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Prudential Standards

Insurance Companies

For prudential supervision of insurance companies, the FSC/FSS utilizes a range of approaches including credit extension and investment limits, asset classification, and allowance for credit losses to ensure asset safety and soundness. In addition, the FSC/FSS utilizes various solvency requirements, supervisory rating, and prompt corrective action to ensure effective prudential oversight of insurance companies.

Supervisory Evaluation and Rating

The supervisory evaluation and rating regime was changed from CAMEL to RAAS (Risk Assessment and Application System) in September 2012 for transition to risk-based supervisory evaluation and rating. Under RAAS, each insurance company receives from the FSS a composite rating on the basis of evaluation and rating of seven components of the insurance company's overall financial soundness and business operations.

The seven components are: (1) management risk; (2) insurance risk; (3) interest rate risk; (4) investment risk; (5) liquidity risk; (6) capital adequacy; and (7) earnings. For each of the seven components, quantitative and non-quantitative factors comprising the component are analyzed for a component rating on a 1 to 5 numerical scale (1 the highest rating and 5 the lowest). The component ratings are then aggregated for the insurance company's composite rating on a 1 to 5 numerical scale with three levels (+, 0, or -) for each numerical scale, meaning a total of 15 possible level assignments.

Composite rating is used as the basis for prompt corrective action (PCA), which can vary from management improvement recommendation (MIR) and management improvement demand (MID) to management improvement order (MIO). MIR is the least adverse supervisory action and MIO the most adverse. MIR is issued when (1) the composite rating is 3, 2, or 1, and (2) the capital adequacy component rating is 4 or 5, or at least two of the ratings for insurance risk, interest rate risk, and investment risk are 4 or 5. MIO is made for insurance companies that are assigned a composite rating or 4 or 5.

Asset Classification

The assets of insurance companies are classified into 5 classes: normal, precautionary, substandard, doubtful, and presumed loss. The specific asset classification rules for insurance companies are provided in the insurance supervision regulation. Assets subject to classification include loans, securities investments, notes, different types of insurance claims, and other assets held by insurance companies that are judged to merit specific asset classification on the basis of the obligor's ability to service debt and the nature of the business transactions. The classification of insurance companies' assets constitutes a major component for RAAS with a significant effect on the ability of insurance companies to meet its insurance and other obligations. For impaired assets, asset classification also forms the basis for allowance for various credit losses.