The regulatory regimes are evolving rapidly in Asia-Pacific, focusing on developing a risk based capital (RBC) framework or strengthening existing solvency requirements. The International Association of Insurance Supervisors (IAIS) – global standard-setter for the insurance industry – issued new insurance core principles (ICPs) in relation to RBC requirements in late 2011.
All insurance supervisors are obliged to comply with these new ICPs as soon as practicable. In Asia-Pacific, we are seeing countries release or refine their criteria regularly, and companies are struggling to keep pace with the changes.
Aon Benfield publishes an annual
‘Asia-Pacific Solvency Regulation’
book, which details the non-life solvency requirements of the following 20 jurisdictions in the region: Australia, Brunei, China, Hong Kong, India, Indonesia, Japan, Korea (Republic of), Macau, Malaysia, Myanmar, New Zealand, Pakistan, Papua New Guinea, Philippines, Singapore, Sri Lanka, Taiwan, Thailand and Vietnam.
Aimed at multi-national insurers and reinsurers, including firms looking to expand overseas, the report provides an understanding and benchmarking of the existing methodologies adopted by regulators. Asia-Pacific has been identified as an area of growth and – as new capital flows in – companies will continue to take advantage of opportunities,. so a clear understanding of the status quo and future regulatory changes is very important.
Key findings from the 2014 report include:
China underwent the most significant change since last year:
While regulatory evolution occurs throughout Asia-Pacific, the introduction of China’s second-generation solvency regime – China Risk Oriented Solvency System (C-ROSS) – will have significant impact on the fast-growing insurance market itself.
Previously, Chinese solvency capital was only decided by an insurer’s size but now it takes into consideration insurance/catastrophe, asset and credit risk, plus hard-to-quantify risks such as operational, reputational and liquidity risk. So far the regulator has issued four versions of consultation papers on solvency capital standards under C-ROSS, and expects to issue the final version by the end of this year.
Asia-Pacific is strengthening its solvency regulations. Markets such as Hong Kong and Sri Lanka are moving towards RBC, while developed markets are bringing their existing RBC to a new level – for example Singapore’s introduction of revamped rules known as RBC 2 and Japan’s moving towards an economic value-based solvency regime. Insurance companies need to meet the regulatory challenges, which would effectively motivate them to improve enterprise risk management (ERM). Meanwhile, the tightened regulatory requirement may also create merger and acquisition (M&A) pressures as well as opportunities.
A benchmarking comparison that the industry can learn from: The Solvency II journey in Europe has greatly influenced markets that are developing new solvency regimes. The regime’s three pillar structure is being mimicked in China and Hong Kong, with Pillar 1 for quantitative requirement, Pillar 2 for qualitative requirement, and Pillar 3 for disclosures and information transparency.
Enhanced catastrophe risk capital requirement:
Multiple countries in this region are stepping up the requirement on catastrophe risk capital charge. New Zealand calibrates catastrophe risk capital charge to a loss return period of 1 in 500 years, and is en-route to raising that calibration to 1 in 1,000 years. In Australia, where greater reliance is placed on catastrophe model output, the natural peril horizontal requirement became mandatory this year. In China, catastrophe risk charges for property, motor and agriculture are built into the upcoming C-ROSS. In some South-east Asian countries, where catastrophe risk was not included when risk based capital system was launched, the regulators are now studying the feasibility of incorporating catastrophe risk charges.
The report is geared towards helping insurers drill down to the information that is most important for them. Many insurers and reinsurers are keen on identifying key strategic opportunities and at the forefront of this are the Association of Southeast Asian Nations (ASEAN) countries and China. ASEAN countries present many opportunities due to currently low insurance penetration rates, fast-growing economies, an active infrastructure building, and the forthcoming planned ASEAN Economic Community. Regulatory regimes are evolving quickly, with risk based capital regimes already implemented in half of the countries. However, different insurance regulatory regimes may make insurance market integration difficult.
As for China, the central government has clearly set the goal for the insurance industry’s growth. By 2020, insurance penetration will reach 5%, and the insurance density will reach 3,500 yuan (CNY) – equivalent to US$571/£362 – per person, which represents significant growth from the 2012 level (2.98% and CNY 1,144 respectively). The growth means huge opportunities to insurers and reinsurers. However, understanding the complex regulations – especially the forthcoming C-ROSS – is critical for those who want to do or grow business in China.
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