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.
Long-awaited draft deposit insurance rules released
After mulling the need to insure savers’ deposits for about two decades, China has finally issued the much-awaited draft regulations whereby the government is proposing to insure deposits of up to CNY500,000 (US$81,400) per saver. The central bank had said that this amount would be enough to cover 99.6% of savers’ bank deposits.
It is noted that when these rules take effect, it would be the first time that there is deposit insurance in the country. This represents an important step toward scrapping remaining controls on interest rates and allowing banks to fail in a more market-driven economy.
The rule would apply to all deposit-taking financial institutions and would cover both local and foreign-currency deposits, according to the draft. A deposit insurance fund management agency, to be decided by the State Council’s Legislative Affairs Office, will set the premium rates.
The People’s Bank of China (PBOC) did not state a start date or the amount of premiums banks may pay, saying only that they may differ depending on lenders’ management and risk conditions.
Production liability insurance promoted in pilot schemes
As China’s revised Production Safety Law came into effect in December last year, some cities across the country are implementing pilot schemes to promote production liability insurance, to be in sync with the legislation.
The amendments to the law are the biggest since the legislation was passed in 2002. The amended law, which places emphasis on workplace safety, seeks to establish an accident prevention system and strengthen risk management. It also promotes production safety liability insurance coverage.
The law provides for heavy administrative penalties: violators can attract a fine of CNY200,000 (US$32,558) to CNY500,000 for a general accident; CNY500,000 to CNY1 million for repeated accidents; CNY5 million to CNY10 million for major accidents and CNY10 million to CNY20 million if the circumstances of an accident are especially serious.
Insurance law to be amended to raise criteria for majority shareholding
China’s insurance regulator has drafted amendments to the insurance law that would raise the criteria for investors aiming to be majority shareholders of an insurance company, expand the business scope of insurers, and broaden the areas in which insurance funds can invest, among other changes.
There are 52 proposed amendments in this latest round of revising the insurance law which was last overhauled in 2009. The amendments cover mainly issues involving operating and funding rules, supervision and management, and legal responsibility. Several of them represent ratification of regulations passed by the China Insurance Regulatory Commission (CIRC) in recent years that are not yet included in the legislation.
Expert meetings were held on the draft amendments which are expected to be submitted in the middle of this year to the State Council Legislative Affairs Office.
Proposed amendments and measures
The proposed amendments require those aiming to be major shareholders, to meet the following conditions: “For the most recent three years, the main operating revenue must not be less than CNY1 billion; the asset-liability ratio must not be more than 50% and net assets must not be less than CNY200 million and must be at least 10 times more than the amount to be invested”.
In terms of business scope, among other things, the amendments would provide for annuity insurance to be within the scope of personal insurance. Companies offering personal insurance would have to obtain the approval of the insurance regulator before they can offer medical liability insurance.
The amendments also provided for insurance companies to invest in equity funds and insurance asset management products. Insurers would have to strengthen asset-liability management, and establish and improve the insurance fund comprehensive risk management system.
As for fundraising by insurance companies, the amendments stated that insurers could issue equity, debt instruments as well as other capital raising instruments approved by the insurance regulator.
The amendments also stated that where an insurance company faced a situation of serious liquidity risk, the insurance regulator is empowered to require the insurer to submit plans to improve liquidity, and may take the following regulatory measures depending on the circumstances: order the insurer to increase its capital; restrict the distribution of dividends to shareholders; restrict the use of insurance funds and require the company to improve its asset allocation.
New infrastructure investment rules to be issued
The CIRC has drafted a new rule that would allow insurance funds to entrust third parties to invest in government infrastructure projects on their behalf. So far, insurance funds have not been allowed to directly invest in government infrastructure projects.
The new regulation, on which CIRC is seeking public feedback, provided for infrastructure investments to be in the form of debt instruments, equity, asset-backed securities and other viable investment methods. The investments must be carried out indirectly through third parties.
