levels of risk, and communicate this information to the industry" (p. 12). Consideration should also be given to establishing a specialized independent tribunal as the first level of appeal against decisions of the ISVAP.

ENICP 5 Supervisory cooperation and information sharing

According to the IMF's 2006 report, this principle was only partly observed. While the Insurance Law enables the ISVAP to share information with supervisors in non-EU/EEA countries, and to cooperate with them on supervisory issues (on the condition of reciprocity), the ISVAP has not established formal agreements for information sharing with non-EU/EEA supervisors. In its 2006 report, the IMF recommends that ISVAP systematically exchange quantitative and qualitative information with its Italian counterparts. The ISVAP should also regularly contact the home supervisor of any non-EU/EEA insurer operating in Italy. The ISVAP joined the Committee of European Insurance and Occupational Pensions Supervisors, which has 28 EU/EEA members. The 2008 ISVAP annual report states that ISVAP increased its commitment to international cooperation during that year. ISVAP attended meetings with European Supervisory Authorities to enhance cooperation and examine the financial crisis. Per the 2009 Cavina document, the ISVAP works in cooperation with the BoI, CONSOB, COVIP, the Competition Authority (ANTITRUST), and the Communications Supervisory Authority. ISVAP also cooperates with the supervisory bodies of other EU member states, in all the financial sectors, including in the banking and securities market sectors, where banks and securities firms control insurance companies.

FCICP 6 Licensing

This principle was observed, according to the IMF's 2006 report. Licensing of insurers is governed primarily by Legislative Decrees No. 174 of 1995 and No. 175 of 1995. Conversely, reinsurance companies must be registered in accordance with Presidential Decree No. 449 of 1959. The ISVAP routinely requests input from the applicant's home supervisory authority, with respect to applicants based in the EU/EEA, and assesses the risks arising from insurers that are part of a group. In its 2006 report, the IMF recommends that ISVAP exchange information with relevant supervisors outside of the EU/EEA to ensure that ISVAP is adequately informed of developments that may affect all supervised entities.

CPICP 7 Suitability of persons

This principle was largely observed, as stated in the IMF's 2006 report. Under Ministerial Decree No. 186 of 1997, significant owners, members of the board of director or board of statutory auditors, and the chief executive are required to meet fit and proper requirements. Furthermore, per the IMF report, "insurers must inform ISVAP about such appointments and ISVAP may object to an appointment on a timely basis" (p. 14). The ISVAP also has the authority to suspend or revoke authorizations when significant owners no longer meet suitability requirements. In its 2006 report, the IMF recommends that "the fit and proper requirements be defined and applied broadly enough" (p. 15) to take into account individuals' competence and soundness of judgment, due diligence, as well as interests of policyholders. It is further recommended that legislation be amended to require that all senior management of an insurer meet fit and proper requirements. The ISVAP is also advised to exchange information with relevant supervisors outside of the EU/EEA entities.

CPICP 8 Changes in control and portfolio transfers

This principle was largely observed, as stated in the IMF's 2006 report. Natural or legal persons are required to obtain the approval of the ISVAP in order to acquire a qualifying holding (i.e. direct or indirect holding of at least ten percent of the capital or of the voting rights of an insurance company) in an insurance company with its registered office in Italy. Furthermore, the ISVAP must be notified whenever qualifying holdings increase or decrease by five percent or more of the capital. The IMF report notes, however, that the ISVAP lacks "the power to object to increases or decreases in the shareholdings of a previously-approved qualifying shareholder" (p. 15). It was recommended by the IMF that the ISVAP "document and publish the specific criteria that it will apply in assessing proposed changes in control and portfolio transfers" (p. 16). Consideration should also be given to requiring that "a report be prepared by an independent actuary regarding the risks that a proposed change in control or portfolio transfer may pose to the interests of the policyholders of both the transferee and transferor" (p. 16) the IMF report continues.

