A closer look at general and country-specific regulatory trends in Asia
As insurance markets continue to develop globally, many Asian regulators are reviewing their current approaches to the supervision of insurers and insurance intermediaries. In several countries, changes in market characteristics—in particular, higher income per capita and technological uptake—have led to rapidly increasing consumer demand and insurance penetration, and have in turn driven regulatory change. In addition, historical solvency issues across Asia, coupled with changes in other regions, such as the recent implementation of Solvency II in Europe and the ongoing implementation of the global Insurance Core Principles (ICPs) of the International Association of Insurance Supervisors (IAIS) by insurance supervisors, have increased the pressure to modernize insurance capital regulation in the region. Hong Kong is the latest jurisdiction to reform capital requirements by working on the introduction of a risk-based capital regime supported by a new Own Risk and Solvency Assessment (ORSA) requirement. These evolving market needs and global regulatory drivers have accelerated the pace of existing reforms in many countries and have inspired other regulators to begin their own regime changes.
Several areas of regulatory change have emerged as areas of common focus. In particular, solvency and risk management reforms are at the center of most changes, with many mature insurance markets having already considered or implemented increasingly complex and nuanced frameworks, along with more extensive reporting and disclosure requirements. The supervision of insurance groups and treatment of consumers are other areas of focus, largely as a result of systemic issues in specific local insurance markets. Major reforms are planned in many countries over the next three to five years, and these broad regulatory changes present a variety of new challenges to firms operating in Asia and may continue to do so if other countries in the region adopt them. The reforms will require many insurers to reconsider their risk and capital management strategies, corporate structures, and approach to ensuring consumer protection and embedding a good corporate culture. We summarize the key developments and set out country-specific changes in the rest of this article.
Capital and Solvency
Perhaps the most significant change in Asian economies is the shift toward more advanced forms of capital and solvency regulation. Some insurance markets are now adopting risk-based capital (RBC) frameworks, which borrow significantly from the European Solvency II standard. South Korea, for example, plans to completely replace its regime in the coming years, requiring a capital injection of 50 trillion won (about 40 billion USD) into its life insurance industry. Additionally, Japan is conducting extensive fieldwork to evaluate the impact of an economic value-based solvency regime. Furthermore, Hong Kong is also significantly changing its current rule-based solvency regulations, moving toward a three-pillar approach similar to Solvency II and other developed markets.
Other jurisdictions continue to refine their existing RBC frameworks to better account for stakeholder needs. For example, monetary authorities in Singapore and Thailand have both engaged in extensive industry and expert consultations, and are considering changes that propose to improve their regimes’ risk confidence, coverage and sensitivity. Although other Asian countries have not made explicit plans to fully reform or make major improvements to their capital frameworks, it is clear they are keeping a close eye on developments in these larger, more mature markets.
ORSA requirements are also gaining traction in the Asian insurance sector, largely as a result of its inclusion in the IAIS ICPs. Recent regulations in several countries, including Japan, Singapore, Taiwan and Thailand, require annual submission of ORSA reports to the regulator. Others, such as Hong Kong, have plans to introduce similar schemes in coming years.
Supervision of Groups
The approach to the supervision of large insurance groups is also receiving more attention in recent years. In many countries, including India and Indonesia, governments have altered foreign ownership restrictions in order to prevent local insurance industries from being overly affected by foreign-owned groups. Other economies, such as Hong Kong and Singapore, do not have these type of restrictions and have instead opted to regulate large groups separately. For example, Hong Kong recently introduced a recovery regime affecting global systemically important insurers (G-SIIs), which will establish two tribunals for the purpose of administering, mediating and reviewing recovery of these insurance conglomerates.