However, there are still areas in which infrastructure investment are forbidden. These included: banned or restricted projects; projects which have not yet been officially licensed; projects which are unclear; projects with unclear ownership and in which legal risks exist; projects which are funded by a financing entity which does not qualify to provide funding; and other circumstances prescribed by the CIRC.
CIRC targets full price liberalisation in life market this year
China will kick off premium rate reform for universal life insurance and strive to achieve fully market-based pricing for life insurance this year, said CIRC Chairman Xiang Junbo.
With effect from 16 February, the CIRC had allowed life insurers to determine their own guaranteed return for universal life products. The key measures included:
• the guaranteed minimum interest rate is fully market-oriented; the guaranteed rate cap is lifted from 2.5% to 3.5%. Products priced at a guaranteed rate higher than 3.5% require CIRC approval;
• increase in protection coverage and regular premiums with the sum insured for death to be at least 20% of account value (up from 5% previously) and the cap on regular premiums lifted to CNY10,000 from CNY6,000;
• strengthening of risk management with reserves for universal life liabilities made compulsory, and separate reserves to be set up to cover the guaranteed returns and variable returns; and
• lower cap on expense loading.
After universal life insurance, next on the reform agenda will be pricing of participating life insurance, among other products, Mr Xiang had said.
Meanwhile, preparations for motor insurance premium rate reform are also underway and six provinces and cities including Northeast China’s Heilongjiang Province will be singled out for the pilot reform once the State Council approves the plan.
Transitioning to C-ROSS
Turning to other areas of the insurance market, Mr Xiang said that the CIRC will have three major thrusts this year. These are: to clinch legislation governing catastrophe insurance, promote tax incentives for pension and health insurance, and go all out to push critical illness insurance across the country.
He said that this year would also be important for the insurance industry because it would mark the country’s transition to the new China Risk Oriented Solvency System (C-ROSS) set to be fully implemented by next year.
Three jurisdictions to cooperate on insurance fraud
The Office of the Commissioner of Insurance (OCI), the China Insurance Regulatory Commission (CIRC) and the Monetary Authority of Macao (AMCM) have signed a cooperation agreement last December, committing to enhance their cooperation against insurance fraud.
The agreement set out a framework that enables the regulators in the respective jurisdictions to provide assistance and information to one another to help in performing their supervisory role in monitoring insurance fraud risks.
Foreign investment promotion board approval required for 27-49% holdings in insurers
The Indian government has notified new rules for foreign investment in the insurance sector, that permit up to 49% investment by foreign entities in the sector, up from 26% allowed earlier, subject to approval by the Foreign Investment Promotion Board (FIPB).
FDI proposals up to 26% of the total paid-up equity of the Indian insurance company are allowed on the automatic route, and FDI proposals which take the total foreign investment above 26% and up to the cap of 49% shall require FIPB approval, according to a Finance Ministry statement.
The investment ceiling also applies to insurance brokers, third party administrators, surveyors and loss assessors and other insurance intermediaries.
More business to be ceded to local reinsurers
The Indonesian financial regulator Otoritas Jasa Keuangan (OJK) has proposed that insurance companies in the country, place 100% of their business for covers such as motor, life, health, personal accident, surety, credit and cargo, with domestic reinsurers.
This would mean that the amount of business to be ceded to domestic reinsurers would be sizeable. In 2013, the gross premium of the overall insurance market stood at IDR191 trillion (US$15.3 billion), according to the OJK. Life insurance accounted for 60% or IDR114 trillion of this total. Motor, health and personal accident insurance accounted for more than a third of total premiums in the non-life sector.
OJK had proposed for the new cession requirement be implemented with effect from the start of this year, in order to “improve and optimise capacity in the country”, according to a draft circular which the regulator issued to the insurance industry earlier this month. The Authority had expressed about the deficit in the balance of payments resulting from the placement of business with overseas reinsurers. This deficit had amounted to US$455 million a year over the past five years, according to OJK data.
