Technical Specifications for RBC 2 - Monetary Authority of ...

1 Ufsas 6 May 2019 Technical Specifications for RBC 2 YE2018 Parallel Run Technical Specifications FOR RBC 2 6 MAY 2019 Monetary Authority OF SINGAPORE 2 Contents 1 APPLICABILITY OF RBC 2 .. 4 2 PRESCRIBED CAPITAL REQUIREMENT ( PCR ) AND MINIMUM CAPITAL REQUIREMENT ( MCR ) .. 6 3 VALUATION OF ASSETS AND LIABILITIES .. 9 4 COMPONENTS OF REQUIRED CAPITAL .. 14 5 COMPONENTS OF AVAILABLE CAPITAL .. 33 6 ADJUSTMENTS TO RISK-FREE DISCOUNT RATES MATCHING ADJUSTMENT ( MA ) AND ILLIQUIDITY PREMIUM ( IP ).

2 41 7 SUBMISSION INSTRUCTIONS .. 49 Appendix 1: TYPE OF RISK REQUIREMENTS AND DESCRIPTION OF RISKS .. 54 Appendix 2: LIST OF COUNTRIES IN MSCI WORLD EQUITY INDEX .. 57 Appendix 3: TREATMENT OF COLLECTIVE INVESTMENT SCHEMES .. 58 Appendix 4: CALCULATION OF INTEREST RATE MISMATCH AND CREDIT SPREAD RISK REQUIREMENTS .. 60 Appendix 5: APPROACHES FOR RECOGNISING INSURER S INTERNAL CREDIT RATING MODEL AND PROCESS FOR UNRATED CORPORATE BONDS .. 66 Appendix 6: CRITERIA FOR RECOGNITION OF INTERNAL CREDIT RATING PROCESS ( PROCESS ) FOR UNRATED BONDS UNDER PROPOSED APPROACH 2.

3 70 Appendix 7: RECOGNITION OF EXTERNAL CREDIT ASSESSMENT INSTITUTIONS ( ECAI ) .. 75 Appendix 8: TREATMENT OF GUARANTEES AND COLLATERAL .. 77 Appendix 9: TREATMENT OF STRUCTURED PRODUCTS AND DERIVATIVES .. 79 Appendix 10: REQUIREMENTS FOR RECOGNITION OF LETTER OF CREDIT .. 84 Appendix 11: MINIMUM REQUIREMENTS FOR PAID-UP ORDINARY SHARES .. 87 Appendix 12: MINIMUM REQUIREMENTS FOR AT1 CAPITAL INSTRUMENTS .. 89 Appendix 13: MINIMUM REQUIREMENTS FOR TIER 2 CAPITAL INSTRUMENTS .. 94 Appendix 14: SUBMISSION REQUIREMENTS FOR AN INSURER INTENDING TO ISSUE OR RECOGNISE A CAPITAL INSTRUMENT AS CET1, AT1 OR TIER 2 CAPITAL.

4 97 Appendix 15: DIRECT LIFE INSURERS THAT PROVIDED DATA FOR THE CALIBRATION OF MA AND IP FOR QIS 2 .. 99 Appendix 16: ELIGIBILITY CRITERIA TO BE MET FOR APPLYING MATCHING ADJUSTMENT .. 100 Technical Specifications FOR RBC 2 6 MAY 2019 Monetary Authority OF SINGAPORE 3 Appendix 17: EXAMPLE OF ROLLOVER OF EXCESS CASH FLOWS TO LATER YEARS AND IMPACT TO MA PORTFOLIO YIELD .. 106 Appendix 18: METHODOLOGY FOR DETERMINING COSTS OF DEFAULT AND DOWNGRADE .. 107 Appendix 19: FRAMEWORK FOR IP .. 108 Appendix 20: CALIBRATION OF THE IP AND DERIVATION OF THE FUND LEVEL IP.

5 110 Technical Specifications FOR RBC 2 6 MAY 2019 Monetary Authority OF SINGAPORE 4 1 APPLICABILITY OF RBC 2 MAS has conducted three rounds of impact studies on the RBC 2 proposals. The most recent impact study was conducted from September to November 2018. All insurers (with the exception of captives, Lloyd s insurers and marine mutuals) participated in the 2018 impact study. Consistent with the approach taken under previous impact studies, all insurers (with the exception of captives, Lloyd s insurers and marine mutuals) will be required to conduct a parallel run based on the finalised proposals in this Technical Specifications document for the year ended 31 December 2018.

6 This will allow the insurers to assess the impact of finalised RBC 2 proposals on their capital positions and prepare for RBC 2 implementation from 1 January 2020. MAS expects to conduct a final parallel run for the year ended 31 December 2019. Locally incorporated reinsurers which are headquartered in Singapore (where MAS is the home supervisor) are to assume that RBC 2 will be applied immediately on its offshore insurance funds as well as its branches for the purpose of the parallel run based on 31 December 2018 valuation date.

7 Locally incorporated reinsurers that are headquartered overseas (where MAS is not the home supervisor) will continue to be subject to the current simplified solvency requirements1, whilst reinsurance branches will be exempt from solvency requirements for the offshore insurance fund2. This is elaborated in Section 7 of the Third Consultation Paper, and summarised in the diagram below. 1 For avoidance of doubt, the OIF of locally incorporated reinsurers that are headquartered overseas (where MAS is not the home supervisor) is only subject to the current simplified solvency requirements (as described in footnote 98 of the RBC 2 Review Third Consultation paper issued in July 2016 ( Third Consultation Paper ), and not subject to any of the requirements set out in Section 4 of this document.)

8 2 For avoidance of doubt, the OIF of licensed reinsurance branches is exempted from any form of solvency requirements, including those set out in Section 4 of this document. Technical Specifications FOR RBC 2 6 MAY 2019 Monetary Authority OF SINGAPORE 5 Instructions on the YE2018 parallel run can be found in Section 7 of this document. Excel workbooks with forms designed to capture the necessary information for analysis are provided to insurers for completion, as elaborated below.

9 To perform the parallel run, the following documents are made available: (a) This Technical Specifications document; (b) MAS_RBC 2 workbook main workbook for results of the parallel run ( Main Workbook ); (c) workbook for deriving the amount of Matching Adjustment ( MA Workbook ); (d) SGD and USD Spot Rates_YE2018_Smith workbook for generating discount rates for liabilities ( Discount Rate Workbook ); and (e) Questionnaire for YE2018 RBC 2 Parallel Questionnaire on additional details requested on the parallel run ( Questionnaire ).

10 Technical Specifications FOR RBC 2 6 MAY 2019 Monetary Authority OF SINGAPORE 6 2 PRESCRIBED CAPITAL REQUIREMENT ( PCR ) AND MINIMUM CAPITAL REQUIREMENT ( MCR ) The Capital Adequacy Ratio ( CAR ) and Fund Solvency Ratio ( FSR ) remain relevant under RBC 2, meaning that insurers will be asked to compute these two ratios. The CAR continues to be the ratio of Financial Resources ( FR ) / Total Risk Requirements ( TRR ) at the company level. In the case of the FSR, it will be the ratio of FR / TRR at the adjusted fund level, instead of the insurance fund level (see the table below).