Asian risk managers need to unite to stem rise of insurance protectionism

At the highest level there is a desire to harmonise rules and regulations that govern financial services in Asia in order to stimulate growth and investment in the region and deliver a more consistent regulatory playing field for consumers and businesses. The Association of Southeast Asian Nations (ASEAN) for example agreed back in 2007 to create the Asian Economic Community (AEC) by this year and one of its key goals is to deliver a single market for financial services for the region including insurance. The main result of this has been the adoption of risk-based solvency regimes across the region that are based on the International Association of Insurance Supervisors (IAIS) common principles and are often based on Europe’s new capital adequacy and reporting regime Solvency II.hideThe 1st ASEAN Finance Ministers’ and Central Bank Governors’ Meeting in Kuala Lumpur, Malaysia, earlier this year issued a joint statement that read: “We acknowledged the progress achieved under ASEAN cooperation in insurance, particularly in the development of insurance regulatory and supervisory frameworks through IAIS and updates by member states on developments in their domestic insurance markets. We recognised that capacity building and research are continuously being discussed by the ASEAN Insurance Regulators’ Meeting (AIRM), and encouraged that these activities be further intensified.” “A well-developed, open and integrated insurance sector signifies competitive markets with more, better quality and lower-cost services for the customers to choose from. In an integrated market, insurers’ capacity to underwrite also improves, with stronger balance sheets and more consistent legal and regulatory frameworks,” explains ASEAN. “These will encourage individuals and firms to obtain insurance, enabling them to mitigate risks to their day-to-day lives and operations. This can include catastrophe insurance, which will help ASEAN citizens become more resilient to losses from natural disasters. In turn, higher insurance take-up will boost trade, investment and economic activity,” it adds. As a result, ASEAN member states (AMS) agreed on the ASEAN Insurance Integration Framework, which guides member states on how to proceed with the liberalisation and integration of their insurance sectors. “They are starting with the cross-border supply of marine, aviation and goods in international transit (MAT) insurance and exploring more sub-sectors to liberalise,” explains ASEAN. But, while the ASEAN supervisors and other regional heavyweights such as China and Japan may well be upgrading their solvency regimes to be in line with international standards there is little or no evidence of progress made in the critical area of global programmes. If anything the environment is becoming more difficult for Asian and international companies that attempt to cost-effectively and efficiently manage their cross-border risks through global programmes. Indonesia, the biggest economy in the ASEAN group, has a draft regulation on the “own retention and domestic reinsurance support” that will actually make it even more difficult for companies to use international markets to cover their risks. The Philippines regulator has introduced a basic risk-based capital (RBC) framework but the country’s insurance supervisor has also instituted a minimum paid-up capital requirement that is set to increase every two years until 2020. Such measures are designed to protect the local insurance and reinsurance markets by forcing as much premium to be retained locally as possible. International insurers, reinsurers and risk managers argue, however, that in reality they simply make it more difficult for businesses to access critical coverage for their risks and leave the economies more vulnerable and less able to attract investment. Lloyd’s of London, the international marketplace, is very keen to expand its Asian business via its platforms in Singapore and China (see news on page 3) and has made good progress in recent years. But it is worried about rising protectionism in all emerging markets, not just in Asia. John Nelson, Chairman of Lloyd’s, told delegates at the FIDES conference in Santiago, Chile at the end of last month that this is a big problem that needs to be tackled. “So let’s start with protectionism. We need to convince regulators of why the flow of international reinsurance capital helps their economies to recover from a catastrophe more quickly and certainly with less impact on national GDP,” said Mr Nelson. “A robust regulatory system of course enhances customer confidence, reassures investors and brings more certainty to risk taking. But what is concerning is when that regulation leads to protectionist policies. There’s a natural desire to want to retain premiums in local markets. But the point of reinsurance is to transfer risks out of country. Local market access to international reinsurers diversifies risk outside national boundaries. And it is absolutely essential to deal with the