Development of Risk Based Capital Framework in Singapore. Questor Ng, Raymond Cheung Singapore Actuarial Society

Transcription

1 Development of Risk Based Capital Framework in Singapore Questor Ng, Raymond Cheung Singapore Actuarial Society

2 History of RBC in Asia Indonesia Taiwan Malaysia Thailand Singapore South Korea Solvency I Framework Enhancing RBC I framework Hong Kong China Macau India Vietnam Exploring RBC I/RBCII Singapore Malaysia South Korea Indonesia Taiwan 2

3 Pre-RBC Framework in Singapore Factor based framework Liability Reserving NPV with prescribed parameters Implicit margin on PAD Solvency Required capital derived as % of reserve and SA; consider liability risks only 3% and 2% of reserve on Non-Par and Par reserve; 0.1% and 0.2% on SAR for term <2 yrs and >2 yrs Available capital equals to net asset Asset Lower of book value or market value No concentration risk adjustment 3

4 RBC 1- Critical Elements Mix of factors and principle based framework bears similarities to Australia s MCR Consider some risks explicitly: Components C1 C2 Type of Risk Requirement Life: Insurance risk on mortality, morbidities, expenses: 10% to 40% PAD on assumptions Non-Life: Specific risk charges on premium & claims liabilities by Business lines Asset risk, ALM risk: factor based and sensitivity to risk free rates C3 Concentration risk: factors based on types of assets and institutions Reserving: Life: GPV reserve with PAD considering all policy related cashflows Par fund reserve is set equal to asset value Negative reserve zeroised at policy level Non-life: Best estimates (BE) of insurance (claims + premium) liabilities Additional PAD reach at least 75% level of sufficiency 4

5 RBC 1- Critical Elements Solvency: Capital on market value basis Type of capital Tier 1: high quality Tier 2: moderate quality Par Non-guaranteed Bonus Description Paid-up capital, net asset (except Par fund), Par shareholders' account Irredeemable, cumulative preference shares, subordinated loan etc Min[ 50% * (Asset - Guaranteed reserve on BE return), (Asset - Guaranteed reserve on risk free rate) ] Company solvency ratio must exceeds 120%. Most insurers in Singapore, however, have CAR well in excess of 150% CAR = Tier 1 + Tier 2 + Par non-guaranteed bonus C1 + C2 + C3 5

6 RBC 1 Pros and Cons Pros More assurance on sufficiency of reserve Risks are included explicitly and therefore provided for both assets and liabilities Differentiate good insurers (with less risks) vs bad insurers (with more risks) Cons Still does not consider all aspects of risks and their interaction P&L and B/S more volatile on market value basis PAD and prescribed parameters may not be sufficient No explicit escalated level of supervisory intervention Does not include a risk management framework 6

7 Factors driving RBC 2 1. Development in global supervisory principles and framework (e.g., ICPs issued in 2011 by the International Association of Insurance Supervisors (IAIS)) ICP 14 Valuation: requires assets and liabilities valued consistently; reflecting risk adjusted cashflows ICP 17 Capital Adequacy: capital to be adequate based on nature, scale and complexity of risks, and feasible in practice 2. Development of Solvency II in Europe and Basel III framework To align Singapore RBC I to the international standard Singapore government s aim to develop Singapore as a key financial hub of Asia Synergy and alignment with supervisory framework of other sectors in Singapore, particularly, the banking sector 3. More volatile investment and operating market The financial and environmental risks posed to the insurance sector (e.g., GFC) Movements in consumer protection and safeguarding policyholders interests Better protection against insolvency capital alone is insufficient Now a best practice to have comprehensive risk management framework 4. Economic mismatch between assets and liabilities valuation Assets are on market value basis but liabilities are not 7

8 RBC 2 Expected timeline Q MAS issued Consultation Paper on RBC 2 Apr 13 MAS issued regulations on ERM & Public Disclosure Q1 14 Parallel run RBC I & RBC II Q Finalization of Calibration factors -Study Internal model for the next 2/3 years Q April 2013 Q Q1/Q Q Q4 13 QIS I calibration Factors Q1/2 14 QIS II calibration Factors 8

