Practical Actuaries and Financial reporting system: Thailand. Joint Regional Seminar Bangkok. July by Soon Chooi Ong FSA, FIAA

Transcription

1 Practical Actuaries and Financial reporting system: Thailand by Soon Chooi Ong FSA, FIAA Joint Regional Seminar Bangkok July 2009

2 Contents 1 Thailand Current Financial Reporting System for Insurance 2 2 Current Development RBC Reporting Framework 6 3 Timeline and convergence with international standards 9 4 Understand the Financial Reporting Framework 11 5 Understand the stakeholders 15 6 Enhancing your value 18 1

3 Current Financial Reporting Framework Liability Long-term Policies with guaranteed benefits and term greater than 1 year are valued by net premium method (zilmer method with limited deferral of acquisition cost) Short-term Policies with term less than 1 year are valued using unearned premium reserve/unexpired risk Assumptions used follow pricing assumptions ie mortality rate table (TMO97), pricing morbidity rates, pricing interest rate and zero lapse rates Product Pricing is regulated with respect to pricing method (use of commutation functions with zero lapse), assumptions on mortality/morbidity, interest rates, expense and commission loadings Certified by Statutory Actuary approved by OIC Assets For statutory financial statements, TAS (Thailand Accounting Standards) apply: assets are valued based on following asset classifications. Active Trading valued at market value; HTM (held to maturity) valued at amortized cost; AFS (Available for Sale) valued at market value via balance sheet equity; or Other Invested assets valued using cost method or equity method or consolidated method depending on ownership share. For solvency purpose, additional OIC regulations apply: assets are valued on amortized basis for bonds but on market value for equities (and debentures). For debentures, trading market value is recognized within first 30 days of purchase, after which amortized value is recognized Investments management is strictly regulated with conservative restrictions on allowable investments and concentration limits; and compulsory appointment of asset custodians starting April 2009 Compulsory pledge of assets (25% of Policy Liabilities less policy loans) for safe-keeping by OIC. While on pledge with OIC, these assets can t be traded Assets of public companies are subject to impairment tests Thailand Insurance Life Act 2008 Regulations Minimum Solvency requirements = 2% of policy liabilities Capital Adequacy Ratio =150% of Minimum Solvency Requirements effective Jan 1, 2009 Premium rate pricing is regulated Enterprise risk management (ERM) requirement effective Jan 1, 2009 on all insurance companies Early Warning System (required disclosure of financial ratios on capital, investment and net income) effective Jan 16, Possible sanctions against companies whose ratios fall below minimum levels Accounting Standards TAS (Thailand Accounting Standards) apply for statutory financial statements For solvency purposes, additional OIC regulations are imposed In aspects where TAS are silent, eg.deferred tax and employee pension benefits, recourse to international standards like IFRS are allowed 2

4 How does current FRS stack up to current environment? Current FRS works well in a stable financial environment with fairly uniform insurance products But Current Economic Environment are Market globalization Investors/shareholders demand more transparency and accountability Economic development. In 2008, GDP per capita = Baht$ 137K compared with GDP per capita = Baht$ 29K in 1988 Volatile financial conditions, economic cycles, subject to financial crises and bursting of bubbles. But Current Social Political Environment are. More educated population Customers prefer making informed choices. More varieties of insurance products to meet customers needs Management style and compensation demand fair rewards and incentives for good and effective management Gaps in Current FRS Liabilities valuation are formulae based, fixed assumptions: one size fit all, not commensurate with individual company risk profiles, fixed assumptions are unrealistic and incompatible with changing environment Asset risks are omitted and not seriously taken into account. In volatile market, assets risks far surpass liabilities risks. Insurance benefits are more predictable and less variable through sheer volume and law of large numbers. But there aren t as many types and number of assets in fixed income/bonds/stocks/other assets. Assets number in thousands whereas liabilities number in millions Similarly, asset-liabilities mismatch risk, liquidity risks are omitted Margins are implicit, opaque and non transparent. Risk profiles are not apparent Need supplements with own internal models eg company s own economic valuation model Non comparability of financial strength between companies as available capital are not risk-adjusted Without the ability to adjust capital requirements to risk profiles, difficult to liberalize existing financial reporting constraints for example in regard to investment limits rules on equities/properties, OIC approval criteria for surplus distribution to shareholders 3

5 How does current FRS stack up to current environment? Further Flaws in current FRS Safety not guaranteed in a volatile economic climate Margins are not commensurate with the individual company s risk profiles No incentives for prudent risk management to reduce capital, as capital requirements are the same regardless of how risks are managed and controlled. Performance incentives may not be fair based on current reporting basis Hard to determine whether capital is adequate. As risk profiles are not revealed, any causes of deterioration of capital adequacy are not quickly apparent. Hard to take prompt remedial action without knowing the cause of the problem Non comparability of financial strength between companies as available capital are not risk-adjusted 4

6 Contents 1 Thailand Current Financial Reporting System for Insurance 2 2 Current Development RBC Reporting Framework 6 3 Timeline and convergence with international standards 9 4 Understand the Financial Reporting Framework 11 5 Understand the stakeholders 15 6 Enhancing your value 18 5