NCICP 9 Corporate governance

According to the IMF's 2006 report, this principle was only partly observed. The Italian corporate governance model provides for both a board of directors and a board of statutory auditors. Since 2003, as stated in the IMF report, companies have been permitted to adopt either the one-tier board or two-tier board structure. Most requirements concerning corporate governance are established by the Civil Code, although the Insurance Law establishes additional requirements in the area of internal audits and the use of derivatives. Listed companies are subject to further governance requirements. In this regard, corporate governance requirements should be strengthened for insurers that are not subject to the requirements applicable to listed companies. It is further recommended that the ISVAP strengthen its offsite and on-site assessment of both compliance with corporate governance requirements and the effectiveness of insurers' corporate governance practices. The IMF report noted that "improvements in the level of observance in these areas would be facilitated by changes in legislation, although ISVAP can also take steps, such as publishing entity-specific financial information on its website" (p. 5). According to Braghini’s 2005 article, the 2005 Insurance Code has a number of provisions to ensure that existing insurance regulations are consistent with revised corporate governance requirements for supervised entities. The Insurance Code particularly provides “a revised notion of ‘control’, which takes into account the new instruments by which a subject may have interests in and control a company” (Braghini 2005, p. 2). For example, shares with limited or special rights, tracking shares, etc. In addition, the Insurance Code provides directors and auditors of insurance companies, a new independence requirement. Not only that, but the Insurance Code also provides the opportunity for supervised entities to adopt either the one-tier or two-tier models of corporate governance. Furthermore, it also confirms the disclosure requirement to report to the ISVAP, any agreement with shareholders regarding direct or indirect voting rights in an insurance company.

According to a 2009 Chartered Financial Analyst (CFA) Institute report, existing corporate governance models are likely to undergo changes due to an “evolving market structure” (p.48). This suggests the potential for a greater engagement and broader distribution of shareholders and shareholders’ rights. The 2009 CFA Institute report however, cites that changes to existing corporate governance models are expected due to an “evolving market structure” (p. 48), which suggests the potential for greater engagement of shareholders and a broader distribution of shareholder rights. On April 9, 2009, in response to financial market volatility, Italy adopted Law No. 33 of 2009 (Law on Economic Incentives) in order to protect listed companies against speculative hostile takeovers. According to a 2009 Shearman & Sterling report, Law No. 33, aims to allow “for more effective defensive measures against hostile takeovers” (p. 1) by amending provisions concerning mandatory tender offers, disclosure on shareholdings and treasury stock. The report however does also state that it was “too early” to predict the impact of the provisions of the new law.

CPICP 10 Internal control

This principle was largely observed, as stated in the IMF's 2006 report. The ISVAP has legal powers to set rules on administrative organization and internal controls, and exercise its powers. As part of its on-site inspections, the ISVAP assesses internal controls, including reviews of internal audits, and reports prepared by the board of statutory auditors. The board of directors receives regular reports on internal controls from the board of statutory auditors, as well as from the internal auditor. While insurers are required to have an internal audit function, they are not obligated to have a compliance function. A draft circular on internal control and risk management has been issued, replacing Circular No. 366/D of 1999, which will require insurers to perform an annual self assessment of internal controls and report the results of this assessment to the ISVAP. In its 2006 report, the IMF recommends that the draft circular on internal control and risk management be implemented with high priority. It is further recommended that ISVAP strengthen its off-site assessment of internal controls by routinely reviewing internal audit plans and reports, as well as reports of the board of statutory auditors. The ISVAP should also meet regularly with the head of the internal audit function, the appointed actuary, the external auditor, the auditing actuary and the board of statutory auditors. According to Bruno Giuffre’s 2006 article, the 2005 Insurance Code requires all insurance companies, including branches of foreign insurance companies in Italy to operate an adequate internal control system. The Insurance Code further requires internal control systems to properly integrate risk monitoring systems into the company’s organization and that the systems consistently assess and control risks. The 2008 ISVAP annual report states that in that year, the ISVAP conducted inspections on supervised entities to ensure that they had adopted capable internal control systems in line with the provisions of the 2008 Regulation No. 20 on Internal Controls, Risk Management, Compliance, and the Outsourcing of Insurance Undertakings.

FCICP 11 Market analysis

This principle was observed, according to the IMF's 2006 report. Market and industry developments are regularly assessed by the ISVAP, with highlights published in its annual report. The ISVAP also prepares regular and special statistical surveys and qualitative analyses. However, the ISVAP lacks a formal program to monitor and analyze factors that may have an impact on insurers and the insurance market. In its 2006 report, the IMF recommends that the market analysis process include regular meetings and cooperation with other financial sector supervisors. The ISVAP should further ensure that the results of its market analysis are widely disseminated within the organization in order to better assess risks in the insurance sector, and to establish supervisory priorities.