For other insurance classes, a minimum of 25% of the business have to be similarly placed, with the proportion to be increased in the following years, said the regulator.
OJK said that while it encourages insurance companies to increase their own retention of business, it would also promote optimal utilisation of domestic reinsurance capacity through regulation.
Regulator enhances the requirement in the areas of Cybersecurity and Information Security Management
On 13 February, the FSA announced draft amendments to the “Comprehensive Guidelines for Supervision of Major Banks” and “Inspection Manuals” for public consultation. The amendments aim to improve information and cyber security management systems in all financial institutions, strengthen security measures for internet banking services, and raise public awareness to these measures.
The amended Comprehensive Guidelines for Supervision and Inspection Manuals are expected to be effective in this year.
Regulator enhances rules on selling insurance product by independent agencies
On 18 February, the Financial Services Agency (FSA) proposed drafts of “Order and Ordinance for Enforcement of the Insurance Business Act” and “Comprehensive Guidelines for Supervision of Insurance Companies” for public consultation.
Under the new regulation, independent agencies selling products from multiple insurers will need to provide customers with a list of plan they sell. This will enable customers to compare costs and benefits and make more informed decisions. Also, agencies will need to explain why they recommend a particular product to prevent them from favouring plans that earn them high commission.
The FSA is looking to introduce the regulations in the spring of 2016.
Regulator calls for specialised insurance tribunals
The Securities and Exchange Commission of Pakistan (SECP) has recommended that specialised and independent insurance tribunals be set up to help clear the backlog of insurance cases.
The SECP, which regulates the capital market and the insurance, corporate and non-banking financial sectors, said that complaints have been pending in the courts for the last five years.
In order to provide speedy justice to aggrieved policyholders, the SECP is in favour of establishing independent and exclusive insurance tribunals as envisaged under the Insurance Ordinance. It is offering to provide office space to the specialised tribunals at its offices in Islamabad, Lahore, Peshawar, Faisalabad, Multan, Quetta and Karachi.
Meanwhile, the SECP has started formulating regulations for small dispute resolution committees, which will arbitrate between insurance companies and the policyholders.
The SECP is also working with the World Bank to strengthen and reform the insurance regulatory framework and to enhance its supervisory capacity. The project aims to introduce a risk-based capital regime and risk-based supervision of insurance companies in the country.
Regulator assures industry on revised RBC framework
Proposed changes to the risk-based capital framework, or RBC 2, which seeks to reflect the relevant risks that insurers face, will be more risk sensitive and robust but it should not hamper well-managed insurance businesses.
Mr Ong Chong Tee, Deputy MD of financial supervision at the Monetary Authority of Singapore (MAS) said the regulator would only implement RBC 2 after it has conducted “a thorough calibration and assessment”.
Noting that some insurers “are naturally anxious” if the required capital buffers would be the same under RBC 2 as it is currently, he said: “This is not our expectation given that risk requirements under RBC 2 are designed to be more risk sensitive, comprehensive and calibrated at a higher competency level.”
There will also be greater differentiation in the capital adequacy ratio (CAR) that assesses insurers’ solvency, for firms with varying risk profiles, he said.
The need for RBC2
In underlining the need for RBC 2, Mr Ong said that the operating environment for global finance including insurance has and will become increasingly complex given the more connected global markets and the vulnerability of contagion.
Coupled with an overall low interest rate environment that now pushes investors, including insurers, to target more risky, higher-yielding products and potential new areas of risks, such as technology risks, he said that it is important for Singapore’s insurance capital framework to remain relevant and effective.
It is also important that insurers operating in Singapore are well-capitalised to weather different crises and risks, said Mr Ong. The public assurance is the first from the MAS since detailed specifications for the first quantitative impact study was released in mid-2014.
A second study for the revised framework will be conducted in the second quarter of the year. RBC 2 is targeted to be implemented in 2017.