7 The time is (over-)due for Thailand to change its FRS framework to align with international developments and to meet the needs of the local social, economic and political environment From Current To RBC Framework Stable environment and uniform products Standard margins, one size fits all Opaque, Nontransparent and noncomparability Conservative, not easily adjustable, no incentive for prudent management Dynamic environment and proliferation of product varieties Margins based on own risk profiles: consistency and provide meaningful early warning Transparent, riskcommensurate and comparable Robust, incentive for prudent management and promote strategic risk management and opportunity 6

8 Impending RBC Financial Reporting Framework RISKS and PRINCIPLES BASED Liability Fair ( Market ) Value Approach Liabilities are determined using best estimate cash-flows plus PADs (provision for adverse deviations) for all significant contingencies affecting the cash-flows. Such PADs are provided at 75% confidence level Assumptions used follow company s own experience or similar industry experience if own is not available. Assumptions subject to contingency are padded at 75% confidence level Long-term Policies with guaranteed benefits are generally valued by gross premium valuation based on best estimate cash-flows with PADs, discounted at rsik-free interest yield curve Short-term Policies with term less than 1 year are valued using unexpired risk plus PADs at 75% confidence level Certified by Statutory Actuary approved by OIC Assets Fair ( Market ) Value Approach For statutory financial statements, generally IFRS/TAS standards which are consistent with fair value reporting will be adopted. Solvency will follow same basis as statutory financial statements: No additional OIC regulations apply Regulatory restrictions on allowable investments and concentration limits may be liberalized due to risk charges (risk provisions) to cover asset risks for solvency purposes Thailand Insurance Life Act???? Regulations Risk Capital Requirements = PADs on liabilities which increase confidence level to 95% + asset risk charges Asset risk charges include market risk (covering adverse impact from volatility of equities and from volatility of interest rate yield, credit risk, and asset counter-party concentration risk Capital Adequacy Ratio = Total Available Capital / Risk Capital Requirements >= 100% Risk Charges covering operation, liquidity, and company group will be considered at further stages in future Accounting Standards Adopted TAS (Thailand Accounting Standards) to align with IFRS which are consistent with fair value principles Valuation requires Robust Models and Realistic Basis 7

9 Contents 1 Thailand Current Financial Reporting System for Insurance 2 2 Current Development RBC Reporting Framework 6 3 Timeline and convergence with international standards 9 4 Understand the Financial Reporting Framework 11 5 Understand the stakeholders 15 6 Enhancing your value 18 8

10 Key milestones related to the rollout of the new RBC financial reporting framework... Kick off of RBC market test RBC roll-out Industry parallel run on 31 Dec 2009 data Industry parallel run on 31 Dec 2010 data Thailand RBC Framework go live Solvency 2 launch 17 July Dec Jun Jun 2011 Pre RBC roll-out Industry Rollout Voluntary market testing of RBC due 15 Sep 2009, by participating companies based on 31 Dec 2008 data Second consultation working groups and industry to finalise RBC parameters for approval and roll-out 9 Industry start to implement RBC valuation processes into their systems Results would help to refine transitional arrangements 1 Jan 2012? Future Outlook Nov 2012 Launch Thailand Insurance FRS go live on RBC framework Alignment with international standards (eg IFRS stage 2 and Solvency 2) expected to influence further development in Thailand RBC framework Importance of internal models to be robust and utilized as effective basis for decision making in a company s integrated risk management procedures, before acceptance and approval by regulator (Solvency 2 Test Zero for internal model approval) RBC Refinement may occur after parallel runs manifest actual impact on industry, taking into consideration development in financial markets and international FRS standards and regulations Practicality issues and pro-cyclicality effect of RBC framework. Will risks requirements dampen economic growth unnecessarily in times of global financial crisis?

11 Contents 1 Thailand Current Financial Reporting System for Insurance 2 2 Current Development RBC Reporting Framework 6 3 Timeline and convergence with international standards 9 4 Understand the Financial Reporting Framework 11 5 Understand the stakeholders 15 6 Enhancing your value 18 10

12 Understanding the FRS Framework What impact P&L Current period cash-flows Income eg premium Outgo eg expenses Recognized Investment Income Provisions for (movement in) liabilities Value of liabilities depend Recognized future cash-flows plus provisions for contingencies: fixed, variable or contingent Behavior and Inter-relationships between the cash-flow items Accounting Principles and Adjustments Accrual or Cash receipt basis Recognition bases for income and outgo: matching principles Value bases for assets and liabilities: market (fair) value, expected value, cost value Amortization bases Loss recognition bases eg impairment of assets or expected future loss 11

13 Understanding the FRS Framework What impact Balance sheet Value of Assets Asset type and quality Future income eg deferred tax assets, deferred acquisition assets Goodwill/Intangibles Equity and Retained Profit Value of Liabilities Recognized future cash-flows plus provisions for contingencies: fixed, variable or contingent Behavior and Inter-relationships between the cash-flow items Accounting Principles and Adjustments Basis of liabilities recognition: eg Fair value or net premium method Basis of assets recognition: eg Fair value or amortized value or cost method Consistent treatment between assets and liabilities Amortization methods Loss recognition eg impairment of assets or future loss in liability adequacy test 12

