Framework for Insurers in Singapore: Challenges and ...

1 New Risk Based capital Framework for Insurers in singapore : Challenges and OpportunitiesNew Risk Based capital Framework for Insurers in singapore : Challenges and Opportunities02 IntroductionThe RBC Framework for insurance companies was first introduced in singapore in 2004. It adopts a risk-focused approach to assessing capital adequacy and seeks to reflect the relevant risks that insurance companies face. In order to align the Framework with international standards and best practice, and in light of the evolving market developments, there is a need to enhance its risk sensitivity and coverage. The new RBC Framework s ( RBC2 ) key objectives are to enhance policyholder protection, observe international standards and best practices and to ensure Insurers can perform its economic and social role on a sustainable Risk Based capital Framework for Insurers in singapore : Challenges and Opportunities03To date, there have been two consultation papers issued by the Monetary Authority of singapore ( MAS ).

2 The second consultation paper was issued in March 2014. The key proposals under the second consultation include: Introduction of new risks categories (such as insurance catastrophe and operational risk requirements) and reorganisation of existing risks categories; Introduction of two explicit solvency intervention levels, Prescribed capital Requirement ( PCR ) and Minimum capital Requirement ( MCR ) at both the company and insurance fund level; Introduction of a matching adjustment for life Insurers as a more targeted approach; Alignment with banking capital Framework for consistency where relevant and useful; and Unlocking of conservatism in certain areas of the RBC 15 July 2016, the MAS issued a third consultation paper.

3 This consultation paper sets out the revised proposals, taking into account the feedback received from the second consultation paper along with various engagements the MAS has had with the industry. This briefing note summarises some of the key updates in the third consultation contains detailed technical specifications for Insurers to conduct the second Quantitative Impact Study ( QIS 2 ). With the exception of captives, Lloyd s Insurers and marine mutual, all Insurers are required to conduct QIS 2. The basis for calculations under QIS 2 will be based on the valuation date of 31 December 2015 and are required to be submitted to the MAS by no later than 20 October Risk Based capital Framework for Insurers in singapore .

4 Challenges and Opportunities0420002001200420122011 2010200920132014201520161967 The insurance act was passedInsurers are licensed and governed under the insurance ActInsurers can operate insurance business in singapore either as licensed Insurers or foreign Insurers under a foreign insurer schemeLiberalisation of the insurance industryLifting of the 49% restriction on foreign ownership of local insurersImplementation of insurance fundsEstablishment of the singapore insurance Fund (SIF) and Offshore insurance Fund (OIF)Objective is to secure a minimum level of asset protection for insurance policyholders by segregation of insurer s assetsMandatory stress testing requirements Introduction of mandatory stress testing requirements for all Insurers in singapore (excluding reinsurers and captives)

5 MAS prescribe stresses covering macroeconomic, insurance and credit stresses as well as reverse stress testRBC2 consultation kickoffTo take into account the revised insurance Core Principles and Standards issued by the International Association of insurance Supervisors Seeks to enhance insurer risk management practicesQIS1 MAS publishes RBC2 2nd Consultation paper and QIS1 technical specificationsQIS2 MAS publishes RBC2 3rd Consultation paper and QIS2 technical specificationsRBC1 implementationAdopts a risk-focused approach to assessing capital adequacySeeks to reflect the relevant risks that insurance companies faceA minimum capital adequacy Ratio (CAR) of 120% and Fund Solvency Ratio (FSR) of 100%HistoryNew Risk Based capital Framework for Insurers in singapore .

6 Challenges and Opportunities0520002001200420122011 2010200920132014201520161967 The insurance act was passedInsurers are licensed and governed under the insurance ActInsurers can operate insurance business in singapore either as licensed Insurers or foreign Insurers under a foreign insurer schemeLiberalisation of the insurance industryLifting of the 49% restriction on foreign ownership of local insurersImplementation of insurance fundsEstablishment of the singapore insurance Fund (SIF) and Offshore insurance Fund (OIF)Objective is to secure a minimum level of asset protection for insurance policyholders by segregation of insurer s assetsMandatory stress testing requirements Introduction of mandatory stress testing requirements for all Insurers in singapore (excluding reinsurers and captives)

7 MAS prescribe stresses covering macroeconomic, insurance and credit stresses as well as reverse stress testRBC2 consultation kickoffTo take into account the revised insurance Core Principles and Standards issued by the International Association of insurance Supervisors Seeks to enhance insurer risk management practicesQIS1 MAS publishes RBC2 2nd Consultation paper and QIS1 technical specificationsQIS2 MAS publishes RBC2 3rd Consultation paper and QIS2 technical specificationsRBC1 implementationAdopts a risk-focused approach to assessing capital adequacySeeks to reflect the relevant risks that insurance companies faceA minimum capital adequacy Ratio (CAR) of 120% and Fund Solvency Ratio (FSR) of 100%New Risk Based capital Framework for Insurers in singapore : Challenges and Opportunities06 Third consultation paperThe MAS published its third consultation paper on 15 July 2016 proposing revisions to the Risk-Based capital Framework for Insurers , factoring in feedback from the industry as well as various closed-door consultations.

8 Insurers are required to submit their second quantitative impact study results by 20 October 2016 following which the MAS will further evaluate the revised RBC2 latest consultation paper sets out the revised proposals. Some areas have been updated based on second consultation feedback and others proposals have been maintained. Key revisions are set out below:C1 insurance Risk Requirement C1 risk component covers the uncertainty in the amount and timing of claims and benefit payments. This is separately calculated for life and non-life InsurersGeneral InsurersModular approach in line with current RBC where modules include mortality, disability, dread disease and lapse Charges are applied to Claims and Unexpired Risk Reserves which are set at the 75th Proposals/ChangesRemoval of reference to standard tables and more reliance on the appointed actuary s change from the current methodology and factors.

9 Natural catastrophe risk requirement was introduced in previous consultation. No update has been provided in the third consultation. It is expected that this will be in play after RBC2 go-live. Prescribed correlation matrix to allow for diversification between the risk modules Mortality, Longevity, Dread disease, Other insured events, Catastrophe, Mortality, Disability, Lapse, Conversion of Option, Expense. Permanent 20% increase to the best estimate mortality rate assumptions 25% decrease to the best estimate longevity rate assumptions 40% increase (where premium payable is guaranteed for the full duration of the policy) and permanent 30% increase (where premium payable is not guaranteed for the full duration of the policy) to the best estimate dread disease incidence rate assumptions 120% expense risk requirement in first year and 110% thereafter of the insurer s best estimate of its future experienceImplications.

10 For General Insurers , there is no change in C1 risk charges from the current RBC Life Insurers , the Catastrophe risk requirement under QIS2 has changed from a Mortality and Morbidity component to just a Mortality component which would reduce the risk requirement. However, the mortality shock component has been increased from an additional death per 1000 (under QIS1) to an additional 1 death per 1000 (under QIS2). In addition, the correlation matrix has been expanded to incorporate the new C1 requirements. New Risk Based capital Framework for Insurers in singapore : Challenges and Opportunities07C2 Asset Risk Requirement Covers the risks such as falls in equity values, increase in interest rate volatility, spread risk, currency risk and asset-liability mismatch and General InsurersRisk requirement for the C2 asset risk module consists of: Equity investment, Interest rate mismatch, Credit spread, Property investment, Foreign currency mismatch and Counterparty default risk.