underinsurance problem in many regions,” he continued. “And in those regions, such as Asia, where facultative reinsurance is so strong, the reinsurance industry is adding not just capacity, but also product development and innovation to the local insurance market,” explained Mr Nelson. Parima board members interviewed for this issue of Commercial Risk Asia would clearly like to see this matter tackled. Kelvin Wu, Manager Group Risk & Insurance at International SOS in Singapore, said: “The lack of consistency and clarity across global regulations and the compliance required often proves to be quite onerous. The regulations often appear to be driven by protectionism, without due consideration to the maturity of the global buyer. As an industry, the insurers, brokers and risk managers need to be more equipped and consistent in pressuring the regulators worldwide in developing a more consistent regulatory environment, at least for the larger and more sophisticated global insurance buyer.” David Ralph, Head of Risk Management & Compliance at PCCW, the Hong Kong-based holding company of HKT Group Holdings, the information and communications technology company, said that PCCW uses a global insurance programme for as many lines as it can. Mr Ralph said that this is an extremely important part of the group’s overall risk financing strategy. But it is also one element that causes ‘no end’ of new and varied problems. “Most of the issues stem from the huge variance in regulatory regimes, many of which seem more focused on protecting the local insurers rather than protecting the purchasers of such insurance. We all (insureds, brokers and insurers) need to collectively and separately pressure insurance regulators to develop some form of global consistency for insurances, especially for large multinational risks,” said Mr Ralph. “Most insurers and brokers are working on tools and processes to help us manage this huge and complex diversity. Some are more mature than others, but ultimately we would be best served if we had a more homogeneous insurance regulatory framework at least for large sophisticated multinational insurance programmes,” added Mr Ralph. The CEO of one leading Europe-based international insurance group told Commercial Risk Asia that his company has invested in expansion throughout the Asia Pacific region and is keen to continue to do so and support its international and regional customers in the region with cross-border coverage through global programmes. But he said that the rules that are designed to protect local insurance companies and limit the transfer of business out of the country via reinsurance make life difficult for the insurers and their customers and is limiting investment in the region. Reinsurance broker Guy Carpenter published a report on the Asian regulatory landscape at the start of this month in which it said that the insurance supervisory landscape in the Asia Pacific region is changing fast. The broker said that the regulatory developments in the region are driven by four key motivators. These are the need to improve resiliency post-catastrophic loss, a desire to increase oversight in a post-great recession world, a need to follow best practices from the banking and international insurance sectors and, finally, to satisfy domestic political pressures. Guy Carpenter’s report said that some countries in the region have instituted rules that may potentially hinder the development of a healthy, profitable insurance market. “The Indonesian regulator’s recent steps to reduce capital outflows, with a focus on reinsurance premiums ceded to international reinsurers, remain highly debated,” stated the broker. “The Indonesian regulator has also encouraged all domestic reinsurers to obtain an international rating in order to improve competitiveness with foreign reinsurers,” added the report. It is anticipated, however, that high cessions to other unrated, domestic companies may increase credit risk charges and thereby pressure capital adequacy ratios, continued the broker. AM Best and Standard & Poor’s credit charges on reinsurance recoverables are much higher than those of most domestic solvency schemes, explained Guy Carpenter. The Philippines is another worrying case. In addition to a basic risk-based capital framework, the country’s insurance supervisor has instituted a minimum paid-up capital requirement that is set to increase every two years until 2020, explained Guy Carpenter. “The policy applies uniformly across the industry regardless of premium volume, line of business or geographic scope and therefore its impact is more strongly felt by smaller carriers,” reported the broker. Parima clearly has a lot on its plate currently as it expands further across the region and introduces its pan-Asian risk management certification scheme. But it would welcome a campaign to work with other international associations to try and tackle this increasingly difficult problem.

Asian risk managers need to unite to stem rise of insurance protectionism

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