14 Understanding the FRS Framework stakeholders and environment decide and influence objectives objectives influence valuation bases for assets, liabilities and capital requirements What are the objectives and the environment it operates in Examples of objectives safety, transparency and accountability fair and equitable representation of financial operation and results comparability of financial results promote sound and robust risk management culture simplicity and ease of use while meeting stakeholders needs for all practical purposes Fit for purposes Asset and liabilities valuation methodology and bases adopted can deliver the objectives Consistent treatment between assets and liabilities Accounting standards adopted can deliver the stated purposes Regulatory framework Enforce Sound Corporate Governance Enforce an integrated and robust Risk management process Enforce Capital Requirements and Capital Adequacy Ratio Policies to promote economic stability and growth eg to enforce regulatory measures to ensure continued soundness of FRS during financial crisis eg interim measures counteract procyclicality effect 13 A FRS that can be used easily to report fairly and accurately on all (most) situations for all practical purposes, and the reports can be used reliably as a basis for comparison and decision making is a good system

15 Contents 1 Thailand Current Financial Reporting System for Insurance 2 2 Current Development RBC Reporting Framework 6 3 Timeline and convergence with international standards 9 4 Understand the Financial Reporting Framework 11 5 Understand the stakeholders 15 6 Enhancing your value 18 14

16 What do the stakeholders want from the Financial Statements 1 2 Shareholders/investors require: Customers/policyholders require: transparency, accuracy and accountability transparency, safety and accountability 3 Regulators require: 4 Management require: transparency, accountability, reliability, safety at micro/macro level, economic stability accuracy, details/facts for purposes of performance compensation, performance monitoring, strategic planning, risk management, 15

17 Understand the needs of the stakeholders Views of the stakeholders Questions on Financial Statements( including P&L and Balance Sheet): How accurate (equitable) is the measurement of emergence of profit in each period How accurate (equitable) is the measurement of assets and liabilities What factors affect the bases of the measurement What are possible errors in the measurement What are indicators of improving trend or deteriorating trend Are capital put to strategic and optimal use 16

18 Contents 1 Thailand Current Financial Reporting System for Insurance 2 2 Current Development RBC Reporting Framework 6 3 Timeline and convergence with international standards 9 4 Understand the Financial Reporting Framework 11 5 Understand the stakeholders 15 6 Enhancing your value 18 17

19 Enhancing your value... Data and Model Management Data management skills Building robust models, reliable, credible and effective Perform analysis and sources of earnings Automation of data and results/reports for quick and accurate delivery Communication Modelling and data analysis Explain actual situations Explain causal and inter- relationships, trends and strategy Cross-disciplinary communication Strategic Advice Risk is opportunity Propose optimal and strategic use of capital eg. for new business or for expansion of existing products with appropriate risk profiles Propose strategic risk management policy How to handle excessive risks: eg. withdrawal, hedging Strategic Advice Communication 18

20 Policy submission Data entry Underwriting Medical & Support a 4b 4c 4e Collections & payment 5 Policy issuance 6 7 Policy delivery Enhancing your value Strategise, monitor and re-strategise Risk profiles identified Re-strategize to increase efficiency and to keep up with changing environment Virtuous improvement cycle Risk is opportunity: Plan and take advantage of attractive risk-return opportunities Withdraw from excessive risks or hedge excessive risks Use capital optimally Monitor results 19

21 Enhancing your value... Illustration of best practice internal Model -Consultation Papers (CP37, CP56) of Solvency 2, Level 2 implementing measures on IMAP (internal model approval process) Model is robust, continually used and improved in an integrated risk management framework covering all aspects of operation Model governance is under purview and attention of board and senior management Model calibration, validation and profit and loss attribution: management demonstrate responsibility and participation by putting in place independent review; profit and loss segregate by business unit Senior management understand the model: eg model s strength and weaknesses to make wise business decisions Fitness for purpose i.e. fit with business model and risk management Can capture risks adequately Integration with risk management: model used to develop risk appetite (consistent with business strategy), set and monitor risk strategies and limits, produce key risk management information, quantify and rank risk Consistency Included in decision making by management Frequency: timely full calculation, and accurate proxies for interim periods between full calculations Accessibility of results 20 Data and statistical quality Sound control over data analysis and collection Where little or no data available: expert judgment should be accompanied with robust process of independent review/challenge to determine model parameters. Sensitivity results of such key assumptions and the limitations on the model s use should be understood Data at extreme tail of distribution such as longevity may not be available. Scenarios testing based on available data, distribution and interdependencies of various risk factors may exhibit a plausible range of results to consider and plan for

22 Disclaimer: The views and opinions expressed or implied in this presentation are solely that of the author. In no way does it represent the views of the organization in which the author works as an employee. The author accepts no responsibility for any liability that may arise from the use or misuse of any opinions (expressed or implied) and materials in the presentation. 21