Asian regulators also place an increased focus on insurers’ conduct and treatment of consumers. Several countries have identified systemic issues within their insurance markets—largely due to lack of information and inappropriate outcomes for consumers, or lack of insurance availability and penetration—and are tackling this with tougher requirements targeted at both insurers and intermediaries. Hong Kong, Japan and Malaysia have recently enhanced regulations around product design, appropriateness of product for consumers, remuneration and commission structures, marketing and sales, while South Korea has announced a roadmap to strengthen regulations to achieve similar objectives. Singapore has taken a different track, focusing on the culture, corporate values, remuneration and accountability of senior management and its potential to effect change in consumer outcomes. Japan, Macau and Singapore have strengthened regulation of licensing and professional development of intermediaries and financial advisers in an attempt to ensure informed and appropriate treatment of consumers.
The likely effects on insurers from all of these changes are significant and involve:
- A continued move toward economic valuation basis and economic capital model builds
- Higher solvency control level requirements
- Increased need to improve enterprise risk management (ERM) standards and group ERM functions and capabilities
- Better data and systems requirements aligned to International Financial Reporting Standard (IFRS) 17
- Increased pressure on the conduct agenda and impact on internal approach, skills and resourcing
- Need to respond to jurisdiction-specific requirements, such as Hong Kong proposing to conduct risk analysis within the ORSA
See Figure 1 for a summary of country-specific changes. Simply click on the name of each country or territory to reveal its regulations.
Figure 1: Regulatory Changes by Country/Territory
Hong Kong plans to steadily move toward a three-pillar risk-based approach to solvency (similar to Singapore) and is nearing a new round of consultations concerning a quantitative impact study (QIS) and Pillar 2. Notable enhancements to enterprise risk management (ERM) and the introduction of an Own Risk and Solvency Assessment (ORSA) for all insurers (in the second half of this year) are also anticipated. Additionally, groupwide supervision arrangements will be strengthened.
Hong Kong has increased its supervision of large insurance groups. Its most recent initiative is the introduction of a resolution regime covering global systemically important insurers (G-SIIs). The regime will establish two tribunals to supervise and review recovery and resolution compensation.
Regulation of insurers and intermediaries has also been enhanced, with a focus on product design, commission structures, marketing disclosures and sales.
India has recently set a minimum threshold on net owned funds and assigned capital for foreign reinsurers setting up branches in India, but it has otherwise not yet commenced reforms to insurers’ capital requirements.
India has issued regulations allowing corporate agents to distribute products from more than one insurance company and regulations that require policyholder records to be held electronically and physically in India.
Indonesia has issued new capital-related regulations that require insurance companies to determine target solvency margins over the minimum requirement, but it has not implemented a specific risk-based capital (RBC) regime. It also has temporarily relaxed its capital requirements for insurers as a form of economic stimulus, allowing new valuation methods and reducing required capital thresholds.
Indonesia recently issued regulations that stipulate the scope, type, registration and approval of insurance products—and which provide for consumer protection. The regulation requires approval prior to marketing new products and restricts alternative distribution channels.
Indonesia has also recently set out new reinsurance regulations. These new rules provide for reinsurance support strategies, as well as mandated reinsurance coverage, which differs among insurance types.
Japan now requires all insurers to submit ORSA reports and has turned its focus to ERM implementation, regulation of groups and assessing performance against risk appetite statements. The Japanese Financial Services Agency (FSA) is currently conducting field tests in consideration of implementing economic-based valuation and supervision.
The FSA’s newest regulations focus on consumer outcomes, requiring insurance companies to develop products that prioritize customers’ interests and addressing disclosure of information. Implementation is complete as of April 2017.
The regulations are also aimed at insurance intermediaries, requiring changes in corporate structure with regard to their business size and characteristics in some cases.
South Korea is considering implementation of an RBC regime similar to Solvency II, with plans to release guidance in the near future. It also has recently enhanced its existing standards and will implement an ORSA requirement later this year. The Financial Supervisory Service (FSS) has renewed focus on internal risk management processes, scenario testing and recovery plans.
The FSS released a road map to enhance consumer protection and competition in the insurance industry. It plans to deregulate new product pre-approval and premium regulation, diversify capital financing and prevent incomplete sales.
The Monetary Authority of Macau has introduced a requirement that the appointed actuary must file a peer-reviewed annual actuarial report. Otherwise, it has not introduced any new regulation of insurers’ capital requirements.
