Cyber and new regulations push risk management up APAC insurers’ corporate agenda

New regulatory and reporting requirements along with a widening range of risks such as cyber are helping to expand the role of the CFO within the Asia-Pacific insurance sector. During AM Best’s recent 11th Asian CFO Summit in Hong Kong, a range of senior insurance market figures from the region told the credit rating agency that the rapid rise of critical business risks such as cyber, terrorism and political risk are forcing risk onto the boardroom agenda as never before. This is clearly a challenge for companies of all types and insurers are just as vulnerable to these risks as other corporates. But the situation also represents an opportunity for risk managers within Asia-based corporations, as well as the insurance market itself. Greg Solomon, regional director, head of life and health, Willis Re, told AM Best TV that the recent spike in demand for solutions to difficult risks such as cyber and terrorism is a positive sign that needs a reaction from the insurance and reinsurance market. “There is the issue of supply and demand. For example, up until now there have been insurers and reinsurers offering cyber cover, offering terrorism cover, but that was less of an issue to people. But now, just in the last few months, we have seen major issues around terrorism [and] cyber, so now the demand is likely to go up. So how will it evolve? It really depends on how the meeting of the risk and the capacity areas take place,” he said. Peter Cashin, partner with law firm Kennedys in Hong Kong, agreed that cyber is proving to be a big catalyst in the sector. “Going forward, cyber is really one of the big risks – understanding cyber, understanding cyber accumulations. From a risk acceptance standpoint on the insurance side, and from the point of view of management and protecting the organisation on the other, [that] is particularly important,” he said. Bob Leung, global vice-president of Chinese investment firm AMTD Group, agreed that the big change in the global risk landscape in recent years has radically changed the function of the CFO within the insurance sector in Asia-Pacific and worldwide. “Compared to ten years ago the…CFO role in insurance companies has more than tripled…such a role [is] under constant review…what the risks are, and finding solutions and thinking about those risks, are important,” he said. Jonathan Zhao, managing partner, Asia-Pacific insurance sector leader at EY based in Hong Kong, pointed out that the rise of cyber also introduces greater complexity for insurance companies, their CFOs and risk managers because of the potential impact on investments. “Some of the large players are focusing a lot of their business on innovations. As a result, [this] will introduce additional risk on the technology and cyber. So for those companies, they definitely need to pull out of a focus on the investment side…putting more money to actually prevent the cyber security risk,” he said. Dennis Funa, insurance commissioner of the Philippines, said that one of the big challenges currently facing insurers in his country and the wider region is the arrival of limitations placed upon them by the new risk-based capital rules and limits on investments insurers that they are able to make. New regimes such as those recently introduced in China and Hong Kong are of course positive steps forward and will raise confidence in the sector among individual and business customers. But the introduction of such sweeping changes does of course present a challenge for insurers in the region, just as Solvency II did in Europe of course. “One of the challenges in the industry now, and especially for us, is finding a better opportunity for insurers. The investment choices are limited right now and eventually that will impact on the finance they have to generate for the insureds,” said Mr Funa. Jonathan Zhao, managing partner and Asia-Pacific insurance practice leader at EY, said new rules such as the China Risk Oriented Solvency System, the government’s recent crackdown on what Chinese insurers are able to invest assets in, and tighter rules on life product management and sales, are proving a challenge for the sector. But it also brings new opportunities such as in the massive infrastructure market, he added. Mr Zhao said: “I think the reason for some of these new regulations is one side trying to prevent some of the investment activities, speculating and really moving the market. But at the same time, the regulator also wants to give more diversification and opportunities for the insurance companies. So it’s not only about restrictions but also new investment opportunities, such as infrastructure investment.” Mr Zhao added that all these new rules, when coupled with international efforts, such as the arrival of International Financial Reporting Standard 17 (IFRS) that replaces IFRS4 on accounting for insurance contracts and is effective as of 1 January 2021, are real game changers for insurers. “These new regulations together with the IFRS17 for insurance accounting standards are going to change the way the insurance sector is operating. They need to better understand financial impact from the P&L perspective. It changes the financial presentation. So, from both the income statement and balance sheet perspective, companies need to look at their product design and what kind of product that they are really selling,” he told AM Best. “The challenge is not just in the financials or accounting but also from the investment side. [The insurer needs to] decide what kind of a liability you might have in the long term. You need to look at your assets. The other question is on the investment. There is also the impact on the people element because we need more people to understand the impact better,” added Mr Zhao. All of these changes, including a new insolvency law in China that represents another step in the risk-based regime, are quite significantly changing the role of the CFO and sharpening the focus on capital efficiency, added Mr Zhao. “China introduced a new China insolvency law, which is the next generation of the risk-based capital regime, [that is] definitely putting a lot of pressure on solvency. So CFOs have to be better at managing the bottom line and also creating those capital efficiencies. They not only have to know how to sell the product, but [also tp] understand what expense and capital you need to better manage their solvency position. So risk management will be key in the future,” he explained.

Cyber and new regulations push risk management up APAC insurers’ corporate agenda

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