ASHK RBC Task Force Tentative ASHK Position

Transcription

1 The Actuarial Society of Hong Kong ASHK RBC Task Force Tentative ASHK Position Peter Duran, Chairman Angelina Lai David Menezes Solicitation of Member Views 18 November 2014

2 Purpose The OCI issued a Consultation Paper (CP) on a new RBC Framework for the HK insurance industry on September 16 with a comment deadline of December 15. The CP proposes a three pillar approach to solvency regulation in HK Pillar 1: Quantitative requirements Pillar 2: Qualitative requirements / ERM framework Pillar 3: Disclosure / transparency The purpose of tonight s discussion is to Review the content of the CP; Present the tentative views of the ASHK; and Solicit input from members 2

3 Discussion Points Introductory remarks Role of the actuary Role of the ASHK Proposed approach to valuation Proposed structure of capital requirements Diversification Capital tiering Internal models Pillar 2 Pillar 3 Group wide supervision Risk categories 3

4 Introductory Remarks The ASHK welcomes the OCI s initiative to modernize the HK solvency supervision framework The current framework has worked reasonably well, but is not risk-based. The ASHK s RBC Framework Task Force has prepared a draft comment letter for approval by the ASHK Council. The Council is currently reviewing the draft. The views presented tonight are therefore preliminary. The CP is very high level. Most of the material and questions posed relate to Pillar 1, so tonight s discussion will focus mostly on Pillar 1. We welcome input on all aspects of the CP, however. 4

5 Role of the Actuary The Appointed Actuary has statutorily defined duties under the existing framework for long term business. Chapter 41 requires: At least annually an investigation of financial condition, including valuation of liabilities (s. 18) Certification of profit and loss statement submitted by the directors (Sch. 3, Part 1, #5) Certification for Class G business (GN7) Review of liabilities for employers compensation insurance and motor insurance (GN9) Role of the Appointed Actuary in ALM (GN13) We believe the need for an Appointed Actuary role will continue under the new framework The new approach is more principle-based with a significant amount of actuarial judgment required We suggest that an appointed actuary role be established for general insurers as well as life insurers The review of liabilities of general insurers should cover all lines of business We are currently discussing the need for a statutorily defined actuarial role in Pillar 2 (ALM, risk appetite, ERM). There is a requirement for an actuarial function under Pillar 2 in ICP 8, Risk management and internal Controls. 5

6 Role of the ASHK The ASHK has issued several Actuarial Guidance Notes under the current framework AGN 3 and its supplements (guidance on valuation of long term business) AGN 7 (dynamic solvency testing) We believe there will continue to be a need for AGN s under the new framework. Potential areas include: Assumption setting MOCE (risk margins) Pillar 2 (prospective financial information) Other? 6

7 Proposed Approach to Valuation Valuation of assets and liabilities should be internally consistent and should be derived from adjustments to general purpose (HKFRS / IFRS) financial statements. An economic approach should be used for asset and liability valuation, except for class G, where the current GN7 approach should be retained. A market consistent approach to valuation should be used for all classes of business (option (a)) OR a combination of market consistent and amortized cost approaches should be used depending on the class of business (option (b)). If option (b), the CP asks for which classes of business amortized cost should be applied. The discount rate is not defined, but it is suggested that a marketreferenced rate might be used. Focus seems to be on stabilizing the discount rate at long durations where there are no matching assets by prescribing a long term rate or using averages. 7

8 Proposed Approach to Valuation (continued) Contract boundaries would be defined the same as in the IFRS 4 Phase 2 Exposure Draft. Margins over current estimates (MOCE) should be included in technical provisions. How they are defined is not addressed. There should be explicit allowance for options and guarantees. There should be a cash value floor in the valuation of technical provisions. The level at which the CV floor is applied is not specified. The CP is silent on negative technical provisions, for example, for riders that have no CV. 8

9 Approach to Valuation ASHK Position ASHK agrees with continuing the current approach for Class G business. ASHK suggests that invested assets be valued at fair value This would ensure comparability among companies ASHK does not believe that current HKFRS valuation of technical provisions is appropriate Different companies have different accounting policies for insurance contracts Technical provisions should be economic based on current estimates. This is not necessarily a pure market-consistent approach IFRS 4 Phase 2 might be an appropriate starting point, but It is not final and key decisions (par contracts) are still outstanding The contractual service margin (CSM) should not be part of technical provisions MOCE should be included in technical provisions Currently GI insurers are only required to have a MOCE for motor and EC 9

10 Approach to Valuation ASHK Position Options and guarantees should be explicitly provided for, but no position is taken on the technicalities of the approach. The discount rate for liabilities should be stabilized by means of an ultimate forward rate or similar device. The discount rate should not be a risk free rate but should include some component of liquidity premium / corporate spread. There is a difference of opinion regarding contract boundaries. The ASHK strongly disagrees with imposition of a CV floor Reserves will be lower under the new approach, so a CV floor would bite more often We suggest a mass lapse sensitivity as a better way to capture the risk of mass lapse The ASHK believes that full credit should be given for negative reserves. 10

11 Proposed Structure of Capital Requirements Solvency position is to be determined on a going concern basis taking account of one year of projected new business. There are two solvency control levels 1. PCR (Prescribed Capital Requirement). OCI does not intervene if actual capital is greater than PCR 2. MCR (Minimum Capital Requirement). If actual capital is less than MCR, OCI invokes strongest actions PCR is set based on a 99.5% VAR approach MCR is determined by a simple formula and targets a lower confidence level than the PCR 11