FCICP 12 Reporting to supervisors and off-site monitoring

This principle was observed, according to the IMF's 2006 report. The ISVAP has legal powers to require the provision of both quantitative and qualitative information. Audited financial statements, as well as extensive supervisory returns, must be submitted annually by insurers. While less extensive information is required of branches of EU insurers, Italian insurers and branches of non-EU insurers are required to provide the same information. In its 2006 report, the IMF recommends that the deadline for the submission of annual supervisory returns be shortened.

According to an assessment on the regulatory and standard-setting framework published by the Consiglio Nazionale dei Dottori Commercialisti e Degli Esperti Contabili (CNDCEC) in 2005, the ISVAP has the power to control the administration of accountants, and verify compliance with the legislative, regulatory, and administrative requirements. The ISVAP also has the authority to convoke the President of the board of statutory auditors, as well as auditors. According to the IMF's 2006 report, accounting and auditing standards are based on the adoption of EU Directives. The Italian Accounting Board is primarily responsible for issuing accounting and auditing standards. Since 2003, auditing standards have been harmonized with International Standards on Auditing. Starting in 2005, listed companies must prepare consolidated accounts in accordance with International Financial Reporting Standards (IFRS). According to the IMF's 2006 report, "the implementation of IFRS should considerably improve the extent and comparability of information disclosed by listed insurers and other insurers required to apply IFRS" (p. 31). Conversely, reporting at the individual entity level will continue to be based on Italian Generally Accepted Accounting Principles, which differ significantly from IFRSs in some areas. According to Giuffre’s 2006 article, the 2005 Insurance Code has strengthened the ISVAP’s power of enquiry and investigation. This includes the power to conduct inspections and controls, request information, issue orders to exhibit documents, etc. The 2008 ISVAP annual report states that the ISVAP conducted its off-site monitoring by increasing its assessment of entities’ vulnerabilities to market, credit, and liquidity risks. To assist in the performance of its duties, ISVAP requested that entities provide a “continuous flow of data, together with impact studies (stress test), and the estimate of future economic results, including data concerning the solvency requirement” (p. 53).

ENICP 13 On-site inspection

According to the IMF's 2006 report, this principle was only partly observed. The ISVAP has legal powers to conduct on-site inspections, and to request information necessary to perform its duties. It further has the authority to impose sanctions where violations of legal requirements are identified. Per the same report, 105 inspections were performed in Italy in 2004, covering 122 risk areas. The ability of the ISVAP to assess the risks that exist in the insurance sector could be improved by increasing the frequency and scope of on-site inspections of both insurers and intermediaries. As mentioned earlier, according to Giuffre’s 2006 article, the 2005 Insurance Code has strengthened the ISVAP’s power to enquire and investigate. This includes a strengthening of ISVAP’s inspection authority, as well as the right to request for information, give orders to exhibit documents, etc. According to the 2008 ISVAP annual report, the ISVAP conducted a total of 105 on-site inspections in 2008. Of the 105, 23 inspections were carried out on the premises of supervised entities, 14 were conducted at claims settlement departments, and 68 on insurance intermediaries and other operators.

FCICP 14 Preventive and corrective measures

This principle was observed, according to the IMF's 2006 report. Legislation provides the ISVAP with a range of preventive and corrective measures to achieve its supervisory objectives. These measures include moral suasion, requiring a solvency restoration plan, issuing an administrative order, imposing fines or penalties, restricting the insurer's activities, withholding approval of new activities, appointing an administrator, and withdrawing the license through a decree of the Ministry of Economic Development (MSA). According to the IMF report, the ISVAP is moving toward a more risk-based supervisory approach. In this regard, it is recommended that the ISVAP "develop criteria for assessing the overall risk of an insurer and define the nature of supervisory action corresponding to various levels of risk, and communicate this information to the industry" (p. 12). According to Giuffre’s 2006 article, the 2005 Insurance Code has strengthened the ISVAP’s corrective powers.

