Global Corporate Insurance & Regulatory Bulletin - June 2013

Co-edited by Martin Mankabady, David W. Alberts, Lawrence R. Hamilton and Vikram Sidhu

Keywords: corporate, insurance, regulatory,

ASIA

ASIA AND SOLVENCY II

In recent years, many Asian countries have adopted Risk-Based Capital regimes ("RBC") to regulate solvency of insurers. With the European Union's proposed adoption of Solvency II, it is expected that more Asian regulators will adopt RBC systems.

What Is The Current Position In Asia?

The levels of sophistication in the RBC regimes adopted vary between Asian regulators. Many regimes have similar elements as Pillar 1 of Solvency II (i.e., a solvency requirement). No Asian country has implemented a regime fully equivalent to Solvency II, other than Japan's solvency regime for reinsurance.

Singapore

Solvency requirement is based on a standard formula which requires the insurer to meet a 99.5% confidence level for one year. Singapore is still reviewing its RBC regime and the next phase will consider the use of internal models.

Singapore has introduced in 2013 Own Risk Solvency Assessment ("ORSA") and disclosure requirements. The first ORSA report for insurers is due 31 December 2014.

Malaysia

Malaysia implemented RBC in 2009 and uses a standard formula to assess solvency requirement. It has introduced ORSA requirements but not the disclosure requirements set out in Pillar 3 of Solvency II.

Japan

Solvency requirement is based on insurance risk, investment risk, minimum guarantee risk and third sector insurance (medical) risk. Japan also has a requirement for an appointed actuary to prepare an "Opinion Letter" on an annual basis, which sets out reserve adequacy, fairness of policyholder's dividends and business continuity under some scenarios. This is somewhat short of the Pillar II ORSA requirements which require the insurer to undertake a forward-looking risk assessment and implementation of effective management practices to control and report on risk.

Japan's regime for re-insurance has been found by the European Insurance and Occupational Pensions Authority to be equivalent to Solvency II.

Thailand

Thailand implemented RBC in September 2011. The solvency requirement consists of insurance risk, credit risk and market risk, but not operational risk. Thailand has not introduced any ORSA or disclosure requirements.

China

China is still on a "first generation" solvency regime and has not adopted RBC. The China Insurance Regulatory Commission issued a new regulation in July 2012 requiring insurers to strengthen their solvency management focusing on four areas:

Setting up solvency management; Preparing a capitalisation plan; Forecasting near-term solvency and preparing a remediation plan, if needed; and Establishing accountabilities. Hong Kong

Hong Kong is also on a "first generation" solvency regime but is considering adopting a RBC regime having commissioned a consultant to carry out a study on the framework for insurance business in Hong Kong in 2012. The regulator is aiming to consult the industry on the proposed framework later in 2013 and come up with a recommended framework early next year.

Implications Of Solvency II On Asian Regulators

Due to the anticipated implementation of Solvency II in the European Union, Asian regulators have been reviewing their solvency regulations with a view to focus more on risk. Countries with "first generation" solvency regimes are expected to move towards RBC regimes, although this may take some time as there will be lengthy consultations and discussions.

At this time, Asian regulators do not appear to have any plans to fully adopt Solvency II. However, Singapore's and Malaysia's regimes are already very similar to Solvency II. Singapore is also still reviewing its RBC regime with a view to adopting further elements of Solvency II (such as the internal model).

Asian regulators do not appear to have any difficulty in adopting and implementing Pillar I solvency requirements, but seem hesitant about the requirements for the other two Pillars, particularly the ORSA requirements in Pillar II. ORSA involves managerial skills in reviewing and adopting policies and internal practices to deal with the various risks faced by insurers, which would require Asian insurers to spend considerable time and money to fully acquaint their management and board; that will require greater technical expertise as some insurers have limited capability and resources to properly undertake the risk assessment and adopt appropriate managerial practices.

Solvency II has made Asian countries more aware of the importance of risk in assessing insurers' solvency and to develop regulatory regimes which takes account of the full range of risks facing insurers. Given the economic and business development in Asia, it is important to develop robust solvency regulatory frameworks for...

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