The risk-based capital regime had been slowly making inroads in Asia pre-2008 financial crisis, but it was the crisis that set most of the region looking to either get into the regime or enhance their existing models. We look at Asian markets with an RBC framework in place and those en route to establishing one.
The move towards RBC in Asia has been associated with the barrage of regulatory initiatives across the region, something often viewed as an aftermath of the 2008 financial crisis. While the crisis did accelerate the regime’s adoption in the region, RBC had made inroads in Asia long before the crisis came about.
Japan is the pioneer in the region, having had its own framework for 17 years. In 2001, Australia introduced its risk-based solvency test with the implementation of the General Insurance Reform Act. Taiwan followed in 2003 and Singapore in 2004. The following year, Indonesia left behind its old solvency regime in favour of RBC. The past few years have also seen Malaysia, Korea and Thailand adopting the regime.
But while some markets have just established or are en route to setting up an RBC framework, others have started to move to more holistic approaches to asset and liability risk management as global regulatory trends put greater stress on ERM and market risks.
Countries like Australia and Japan have also been closely keeping tabs on developments in Solvency II. Australia has in fact recently introduced a new RBC regime with key parallels to Solvency II, while Japan is seriously considering introducing economic value-based solvency regimes.
And with more developments expected of Solvency II, more markets in the region are expected to look into adopting economic value-based solvency frameworks.
Here is a roundup of Asian markets with RBC regimes, and those preparing to introduce one.
Australia
The Australian Prudential Regulation Authority (APRA) has implemented the Life and General Insurance Capital (LAGIC) beginning 1 January 2013. LAGIC has parallels to Solvency II and entirely revamps the RBC requirements of insurers. It requires insurers to embed a risk management culture within their organisations and for boards of management to take responsibility for it.
Analysts expect diversified companies and groups to do better than monoline players under the new system and have noted that rates for certain segments of business may go up.
While some industry players have expressed concern about the regulator acquiring more power, many have been supportive of the initiative, saying that APRA was open and responsive to the industry through the LAGIC consultation period and that the change was heralded a few years ago.
Indonesia
The country’s RBC framework has been expected to see enhancements as the Ministry of Finance released Regulation No 53/2012 in April 2012 announcing amendments to the rules in risk-based solvency margin calculation. The new rules stipulate that an insurer’s solvency be at least 100% of the minimum required RBC.
Insurers need to meet the minimum required RBC solvency ratio of 120%. The Ministry of Finance may raise this though depending on the underlying risks of a company’s business plan and the current development of the business. The regulator will require an insurer to alter its business plan accordingly if it fails to keep the target rate of solvency.The calibrated increases in the minimum capital requirement are continuing and will culminate in a Rp100-billion (US$10.1 million) minimum capital by the end of 2014.
Japan has been following an RBC regime since 1996. To adopt a more rigorous approach, the Financial Services Agency (FSA) implemented new calculation standards for the solvency margin ratio since the fiscal year ended
March 2012.
The standards make the measurement of risks more precise, raising the confidence level of the coefficient of each risk, renewing statistical data used as the basis of the coefficient of each risk, and requiring that earthquake risk for fire insurance be computed through a risk model.
FSA has also been looking into introducing economic value-based solvency regimes, and has conducted field tests and dialogues with professional organisations. Based on the result of the field tests, FSA found that many companies recognise the importance of the economic value-based calculation of insurance liabilities as it helps promote asset liability management and risk management enhancement.
Many insurers pointed out though that estimating future cash flow as part of the calculation of insurance liabilities puts a heavy burden on calculation work. In response, FSA noted that it is necessary to consider introducing a simplified method within reasonable limits, such as calculation based on a sampling of policies and a summary calculation of insurance policies with the same actuarial assumptions.
Korea
The country introduced an RBC framework in April 2011 as a major step towards risk-based supervision. Its model is similar to that in the US and other countries, but with added refinements to make it suitable to the domestic market’s needs and realities. The Financial Supervisory Service (FSS), the industry regulator, continues to refine the framework to make it in line with international standards.
A year after introducing the framework, FSS raised the confidence level for insurance risk of life and long-term liability insurance from 95% to 99%.
Current FSS Governor Choi Soo-Hyun has said that strengthening the RBC regime should be understood as Korea’s commitment to meeting the highest global standards and raising the level of confidence in the insurance industry. It is also a way of encouraging insurers to raise additional capital, if needed, so they are well prepared for low-interest rates and other risks.
FSS in fact instructed insurers late in 2012 to raise their capital base after finding that some non-life players had weak capability to pay claims due to low returns and lack of risk management capacity. Insurers need to keep an RBC ratio of 200% in order to maintain sound fiscal health.
Malaysia
After starting work on RBC requirements in 2004, Bank Negara Malaysia (BNM) introduced RBC in 2009, with the aim of better aligning the regulatory capital requirements with the underlying risk exposure of insurers, improving the transparency of prudential buffers, and giving insurers greater flexibility to operate at different risk levels.
