The global insurance industry is undergoing significant regulatory change, with regulators in the more developed markets endeavouring to synchronize their efforts. Similar occurrences can be observed in the Asia-Pacific region, where a number of countries are reviewing and undergoing changes in their approach to insurance regulation and holistic risk management. Most notably, a number of regulators are either introducing risk-based capital (RBC) or revisiting their existing RBC frameworks. The maturing regulatory approaches in Asia-Pacific will be a significant factor in managing systematic risk and enhancing policyholder protection. Asia-Pacific is different. While the proposed RBC framework in Asia-Pacific may have similarities with the European Solvency II standard, there is wide disparity in the level of sophistication and application. Many of the changes are being driven by local market nuances, such as characteristics of the insurance products being sold and maturity of the insurers who operate in the various jurisdictions. For example, Australia has recently implemented its second-generation solvency regime. Singapore and Thailand are consulting with the industry on second-generation RBC frameworks, while others such as China and its Hong Kong SAR are considering moving in that direction. These moves are particularly encouraging in providing a regulatory framework that will allow for a degree of consistency, especially for those insurers who have multiple offices across the region.

1. 1
Risk-based capital and
governance in Asia-Pacific:
emerging regulations

2. 2Risk-based capital and governance in Asia-Pacific: emerging regulations
Changing regulations
in a changing market
Across the Asia-Pacific region,
countries are reviewing their
approach to regulation and holistic
risk management. Regulators are
synchronizing their efforts across
borders, as they introduce new
risk-based capital (RBC) or revisit
existing RBC frameworks.
Regulatory changes present both
challenges and opportunities
for insurers. More investment
will be required. But when those
investments are directed effectively,
the business as a whole will benefit.
This e-book report outlines the current status
of regulatory changes and RBC regimes in key
countries across the Asia-Pacific region.
Asia-Pacific is different

3. 3Risk-based capital and governance in Asia-Pacific: emerging regulations
Changing regulations
in a changing market
Across the Asia-Pacific region,
countries are reviewing their
approach to regulation and holistic
risk management. Regulators are
synchronizing their efforts across
borders, as they introduce new
risk-based capital (RBC) or revisit
existing RBC frameworks.
Regulatory changes present both
challenges and opportunities
for insurers. More investment
will be required. But when those
investments are directed effectively,
the business as a whole will benefit.
This e-book report outlines the current status
of regulatory changes and RBC regimes in key
countries across the Asia-Pacific region.
Asia-Pacific is different

4. 4Risk-based capital and governance in Asia-Pacific: emerging regulations
„„ A robust regulatory framework is good for the industry,
but will increase the cost of compliance
„„ Changing regulations may prompt innovation and
provide incentives to enhance organizational metrics
„„ Better-managed companies may benefit from lower
capital requirements
„„ Companies focusing on new business value will look
more closely at in-force value management
„„ Deeper understanding of risk profiles and appetites will
be needed, as will more sophisticated modeling of risk-
adjusted returns
„„ Convergence of regulations toward RBC will make
the Asia-Pacific insurance markets more attractive for
foreign investments
„„ Customers may benefit from new ideas and solutions
and a healthier competitive marketplace will result
The implications of RBC

5. 5Risk-based capital and governance in Asia-Pacific: emerging regulations
„„ The China Insurance Regulatory Commission
(CIRC) is adopting a system similar to Europe’s
Solvency I
„„ Internal risk management, solvency reporting,
financial analysis and supervision, regulatory
intervention, and bankruptcy remediation
„„ Solvency regulation system was developed
2003-07
A new system is needed
„„ Current limitations in providing good guidance for
improved risk management
„„ To meet local market needs and provide experience
for other emerging markets and the international
insurance industry
„„ The transition period and new measures are still
unclear at this stage
Increased complexity and risk in fast-growing market
The Chinese insurance industry is actively
looking to learn from the experience of
developed markets.
China

6. 6Risk-based capital and governance in Asia-Pacific: emerging regulations
„„ Australian Prudential Regulation Authority
(APRA) seeks to harmonize cross-industry
risk management
„„ Recent enhancements to regulatory regime:
capital adequacy framework and draft
conglomerate supervision
„„ Higher cost of compliance is topic of
government inquiry into Australia’s
financial system
Current standards
„„ 2013: Life and General Insurance Capital (LAGIC) for general and
life insurers
„„ Three-pillar approach consistent with Basel III and Solvency II
„„ The aim is to assess and meet the country’s evolving needs and
support economic growth
„„ Topics such as recovery and resolution planning will be a natural
extension of stress- and scenario-testing exercises
„„ International capital standards (targeted for 2019) impact only
a few larger insurers
Australia

