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Regulators in action

Source: Asia Insurance Review | Aug 2015

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.
Life insurance reforms to be reviewed again in 2018
The reform process for Australia’s life insurance industry, proposed on 25 June by the financial advice sector, is to be closely monitored and a review will be undertaken in 2018, said Mr John Trowbridge, Chairman of the Life Insurance and Advice Working Group.
   The 25 June reforms reduce the maximum commission rate payable to advisers by life insurers over three years till 2018. They also called for the development of a code of practice for insurers, a more effective advice process for consumers and wider product selection, all aimed at enhancing the ability of advisers to act in the best interests of their clients. They were proposed by the Financial Services Council (FSC), Association of Financial Advisers (AFA) and the Financial Planning Association (FPA).
   The 25 June announcement has its roots in the findings last year of the Australian Securities and Investments Commission (ASIC) review of life insurance advice. ASIC had found unacceptable levels of poor quality advice, and a strong correlation between high upfront commissions and poor consumer outcomes.
Govt mulls allowing higher foreign investors’ stake 
The Bangladeshi government plans to increase the stakes that foreign firms are allowed to hold in insurance companies in the country, to attract more reputed multinational insurers.
   Currently, foreign insurance firms and their local partners can hold a stake of up to 60% in the total sponsors’ holdings in an insurance company. The government is likely to increase it to 83%, it was reported. 
   The insurance authority also wants to increase the size of the paid-up capital required for life insurers to BDT1 billion (US$12.8 million). The paid-up capital requirement for a life firm is now BDT300 million. Of the amount, 40% of the holdings are reserved for subscription by members of the public in a public listing.
   These decisions have been approved in principle by the Insurance Development and Regulatory Authority (IDRA). The next step is the issuance of a statutory order by the government for the changes to take effect.
CIRC extends policy support to three new FTZs
The China Insurance Regulatory Commission (CIRC) is extending policy support to free-trade zones (FTZs) in Fujian, Guangdong and Tianjin. The goal is to promote the development of such zones which are test beds for a range of economic reforms, including interest rate liberalisation and less red tape.
   The move by CIRC follows the central government’s approval last December for the establishment of the three new FTZs, which are modelled after the Shanghai FTZ launched in September 2013. 
   The three new FTZs are expected to tap their unique geographical and industrial strengths. Guangdong FTZ will carry out programmes for economic integration with Hong Kong and Macau. Fujian is expected to promote development with Taiwan, while Tianjin will focus on coordinated growth with Beijing and Hebei province.
   The policy initiatives for the Shanghai FTZ, that are likely to be extended to the new zones, include:
• Establishment of foreign-invested specialised health insurance companies, which may be wholly-owned;
• Establishment of branches by insurance companies, development of cross-border yuan-denominated reinsurance business;
• Outbound investment pilot scheme by FTZ insurance institutions, and research for expanding the scope of permitted outbound investments and relaxing the relevant outbound investment restrictions for FTZ insurance institutions;
• World-renowned professional insurance intermediaries as well as organisations or individuals engaged in reinsurance business carrying out business in the FTZ to support the development of the insurance industry, subject to the relevant laws and regulations;
• Development of shipping insurance, including development of shipping insurance institutions and shipping insurance brokers;
• Product innovation by insurance companies, and continuous expansion of the scope of liability insurance;
• Improving the insurance market system, and promoting the establishment of functional insurance institutions such as reinsurance centre and insurance fund management centre, etc; and
• Establishing connections and mechanisms to promote financial reform and innovation.
   Implementation details of the CIRC will be issued later, with reform measures tailored according to the different strategic positioning of the Fujian, Guangdong and Tianjin FTZs.
CIRC to restrict related-party transactions
The CIRC will restrict related-party transactions for insurers, it announced in a circular. The aim is to prevent the unwarranted transfer of benefits and risks among related companies as well as to ensure that related-party risks are managed.
   Among several measures, the new rules place a cap on related-party investments at 30% of the firm’s total assets at the end of the previous quarter. Such investments should also not exceed the value of the net assets of the insurer at the end of the previous quarter.
   Any investment in a single related party should not exceed 15% of the insurer’s total assets or 5% of the related party’s total assets at the end of the previous quarter, whichever is greater.
   Insurers have to submit quarterly reports on related party transactions and balances to the CIRC.
