Session 1 Keeping Pace with Regulatory and Rating Agency Changes. Sifang Zhang, CPA, CFA, CERA

Transcription

1 Session 1 Keeping Pace with Regulatory and Rating Agency Changes Sifang Zhang, CPA, CFA, CERA

2 Keeping Pace with Regulatory and Rating Agency Changes SIFANG ZHANG CPA, CFA, CERA 16 November, 2015 Agenda Why the Changes Matter Regulatory Evolution across Asia Pacific Rating Agency Trends and Criteria / Methodology Updates Trends Key Topics for 2016

3 Why the Changes Matter From the Perspective Strategic Risk Management Risk and Economic Capital Modeling Emerging Risk Management Risk Control Processes Risk Management Culture Data Source: Standard & Poor s Although hard to quantify, strategic risks have huge impact on insurers. Regulatory and Rating Agency changes fall into the Strategic Risk category.

4 Regulatory Change Matters -- Example New regulatory requirements might cause capital pressure to insurance and reinsurance companies. Reinsurers in China Change of Capital Currency in CNY million Before Capital Injection After Capital Injection 1,000 1,650 1, , ,032 10, Lloyd's China Munich Re Beijing Scor Beijing Taiping Re June 2015 Data Source: China Insurance Regulatory Commission ( CIRC ) Taiping Re Sept 2015 China P&C Re Regulatory Change Matters -- Example China Life P&C PICC China Re Huatai China Re Yingda Pingan Continental CPIC BOCI Sunshine Taiping Pingan Data Source: S&P, A.M. Best, Fitch, and Moody s Driven by regulatory change, number of newly rated China domestic P&C insurers in 2015 exceeds number of all those initially rated before 2015.

5 Rating Agency Change Matters During the /1 renewal season, a rating agency introduced new rating criteria Pass / Fail stress test for those impacted companies Certain companies were placed under creditwatch o Including some reinsurers Raised concerns of cedants in APAC, during renewal season Some impacted reinsurers had to seek credit enhancement to mitigate cedants concerns Data Source: Aon Benfield Analytics Regulatory Evolution across Asia Pacific

6 Main Themes Increased minimum APAC Solvency Capital Requirement USA 1994 Japan FY1996 Indonesia 1999 Australia 2002 Singapore 2004 Taiwan 2003 Philippines 2006 Canada / Bermuda 2008 Malaysia 2009 PNG 2010 Korea Thailand 2011 Hong Kong China Brunei 1995 India 2000 China 2001 RBC HK/Macau 1997 Data source: Aon Benfield Analytics Pakistan 2002 Increased minimum Vietnam 2007 Solvency Margin

7 Hong Kong Migrating to RBC Three pillars Four phases PILLAR 1 PILLAR 2 PILLAR 3 Phase I Framework Key approaches Quantitative Aspect Capital Adequacy Qualitative Aspects Disclosure And Transparency Phase II Phase III Detailed rules QIS Amendment of Legislation Data Source: Hong Kong Office of the Commissioner of Insurance Phase IV Implementation Increased minimum China C-ROSS -- Evolution st -generation solvency regime began May 2013 C-ROSS conceptual framework published July/August nd -version non-life C-ROSS rules published November 2014 CIRC issued Pillar 3 consultation papers and 4th version nonlife Pillar 1 rules March 2012 Roadmap of 2 nd - generation solvency regime (C-ROSS) published Data source: Aon Benfield Analytics April st -version nonlife C-ROSS rules published (Pillar 1 & 2) Increased minimum September / October 2014 CIRC issued 3rd version non-life C-ROSS rules including updated Pillar 2 papers February 2015 CIRC published final version C- ROSS. Transition period began.

8 China C-ROSS -- Framework Institutional Characteristics Supervisory Pillars Quantitative Capital Requirements One Supervision Emerging Markets Risk-Oriented with Value Consideration Qualitative Supervisory Requirements + Market Discipline Mechanism 17 Guideline Supervisory Foundation Company s Own Solvency Management (COSM) Documents Increased minimum Data source: CIRC China C-ROSS -- Rules Pillar 1 Quantitative Capital Requirements Regulation No. 1, Actual Capital. Regulation No. 2, Minimum Capital. Regulation No. 3, Assessment of Life Insurers Liabilities. Regulation No. 4, Minimum Capital for Insurance Risk (non-life). Regulation No. 5, Minimum Capital for Insurance Risk (life). Regulation No. 6, Minimum Capital for Insurance Risk (reinsurance). Regulation No. 7, Minimum Capital for Market Risk. Regulation No. 8, Minimum Capital for Credit Risk. Regulation No. 9, Solvency Stress Test. Regulation No. 16, Solvency Report. Data source: CIRC Increased minimum Pillar 2 Qualitative Supervisory Requirements Regulation No. 10, Integrated Risk Rating. Regulation No. 11, Solvency Risk Management Requirements & Assessment Framework. Regulation No. 12, Liquidity Risk. Pillar 3 Market Discipline Mechanism Regulation No. 13, Disclosure of Solvency Information. Regulation No. 14, Communications of Solvency Information. Regulation No. 15, Credit Rating of Insurance Companies. Regulation No. 17, Supervision of Insurance Groups.

