In this update brought to you by PwC, we bring you a roundup of key regulatory activities around the region in the recent few months.
Financial services regulator places advisers on watch
Australia’s corporate markets and financial services regulator has said it remains concerned about financial advisers, and will watch them closely in coming months, particularly the six largest financial advice institutions because of their dominance in the market.
The Australian Securities and Investments Commission (ASIC), which released a new initiative called ASIC’s Strategic Outlook, said that it would also monitor operators of managed investment schemes for illegal and risky behaviour.
In its Strategic Outlook for the current financial year ending next June, ASIC said that it plans to carry out “pro-active risk based” surveillance of financial advisers in the coming months, concentrating on their compliance with rules and regulations.
Latest progress of China Risk Oriented Solvency System (“C-ROSS”)
China’s second generation of solvency supervision system is known as China Risk Oriented Solvency System (“C-ROSS”). The essential part of solvency supervision consists of three pillars. The solvency of insurance undertakings is supervised and managed through the three pillars approach. The three pillars focus on the contents, principles, methods and standards of solvency supervision from three aspects: quantitative capital requirements, qualitative supervisory requirements and market discipline mechanism. The effective date of C-ROSS has not been officially set yet but it is expected to be some time in 2015 or early 2016.
In November, both life and non-life insurance companies performed the third round of testing on Pillar I, and reinsurance companies are asked to perform the first round of Pillar I tests.
In October and November, the CIRC also issued several exposure drafts of certain Pillar II & III regulations solicit comments. The draft paper covers topics including Integrated Risk Rating, Liquidity Risk Management, Group Solvency, and Reporting and Disclosures.
Risk profiling requirements for debt investments
The CIRC has formally released the rules requiring insurance companies to classify their investment assets according to the risk profile. The objective is to strengthen risk management of insurance fund investments. Five categories of investment assets are identified accordingly: normal; special focus, secondary; doubtful and loss. The review of assets for their quality category is required to be carried out at least once every six months.
Those rules provide guidance for insurance companies to establish a mechanism gradually by evaluating the investment risk scientifically and improve the quality of investment assets. Detailed implementation may be issued further until a more comprehensive review from insurance markets.
CIRC solicits comments on exposure draft of related party transaction
The CIRC solicits comment on exposure draft of related-party transaction in October to further regulate related-party transactions of insurance companies. This regulation is part of the CIRC’s efforts to enhance risk management of insurance investment fund since the investment channel of insurance fund was broadened.
According to the draft, investment activities in products issued by a related party, or underlying assets are owned by a related party, or real estate or assets owned by a related party, are all considered investment type related party transactions. and the regulation also set a cap on the percentage of assets in these transactions. Importantly, the draft requires that all significant related-party transaction which requires board approval must obtain approvals from at least 2/3 of unrelated directors.
Regulator unveils first timetable for disaster insurance
The CIRC has set out a three-phase programme to develop disaster insurance in the country, with full implementation to be completed by 2020.
CIRC Vice Chairman Zhou Yanli said that the timetable would involve:
• completion of research work into the establishment of a disaster insurance system and set up a clear institutional framework by the end of this year;
• completion of legislation for disaster insurance, issuing of regulations and studying the setting up a catastrophe insurance fund by the end of 2017;
• full implementation of the disaster insurance programme which would be part of the country’s disaster prevention and mitigation system by 2020.
Regulator tightens management of new life insurance products
The CIRC has issued draft rules to tighten the management of life insurance products, requiring life insurers to file new products for approval only if they meet solvency standards.
In its “Notice on further strengthening the management of products of life insurance companies”, CIRC said that the solvency ratio of a life insurer, seeking approval for a new product, should be at least 150%. The ratio to be considered is the average of the solvency ratios at the end of the quarter prior to application to CIRC and the end of the forthcoming quarter.