Legislation of the establishment of the Independent Insurance Authority
The Insurance Companies (Amendment) Bill 2014 enabling the establishment of the Independent Insurance Authority (IIA) was passed on 10 July 2015.  A Provisional Insurance Authority (PIA) is expected to be set up by the end of this year to facilitate the transition from the existing Office of the Commissioner of Insurance (OCI) to the IIA.  
   The IIA is expected to become operational towards the end of next year. In addition, a statutory licensing regime will be introduced for insurance intermediaries to replace the existing self-regulatory regime.
   This significant restructuring of the insurance regulator comes after many years of planning and preparation, and precedes a number of substantial insurance regulatory changes that are planned for Hong Kong over the coming few years. 
Guidance Note 16 on Treating the Customer Fairly (GN16)
In July 2015, the Insurance Authority issued the second draft of GN16, which sets out a framework for Treating the Customer Fairly for non-unit linked life business. The objectives of GN16 are to: 
• develop and market products in a way that pays due regard to the interests of customers; 
• provide customers with clear information before, during and after the point of sale; 
• reduce the risk of sales which are not appropriate to customers’ needs; 
• ensure that any advice given is of a high quality; and 
• manage the reasonable expectations of customers.
   This guidance note will be effective on 1 April 2016 for new products and on 1 January 2017 for the existing policies of current products, and aims to further align Hong Kong with IAIS International Core Principles.
Govt to clarify ownership rule by August
The Indian government is expected to clarify by August what Indian ownership and control means in the insurance sector, and the clarification is expected to be good news for foreign investors.
   The insurance law, when amended in March, increased the foreign investment cap in the insurance sector to 49% from 26%. But it said that ownership and control shall remain at all times with resident Indian entities. Foreign investment refers to portfolio investment by foreign entities as well.
   This has created uncertainty. Investors are confused about whether or not the Indian majority ownership requirement applies too to the parent company of an insurer. At present, there are local promoters of some insurance companies that are majority owned by foreign investors. Examples include Housing Development Finance Corp (HDFC) and ICICI Bank in which more than 70% of the shares are held by foreign institutional investors. The insurance ventures involved are HDFC Standard Life and ICICI Prudential Life.
   The uncertainty is leaving foreign investors in a wait-and-watch mode. Prior to the amendment of the insurance law, the Department of industrial Policy and Promotion clarified in 2010 that holdings of firms such as HDFC and ICICI Bank in insurance subsidiaries would be exempt from foreign ownership rules. Insurers have asked the government whether that exemption still holds.
Licensing rules for foreign insurers in SEZs announced
Myanmar authorities have announced the finalisation of rules and regulations for foreign insurers to operate in special economic zones (SEZs), including a requirement to pay a US$30,000 licence fee each.
   The foreign insurers would be allowed to operate in SEZs such as Thilawa, Kyaukphyu and Dawei which are under construction. Currently, 15 companies from Europe and Asia are allowed to open offices in the country.
   Earlier last year, the Myanmar authorities ended the monopoly of Myanma Insurance, the sole insurer in the country since 1952, by allowing private local companies to enter the market.
Govt considering ban on commissions for advisers
The New Zealand government is proposing to ban commissions for insurance brokers and advisers in its review of the Financial Advisers Act and the Financial Service Providers Act.
   In an issue paper seeking public feedback on the proposal, the Ministry of Business, Innovation and Employment (MBIE), said: “A number of financial advisers are either partly or wholly paid by commissions that are paid by product providers. These commissions can create a conflict of interest for the adviser; incentivising them to advise that their client buy a particular product.”
   Authorised Financial Advisers are legally obliged to disclose commissions they may earn, as well as any conflicts of interest. However, the problem in the insurance industry is that most brokers/advisers are only Registered Financial Advisers, who do not have to explicitly make these disclosures.
MAS to provide greater guidance on commission rebates “where necessary”
The Monetary Authority of Singapore (MAS) will work with the industry and other relevant stakeholders to “provide greater guidance on the use of commission rebates, where necessary”, said Ms Merlyn Ee, MAS Executive Director, at the annual conference of the Association of Financial Advisers (Singapore).
   Ms Ee added that FA firms should focus on building a corporate culture of fair dealing, raising the competency of their representatives, and investing in technology to improve efficiency. Putting customers first will be key to helping licensed FAs secure the trust of their customers that is so critical to taking their business forward.
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