9 RBC 2 Critical Elements 1. Assets and liabilities to be valued on more consistent basis Assets continues to be value using market value or net realisable value Liabilities on best estimate basis, without PAD + explicit risk margin Liabilities to be discounted using risk free rates (SG government bond yields), instead of historical average risk free rates Illiquidity premium not included on risk free rates 2. Solvency available capital rules: Aligned to Basel III framework Par non-guaranteed bonus reserve continue to be positive adjustment Negative reserve to be recognised as positive adjustment (Outstanding) 3. Consider comprehensive list of risks facing insurers. Additional risks: Operational, catastrophic, spread Liquidity risk is not included but monitored through stress test 9

10 RBC 2 Critical Elements 4. Solvency requirement to cater to 99.5% confidence level over a one year period No allowance for diversification benefits when aggregating capital risk requirements (i.e. between risk categories) (Outstanding) Which means it could be more conservative than 99.5% as a whole (Diversification benefits within certain risk categories are allowed) 5. Two regulatory intervention points: MCR: calibrated to the 90 th percentile scenario over 1 year period Strong regulatory intervention expected: Stop NB, withdrawal of license, transfer of portfolio to other insurer PCR: calibrated to the 99.5 th percentile scenario over 1 year period Required to submit capital plan to restore financial strength within 3 months 6. Partial or full Internal model in replacement of standard: Not expected in 1 st phase 7. Introduce Enterprise Risk Management requirements, including ORSA ORSA mentioned as MAS continuing efforts to enhance risk management and capital management in an integrated and enterprise-wide manner Stress testing requirements will split into 2 parts from 2014, with self-select scenarios covered under ORSA scope 10

11 Assets (MV) Regulatory B/S: RBC 1 vs RBC 2 Capital Buffer Min CAR 120% Risk Charges MCL Capital Buffer of at least 80% of RC Calibrated to 1-in-7yrs Best Est.+ PAD LTRFDR Assets (MV) Capital Buffer Prescribed Capital Reqmnts (PCR) Min Req. (MCR) Risk Margin Best Estimate Liability Min CAR??? Calibrated to 1-in-200yrs Calibrated to 1-in-10yrs Explicit RM for Ins. & Ops Risks Best Est. SGS 11

12 RBC 2 Main Issues 1. Alignment between Insurance and Banking sector framework Banking and Insurance sector are fundamentally different Insurance sector is less susceptible to systemic / contagion risks than banking sector (reference source: Geneva Association, IAIS Conference) 2. Alignment between Life and Non-life insurance sector Life insurance and Non-life insurance sector are different Difference in nature of life & non-life sector should be considered in designing requirements on discounting, margin calculation (PAD or CoC), CAT risk charge, etc 3. Tight timeline proposed for calibration and implementation is a concern 4. Diversification between risks Each risk scenario is calibrated to 99.5 th percentile No diversification is proposed Likely significant increase in capital requirement is a concern 5. Discount rate Government bond yields or swap curve? Illiquidity premium? 6. Negative reserve Not as tier 1 capital but a positive capital adjustment Should 100% negative reserve be recognized? 12

13 RBC 2 Likely Impact 1. Insurance Market as a whole Overhaul in capital requirements may reduce the attractiveness of Singapore as an Asia insurance hub Changing level playing field between insurance and other sectors (e.g., banking) Changing competitiveness between insurance companies Increased cost of doing business will eventually be passed on to consumers through more costly premiums or lower coverage 2. Business Strategy Likely to have higher minimum capital cost More reinsurance for those who need capital? Change in product mix offered? Change in the focus on distribution channels? 3. Decision making A comprehensive enterprise wide risk management framework, strategy and culture Help to create more awareness of risk and reward? Better decision making, ie using capital more efficiently? Invest and develop in Internal Model for decision making? 4. Disclosure More disclosure on various aspects of insurers More disclosure translates to higher transparency? Does it help to minimize insolvency risk? Systemic risk? 13