CPICP 15 Enforcement or sanctions

This principle was largely observed, as stated in the IMF's 2006 report. The ISVAP has legal powers to impose a wide range of sanctions, including monetary penalties, against insurers that fail to comply with certain provisions of the legislation. Furthermore, directors and managers of insurance companies, as well as insurance intermediaries and those operating without authorization can be punished by fines, or imprisoned by decision of the court. Fines are imposed by the MSA on the recommendation of the ISVAP. According to the IMF report, monetary penalties are expected to be significantly increased with the adoption of the Insurance Code. However, the ISVAP does not have legal powers to restrict or suspend dividend payments to shareholders, when such payments jeopardize the insurer's solvency. The disqualification of individuals, which are involved in the management of an insolvent insurer, is also limited to three years. In this regard, the IMF report recommended that legislation be amended to explicitly enable the ISVAP to restrict or suspend dividends or other payments to shareholders. Legislation should also be updated to avoid that breach of fitness or propriety requirements be automatically disregarded after three years. The 2005 Insurance Code, according to Giuffre’s 2006 article, has extended and strengthened the powers of the ISVAP. For example, the ISVAP has the power to appoint receivers for insurance companies that violate the provisions on solvency margins and fail to correct their non-compliance within an acceptable time frame. Violations may incur sanctions like bans on new deals for up to six months. In addition, the ISVAP has the power to intervene where a company is found to have irregularities in its management, or is in serious violation of legislative or statutory provisions. According to the 2008 ISVAP annual report, the ISVAP issued 5,562 sanctioning proceedings in 2008, which was 83.7 percent more than in 2007 (3,028).

FCICP 16 Winding-up & exit from the market

This principle was observed, according to the IMF's 2006 report. The reorganization or winding-up of an insurer is supervised by the ISVAP under Legislative Decree No. 93 of 2003. Furthermore, per the IMF report, the ISVAP has the authority to withdraw a license "if an insurer breaches the guarantee fund requirement and is unable to implement a satisfactory short-term financing plan" (p. 22). According to the Braghini’s 2005 article, the 2005 Insurance Code significantly reorganizes winding-up of insurance companies’ matters, among other issues. The article further states that once the reform of Italy’s general Bankruptcy law is prepared and approved, the issue of winding-up in the insurance sector may need to go through another review.

CPICP 17 Group-wide supervision

This principle was largely observed, as stated in the IMF's 2006 report. Legislation clearly defines when an insurer is considered to be part of a group. Moreover, insurers which are part of the same group are supervised by the same team within the ISVAP. According to the IMF report, the five largest groups accounted for 53 percent of life premiums and 67 percent of non-life premiums in 2003. While protocols between the supervisory authorities of EU/EEA countries are generally in place, the ISVAP has not established such arrangements with non-EU/EEA supervisors. Furthermore, the ISVAP does not systematically exchange information with its Italian counterparts responsible for supervision of the banking, securities and pension sectors. In its 2006 report, the IMF recommends that the ISVAP "systematically exchange quantitative and qualitative information with its Italian counterparts. The ISVAP should also regularly contact the home supervisor of any non-EU/EEA insurer operating in Italy. Legislation implementing the EU Financial Conglomerates Directive No. 2002/87/EC in Italy has recently been approved.

IDICP 18 Risk assessment and management

According to the IMF's 2006 report, this principle was only partly observed. While the ISVAP has established requirements for the management of specific risks, there is a lack of explicit requirements regarding the overall assessment and management of risk by insurers. Some larger insurance companies in Italy have already set up risk management functions and committees, both at the group and operating levels. A draft circular on internal control and risk management has been issued, replacing Circular No. 366/D of 1999, to require insurers to establish comprehensive risk management policies and systems, including regular reviews of the market environment, annual stress tests, and annual self-assessments of risk management. It is recommended that the draft circular on internal control and risk management be finalized and implemented with high priority. The IMF notes that the level of observance of this principle should be significantly increased through the implementation of this recommendation "along with regular assessment of the overall effectiveness of insurers' risk management by ISVAP" (p. 24). According to the 2008 ISVAP annual report, in 2008, the ISVAP continued to inspect and ensure that supervised entities had capable risk management systems in place to address in issues that arose.