9 China C-ROSS Minimum Capital The minimum capital now consists of three parts as below: Minimum for quantifiable risks, i.e. insurance risk, market risk, and credit risk. This part is calculated as: MC P&C = MC 2 insurance + MC 2 market + MC 2 credit MC insurance MC market MC insurance MC credit MC market MC credit ) Minimum for control risk. Additional for Cyclical risk. This is to be specified by separate regulations issued by CIRC later. Insurers important to domestic financial system. Detailed rules to be set by CIRC later. Insurers important to international financial system. Detailed rules to be set by CIRC later. Increased minimum Data source: CIRC China C-ROSS Insurance Risk Premium Risk Reserve Risk Catastrophe Risk Allowance for deterioration in future claims and expenses Based on past 12 months net premium Covers all lines of business Allowance for uncertainty in timing and amount of outstanding claims leading to reserves being insufficient Based on net reserves Covers all lines of business Allowance for typhoon (and typhoon-induced flood) and earthquake risk Based on net retained exposures Applies to motor, property, and agriculture Increased minimum Data source: CIRC

10 China C-ROSS Credit Risk Risk factors of minimum capital required on reinsurance credit risk were the hottest topic when C-ROSS consultation papers were released in RF 0 for primary insurers as cedants Apr-14 Jul-14 Sep-14 Nov-14 Feb-15 Solvency of Reinsurer V1 V2 V3 V4 Final >200% 0.1% 0.1% 0.5% 0.5% 0.5% [150%, 200%) 1.3% 1.3% 1.3% 1.3% 1.3% On-shore [100%, 150%) 15.7% 15.7% 4.7% 4.7% 4.7% Reinsurers [50%, 100%) 26.1% 26.1% 26.1% 26.1% 26.1% <50% 74.5% 74.5% 74.5% 74.5% 74.5% All solvency adequacy ratios Off-shore meet regulatory Reinsurers requirement reinsurance assets collateralized 30% 19.2% 8.7% 8.7% 8.7% reinsurance assets not collateralized 60% 58.8% 58.8% 58.8% 58.8% Partial or all solvency adequacy ratios fail regulatory requirement 90% 86.7% 86.7% 86.7% 86.7% Data source: CIRC, Aon Benfield Analytics Increased minimum China C-ROSS current status Average Solvency Insolvent Insurer Under expiring 2Q % for the whole industry 286% for P&C 259% for Life 430% for Reinsurance 1 Life Insurer solvency requirement Under C-ROSS 4 P&C Insurer 6 Life Insurer 1 Reinsurer Formal Launch of C-ROSS 1Q 2016 Minimum Capital Composition for the P&C Industry 2Q % 40.8% 32.0% 29.5% 100.0% Data source: CIRC Insurance Risk Market Risk Credit Risk Diversification Total Increased minimum

11 Singapore RBC 2 RBC framework was first introduced in The regulator Monetary Authority of Singapore (MAS) is pushing forward RBC 2. The first-round consultation of RBC 2 was unveiled in June 2012 In March 2014 MAS issued the second consultation paper. This new paper sets out more specific proposals for RBC 2, and also provides detailed technical specifications which allow insurers to conduct a full scope quantitative impact study to fully understand the impact of RBC 2. This new paper proposes substantial increases of some capital charges while providing some degree of capital relief by means of matching (cash-flows) adjustment, diversification benefit, etc. MAS closed the consultation period at end of June 2014 and plans to complete the calibration factors and features of the RBC 2 framework by end of 2014 and formally implement the regulations from Data source: Monetary Authority of Singapore ( MAS ) Increased minimum Japan Ongoing movements in the economic value-based solvency regime and accounting system JFSA Second Field tests Insurance companies interests in the economic valuebased solvency regime and risk management remain strong Insurers need sufficient time to prepare before formal introduction of the regime Data source: Japan Financial Service Agency ( JFSA ) Increased minimum