The notice also said that life insurers should submit to the CIRC one new product at a time. They should only file a second new product for approval only after the regulator has made a decision – whether “Approved” or “Rejected” - on a product application already before it.
Commenting on accountability, the draft rules stressed that the insurance company, its chairman, general manager or chief executive, chief actuary, legal liability representative, and other related management personnel will be held responsible if there are violations of the rules. CIRC will impose the appropriate penalties or other measures in accordance with laws and regulations.
The draft also said that the pricing of the products should be in accordance with actuarial principles. Insurers should also improve transparency and provide appropriate product information.
RBC framework consultation launched
The Insurance Authority (IA) has launched a three-month consultation on the proposed Risk-based Capital (RBC) framework for Hong Kong’s insurance industry and has sought comments from interested parties, particularly the insurance industry and professional bodies.
Commissioner of Insurance Annie Choi explained that the RBC framework seeks to align Hong Kong’s regime with international requirements and to make capital requirements more sensitive to the level of risk that insurance companies are bearing.
The move towards developing an RBC framework does not necessarily imply a need for individual insurance companies to increase or decrease their capital. Under the RBC framework, the level of risk to which an insurer is exposed would be taken into account when determining its capital requirement, she said.
Ms Choi added that the consultation document is focussed on the objectives, overarching principles and proposed framework for the RBC regime. Building on these overarching principles and the responses received, the IA will then develop detailed proposals, carry out quantitative impact studies and conduct further consultation. It would take at least two to three years to complete all the preparatory tasks before the RBC regime can be implemented.
“The new RBC regime will be rolled out in phases with a sufficiently long run-in period so that insurers will be able to achieve full compliance incrementally,” she added.
The consultation period ends this month.
25% of IPO shares to be set aside for insurers, mutual funds
The Securities and Exchange Board of India (SEBI), India’s capital market regulator, plans to make it mandatory for issuers to reserve 25% of an initial public offering (IPO) for domestic insurers and mutual funds.
If insurers and mutual funds do not subscribe fully to their portion fully, the IPO could be considered a failure, according to industry sources.
IRDA to scrap standardised general insurance cover
India’s Insurance Regulatory and Development Authority (IRDA), is set to scrap the decade-old standardised general insurance policy format covering fire, accidents or floods, leaving customers free to pick the kind of risk they need protection against.
The move could lead to reduced premiums for companies that want fewer events covered. As such, this would change the way companies buy insurance and the way insurers priced products, according to market observers.
Experts said the move would bring certainty and transparency for insurance clients. Products could be customised to suit the needs of clients and supported by reinsurance.
Regulator calls for products which return money to policyholders
India’s insurance regulator has asked insurers to consider designing life insurance products – unit-linked insurance plans (Ulips) and participating traditional plans - which have a capital guarantee. This is to allow policyholders to receive some money on the maturity of the policies.
The IRDA, in draft guidelines circulated to insurers earlier this year, asked for pricing to be such that insurers would be able to return a minimum amount back to the customers on maturity. The guidelines have yet to be finalised.
According to the draft guidelines, Ulips, at an assumed gross yield of 4% per annum, would return at least 90% of all premiums, excluding service tax, back to the policyholder.
For traditional plans, the draft guidelines said that at an assumed 4% rate of return, participating traditional plans should be designed in a manner that they return more than 100% of all premiums paid till the date of maturity for both paid-up policies and in-force policies.
Regulator looking to widen investment avenues for insurers
The IRDA is looking to allow insurers to deal in equity derivatives, having already approved them dealing in rupee interest-rate derivatives. This could be considered for unit-linked portfolios, in particular.
The regulator would also look at Real Estate Investment Trusts (REITs) and if it is viable, they may discuss REITS with the markets regulator, Security and Exchanges Board of India, about allowing insurers to invest in them.
On the risk management and mitigation front, Mr Nair said that IRDA is studying the catastrophe bond market to ascertain investor appetite or such an instrument.
