Risk-based supervision (RBS) assesses risks within the financial system, prioritizing resolution of the most critical risks. It is becoming the dominant regulatory approach worldwide. The RBS process identifies an individual insurer's most critical risks and evaluates risk management, financial vulnerability, and compliance through focused review. RBS is forward-looking, evaluating present and future risks to facilitate early intervention. It focuses on continuous data collection, on-site examinations, thematic reviews, increased audit/compliance reliance, and engagement between supervisors and management. The goal is continuous supervision and early corrective action.

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Risk Based
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By - David E.O Igiehon (CRCMP)
Unitrust Insurance Co. Ltd
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2. Risk-Based Supervision (RBS) is a comprehensive, formally
structured system that assesses risks within the financial system,
giving priority to the resolution of those risks. It is gradually
becoming the dominant approach to regulatory supervision of
financial institutions around the world.
The risk based supervision process (‘RBS’) is designed to work as
a structured process that identifies the most critical risks faced by
an individual insurer and systemic risks in the insurance system.
The RBS process also covers assessment of an individual insurer’s
management of those risks along with its financial vulnerability to
potential adverse experiences through a focused review by the
supervisor.
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3. The RBS process is forward looking with a focus
on evaluating
 both present and future risks,
 identifying incipient problems and
 facilitating prompt intervention/ early corrective
action moves.
It is a departure from the earlier compliance
focused and transaction based approach called
Traditional Silo risk approach.
Background Cont;
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4. 1. Continuous collection of financial and
non-financial data from insurers with a
view to enable the regulator to
independently perform analysis of raw
data through off-site surveillance
2. Inclusive and regular onsite examination
focused on evaluating the risk and control
environment within the insurer. The inclusive
examination process is designed to enable the
supervisor to form an objective view on the
probability of failure and impact of failure
based on the existing control framework of the
insurer.
3. Thematic and targeted reviews by the
supervisor with a view to evaluate, through
use of specialists, the impact of systemic
risks on the insurer and the manner in
which the insurer is addressing potential
high-risk areas.
4. Increased reliance on the insurer’s
audit and compliance functions to
provide transactional assurance to the
supervisor and enable allocation of
supervisory resources to high risk areas
5. Use of capital add-ons1 based on the
assessment of probability and impact of
failure to encourage insurers to
strengthen their control environment
Increased engagement between the
supervisor and the senior management
of the insurer with a view to ensure good
corporate governance, transparency and
accuracy of information used by senior
management for decision making.
To achieve its objective of continuous supervision and early corrective
action, the risk based supervision process focuses on the following
aspects
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5. The risk based supervision process focuses heavily on off-site surveillance. It is, extremely data intensive
and it is envisaged that Insurers will be able to provide data in a seamless and automated manner to the
supervisor on a regular basis. The risk based supervision process are
Risk Based Supervision Process
Risk Based Supervision Process
1
Data
gathering
and
analysis
2
Risk and
control,
capital and
compliance
assessment
3
Assessment
of
probability
of failure
and impact
assessment
4
Supervisory
stance and
rating
5
Action
plan and
capital
add-on
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6. Data Gathering and Analysis
Insurers are expected to provide
approximately 25,000 data points
through regulatory returns at
multiple frequencies. The
requirements are expected to
change dynamically based on
emerging risks in the industry.
Data collected by the supervisor
covers both qualitative and
quantitative data and is broadly
expected to cover the following
aspects:
- Credit risk
- Market risk
- Operational risk
- Liquidity risk
-Information technology Risk
-Insurance Risk
-Internal audit Compliance
-Legal and Regulatory Risk
-Strategic Risk (Management &
Board)
The supervisor would identify
inherent risks applicable to all
Insurers. The data collected will
form the basis for computing risk
indicators against the inherent risks
identified. Accordingly, the accuracy,
completeness and timeliness of data
are critical for the determination of
rating by the supervisor.
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7. Risk and Control, Capital and Compliance
Assessment
Assessment of existing controls for
inherent risks, available capital,
ability to raise capital, earnings
growth to augment capital and
compliance form the basis for
determining the probability of
failure. It is important for the
insurer to demonstrate to the
supervisor that controls are in place
to address inherent risks. The ability
of the insurer to demonstrate that
inherent risks are controlled
appropriately as well as the ability to
demonstrate an appropriate scoring
on the risk indicators will have an
impact on the determination of the
probability of failure.
Further, qualitative aspects will be
assessed by the extent to which the
compliance and internal audit
functions provide assurance to the
supervisory staff. It is expected that
as the supervisory focus moves away
from transaction and compliance
testing, the insurer will augment its
transaction testing through
concurrent/ internal audit and
compliance testing. Availability of
excess capital judged by existing
excess capital, earnings growth and
access to capital raising sources
forms a key part of the decision on
probability of failure.
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8. Assessment of Probability of Failure
and Impact Assessment
The supervisor will determine the probability of
failure based on the residual risk and the
available capital to absorb the risk. Impact of
failure varies for systemically important and
non-systemically important institutions. While
probability of failure and impact of failure are
assessed separately, it is important for an
individual insurer to strive towards reducing the
probability of failure.
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9. Supervisory Stance and Rating
The supervisor will determine
the rating based on the risk the
insurer poses to the supervisory
objectives of financial stability,
protection of policyholders’
interests and stakeholders
protection. The supervisory
rating is therefore a function of
the probability of failure and
the impact that the failure can
cause to the financial system.
Apart from objective
parameters, thematic reviews,
the views of the supervisory
relationship
manager assigned to the
insurer and the ability of the
insurer to demonstrate good
governance plays an important
role in determining the
supervisory rating. The
supervisory stance resulting
from the rating may lead to
baseline (normal) monitoring,
closer monitoring or active
oversight. The insurer should
aspire to remain within the
baseline (normal) monitoring
stance.
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10. Action plan and capital add-on
Based on the supervisory rating, the insurer and the
supervisor are expected to agree on an action plan. The
objective of the action plan is largely expected to focus
around reducing the probability of failure. However,
where insurers are systemically important, the focus is
also expected to be on managing potential contagion.
Where the probability of failure is higher or where the
impact to the financial system is high especially in case
of systemically important institutions, the supervisor
may require additional capital to be kept aside.
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11. Reference
Risk Based Supervision – Financial service commission - www.fsc.gov.bb/index.php/43-in-
focus/144-rbs-in-focus
Navigating the risk based supervision process - Deloitte - www.deloitte.com/in.
Inherent Risk categories – NAICOM – Risk-Based Supervision Framework for Insurers in
Nigeria.
Systematically important Financial Institution - Wikipedia
https://en.wikipedia.org/wiki/Systemically_important_financial_institutionsystemically important,
Capital Add-On - Implementing Measures on Solvency II: www.ceiops.eu –CEIOPS
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