18 August 2017

Asia Pacific (APAC) has increasingly been identified as an area of potential growth for insurance companies globally with its healthy economic growth and increase in disposable income. However, to successfully harness these opportunities, a sound understanding of current and future regulatory changes is crucial. It is observed that the global insurance industry has been consistently assessing the impact of these immense regulatory changes to better manage systemic risk and enhance policyholder protection. Similarly in APAC, a number of regulators have been reviewing and implementing various changes, focusing in particular on the introduction of risk-based capital (RBC) as well as revisiting existing RBC frameworks.

APAC is different

The minimum Risk Based Capital (RBC) is the sum of funds that a company would keep to anticipate the adverse risk resulting from deviation in asset and liability management. APAC utilises the RBC framework as opposed to the European Solvency II Standard, and this is due to the distinctive characteristics of each country, which are unique in terms of products sold as well as the maturity of insurers operating in the different jurisdictions. (The detailed differences between RBC vs European Solvency II can be seen in this report).

For instance, following Australia’s implementation of the RBC, Singapore and Thailand have begun consultations with the industry on second-generation RBC frameworks, with China and Hong Kong likely to follow in the same path. The implementation of this framework across different geographical locations will enable insurers with multiple geographical platforms to focus on a consistent regulatory framework.

In addition, many countries are placing more emphasis on their risk management process, further illustrating how regulators are focusing on this area. It is therefore vital to ensure that the organisation’s daily operations and risk profile are within the firm’s risk appetite.

Impact on insurers

While regulatory advances within the Asia-Pacific region will improve the way insurers operate and create long-term sustainability, it will also inevitably impact the way insurance companies run their business in terms of product offerings, investment strategy, capital utilisation, risk transfer opportunities and infrastructure.

Some key implications include the following:

• The cost of regulatory compliance is expected to increase significantly, with the Asian Pacific region bearing between USD $4 to $7bn additional costs annually.
• Changing regulations will require consistent innovation of processes and systems to improve and support the various organisational aspects at a company level, which could place firms at a strategic position to benefit from the lower capital requirements.
• There will be an increased focus on the risk profile of the company, which will require advanced techniques in modelling and optimising risk, as well as the need for efficient reporting systems and the redefinition of key performance indicators to enhance their business strategy.

Case Study: Singapore’s Monetary Authority of Singapore

The Monetary Authority of Singapore (MAS) is currently finalising the risk calibration and features of the RBC framework, and this is expected to be implemented in 2017. The RBC framework for insurers was first introduced in Singapore in 2004, adopting a risk-focused approach to assess capital adequacy while reflecting common risks that insurers face. The minimum capital prescribed under the framework also serves as a buffer to absorb losses.

The MAS has also embarked on a review of the framework (coined “RBC 2 review”) in light of evolving market practices and global regulatory developments. The new capital framework is aimed at enhancing risk assessment so that capital requirements are more aligned to an insurer’s business and risk profile.

Despite MAS’ uncertain timeline for RBC 2, insurers have to start planning ahead to comply with the new regulatory changes which could result in higher costs. Expense management and compliance with the latest regulations should be on top of insurers’ agenda if they want to manage costs and remain competitive in the market.

Looking ahead

In the years to come, consistent changes are expected to occur within the industry’s regulatory frameworks and it is imperative that insurers manage these changes strategically and successfully. Flexible trained resources would therefore be required to help insurers fulfil these regulatory frameworks - either through monitoring the progress of global emerging regulations or through mapping out suitable operational and strategic responses to the ever-changing regulatory landscape.