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May 2019

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Turning regulatory change to your advantage

Source: Asia Insurance Review | Jan 2017

Ms Saskia Bosch van Rosenthal of PwC Hong Kong discusses preparing for the upcoming regulatory changes happening in the region and how to turn them to an insurer’s advantage. 
 
 
Asia is no exception to the wave of regulatory change insurers across the globe have been facing after the financial crisis. This has a big impact on insurers’ balance sheets, risk management, and ways of selling products. 
 
   Several regulators are focusing on strengthening risk and capital management. A few examples of current initiatives:
  • Hong Kong’s OCI and other regulators are looking at group-based supervision, Enterprise Risk Management, and Own Risk and Solvency Assessments. 
  • Hong Kong is planning its first Risk Based Capital (RBC) quantitative impact study for 2017.
  • The Indian regulator has recently instituted a “Committee on RBC Approach and Market Consistent Valuation of Liabilities”, four years after 2012’s consultation paper on RBC.
  • Japan’s FSA is considering implementing a more economic capital-based regime.
 
   Other countries may decide to follow suit and implement a minimum standard to fulfil the International Association of Insurance Supervisors’ insurance core principles. 
 
   Insurers closely monitoring changing risk and capital management regulations could opt to lay the groundwork in advance rather than wait for more clarity from the regulators. This could include developing new models to calculate required capital, while systems and processes will need to be updated to enable revised risk reporting. 
 
   What all this requires, are different skillsets in employees, and it is possible to start training staff on a more risk based approach to their work without the specifics of the regulation being known.
 
Preparing for the upcoming changes: using it to your advantage
You can use regulatory change to your advantage rather than treat it only as a compliance exercise. For example, in the space of risk management, it can result in lower capital requirements, more sophisticated management of risk, and/or better pricing. 
 
   Below are some of the areas in which insurers can create benefits on the back of regulatory requirements.
 
Requirement Opportunity
Higher level of granularity in models
  • Better pricing of risks 
  • Better understanding of sensitivities in the business and faster response (eg change product portfolio or target audience)
  • Note: too much granularity can lead to runtimes that are too long and fewer insights from information overload
Higher governance standards
  • Strengthened role of the risk function
  • Getting in line with current FSB thinking
  • Mitigation of risk of misconduct in the business
ORSA / ICAAP
  • Better understanding of emerging risks and possibility for earlier intervention
  • Better decision making because of longer term focus on the risks in the business, in combination with scenario thinking
Tighter reporting timelines
  • New reporting timelines forced European insurers to streamline their processes, leading to longer term cost savings in FTEs and fewer errors

 

 
   From an external perspective, rating agencies view RBC regimes as a positive yet challenging development. 
“The more robust rules will increase confidence around the financial strength of the sector, but several challenges lie ahead, in particular for medium and small players that will need to cope with potentially more stringent capital requirements.” 
– Jeffrey Liew, head of Fitch’s 
Asia-Pacific insurance ratings group
 
Although the regulatory landscape is complex, embracing regulatory change and exploiting its opportunities can strengthen an insurer’s organisation.
 
Ms Saskia Bosch van Rosenthal is a Director at PwC Hong Kong and PwC’s Asia Insurance Regulatory leader.
 
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