Asia Pacific solvency regulation report from Aon Benfield

Aimed at multinational insurers and reinsurers, including firms looking to expand overseas, Aon Benfield’s Asia Pacific Solvency Regulation report for 2016 outlines the latest non-life solvency requirements for 20 markets in the region. The reference guide 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 crucial,” said Aon Benfield.

The following 20 Asia Pacific markets are included in the report: 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, Vietnam.

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The report examines:

• Regulator: Insurance authority governing the insurance industry of local market.
• Minimum Capital Requirement: Minimum capital required in setting up and maintaining an insurance or reinsurance company.
• Solvency Capital Requirement: The method which the regulator sets for all insurance and reinsurance companies in order to meet the solvency margin / capital adequacy ratio set down.
• IFRS Status: The status of implementation of International Financial Reporting Standards (IFRS).
• Recent Developments: Recent regulatory developments in each market affecting the operations of insurance companies.

In most cases the method which the regulator sets for all insurance and reinsurance companies in order to meet the Solvency Capital Requirement approach is a risk based capital approach. However, in some countries, such as, Brunei, Hong Kong, India, Macau, Pakistan, and Vietnam, the approach is based on the solvency margin. In Myanmar, a separate fund for each class of general business and for life assurance must be established.

In Malaysia the approach is a risk based capital one, except in the Labuan International Business and Financial Centre (IBFC) where it is based on the solvency margin.

Risk-based capital trends

The report noted that risk-based capital trends continue, pointing to China which has formally implemented its second-generation solvency regime, C-ROSS, which considers the breadth of risks an insurer faces (market, premium, reserving, catastrophe, credit risk etc).

Aon Benfield said this represents a significant change from the previous solvency requirement which was simply based on the size of the business and determined as a percentage of the insurer’s premium or incurred claims. Risk-based capital adoption is also being considered in India, Hong Kong and Labuan (a federal territory of Malaysia). Meanwhile, regulators in Singapore, Thailand and Japan are considering upgrading their existing risk-based capital requirements to more accurately reflect the risks insurers face, said Aon Benfield.

The report also highlighted enhanced catastrophe reporting requirements from Asian regulators. For example, with the implementation of C-ROSS, catastrophe risk is now part of the solvency consideration for Chinese insurers, said Aon, adding that regulators in Singapore and Thailand are considering adding catastrophe risk into solvency capital calculation as part of their risk-based capital 2 initiatives.

The report noted that in New Zealand, the catastrophe risk charge in risk-based capital is now calibrated at a 1 in 1,000 years earthquake, up from previous 1 in 750 years requirement. “These regulatory changes help motivate insurers to pay more attention to their management of catastrophe risk,” said Aon Benfield.

The other trend highlighted by the report was the strengthening of enterprise risk management (ERM) requirements. Aon said insurers in Singapore and Japan have just started filing Own Risk & Solvency Assessment (ORSA) reports for regulators to review, while Chinese insurers are having their ERM scrutinised by the regulator, in line with the C-ROSS Pillar 2 requirements.

Strengthened ERM

Aon added that the strengthened ERM requirements will help protect the interests of policyholders and promote the overall stability of the industry.

“The report is geared towards helping readers drill down to the information that is most important for them,” said Sifang Zhang, Head of Aon Benfield Analytics’ Regulatory and Rating Agency Advisory team for APAC. “Asia Pacific presents many opportunities, yet it is important to understand the regulatory evolution. The enhanced solvency and risk management requirements may change insurers’ risk appetite, which in turn may have an influence on their reinsurance decisions.

“While the regional trends are clear, there are differences between the 20+ markets which are each in different development stages. This report serves as a reference book providing handy information on each market’s capital requirements and the latest regulatory changes. The report’s standard structure will enable easy comparisons to be made when insurers are making strategic decisions.”