Regulator wants to enable insurers to fix agency commission
The IRDA has suggested to the parliamentary panel looking into a long-pending Insurance Bill that a provision be made in the new law to give a free hand to insurers to fix agency commissions. These are currently capped at 40% of the first-year premium.
Sources said that IRDA is of the view that a flexible commission framework would make agents more productive and help the insurance sector retain them.
Insurance regulator loosens investment rules
The Insurance Board (IB), which supervises the insurance sector, has allowed insurers to invest up to 5% of their total investments in the productive sector or shares of public limited companies specialised in hydropower, health, education tourism and agriculture. Previously, the IB had approved such investments on a case-by-case basis, said market sources.
The board had also allowed life insurance companies to invest a maximum of 2% of their total investments in shares of investment companies.
In the new directive, the proportion of investments non-life insurers have to make in government securities has been increased to 20% from the previous 15%. However, the percentage of investment in government securities for life insurers had been kept unchanged at 25%.
As insurers cannot find the required quantity of government securities for investment, they have been asked to deposit the un-invested portion of such allocated funds in fixed deposit accounts in commercial banks and inform the IB about it.
The circular also asked life insurers to invest at least 70% of their funds in bank fixed deposits, short-term investment instruments, government securities and unit trusts or mutual funds of the Citizen Investment Trust. Previously, they were required to invest at least 75% in these sectors. In the case of non-life insurance companies, the investment in these sectors has been kept unchanged at 65%.
Life insurance web aggregator to be ready by 1Q 2015
The Monetary Authority of Singapore (MAS) has indicated that a web aggregator for life insurance products would be ready by the first quarter of next year.
The web aggregator is one recommendation to reduce distribution costs and increase transparency that is among proposals under the Financial Advisory Industry Review (FAIR).
Apart from the web aggregator, good progress has been made on the following key initiatives:
• Life insurance products which consumers can purchase directly from insurers without paying commissions (direct purchase products)
• Balanced scorecard framework for the remuneration of FA representatives and supervisors: Financial advisory representatives and supervisors will need to meet key performance indicators that are not related to sales, such as providing suitable product recommendations and making proper disclosure of material information to customers. Failure to do so will affect their variable income. MAS will provide the industry with a one-year grace period to familiarise themselves with the framework before effecting the requirements in legislation in January 2016.
MAS aims to implement the full suite of FAIR initiatives in 2015. The regulator said that it will give the industry sufficient transition time to put in place systems and processes to comply with the requirements.
Regulatory council to be set up for finance sector
Sri Lanka’s Cabinet has given approval to establish an Inter-Regulatory Institutions Council with a view to identifying issues that require collective action by financial sector regulators. The new body will also facilitate information sharing among the country’s financial sector regulators, according to local media reports.
Financial institutions include licensed insurance companies, insurance brokers, insurance agents, loss adjusters, banks, finance companies, leasing companies, money brokers, primary dealers, stock exchanges and stock brokers/dealers.
Cabinet approves changes to insurance law
In Taiwan, the Legislative Yuan of the Republic of China has approved the following amendments to the Insurance Act on June 4, 2014. The major changes are as follows:
Enhance corporate governance of insurance companies
In order to enhance the corporate governance of insurance companies, the amended Insurance Act requires that an insurance company elect independent directors and establish an audit committee.
Authority will take over insurers that show material deterioration
The amended Insurance Act provides that in the event that an insurance enterprise suffers material deterioration in its business or finance so that such insurance enterprise is incapable of performing its obligations, the competent authority will first require that insurance enterprise submit a financial or business improvement plan, which must be approved by the competent authority. To the extent that the deterioration does not improve, the competent authority will have the authority to take over that insurance enterprise.
During the take-over period, if after evaluation, the receiver believes that the interests of the insured or the financial stability of the insurance enterprise will be furthered by the implementation of the transition mechanisms, then such mechanisms may be enforced after approval from the competent authority.