Keeping Pace with Regulatory and Rating Agency Changes. Sifang Zhang October 8, 2014

Transcription

1 Keeping Pace with Regulatory and Rating Agency Changes Sifang Zhang October 8, 2014

2 Agenda Why the Changes Matter Regulatory Evolution across Asia Pacific Rating Agency Trends and Criteria / Methodology Updates ERM Trends Key Topics for 2014 /

3 From the ERM Perspective Strategic Risk Management Risk and Economic Capital Modeling Emerging Risk Manage ment Risk Control Process 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. 3

4 Regulatory Change Matters Recent Examples M&A and Strategic investment activities in South-east Asian countries Thailand Malaysia Indonesia (YTD) Data source: Bloomberg and Aon Benfield Analytics 4

5 Regulatory Change Matters Recent Examples Many insurers in China substantially increased capital in Q2 and Q3. Company from to change (%) Timing Allianz (China) % April An Bang 9,000 19, % May Hyundai (China) % June Liberty (China) 1,131 1,251 11% June Tian An 5,648 6,981 24% July Ping An Property 17,000 19,000 12% July China Life P&C 8,000 15,000 88% July BOC Insurance 3,035 4,535 49% August Guo Yuan 1,000 2, % August Ding He 1,518 2,018 33% August Fubon % September Lloyd's China 220 1, % September Note: Numbers in RMB million. Numbers are from CIRC announcement except for those in italic which are from Insurance Association of China. 5

6 Rating Agency Change Matters Recent Examples During the last 1/1 renewal season, a major rating agency introduced new rating criteria Pass / Fail stress test for those impacted companies Certain companies were placed under creditwatch Including some reinsurers Raised concerns of cedants in APAC, during renewal season Some impacted reinsurers had to seek credit enhancement to mitigate cedants concerns 6

7 Agenda Why the Changes Matter Regulatory Evolution across Asia Pacific Rating Agency Trends and Criteria / Methodology Updates ERM Trends Key Topics for 2014 /

8 APAC Regulatory Timeline Brunei, 1995 HK/Macau, 1997 Pakistan, 2002 Singapore, 2004 Philippines, 2006 Vietnam, 2007 Canada/Bermuda, 2008 Malaysia, 2009 PNG, USA, 1994 Japan, FY1996 Indonesia, 1999 China, 2001 Taiwan, 2003 India, 2000 China, 2015? Data source: Aon Benfield Analytics Australia, 2002 Solvency Margin RBC Korea/Thailand, Hong Kong 8

9 Hong Kong Migrating to RBC Three Pillars PILLAR 1 Quantitative Aspect Capital Adequacy PILLAR 2 Qualitative Aspects PILLAR 3 Disclosure And Transparency Data source: Hong Kong Office of the Commissioner of Insurance 9

10 Hong Kong Migrating to RBC Four phases Phase I Phase II Framework Key approaches Detailed rules QIS Phase III Amendment of Legislation Phase IV Implementation Data source: Hong Kong Office of the Commissioner of Insurance 10

11 China C-ROSS st -generation solvency regime began May 2013 C-ROSS conceptual framework published July 25, 2014, Version 2 Non-life and Version 1 Life C-ROSS Discussion Papers released Implementation in 2015? March 2012 Roadmap of 2 nd - generation solvency regime (C- ROSS) published April 25, 2014 Version 1 Non-life C- ROSS discussion papers released Version 3 Non-life coming soon? Data source: CIRC and Aon Benfield Analytics 11

12 China C-ROSS Data source: CIRC 12

13 China C-ROSS MC P&C = SQRT (MC 2 insurance + MC 2 market + MC 2 credit + 2ρ 1 MC insurance MC market + 2ρ 2 MC insurance MC credit + 2ρ 3 MC market MC credit ) Premium Risk Allowance for deterioration in future claims and expenses Based on past 12 months net premium Covers all lines of business Reserve Risk Allowance for uncertainty in timing and amount of outstanding claims leading to reserves being insufficient Based on net reserves Covers all lines of business Catastrophe Risk Allowance for typhoon (and typhoon-induced flood) and earthquake risk Based on net retained exposures Applies only to Property (including residential) and Engineering Data source: CIRC and Aon Benfield Analytics 13

