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Regulatory updates

Source: Asia Insurance Review | Aug 2014

In this update brought to you by PwC, we bring you a roundup of key regulatory activities around the region in the last three months. 

Council of Ministers approves new insurance law
Cambodia’s Council of Ministers has approved a draft insurance law to bring sustainability and accountability to the sector.
The law – prepared by the Ministry of Finance and approved in a meeting presided over by Prime Minister Hun Sen – updates and amends a sub-decree regulating the insurance sector, reported a local newspaper. The sub-decree had 56 articles, while the new law has 114.
A draft strategic plan for development from 2014 to 2018 was also passed. It said that the government is looking for US$26.58 billion in capital investment in the public and private sectors during the five years.
CIRC establishes an internal controls and compliance rating standards and guidelines
To improve the compliance and internal control effectiveness of insurance fund investments, China Insurance Regulatory Commission (CIRC) issued a regulation late June 2014 establishing an internal controls and compliance rating standards and guidelines. 
Under this regulation, CIRC rates the insurers as well as insurance asset management companies on a semi-annual basis, following a set of criteria and rating mechanism outlined in the regulation. The rating will start with 100 points with potential points to add or to be deducted. And depending on the final rating scores, companies will be ranked into A, B, C and D four categories. CIRC will track the rating results. 
Companies with an A rating for four consecutive periods are entitled to opportunities to apply for trial runs of business innovations, as opposed to Category C or D companies which may be subject to more inspections by CIRC. 
Reverse mortgage pilot schemes to start in 4 cities
China has launched a two-year pilot reverse mortgage scheme in four cities to allow retirees to use their homes as collateral for pensions from insurers as the government moves to widen financial support for the rising ageing population.
Started on 1 July, the trial in Shanghai, Beijing, Guangzhou and Wuhan is to help Chinese citizens aged 60 and above, CIRC said in a statement on its website. These cities were chosen as they have a more advanced insurance market, a larger ageing population and a big property market.
To take part in the pilot programme, insurers must have a history of at least five years and a registered capital of no less than CNY2 billion (US$321 million), said CIRC. 
Intermediary mart faces unprecedented revamp
The Chinese insurance regulator has called for the biggest revamp of the insurance intermediary market, following incidents of unauthorised fund raising and misleading sales.
Mr Huang Hong, Vice President of CIRC, said that the biggest difference with previous such exercises is that the revamp covers the entire insurance market and not only the insurance intermediary market, because the problems affecting insurance agencies do not exist alone, but are closely related to the rest of the insurance industry.
The proposed reforms include changing the commission system, addressing the falsification of expenses, improving the system for establishing branches. To implement changes, CIRC has set up a steering group whose members include representatives of insurers and Intermediaries.
Insurers to tidy up real estate revaluations
With an eye on containing the risks of a real estate bubble in China, CIRC has issued new rules on the revaluation of real estate investments either held by insurers directly in the form of real property or indirectly through stock 
In a notice issued in June 2014, CIRC seeks to clamp down on over-valuation by insurers of their real estate investments. Some insurers had exaggerated the value of property by 5-10 times according to China Business News.
CIRC directed insurers to submit documents stating the purpose of real estate investments, board resolutions authorising the investments, property valuers’ reports, and rental contracts.
Regulator requires insurers to segregate non-insurance ops
The Chinese insurance regulator has sent draft guidelines to insurers which would require them to fence off their insurance activities from non-insurance operations.
CIRC, in a circular seeking feedback from insurers on the proposed guidelines, said that insurers would have to segregate the personnel, capital, operations, data and other matters of their non-insurance companies from insurance operations so that there will be a firewall between the two activities. 
The purpose is to ensure that risks in non-insurance activities are not transferred to the insurance unit and that non-insurance activities are independent of insurance business. The guidelines do not apply to insurance asset management subsidiaries, agencies, brokerages and assessors.
The draft guidelines also stipulate that insurers cannot provide loan guarantees on behalf of a non-insurance subsidiary; subscribe to bonds issued by non-insurance subsidiaries, lend money to non-insurance subsidiaries. Insurers are also to refrain from exploiting their control over non-insurance outfits to the detriment of the latter. Insurers have to use their own funds to invest in non-insurance subsidiaries.
Cabinet okays establishing insurance asset management body
China’s cabinet, the State Council, has given approval for the establishment of the China Insurance Asset Management Association, in a step closer toward market-driven supervision, according to a source in CIRC.
The new body is expected to be set up within this year, reported China Business News. Important functions of the proposed association include undertaking the registration of insurance asset management products, and promoting self-regulation, product innovation and market reform.
Proposal for FDI to increase to 49% with full Indian control
In his maiden Budget address, Finance Minister Arun Jaitley has proposed that the cap on foreign investment in insurance be increased to 49% “with full Indian management and control”. 
Mr Jaitley also said that the investment would require the approval of the Foreign Investment Promotion Board (FIPB), a government agency which offers a single-window clearance for proposals on foreign direct investment (FDI) in India that would need the prior approval either of the Indian government or the Reserve Bank of India, the central bank.
Under current regulations, foreign investment of up to 26% is undertaken through the automatic route, without going through the FIPB.
Longer-term interest rate derivatives allowed
India’s insurance regulator is allowing insurers to deal in interest rate derivatives with a tenor of more than one year to hedge against interest rate risks. Prior to this new ruling, insurers were permitted to enter into such contracts covering a period of up to one year.
The Insurance Regulatory and Development Authority (IRDA) said that insurers are allowed to deal in rupee interest rate derivatives such as forward rate agreements (FRA), interest rate swaps (IRS) and exchange-traded interest rate futures (IRF). IRS bearing option features will be prohibited for insurers.
