Insurance regulators in most APAC countries have introduced measures to safeguard policyholder interests while ensuring industry resiliency. Most relate to policyholder protection, capital preservation and business continuity, supervisory relief to reduce the administrative burden on insurers and improvements to risk management, among other areas.
Regulations to preserve capital strength and risk management
The capital-management measures introduced by some APAC regulators and the increasing commitment by regulators and insurers to strengthen risk-management practices will position insurers favourably to counter evolving risks posed by the pandemic.
Insurers in Australia and Singapore were asked by regulators to adopt a prudent and forward-looking approach to managing capital while the regulators in India and Sri Lanka have required all insurers to suspend dividend distributions as a near-term measure to minimise capital erosion.
In addition, stress tests on insurers’ capital positions and stringent supervisory efforts to monitor the financial standings of insurers have been implemented in most APAC countries. Insurers have expanded their risk-management efforts following the pandemic by strengthening risk-management committees and conducting frequent stress and scenario tests on capital, liquidity and other key areas, which the agency views as credit positives in the long run.
Most regulators have implemented monitoring mechanisms requiring insurers to submit frequent capital filings and results from various stress tests. For instance, the regulator in Indonesia has indicated that insurers facing significant financial trouble due to the pandemic may be asked to merge with other insurers.
Also, the Insurance Regulatory and Development Authority of India has set up a working group to form a pandemic risk pool to mitigate risks from future pandemics while some regulators (Singapore, Taiwan) have expanded their focus to monitor threats to insurance companies from cyber risks.
Fitch Ratings (Fitch) expects policymakers in some countries to explore the possibility of establishing pandemic risk-mitigation programmes, drawing on regulators’ experience in forming similar programmes to mitigate catastrophe risks.
Regulators in some jurisdictions have also introduced countercyclical measures in the form of temporary alterations to the calculation of regulatory capital positions to minimise unanticipated volatility in regulatory capital ratios. Taiwan’s Financial Supervisory Commission (FSC) introduced an automatic adjustment to equity risk factors, which will move in tandem with the stock-market index to stabilise the capital requirement of insurers.
Similarly, Indonesia’s Financial Service Authority (OJK) allowed insurers to value some fixed-income asset classes based on amortised acquisition values instead of market values, which are generally used in the calculation of solvency ratios. Hong Kong’s insurance regulator agreed on the use of discount rates with increased averaging due to the distortion caused by low market interest rates while the Monetary Authority of Singapore has extended a transitional measure in the calculation of the financial resources under RBC2 to end-2021 to give insurers more time to rebalance their investment portfolios.
In addition, investments by South Korean insurers in stock-market stabilisation funds will receive favourable capital treatment, while regulators in Indonesia and Sri Lanka allow favourable risk charges on uncollected premiums as a direct result of offering grace periods for premium collection.
Policyholder protection a top priority
Safeguarding policyholder interests will remain one of the key objectives of most APAC regulators. Regulators in most APAC countries have allowed insurers to extend the grace period for premium payments while continuing to honour claims during the extension period. Regulators in China, Thailand and Taiwan have requested insurers to offer extensions or favourable terms on policy loans.
Japan’s Financial Services Agency has requested insurers to honour claims to the maximum extent possible during the pandemic and to exercise added flexibility in the interpretation of policy conditions and clauses to help policyholders affected by the pandemic.
Regulators in India and China require insurers to introduce new products covering health and business interruption risks, respectively, at affordable rates. Similarly, the FSC of Taiwan has amended regulations to allow insurers to introduce medical insurance products quickly. Some regulators (China, Sri Lanka) have also mandated the sale of affordable insurance products to individuals involved in controlling the spread of the virus.
Insurers in some jurisdictions have voluntarily granted relief to policyholders above the regulatory recommendations. The Life Insurance Association of Malaysia, Persatuan Insurans Am Malaysia and the Malaysian Takaful Association have collectively set up a coronavirus test fund to subsidise the testing cost of policyholders who are at risk of contracting the virus.
Insurers in several countries offer moratoriums on policy loans, price discounts or premium refunds and renewal extensions mainly to SMEs and policyholders in financial distress. We expect the introduction of products by insurers covering pandemic risks to become relatively common.
Fitch views policyholder outreach by insurers will be vital in improving the reach of the policyholder protection measures introduced by the regulators. APAC regulators continue to strengthen their communication with insurers and policyholders while encouraging insurers to disclose information on insurance coverage, exclusions and details of any measures that insurance companies have implemented to support policyholders.
Fitch thinks that premium deferrals may result in some insurers facing near-term pressure in liquidity due to the temporary reduction in premium inflow. The risk could be offset by the moderation of claims in some business lines and most APAC insurers’ access to sufficient liquid assets. However, the agency believes that well-defined premium rebates and deferral schemes will be less risky for insurers than the introduction of untested products to cover evolving pandemic risks due to the difficulty in adequately pricing these products and a potential spike in claims. However, the policyholder protection measures could help insurers in sustaining overall policy persistency in the long run.
Lower administrative burden
Most regulators have also extended deadlines for the submission of non-essential supervisory reports, relaxed administrative sanctions or penalties for late filings, suspended planned on-site supervision initiatives and allowed the digital distribution of certain products.
The Reserve Bank of New Zealand has temporarily deferred the review of the Insurance (Prudential Supervision) Act 2010 and the Australian Prudential Regulation Authority has postponed the implementation of a reporting standard on private health insurance reforms to allow insurers to tackle the challenges brought on by the pandemic.
Fitch expects the relief offered by regulators to allow insurers to focus on managing the impact of the pandemic better, though some supervisory relaxations may lead to some emerging risks going undetected. We believe that the regulators will continue to introduce additional policy measures to the extent that the implications of the pandemic on the insurance industry will keep evolving. A
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