14 China C-ROSS On-shore Reinsurers Off-shore Reinsurers Solvency of Reinsurer >200% [150%, 200%) [100%, 150%) [50%, 100%) V1 0.1% 1.3% 15.7% 26.1% 74.5% <50% all solvency adequacy ratios reinsurance assets collateralized 30% meet regulatory requirement reinsurance assets not collateralized 60% partial or all solvency adequacy ratios fail regulatory requirement 90% V2 0.1% 1.3% 15.7% 26.1% 74.5% 19.2% 58.8% 86.7% On-shore Reinsurers Off-shore Reinsurers Solvency of Reinsurer International Rating >200% [150%, 200%) [100%, 150%) [50%, 100%) <50% V2 0.1% 1.3% 15.7% 26.1% 74.5% AAA 0.2% AA+ 2.80% AA 7.70% AA % A/A-/A % BBB+ / BBB / BBB % lower ratings 65.80% Data source: CIRC and Aon Benfield Analytics 14

15 China New 10 Guidelines from State Council Foster and Develop Reinsurance Market Players Guide capital from domestic private sector to set up reinsurance companies. Encourage Chinese insurance groups and/or primary insurers to set up reinsurance subsidiaries. Introduce favorable policies to attract more international reinsurers to set up operations in China. Guide current foreign reinsurers in China to increase their investment. Continuously enhance the capability of innovating reinsurance products and reinsurance skills by increasing number of reinsurance market players. Strengthen the Supervision of Reinsurer Credit Risk Build reinsurer information database. Reinsurers need to be registered. Require off-shore reinsurers to provide deposits so as to reduce off-shore reinsurer credit risk. Differentiate the solvency regulatory rules for domestic and off-shore reinsurers. Enhance Reinsurance Innovation Use Shanghai (Pilot Free Trade Zone) and Shenzhen (Qianhai Shenzhen-Hongkong Modern Service Industry Cooperation Zone) as breakthrough points to enhance reinsurance innovation. Make Shanghai and Shenzhen the frontier of reinsurance regulatory innovation Enhance Training of Reinsurance Personnel The IAC will set up a reinsurance department to help enhance communications within the industry. Spend more resources on developing the reinsurance personnel. In the future, reinsurance practitioners in China need to get certified. 15 Data source: CIRC and Aon Benfield Analytics

16 China Agriculture The insurers running agriculture business are now REQUIRED to accrue catastrophe risk reserve. There are two types: Premium Reserve Profit Reserve Cat risk reserve release Trigger: Loss ratio as of June 30 / December 30 exceeds the cat loss ratio* for certain line(s), e.g. crops, live stocks, and forestry, AND, (Settled Loss + Incurred & Reported Loss) / Earned Premium for at least one settled claim exceeds the cat loss ratio* Reinsurance protection is applied first Then the premium reserve of the insurer s local (province) operations is applied If deficit exists, then the head office may release the profit reserve If deficit still exists, then the head office may utilize the company-wide cat risk reserve. The amount released is capped by (actual loss ratio cat loss ratio*) X net loss payment Agriculture Cat Risk Pool Data source: Ministry of Finance of P.R. China and Aon Benfield Analytics 16

17 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 (cashflows) 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 and Aon Benfield Analytics 17

18 Japan The regulator Financial Services Agency (FSA) has decided to conduct field tests covering all insurance companies, with the aim of introducing economic value-based solvency regime. The field tests include trial calculations of the economic value of insurance liabilities, etc. to comprehend to what practical extent insurance companies are dealing with the calculation of insurance liabilities on an economic value basis. Findings obtained in the tests, including any practical issues, will be taken into consideration for the introduction of the economic valuebased solvency regime. After the reports are collected and put together, a summary of the tests, including general tendencies and any issues identified in the process, will be made public in May 2015 (target timing). Data source: Financial Services Agency and Aon Benfield Analytics 18

19 Other Markets in APAC Taiwan Labuan Other Draft amendment to the Insurance Act approved, which would allow the government to take over ailing insurers as soon as their capital drops to a specific level. Current solvency capital requirement 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. Enhancement of RBC solvency regime. Data source: Taiwan Executive Yuan, Labuan Financial Services Authority, and Aon Benfield Analytics 19

20 Evolving Regulations 20

21 Agenda Why the Changes Matter Regulatory Evolution across Asia Pacific Rating Agency Trends and Criteria / Methodology Updates ERM Trends Key Topics for 2014 /

22 A.M. Best Upgrades vs. Downgrades (APAC Non-life) 10 Upgrade Downgrade (YTD) Note: YTD 2014 as of Sept. 30, Data source: A.M. Best Bestlink 22

23 Criteria Updates Standard & Poor s Since last October, S&P has released (for non-life): 10 criteria updates 3 current request for comment papers Many of the updates are clerical in nature Key Updates are: Assessing P&C Insurers Loss Reserves No Impact on Ratings Ratings Above The Sovereign Impacted certain companies in APAC Group Rating Methodology Clarified rather than changed = no impact Data source: Standard & Poor s 23