CPICP 19 Insurance activity

This principle was largely observed, as stated in the IMF's 2006 report. During the licensing process, the ISVAP reviews the reinsurance activities of insurers by focusing primarily on the historical accounting and financial impact of an insurer's reinsurance program. The IMF report notes that a draft circular on reinsurance was issued with proposed requirements on "the development and implementation of a reinsurance strategy and for additional reporting to ISVAP on reinsurance matters" (p. 24). In its 2006 report, the IMF recommends that the draft circular on reinsurance be finalized and implemented with high priority. The ISVAP should also increase the comprehensiveness of its offsite and on-site assessments of reinsurance. The implementation of these recommendations will ensure that insurers have "appropriate reinsurance programs in place, commensurate with the levels of risk determined by their boards of directors and acceptable to ISVAP" (p. 24), the report adds.

FCICP 20 Liabilities

This principle was observed, according to the IMF's 2006 report. Legislation requires insurers to establish adequate technical provisions, and Legislative Decrees No. 174 of 1995, No. 175 of 1995 and No. 173 of 1997 set out specific requirements for the calculation of technical provisions. According to the IMF report, international standards for the valuation of insurance contracts were under development by both the International Actuarial Association and the International Accounting Standards Board. In this regard, the IMF report recommends adopting international actuarial standards once they become available. Legislation should also be amended to extend the requirement for an appointed actuary to all non-life classes of business.

NCICP 21 Investments

According to the IMF's 2006 report, this principle was only partly observed. The ISVAP conducts extensive off-site reviews of investments, as well as on-site inspections. The categories of assets that an insurance company may hold to cover its technical provisions are mainly defined by legislative decrees and orders, in line with EU Directives. Furthermore, requirements on asset/liability management are set out in circulars and orders. However, insurers are not required to establish an investment policy that has been approved by the board of directors. In its 2006 report, the IMF recommends that ISVAP require insurers "to have an overall strategic investment policy and that such policy be approved and reviewed annually by the board of directors" (p. 26). The ISVAP should also provide guidance on insurers' investment policies. Italy’s 2005 Insurance Code, per Braghini’s 2005 article, allows insurance companies to acquire a 100 percent interest in companies that do not conduct insurance business. However, this can only be done if the company being acquired has assets that exceed solvency requirements, and if the ownership is deemed as “prejudic[ing] the solvency of the insurance company” (p. 2), the ISVAP can demand the disposal of such investment.

FCICP 22 Derivatives and similar commitments

This principle was observed, according to the IMF's 2006 report. The ISVAP performs on-site inspections of insurers' derivatives activities, and requires their disclosure in the firm's financial statements. Requirements on the use of derivatives by insurers are set out in orders and circulars, as well as EU Directives. As stated in the IMF report, requirements on the use of derivatives include "the adoption of a comprehensive policy on the use of derivatives by the board of directors, appropriate transactional and risk management expertise, adequate internal controls, the capability to independently verify pricing, and internal audit" (p. 27). The 2005 Insurance Code, according to Braghini’s article, can in principle grant the ISVAP power to authorize the use of derivates as assets covering technical reserves. However, in practice, the Insurance Code gives the ISVAP the power to decide which assets can be used in the various insurance lines.

CPICP 23 Capital adequacy and solvency

This principle was largely observed, as stated in the IMF's 2006 report. The solvency regime is mainly governed by Legislative Decrees No. 173 of 1997, No. 174 of 1995 and No. 175 of 1995, and is based on the EU solvency approach and margins. The solvency of an insurer that is based in another EU/EEA country or in Switzerland and operates in Italy through a branch is supervised by the home country supervisor. Legislation requires that an insurer that is based outside the EU/EEA and operates in Italy through a branch satisfy the minimum solvency margin. While reinsurers are supervised by the ISVAP, they are not subject to the solvency margin requirements. In this regard, the IMF report recommends extending relevant prudential requirements to reinsurers, possibly through the implementation of the EU Directive No. 2005/68/EC on Reinsurance. It is further recommended that ISVAP adopt a solvency control level in excess of the minimum solvency margin, as commonly established in some other EU countries. The European Commission, according to its website, adopted the Solvency II Proposal in July 2007, and the text is currently being discussed in Council and Parliament. Solvency II is based on a three pillar approach, which covers quantitative and qualitative solvency requirements, as well as supervisory reporting and disclosure. Italy will be required to implement the results of the Solvency II project, once they are finalized, as stated in the IMF report. According to the 2008 ISVAP annual report, negotiations of the Solvency II draft document continued to be one of ISVAP’s main activities throughout 2008.