12 Structure of Capital Requirements ASHK Position Inclusion of one year of new business is theoretically sound, BUT For practical reasons, the ASHK suggests that new business not be included when determining required capital for long term business ASHK agrees with inclusion of new business on a standardized basis for short term business ASHK recognizes that the 99.5% VAR approach for the PCR is becoming a norm, but cautions that there is a large element of subjectivity in determining the 99.5% level and it is critical that proposed requirements be field tested for reasonableness. ASHK recommends that the MCR be determined at a percentage of the PCR, rather than as a simple formula This reduces the required calculations It will correspond to different confidence levels for different companies 12

13 Risk Categories The CP identified four categories of risk that will attract capital charges, namely underwriting risk, market risk, credit risk and operational risk. While we realize that these categories are taken from ICP 17, we believe they should be unambiguously defined: Some people draw a distinction between underwriting risk and insurance risk. Both should be covered by the system The distinction between market risk and credit risk is not always clear. For example the risk of changing spreads on corporate bonds is usually considered a market risk, while corporate bond default is a credit risk A charge for operational risk can be problematic A charge based purely on business volumes is unrelated to risk. Larger players may have better operational risk management than smaller ones We would hope the framework would take the actual operational risk of a company into account 13

14 Diversification The CP provides relatively little detail on possible allowances for risk diversification Diversification lowers a company s actual risk profile One of the objectives of the framework is to encourage sound risk management For both the above reasons the system should give credit for diversification Between major risk categories (e.g. underwriting risk and market risk) Within major risk categories (e.g. equity price risk and interest rate risk) 14

15 Capital Tiering The CP suggests that that there be several capital tiers based on quality of capital. Quality considerations include: subordination, permanence, availability Tier 1 capital is the highest quality (e.g. paid in capital, retained earnings) There would be limits on lower tiers capital ASHK supports capital tiering, but suggest there be only two tiers Tier 1 capital would be available under all circumstances, i.e. both on a going concern and a wind-up basis Tier 2 capital would be available only on a wind-up basis 15

16 Internal Models The CP suggests that a standardized approach be used as a starting point, while retaining the flexibility to allow internal models. ASHK recommends that the standard model be used initially, with transition to approved internal models. 16

17 Pillar 2 Qualitative Requirements The discussion on qualitative requirements is very broad. Highlights include: A principles-based approach to asset allocation. The ASHK supports this. Introduction of a prudent-person principle approach to investments. The ASHK will ask for clarification on what the OCI sees as the implications of this. Requirement for an ORSA (Own Risk and Solvency Assessment), including stress and scenario testing and a continuity analysis. The ASHK supports this, but emphasizes the need that the approach not be overly prescriptive. A tickbox approach should be avoided. Ability of the OCI to apply capital add-ons when a company has inadequate corporate governance or ERM. The ASHK agrees with this on the condition that the process for determining capital add-ons should be transparent and the criteria should be objective. 17

18 Pillar 3 - Disclosure The CP proposes enhanced disclosure to the public regarding risk assessments, capital resources and capital requirements. The ASHK therefore recommends that information relating to capital resources and requirements to be disclosed privately to the IA first. The more qualitative information relating to risk assessment and governance of ERM could be disclosed publically with less chance of misinterpretation, and indeed help to gain confidence and serve in educating the public in their understanding of the insurance industry. We also note that securities laws regarding price-sensitive information need to be respected. Any disclosure requirements under the new Framework should not conflict with securities laws. 18

19 Group-wide Supervision - Types of Groups Groups are divided into three types or Tiers. Group-wide Supervisory Approach Tier 1 Tier 2 Tier 3 Groups held by HKbased insurers or NOHC s Insurance subgroup not subject to home jurisdiction group-wide supervision Disaggregated subsidiaries from consolidated basis (subject to OCI approval) Insurance subgroup subject to home groupwide supervision All entities within a group 19

20 Group-wide Supervision Supervisory Approach The level of group-wide supervision varies by tier as shown below. Tier 1 groups are proposed to be regulated on a consolidated basis with a group-side PCR / MCR, but they can apply to disaggregate the non- HK subsidiaries. Capital requirement prescribed at group level Corporate governance and ERM requirements Reporting requirements of group events and intra-group transactions Group-wide Supervisory Approach Tier 1 Tier 2 Tier 3 X X X X X X 20

21 The Way Forward Phase 1: Development of the Framework Phase 2: development of detailed rules. Scheduled to begin in It will include a QIS and another consultation Phase 3: Amendment of legislation. This will require at least 2 3 years Phase 4: Implementation. Rolled out in phases to give companies time to understand the requirements Note: the CP suggests that Pillar 2 can be rolled out earlier than Pillar 1. As a practical matter, Pillar 1 requires amending existing legislation, while Pillars 2 could be implemented the OCI Guidance Notes. The ASHK suggests that the OCI conduct a study of insurers readiness before implementing new requirements ( Qualitative Impact Study ). 21

22 Task Force Members KC Chan Adrian Cheung Peter Duran (Chair) Penny Fosker Cathy Hwang (GI Committee) Simon Lam Rodney Leung Angelina Lai David Menezes Jeremy Porter (Life Committee) Rani Rajasingham Steve Tong Ka Man Wong 22