24 Criteria Updates A.M. Best Since last October, A.M. Best has released (for non-life): 12 criteria updates 1 additional, with Draft status (request for comment process) Many of the updates are clerical in nature Key Updates are: National Scale Rating (NSR) Many countries in APAC fall into CRT 3 to 5 Rating Surety Companies Bail and Surety stress tests defined Data source: A.M. Best 24

25 Criteria Updates A.M. Best Our view of A.M. Best s current thinking around the Stochastic BCAR update is as follows; it is subject to change until the criteria paper is released Expected Timing Current Model Goals Currently still building the model Parallel testing & calibration completed later this year using 2013 financials Draft criteria & request for comment period in late 2014 Goal: Stochastic BCAR only for P&C rating analysis using 2014 financials Include stochastic features for the risk of bond defaults, stock volatility, reinsurer default, pricing risk and reserving risk Diversification benefit for premium and reserve risks updated; covariance between each required capital component currently unchanged Current framework evaluates required capital and PML charge at various confidence intervals (CI) Evaluation of BCAR score will be focused on which CI a rated entity s BCAR score falls below 100% To Be Determined Confidence levels, PML selection & continuation of stress test, BCAR guidelines by rating level and a whole lot more Data source: A.M. Best and Aon Benfield Analytics 25

26 Criteria Updates -- Fitch Prism Factor-Based Capital Model (Prism FBM) for EMEA / APAC Factor-based Capital adequacy is calculated based on risk charges applied to exposure values Enables the rating agency to develop a comparable capital score for use in the rating process Public consultation period October December 2013 Launched for EMEA in September 2014 APAC? Data source: Fitch 26

27 Criteria Updates Moody s Methodology revision in August 2014 Update is almost entirely to enhance and expand the discussion of stress testing. The enhancements to the stress test are better codifying the current approach. Some updates are also being made. Formally eliminating the mild stress scenario. Now systematically including a life mortality pandemic stress. Investment stress factors for some asset classes have increased from the current template to align with stress testing for the banking sector. Data source: Moody s 27

28 Agenda Why the Changes Matter Regulatory Evolution across Asia Pacific Rating Agency Trends and Criteria / Methodology Updates ERM Trends Key Topics for 2014 /

29 Asian (P&C) Insurer s ERM Status very strong strong Adequate with strong risk controls adequate weak NA 50 If we remove those affiliates of USA / European / Australian insurers Data source: Standard & Poor s 0 very strong strong Adequate with strong risk controls adequate weak NA 29

30 2014 / 2015 ERM Hot Topics Solvency Regime Macro-Economic Trends C-ROSS / HK RBC not just about capital requirement. Note the Pillar 2 GDP Growth Headwinds / Low Interest Rate Environment Risk Tolerance/Risk Appetite ORSA / ERM Regulations Regulatory Catastrophe Capital Practical Implementation Challenges ORSA Requirement Spreads in Asia, ERM regulation enhancement in Australia, China, Taiwan, etc. C-ROSS, NZ regulatory requirement evolution. Unusual Risks Mt. Ontake (Japan), Umbrella Movement, etc. Terrorism / Pandemic Terrorism threat in China, ISIS threat, Ebola, etc. 30

31 Agenda Why the Changes Matter Regulatory Evolution across Asia Pacific Rating Agency Trends and Criteria / Methodology Updates ERM Trends Key Topics for 2014 /

32 Key Topics for 2014 / Impact of evolving regulations 2. Macro-economy conditions, profitability, and meeting plan 3. Further emphasis on ERM, with specific focus on a company s risk profile and risk tolerance 4. Catastrophe trends: another quiet year? 5. Continued low investment yields 32

33 Evolving Criteria 33

34 Disclaimer This presentation is produced solely for this ASHK seminar. This presentation does not constitute advice of any kind. You should obtain and consider all information relating to the insurance industry before making a decision based on any information in this document. While Aon has exercised all reasonable care in the preparation of the information contained in this document, it does not, either expressly or impliedly, warrant that such information is error or omission free, complete or current. To the extent permitted by law, Aon, its officers, employees and agents will not accept responsibility for any loss, damage or other liability arising in connection with such information. Aon reserves its right to amend this document at any time although it is under no obligation to do so. Neither the issue of this document, nor any of the information presented in it, should be regarded as a commitment or representation on the part of Aon (or any other person) to enter into a contractual arrangement. 34

35 Contact Information Sifang Zhang Aon Benfield Analytics