Insurance intermediaries are now required to disclose certain information to consumers and to select appropriate products for each consumer. The Monetary Authority has consulted on professional development programs for intermediaries, but the substance or timeline of these changes remains uncertain.
Malaysia has an existing RBC framework for conventional insurers, which was recently extended to cover takaful (sharia) insurers. Bank Negara (the central bank of Malaysia) is looking to review risk parameters for the local insurance industry and has recently regulated dividend distribution to ensure capital adequacy. Otherwise, it is not moving toward substantial change in its capital framework.
Bank Negara’s new life framework removes operational cost limits in order to promote innovation, diversify distribution channels and regulate market conduct in order to improve insurance penetration and consumer outcomes.
Starting in mid-2018, life insurers and general businesses in Malaysia must be run by separate legal entities, which will require the restructuring of many firms holding dual licenses.
The Insurance Commission continues to review its RBC framework and has recently issued new valuation standards. It has also set out a new Financial Reporting Framework that provides for new accounts, asset limitations and economic valuation. The Insurance Code also has been amended to place a minimum bound on new insurers’ net worth of P 1 billion. The amendment also requires existing insurers to increase their net worths gradually over the next few years.
The Philippines recently abolished its insurance equity participation rule, which required banks to have equity holdings in insurers in order to partner with them. Therefore, it is now easier for banks to partner with insurers.
The Monetary Authority of Singapore (MAS) continues to consult on proposed improvements to its existing RBC framework. The changes will align regulation of insurers and banks. The MAS will also introduce dual capital requirements, incorporating a prescribed capital requirement— the minimum for the insurer to operate—and an absolute minimum capital requirement at which the regulator will intervene.
In an effort to improve availability of insurance, the MAS intends to introduce consumer protection initiatives, expand distribution channels and reduce insurance costs. In particular, it has focused on insurers’ boards and the tone they set, their corporate values and culture, employee compensation and commission structures, and accountability.
The MAS also plans to increase regulation of financial advice, including compliance checks and adjustment to remuneration structures.
Taiwan encourages insurers to use economic capital valuation, and production of ORSA reports became compulsory in 2016. Compulsory implementation of economic valuation of capital remains uncertain, and authorities are considering an alternative measurement designed to approximate economic capital.
Taiwan is introducing legislation to encourage the sale of long-term care and products related to health management.
Thailand continues to review its existing RBC framework, addressing gaps in the original regulations and updating risk charges and the overall confidence level. The Office of Insurance Commission (OIC) has implemented stress-testing frameworks and plans to increase insurance capital requirements in the near future.
The OIC is concerned about insurers’ business conduct and consumer protection. Discussions are ongoing.
Similarly, deregulation of pricing, commission and product approval structures continues to be considered.
Minimum capital levels in Vietnam are set for each type of insurance business using a simple calculation methodology. In recent years, insurers have been classified into different groups and are regulated based on certain calculated ratios. However, the future implementation of a RBC regime remains uncertain.
New regulations that require bancassurance staff to undergo specific training have been introduced, with the purpose of ensuring appropriate product selection for consumers.
It is clear that regulatory change in Asia is occurring quickly, with supervisors applying enhanced levels of supervision across all pillars, particularly in their pursuit to employ more risk-based techniques to accompany their off-site and on-site supervisory programs. Greater focus and accountability on boards and among senior management relating to the quality of their governance and risk assessment arrangements, particularly off-balance sheet and noninsurance exposures, will be at the heart of these new reviews. Similarly, we can expect to see a much greater emphasis placed on groupwide supervision and systemic risk analysis across Asia, combined with an increasing focus on conduct of business requirements. For many insurers, such changes will pose structural, data and resourcing challenges for many years to come. For most, now is just the beginning.
is the Global Insurance Regulatory & ASPAC Risk lead at KPMG, and is co-located in Sydney and Hong Kong.
Copyright © 2017 by the Society of Actuaries, Schaumburg, Illinois.