Two years after, BNM completed enhancements to the regime, including changes to converge the valuation rules for financial instruments under RBC with the Financial Reporting Standards 139. It also examined the calibration of market risk charges for indexed investments to make sure the treatment for the FTSE Bursa Malaysia KLCI, picked as the main index for the equity market in 2009, reflected the volatility of the constituent stocks.
In 2012, BNM issued new Internal Capital Adequacy Assessment Process guidelines for insurers, aimed at clarifying expectations for individual target capital levels and plans for capital management. Insurers have carried out gap analyses and updated their risk and capital management frameworks in compliance with the guidelines.
The bank also introduced last year an RBC framework for takaful operators, which will come into full force on 1 January 2014. The framework will be used in setting operators’ capital requirements based on their size and level of risks.
Although a difficult exercise for some players, the RBC introduction is necessary for the takaful sector’s healthy growth in the future, said the local takaful association.
Singapore
After nine years of using its existing RBC framework, Singapore is now working on updating it to reflect the developments in regulations globally and changes in market practices. It released last year its first Consultation Paper on RBC 2, which aims to improve the comprehensiveness of the risk coverage and the risk sensitivity of the framework. It also aims to define more specifically the Monetary Authority of Singapore’s (MAS) supervisory approach to the solvency intervention levels.
The review seeks not only to look into the quantitative aspects of capital requirements but also to enhance insurers’ risk management practices. The consultation paper also solicits feedback on the additional risks to be assessed, the methodology and the implementation schedule, in a bid to boost the overall comprehensiveness of risk coverage and risk sensitivity.
The proposed changes include a calibration of the RBC regime to a 99.5% level of adequacy over a one-year time period and the inclusion of credit spread risk charge.
MAS is set to implement the reworked RBC requirements by the end of 2013, with a two-year parallel run with the current framework.
Taiwan
A risk-based regime came into force in Taiwan in 2003 after a long period of consultation, requiring insurance companies to report their solvency ratio annually.
The Financial Supervisory Commission (FSC) increased in 2012 the RBC index of real estate invested by life insurance companies from 0.0744 to 0.0781, to keep them from overheating in the real estate market. To supplement the increase of the index, FSC also eased limits on insurers’ investments in the stock market, public construction and overseas property markets.
In announcing its plans early in 2013 to allow life insurers to increase investments in property overseas, FSC said it will lower ratings requirements for foreign corporate bonds to BBB- from the current BBB+ grade for insurers that maintain their RBC ratios above 250%. And those with capital adequacy of 200% may buy BBB bonds.
Taiwan is expected to come up with a regulation that will require insurers to do an Own Risk and Solvency Assessment (ORSA). Likewise, there have been discussions on the possible development of an economic capital model for the domestic insurance industry.
Thailand
The Office of Insurance Commission (OIC) raised earlier this year the solvency capital margin on the existing RBC framework, which was introduced in September 2011. From setting a capital adequacy ratio (CAR) at 125% back in 2011, it has increased it to 140% in January 2013.
The framework stipulates that assets be chiefly valued at market value with adjustments, while liabilities are determined through a gross premium valuation system. Total capital required comprises market risk, credit risk, concentration risk and insurance risk charges.
The regulator is also considering revamping regulations on investments requirements to adjust them with the RBC risk charges.
Other markets considering RBC
Sri Lanka
In the rest of Asia, Sri Lanka is gearing to become the next market to adopt an RBC framework. The country, with assistance from the World Bank and FIRST Initiative, has developed a risk-sensitive minimum capital regime for the insurance industry.
The first phase of the RBC project was completed in 2010, and a qualitative report was consequently submitted to the industry in 2011, followed by the submission of the quantitative report. The Insurance Board of Sri Lanka has put the model to road test beginning in the third quarter in 2012 on a voluntary basis. Outputs from participating insurers are going through evaluation.
China
China issued in May 2013 a framework for a second-generation solvency regime in an initial attempt towards insurance supervision reforms. The framework does not stipulate a calculation method for solvency or any technical requirement, but affirms the basis of the new regulatory system: the management of insurers’ solvency.
It also establishes three pillars for solvency regulation: quantitative capital requirements, qualitative requirements and market discipline mechanisms. These pillars require insurers to ensure that their capital adequacy is commensurate with their risk profile, that risk is properly analysed and managed, and that there is sufficient information disclosure for decision-making.
Under the new system, insurers with different business structures, risk profiles and risk management capabilities will have different solvency requirements, with their market behaviour to be taken into consideration as well.
Hong Kong
Hong Kong announced in 2011 that it was looking into adopting an RBC framework. It has started a study of an appropriate model and is looking to implement it in 2016 at the earliest, said the Commissioner of Insurance.
The regulator has always emphasised that Hong Kong will not copy existing RBC models, but will develop one that will fit the needs and requirements of the domestic market.
India
India, which currently uses a factor-based solvency model, is also looking to shift to a risk-based model and had set up a committee to study and spearhead the plan.
An IRDA official had said the model will not exactly follow Solvency II, but will be broadly modelled after the solvency regimes of the US, the UK, Canada and other countries. The model will require risk management on the part of the companies and help keep a standardised model and appropriate risk-based pricing.