Japan is often viewed as one of the most mature and most sophisticated insurance markets in Asia Pacific – so how the nation’s regulator tackles big issues like capital standards is of immense importance to many. We spoke to the FSA’s Norio Hida to find out why economic-value based solvency regulation is of such importance.
The Financial Services Agency (FSA), part of the Government of Japan, plays a pivotal role in maintaining the structural soundness of the nation’s financial services ecosystem – as the regulator of not just banks, insurers and broker-dealers but also myriad other players including trust companies, non-bank financial companies and audit firms.
We spoke to FSA deputy commissioner for international affairs Norio Hida to gain some insights into recent significant developments in the insurance sector in Japan over the past year – and to get a glimpse of what might lay ahead.
Capital standards
Perhaps one of the most pressing issues facing every regulator in the Asia-Pacific region at present concerns capital adequacy – and Japan is no exception. Together with banks, insurance companies form the backbone of a system that has to be robust enough to survive disasters of any magnitude irrespective of whether the trauma is inflicted by earthquake or pandemic.
“The International Association of Insurance Supervisors (IAIS) agreed on the reference Insurance Capital Standard Version 2.0 (ICS Version 2.0) for the monitoring period in November 2019,” said Mr Hida. Documents for the annual confidential reporting of the ICS in 2020, including overarching principles, concepts, technical specifications and templates for data collection, are available on the IAIS’ website.
“According to the agreement, the ultimate goal of the ICS is to establish a common language among supervisors of internationally-active insurance groups (IAIGs). The five-year monitoring period has begun this year. During the monitoring period, ICS Version 2.0 will be used not to review the capital adequacy of IAIGs, but to monitor their performance in the annual confidential reporting of the ICS to group-wide supervisors and discussion in supervisory colleges,” Mr Hida said.
Enter the coronavirus
The impact of the recent pandemic is likely to be felt for decades to come but, from a regulatory point of view, it will be critical to establish if there has been any discernible impact on the implementation of ICS Version 2.0.
Mr Hida is clear. “The IAIS swiftly responded to COVID-19 and, in late March, extended the deadline for the confidential reporting in 2020 from 31 August to 31 October along with adjustments to other projects,” he said. “The purpose of these adjustments is to provide operational relief for its member supervisors, insurers and other stakeholders, to help them focus on responses to and withstand the shocks associated with COVID-19.”
“It is important to note that these measures taken by the IAIS are in line with the message from G20 finance ministers and central bank governors that calls for minimising the short-term disruption from containment measures and their spill-over effects while refraining from rolling back reforms or compromising the underlying objectives of existing international standards. The long-term work plan towards the end of the monitoring period of ICS Version 2.0 remains unchanged,” Mr Hida said.
Ensuring the right fit for Japan
One acknowledged issue with some capital standards is that they can appear to demand a level-playing field among international players while these standards should accommodate subtle domestic requirements and peculiarities. What is FSA’s view on ICS Version 2.0 and particularly its implementation in Japan?
“ICS Version 2.0 takes an economic-value based approach that facilitates enhancement of insurers’ risk-management practices as it effectively capture risks that may arise in the future,” Mr Hida said. “It enables insurers to assess solvency in a forward-looking manner by calculating net assets using current assumptions and comparing it with the economic value of net assets under various stress scenarios.”
Naturally, solvency regulation has been an important focus for the FSA for some time – and it has taken proactive steps to formalize the assessment of its efficacy.
“The FSA has been consistently working towards the implementation of an economic-value based solvency regulation (ESR) over recent years,” said Mr Hida. “In particular, in May 2019, the FSA established the Advisory Council on the Economic Value-based Solvency Regime to discuss the architecture of the ESR as well as the modality of implementation of the ESR as an upgraded supervisory framework in Japan. The final report of the council was published in June 2020.”
Complex outcomes and balance
The report is clearly the result of much effort and pre-planning – very necessary when it comes to reviewing a project with such broad scope of application.
“The final report of the council considers that the standardised model for the ESR should be based on the ICS while noting that domestic regulations may require necessary adjustments,” Mr Hida said.
“On one hand, the report sees that ICS Version 2.0 is a well-balanced model in that it maintains important features needed for economic-value based solvency assessment, incorporates all the material risks and strikes a balance between risk sensitivity and simplicity. On the other hand, the report describes that the domestic regulation may require adjustments from the ICS, such as adjustments for re-calibration based on data submitted by local players or for the solo-based ESR, as the ICS has been developed as a group-based measure targeted at IAIGs,” he said.
Timing is important
The timeline the FSA has set for adoption of the ICS is naturally of great interest to players in Japan and elsewhere in the region.
“In the report, the council proposes that the FSA aim at finalising the new framework around the spring of 2024 and bringing into effect in April 2025,” said Mr Hida. “This timeline is set based on a balance among different factors.
“For example, while it is important for Japan to make the transition into the new framework as quickly as possible, the implementation of the new regime in Japan should take
into account the timeline of the ICS,” he said.
“In addition, it is essential to provide clarity on the details of the new regulation for insurers and other stakeholders. In this regard, the report recommends that the FSA set year 2022 as a milestone provisionally to determine fundamental elements of the new framework in order to provide sufficient time for insurers to prepare for the implementation of the new regulation.”
Consumer impact
There has also been a good deal of focus on what the new standards might mean for the everyday business of closing the protection gap in Japan – and this has clearly been a central tenet of recent FSA initiatives.
“The ESR is expected to contribute to policyholder protection, alignment of solvency regulation and insurers’ risk management and enhancing discipline by the insurance sector through disclosure,” Mr Hida said. “The FSA plans to take recommended steps while it further communicates with a broad range of stakeholders, including regulated insurers, towards the implementation of the ESR in Japan.” A