According to IRDA guidelines, insurers will be allowed to use interest rate derivatives to hedge for transactions that include reinvestment of maturity proceeds of existing fixed income investments; investment of interest income receivable; and expected premium income receivable on insurance contracts which are already underwritten in life and pension and annuity business.
However, an insurer’s dealings in interest rate derivatives cannot exceed an outstanding notional principal amount equivalent to 100% of the book value of its fixed income investments under the policyholders’ fund and the shareholders’ funds taken together.
Regulator tightens up on churning of life policies
The Indian insurance regulator, seeking to protect consumer interests, has made it mandatory for agents to provide full details in a transparent manner when they attempt to persuade policyholders to shift to another life insurance company.
IRDA said in an exposure draft that “no life insurance agent, insurance intermediary or an insurer is permitted to replace a life insurance policy, except, if it is in the interest of the policyholder”. 
Replacement, if required, would be subject to certain conditions, including obtaining written consent from the prospect to replace existing policies. There is also a need to obtain the particulars of all existing life insurance contracts of the prospect, and details of those policies that are proposed to be replaced.
Bancassurance to have more regulations
The increasing popularity of bancassurance has attracted the attention of the financial regulators who is planning to introduce more rules for this distribution channel.
OJK Deputy Commissioner for Non-banking Industries Dumoly F Pardede, was quoted in a local newspaper saying that the OJK feels it is necessary to set more rules of the game to create a healthier business climate.
OJK Strategic Management Deputy Commissioner Lucky Fathul was also quoted to say the regulator will issue new regulations on the non-banking financial sector soon, with bancassurance being one of them.
South Korea
Financial regulator to revise 700+ rules
The Financial Services Commission (FSC) has announced that it will ease as many as 711 of 1,769 regulations suggested by the financial industry in a bid to invigorate the sector which is facing lower profitability and waning public trust in financial institutions. One of the purposes of the deregulatory move is to make financial transactions easier for consumers and corporations.
To do that, the FSC said that it will introduce a comprehensive asset management account system, which will enable consumers to have a single account to manage assets at as many as 15 financial institutions, ranging from insurers, banks, securities brokerages to asset management firms.
In addition, insurers will also be able to sell policies at retail outlets popular with consumers. Financial groups that have separated banking and insurance businesses will be allowed to combine them and open branches that can sell products and services in one place.
Regulators to clamp down on insurance agencies
The Financial Supervisory Service (FSS) and FSC said they will hold insurance agencies more liable for damage to customers caused by improper sales, reported the Korea Times. Also, the regulators are considering a plan to force agencies with more than 100 salespeople to register with the Insurance Agency Association to tighten supervision of their operations.
Agencies will also have to pay compensation to customers for sales of policies with misleading information, said the regulators and they intend to step up their crackdown on unfair practices of inducing a policyholder to drop an existing policy and subscribing to another one. 
Regulator to press ahead with microinsurance
The insurance industry regulator, the Insurance Board (IB), is pushing through microinsurance in the country, allowing insurers to offer such cover starting in the fiscal year which began on 16 July. This is despite challenges faced from the insurance industry and on the government front.
Policy buyers will be able to obtain life insurance and accident insurance coverage under the plan. The IB is also considering allowing microinsurance for crops, livestock and farm equipment. 
However, insurers have been reluctant to provide microinsurance due to the costs of operating small schemes. To help them reduce overheads, the IB plans to allow insurers to work with local non-governmental organisations, community-based organisations and cooperatives and enlist them as agents.
Regulator sets takaful window application requirements
Insurers interested to commence window takaful business will have to deposit an amount of PKR50 million (US$506,000) in a separate bank account for window takaful business duly maintained in a scheduled bank, said the Securities and Exchange Commission of Pakistan (SECP).
In a statement, SECP also said that insurers seeking permission to commence window takaful operations will have to submit their company profile, ownership structure, organisational chart, certificates of incorporation, certificate of registration and business plan, along with their applications.
The SECP circular also spelt out other requirements such as the minutes of the meeting of the board of directors, a resolution approved by the board for the insurer to commence window takaful operations and approval from SECP for such business. The resume of the proposed Shariah adviser would also be needed.
Terrorism cover considered “need of the hour”
SECP feels that the need to set up a terrorism insurance pool has grown to be of greater urgency now, following the 8-9 June terrorist attacks on the Jinnah International Airport in Karachi. Mr Faraz Uddin Amjad, SECP’s Joint Director (Insurance Division), was quoted to say that the need of the hour is to set up terrorism Insurance pool and regulate it under a chief regulator. 
Establishing a terrorism insurance pool is a move which SECP has been advocating for at least three years now. SECP has suggested that the pool be placed under the state-owned non-life insurer, National Insurance Company, with support from Pakistan Reinsurance Company. SECP is ready to help the government in taking the initiative in this regard, said Mr Amjad.
Regulator to ease business environment for life insurers
Taiwan’s Financial Supervisory Commission (FSC) is drawing up measures to make the business environment of life insurers easier and friendlier in the second half of the year so as to help improve their profitability and competitiveness. These could include regulatory easing of purchases of undeveloped land and other investments.
Compared with banks and securities houses, life insurers generally sit on high levels of idle funds and the FSC can lend a helping hand by removing barriers that slow efficient fund utilisation, FSC Chairman William Tseng  said to the local press. 
Currently, to curb land hoarding and property speculation, life insurers are barred from purchasing undeveloped land unless they can get building permits.
The commission has recently allowed insurers to acquire commercial properties overseas to generate rental income, as soaring real estate prices at home make it difficult to meet the investment yield requirement of at least 2.875%.
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