The Asia Pacific region is home to more than half of the world’s population, with diverse societies, cultures, economies and regulatory regimes. As rapid economic development, population growth and urbanisation lead to increased insurance penetration, Asia Pacific represents a key area of growth in the global marketplace.
In Asia Pacific, relatively fewer insurance companies are rated by one or more of the global rating agencies (A.M. Best, Fitch, Moody’s and S&P). Therefore, regulatory requirements are the drivers behind capital requirements for most insurance companies in Asia Pacific, rather than rating agency requirements, which are generally the drivers of capital requirements for companies in the US and Europe.
With many insurance and reinsurance companies already investing in this region and seeking to take advantage of the growth opportunities, an expert insight into these markets is crucial. Aon Benfield’s local teams have produced the “Asia Pacific Solvency Regulation” book providing detailed non-life solvency calculation requirements for selected markets in this region.
Risk based capital regimes in Asia Pacific
The regulatory regimes are evolving rapidly in Asia Pacific, focussing on developing a risk based capital (RBC) framework or strengthening existing solvency requirements. The International Association of Insurance Supervisors (IAIS) – the global standard-setter for the insurance industry – issued new Insurance Core Principles (ICPs) in relation to RBC requirements in late 2011. All insurance supervisors are obliged to comply with these new ICPs as soon as practicable. In Asia Pacific, we are seeing countries releasing or refining their criteria regularly, and companies are struggling to keep pace with the changes.
As such, Aon Benfield has updated this solvency regulation book on an annual basis. The latest version, launched in March 2015, is the fifth annual publication of this book. It details the non-life solvency requirements of 20 jurisdictions in Asia Pacific. They include: Australia, Brunei, China, Hong Kong, India, Indonesia, Japan, Korea (Republic of), Macau, Malaysia, Myanmar, New Zealand, Sri Lanka, Taiwan, Thailand and Vietnam.
Aimed at multi-national insurers and reinsurers, including firms looking to expand overseas, the report provides an understanding and benchmarking of the existing methodologies adopted by regulators.
Asia Pacific has been identified as an area of growth and, as new capital flows in, companies will continue to take advantage of opportunities so a clear understanding of the status quo and future regulatory changes is very important.
Solvency regulation highlights in Asia
Key findings from the 2015 report include:
China had the most significant change since last year
While regulatory evolution occurs throughout Asia Pacific, the introduction of China’s second-generation solvency regime China Risk Oriented Solvency System (C-ROSS) will have significant impact on the fast-growing insurance
Previously, Chinese solvency capital was only decided by an insurer’s size, but now it takes into consideration insurance/catastrophe, asset and credit risk, plus hard-to-quantify risks such as operational, reputational and liquidity risk.
After four versions of consultation papers of C-ROSS, the regulator issued the final version in February 2015 and the industry is now in C-ROSS transition period.
Regional trends: Asia-Pacific is strengthening its solvency regulations
Markets such as Hong Kong and Sri Lanka are moving toward RBC while developed markets are bringing their existing RBC to a new level – for example, Singapore’s introduction of RBC 2 and Japan’s moving towards an economic value-based solvency regime.
Insurance companies need to meet the regulatory challenges, which would effectively motivate them to improve enterprise risk management. Meanwhile, the tightened regulatory requirements may also create merger & acquisition pressures (opportunities).
A benchmarking comparison that the industry can learn from
The Solvency II journey in Europe has greatly influenced markets that are developing new solvency regimes. The three pillar structure is being mimicked in China and Hong Kong, with Pillar 1 for quantitative requirements, Pillar 2 for qualitative requirements, and Pillar 3 for disclosures and information transparency.
Enhanced catastrophe risk capital requirement
Multiple countries in this region are stepping up the requirement on catastrophe risk capital charge. New Zealand calibrates catastrophe risk capital charge to a loss return period of 1 in 500 years, and is en route to raising that calibration to 1 in 1,000 years.
In Australia, the natural peril horizontal requirement became mandatory in 2014. In China, catastrophe risk charges for property, motor and agriculture are built into C-ROSS. In some Southeast Asian countries where catastrophe risk was not included when a risk-based capital system was launched, regulators are now studying the feasibility of incorporating catastrophe risk charges.
Regulatory regimes are evolving quickly
The report is geared towards helping insurers drill down to the information that is most important for them. Many insurers and reinsurers are keen on identifying key strategic opportunities and at the forefront of this are the ASEAN countries and China. ASEAN countries present many opportunities due to currently low insurance penetration rates, fast-growing economies, an active infrastructure building, and the forthcoming ASEAN Economic Community.
Regulatory regimes are evolving quickly, with risk based capital regimes already implemented in half of the countries. However, different insurance regulatory regimes may make insurance market integration difficult.
Risk is opportunity
As for China, the central government has clearly set the goal for the insurance industry’s growth. By 2020, the insurance penetration will reach 5%, and the insurance density will reach CNY3,500 (US$571) per person, which are significant growth from the current level.
The growth means huge opportunities to insurers and reinsurers. However, understanding the complex regulations, especially C-ROSS is critical for those who want to do or grow business in China. The new regulations are driving insurers to reconsider their business structure, asset allocation, reinsurance programmes, financing methods, and so on. The industry has already seen signs of changes.
The impact of regulatory changes can be understood from two perspectives. On one hand, for those who are not prepared, the regulatory evolution may present a significant strategic risk. On the other hand, “risk is opportunity” – those who are prepared may move quickly to adapt to the changes, create value utilising the new rules, and achieve competitive advantage in the era of new regulations.
Mr Sifang Zhang is head of Aon Benfield Analytics’ Rating Agency Advisory team for APAC.
Aon Benfield is the 2014 winner for Reinsurance Broker of the Year at the 18th Asia Insurance Industry Awards.