12 Other Markets in Asia Pacific Labuan Current solvency is based on retained premium. Consultation paper of Insurance Capital Adequacy Framework was issued in January 2014 and the regulator aims to start the parallel run implementation in 2017 and full implementation of RBC in 2018 for traditional insurers. Timeline for Takaful will lag by one year. Philippines Implementation of RBC for non-life insurers Sri Lanka RBC framework issued in 2013 and will be effective in Increased minimum Data source: Labuan Financial Services Authority, the Insurance Commission, Insurance Board of Sri Lanka Global Insurance Capital Standards IAIS Global Systemically Important Insurers or G-SIIs Common Framework ( ComFrame ) for the supervision of Internationally Active Insurance Groups Quantitative part of ComFrame: risk-based global Insurance Capital Standard (ICS) ICS 1 st & 2 nd version in 2017 / 2019 respectively Higher Loss Absorbency impacting only the G-SIIs IAIS proposed 20% increase in minimum capital Data source: International Association of Insurance Supervisor ( IAIS ) Increased minimum

13 Increased Min Capital Requirement Indonesia Pakistan Philippines Sri Lanka Data source: Aon Benfield Analytics Increased minimum Indonesia Min Capital Requirement Currency in IDR bn End of 2012 End of Insurer Reinsurer Sharia Insurer Pakistan Min Capital Requirement Currency in PKR m st Dec, th Jun, st Dec, th Jun, st Dec,2017 Philippines Min Capital Requirement Currency in PHP m st Dec, st Dec, st Dec, st Dec, m LKR for each class of insurance business. Enhanced Catastrophe Consideration New Zealand Insurance loss from Earthquake now aligned at 1:750 years. China Catastrophe risk now part of minimum under C-ROSS, aligned at 1:200 years. Earthquake pool established in Residential Earthquake scheme launched in Thailand Data source: Aon Benfield Analytics Increased minimum

14 China Motor de-tariff pilot program launched in six provinces / cities in June Second round of motor de-tariff pilot program launched in 12 provincial regions in January Malaysia The market is moving towards the abolition of all rating tariffs, which is expected to be effective in late Data source: Aon Benfield Analytics Increased minimum Australia APRA issued Prudential Standard CPS 220 Risk Management China Under C-ROSS, an insurer s risk management has direct impact on solvency. Q = S SARMRA (Solvency Aligned Risk Management Requirement & Assessment). Reinsurance Registration Requirement Hong Kong Pillar 2 and ORSA Vietnam Data source: Aon Benfield Analytics Increased minimum

15 China SARMRA SARMRA (100%) Data source: CIRC, Aon Benfield Analytics 20% 10% 10% 10% 10% 10% 10% 10% 10% Framework and environment Purpose and tools Insurance risk management Market risk management Credit risk management Operational risk management Strategic risk management Reputational risk management Liquidity risk management Increased minimum 40% System robustness From 2 aspects 4 grades 60% System effectiveness The final score of SARMRA is the weighted average of the 9 parts scores. Completely compliance ce Get 100% of standard score Mostly compliance Get 80% of standard score Partially compliance Get 50% of standard score Not compliance Get zero Scoring s MC control = Q x MC quan Q = x S S 80, MC control 0 S < 80, MC control > 0 S China SARMRA Comparison of SARMAR Score of Foreign Companies and Domestic Companies (P&C) Foreign Companies Domestic Companies Score # of insurers % Score # of insurers % % % % % % % Above % Above % Max Max Min Min Average of all 76.5 Average of all 70.0 Average of those above Average of those above Data source: CIRC, Aon Benfield Analytics Increased minimum

16 Recap Increased minimum Increased minimum Rating Agency Criteria / Methodology Updates

17 A.M. Best Stochastic BCAR Share draft model output with companies Issue Request for Comment on property casualty model Review historical trends under new model Receive and evaluate industry feedback Q Q Q Q Q Q Q Industry webinars on progress Finalize and test other BCAR models (life and health, Canadian, Title, and Universal Release criteria Data source: A. M. Best Analyzing and testing model output Issue Request for Comment on other BCAR models Transition to new model A.M. Best Stochastic BCAR Confidence intervals = 98%, 99%, 99.5%, 99.8%, 99.9% B1: Fixed income Risk factors to increase and will vary more by credit quality and duration B2: Equity securities Common stock risk factor more than doubles (34 to 80%) B3: Interest rate risk Based on gross PML; May incorporates varying levels of change in interest rates B4: Credit risk Risk factor on recoverables to reflect tail (e.g. property versus work compensation) B5: Reserve risk Risk factors vary by confidence interval, Diversification from correlation matrices B6: Premium risk Risk factors vary by confidence interval, Diversification from correlation matrices B7: Business risk B8 Catastrophe risk All perils Occurrence net PML after-tax; To vary by confidence formula Cross required capital Sum of B1 to B8 Covariance adjustment Remain the same for now; B8 to be outside the covariance formula Net required capital Denominator = Gross required capital minus Covariance Reported surplus Equity Stress event Occurrence net PML, after-tax; For stress BCAR analysis only Other adjustments Loss reserve equity, fixed income equity, etc. Adjusted surplus Numerator: Equity plus adjustments BCAR score Score = Adjusted surplus / Net required capital Data source: A. M. Best