IDICP 24 Intermediaries

According to the IMF's 2006 report, this principle was only partly observed. The supervision of insurance agents and brokers is mainly governed by Law No. 48 of 1979, Law No. 792 of 1984, and Circular No. 533/D of 2004. The ISVAP publishes a list of registered intermediaries on its website. As stated on the IMF report, the ISVAP performs on-site inspections of insurance intermediaries, and has the authority to take corrective action, such as imposing fines and withdrawing licenses, against registered intermediaries. Furthermore, individuals or entities that are carrying on insurance intermediation activities without registration are subject to fines and imprisonment. Prior to providing insurance services in Italy, intermediaries from other EU countries are required to inform both their home supervisor and the ISVAP. In order to achieve full compliance with this principle, as stated in the IMF's 2006 report, legislation should be adopted "to require that all insurance intermediaries operating in Italy be subject to registration and direct supervision" (p. 29). Furthermore, collaboration is necessary between the ISVAP, the CONSOB and the BoI to ensure that all insurance intermediation activities are subject to periodic on-site inspections. The implementation of the EU Directive on Insurance Mediation No. 2002/92/EC, through the adoption of the draft consolidated insurance code, is expected to strengthen the legal framework for registered intermediaries. As mentioned earlier, according to Bruno Giuffre’s 2006 article, the 2005 Insurance Code empowers the ISVAP to maintain an electronic registry with names of all insurance intermediaries. The article further states that the Insurance Code, requires Agents and brokers to pass an examination evaluating their qualifications and professionalism before they are registered. In addition, intermediaries are required to get a civil liability insurance policy to cover damages resulting from their or from their employess’ negligence or professional error. Also, the Insurance Code requires intermediaries to comply with certain conduct rules and disclosure obligations. For example, intermediaries are obligated to notify clients of whether they would be acting independently, or on behalf of a company. Furthermore, the Insurance Code enhances transparency in insurance payments. The 2008 ISVAP annual report remarks that the ISVAP focused its supervisory duties on intermediaries’ compliance with provisions introduced in the Insurance Code regarding mediation. The ISVAP further examined complaints against undertakings, while checking their “training activity, the fair accounting of commissions, and the revocation of ISVAP mandates” (p. 81).

CPICP 25 Consumer protection

This principle was largely observed, as stated in the IMF's 2006 report. The ISVAP provides assistance to consumers, particularly before concluding an insurance contract, and deals with complaints on insurance matters. According to the IMF report, the ISVAP publishes a list of authorized insurance entities on its website, and issues warning notices to avoid transactions with unsupervised entities. Circulars were issued in 2004 and 2005 by the ISVAP to ensure that insurers and intermediaries act with due diligence, and treat consumers in a fair manner. While requirements exist regarding the cross-border offering of insurance, effective implementation of the EU Directive on Cross-border Financial Services should further strengthen consumer protection in this area. The IMF report recommends that insurers and intermediaries assess consumers' needs with respect to all classes of insurance, before giving advice or concluding a contract. Per the IMF report, insurers and intermediaries should also be required "to disclose possible conflicts of interest to existing or potential policyholders, with respect to all classes of insurance" (p. 30). According to Braghini’s 2005 article, the 2005 Insurance Code has revised consumer protection provisions, particularly regarding advertising and contents of insurance contracts, as well as the information provided to consumers before a contract is executed. The Insurance Code requires insurance companies to get the information on their products approved by the ISVAP before distribution. The ISVAP also has the power to request additional information to be provided where it deems necessary. Per Guiffre’s 2006 article, new provisions to protect consumers promote and enhance transparency between insurers and policy holders. In the event that a company’s product violates the Insurance Code’s provisions on advertising and fair treatment of customers, the ISVAP has been granted powers take action against it.

The 2008 ISVAP annual report states that a Committee on Consumer Protection (CCP) was formed in 2008, to conduct studies on consumer information, particularly in areas covering “unit linked policies, the management of cross-border claims, financial education and the advertising of insurance products.