18 A.M. Best Stochastic BCAR Confidence Interval 98% 99% 99.5% 99.8%, 99.9% Rating level B B+ / B++ A- / A A+ A++ Catastrophe charge 50yr 100yr 200yr 500yr 1,000yr Category Current Approach Initial Proposed March Current Proposed May Peril Peak Peril All perils All perils Return Period 100yr HU/Wind or 250 yr EQ Vary by confidence interval Vary by confidence interval (20yr, 40yr, 100yr, etc.) (50yr, 100yr, 200yr, etc.) VaR or TVaR VaR (loss at a specific return period) TVaR (loss at a specific return period) VaR Agg or Occ Occurence Aggregate Occurrence BCAR Impact Reduction to surplus Addition to net required capital Addition to net required capital Data source: A. M. Best A.M. Best Stochastic BCAR Asset Risk Factor Current VaR 98 VaR 99 VaR 99.5 VaR 99.8 VaR 99.9 US Gov t 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% NAIC Class 1 Bonds 1.0% 1.2% 1.5% 1.7% 2.0% 2.4% NAIC Class 2 Bonds 2.0% 5.4% 6.2% 6.8% 7.5% 8.4% NAIC Class 3 Bonds 4.0% 10.0% 11.0% 11.8% 12.8% 13.7% NAIC Class 4 Bonds 4.5% 23.3% 24.7% 25.8% 27.0% 27.8% NAIC Class 5 Bonds 10.0% 37.6% 38.3% 38.9% 39.5% 39.9% NAIC Class 6 Bonds 30.0% 45.5% 46.6% 47.5% 48.3% 49.2% Public Common Stocks 15.0% 33.9% 39.1% 43.8% 47.3% 48.3% Data source: A. M. Best

19 A.M. Best Cyber Security Has your company been a target of data breach or cyber attack? If yes, how many times and how quickly were they identified What remedial measures were taken? Where does the responsibility to manage cyber security reside? What internal and external controls, and policies and procedures do you have in place to manage data breach or cyber attack? How often do you conduct penetration testing? How often do the company's cyber security professionals receive training? Data source: A. M. Best During the past five years, how much have you invested in upgrading hardware and software systems? How much of such investment was specifically dedicated to preventive measures on cyber attacks and data braches? How much are you planning to invest during the next two years? If you use TPA s, cloud, shared devices, storage or otherwise, how are you managing their risks? Briefly describe your efforts to ensure up to date best practices and latest preventive methods are used. Do you buy cyber security insurance for your company? If yes, what are the policy limits and what is covered and excluded under such policy? Other Updates Fitch introduced PRISM factor-based capital model in APAC in Standard & Poor s Criteria on an updated model to analyze capital adequacy for mortgage insurers. Moody s Update relating to mortgage insurers. Data source: S&P, Moody s

20 Trends Catastrophe Risk Tolerance Study 1:100 after tax net PML as a percent of equity 1:250 after tax net PML as a percent of equity Data source: Aon Benfield Analytics

21 Risk Identification & Prioritization Underwriting Reserve Market Credit Operational Risk elements Pricing risk Parameter risk Loss process risk Catastrophe risk Product design risk Long-tailed lines Latent risks (A&E) Equity Interest rate (GAAP) Currency Reinsurance recoverables Receivables Bond defaults Downgrade migration Basel ii Banking definition: the risk of loss resulting from inadequate or failed internal processes, people, or systems, or from external events Excludes strategic risk and reputational risk Metrics Risk adjusted target combined ratios Catastrophe risk PML target Exposure capacity guidelines Scenario stress tests Conservative reserving Reserve risk quantification Reserve process validation Mix and asset concentration limits Equity and interest rate risk quantification Scenario stress tests Detailed exposure monitoring Rating migration impact quantification Scenario stress tests Disaster recovery plans IT robustness testing Compliance monitoring Data source: Aon Benfield Analytics Emerging Risks Mergers & Acquisitions Alternative capital Regulation Meta data Cyber risks Alternative investments Key issues and related risks Use and permanence Ability to respond to increasing regulatory demands Use of technology in making decisions There are various unique exposures and levels are quickly increasing Considering hedge funds or private equity investment to improve returns still has risk Data source: Aon Benfield Analytics

22 Key Topics for 2016 Looking Forward New stochastic-based BCAR Reinsurance segment pressures Further emphasis on and capital models Mergers & Acquisitions Increasing global regulation

23 Evolving Criteria Contact Information Sifang Zhang CPA, CFA, CERA Director, Analytics, Aon Benfield

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