NCICP 26 Information, disclosure & transparency towards the market

As stated in the IMF's 2006 report, this principle was only partly observed. Under the Italian Civil Code, insurance companies are required to prepare audited annual accounts. While larger insurance companies publish more comprehensive annual reports and provide information on their websites, Italian insurers are not required to publicly disclose their accounts. Furthermore, quantitative information on risk exposures, risk management practices, and corporate governance is often limited. In this regard, it is recommended that annual audited financial statements be made readily available to stakeholders. Disclosure requirements should also be strengthened for insurers that are not subject to the requirements applicable to listed companies. The IMF report noted that "improvements in the level of observance in these areas would be facilitated by changes in legislation, although ISVAP can also take steps, such as publishing entity-specific financial information on its website" (p. 5). Starting in 2005, listed companies must prepare consolidated accounts in accordance with IFRS, which contain extensive disclosure requirements. According to the IMF's 2006 report, "the implementation of IFRS should considerably improve the extent and comparability of information disclosed by listed insurers and other insurers required to apply IFRS" (p. 31). Italy’s 2005 Insurance Code, according to Guiffre’s 2006 article, strengthens the ISVAP’s authority to request disclosure of information from supervised entities; for example, the ISVAP has the right to request periodic data and information that are deemed important within regulation. The ISVAP has been charged with developing “the schemes on the basis of which any insurance company shall prepare its financial statements” (Guiffre 2006, p. 2).

The 2008 ISVAP annual report mentions that in that year, the ISVAP, the Bank of Italy (BoI), and the CONSOB, worked together to ensure that supervised entities in the financial market complied with rules and procedures for reporting under the IAS [International Accounting Standards]/IFRS. The three supervisory authorities put together a document on “Information to be provided in financial reports on business continuity, financial risks, checks on the reduction in asset value and uncertainties about the use of forecasts” (p. 49), the report notes.

CPICP 27 Fraud

This principle was largely observed, as stated in the IMF's 2006 report. The ISVAP assesses an insurer's fraud control measures in connection with on-site inspections of internal controls, and cooperates on a regular basis with law enforcement officials and other domestic or foreign supervisory authorities. According to the IMF report, insurance fraud is an offence under the Criminal Code, and the ISVAP encourages insurers to seek prosecution of suspected fraud. However, the level of insurance fraud in Italy was perceived as being relatively high by market participants. In this regard, it was recommended that ISVAP explicitly require that insurers and intermediaries implement effective procedures and controls against fraud.

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

The regulatory framework for anti-money laundering (AML) and combating the financing of terrorism (CFT) in Italy includes the 1991 AML Law No. 197 (as amended by Legislative Decree No. 153 of 1997), and the 2001 Law for the Establishment of the Financial Security Committee (FSC) No 431 of 2001. The EU's Third Money Laundering Directive No. 2005/60/EC was also transposed into Italian law, and Legislative Decree No. 231 of 2007 implements parts of the EU Directive. Created in 1997 as an autonomous body under the BoI, the Italian Foreign Exchange Office (Ufficio Italiano dei Cambi, or UIC) was Italy's Financial Intelligence Unit (FIU). According to information provided on the UIC website, as of January 1st, 2008, the UIC ceased to exist and was replaced by the Unità di Informazione Finanziaria (UIF), a unit within the BoI as established by Legislative Decree No. 231 of November 2007. According to the IMF's 2006 report, this principle was largely observed. The ISVAP conducts focused on-site inspections of AML/CFT controls of insurers and, recently, intermediaries. The ISVAP further requires insurers and intermediaries to have adequate procedures regarding customer due diligence, to monitor unusual transactions, and to develop internal programs, procedures and controls. However, legislation does not deal specifically with the need for foreign branches and subsidiaries to observe AML/CFT measures consistent with the requirements in Italy. In its 2006 report, the IMF recommends that the ISVAP significantly increase the frequency of its on-site inspections of both insurers and intermediaries in the area of AML/CFT. Additional guidance is also needed to ensure that foreign branches and subsidiaries of Italian insurers comply with AML/CFT measures in Italy. Finally, the ISVAP should become a member of the FSC. According to a 2009 Financial Action Task Force update, Italy has made some progress in these areas. The report states that “Italy has enacted and implemented a comprehensive range of measures to correct” (p. 17) prior deficiencies, especially through Legislative Decree No. 231, which addresses record keeping. However, the report qualifies this praise with the caveat that it is too early to assess the effectiveness of the new regulations, given the short time frame between their enactment and the publishing of the report.