7. 7Risk-based capital and governance in Asia-Pacific: emerging regulations
A decade of strong growth
„„ 155 authorized companies - diverse set of firms
„„ Office of the Commissioner of Insurance (OCI) oversees industry
„„ A rule-based capital adequacy regime in place since the
1980s, with predefined formula (based on SI) to determine
solvency margin requirement
„„ New Independent Insurance Authority (IIA) in works
„„ Aligned with international standards and practices
„„ OCI consulting with the industry about RBC since 2013
„„ Expected implementation in 2016
„„ Focus on need to maintain a level playing field for all insurers
New RBC framework
„„ Latest Insurance Core Principles, Standards, Guidance
and Assessment Methodology (ICP) from IAIS
„„ Experience of overseas jurisdictions Incentives to
introduce enhanced risk management
„„ Ease of use
„„ Avoidance of regulatory arbitrage
Hong Kong

8. 8Risk-based capital and governance in Asia-Pacific: emerging regulations
Life (24 companies)
„„ Huge impact of opening market in 2001
„„ 30% CAGR for nearly a decade, but slowing growth with
regulatory changes
General (28 companies)
„„ 16% CAGR in last decade
„„ Evolving regulation, entry of new private companies,
changing demographics, and greater disposable income
driving growth
Market in flux – political uncertainty, slower economic
growth, regulatory changes and increased competition
Current solvency model
„„ Factor-based with a set formula determined by Insurance
Regulatory and Development Authority
„„ Method for establishing capital requirements is easy, with
no consideration of the underlying risk
„„ Minimum capital requirement INR1 billion
Plan for new RBC framework
„„ Leveraging broader parameters of US, UK and Canada
„„ Target implementation: 2018-19
„„ Focus on enterprise risk management components –
data controls and governance
India
Large and sustainable growth opportunity,
but market in flux

9. 9Risk-based capital and governance in Asia-Pacific: emerging regulations
Indonesia
„„ Expanding middle class and young population driving
savings and investment products
„„ Life insurance growing exponentially
„„ Microinsurance market gaining traction with low-
income consumers
„„ More new entrants to the market and greater opportunities
for mergers, acquisitions and joint partnerships
„„ Changing regulations and stricter capital requirements
aim for greater transparency and stability
New RBC regime launched in 2013
„„ Guidelines for the creation of technical reserves
„„ Guidelines for calculating risk-based minimum capital
„„ Financial healthiness of insurers and reinsurers
Challenges with new regimes
„„ Valuation discount rate: discrepancy in the discount rate
between statutory and accounting rules and a mismatch
in asset and liability valuation
„„ MAD: need to conduct solid experience studies and
determine confidence levels of 75% for margin for
adverse deviation
Key issues moving forward
„„ Setting up a risk management framework
„„ Separation of conventional and sharia business (mainly
life and health microinsurance) products
Large and high-growth market with many challenges

10. 10Risk-based capital and governance in Asia-Pacific: emerging regulations
Current RBC framework
„„ Statutory requirements since 2009
„„ Introduction of ICAAP in 2012 challenged industry
„„ Parliament aims for risk-focused, integrated approach
to regulation and supervision across financial services
Moving forward
„„ Future convergence with IAIS core principles
„„ Focus on risk and capital management
„„ More guidelines expected in ERM implementation,
recovery planning and corporate governance
Malaysia
Strong market focused on stability
„„ Well-developed, stable economy – strong GDP growth
and low inflation
„„ Demographics generate demand for takaful insurance
and bancassurance
„„ Wide-ranging reforms aimed at improving regulatory
efficiency and increasing competition

11. 11Risk-based capital and governance in Asia-Pacific: emerging regulations
Singapore
„„ Risk calibration features of RBC framework
finalized for 2017 implementation
„„ Risk-focused approach in assessing capital
adequacy and reflecting most relevant risks
„„ Minimum capital prescribed serves as buffer to
absorb losses
„„ Early intervention by Monetary Authority of
Singapore (MAS) if necessary
Further updates being assessed
„„ RBC 2 review underway in light of evolving
market practice and global regulatory shifts
„„ In 2014, consultation paper released with
detailed technical specifications of quantitative
impact study
„„ New proposals include solvency intervention,
asset and liability interventions, required
capital components
RBC updates underway

12. 12Risk-based capital and governance in Asia-Pacific: emerging regulations
„„ Financial Supervisory Service (FSS) introduced RBC
in 2009, with goal of soundness and stability in the
overall insurance industry
„„ Ongoing reviews aligned to that objective
„„ FSS encourages insurance providers to adopt risk-
based management in their governance
„„ 2012 changes subdivided capital classes and
categorized risk factors
„„ Enhanced RBC calculation methodology added
reverse margin risk in 2013 and raised confidence
level of risk factors in 2014
„„ Recent changes have led some insurers’ solvency
margin ratio to fall below recommended ratio of 150%
Current RBC approach
Future enhancements expected
„„ Increased confidence levels for interest rate risk
„„ Lower solvency ratio
„„ IFRS 4 Phase II to be introduced in 2018
South Korea

13. 13Risk-based capital and governance in Asia-Pacific: emerging regulations
Thailand
Current state
„„ RBC framework and gross premium valuation
(GPV) regime implemented in 2011, with testing
to gauge impact and gather response
„„ Temporary RBC exemptions to deal with
difficulties associated with floods
„„ Solvency requirement increased in 2013
„„ Market testing would allow regulators to gather
industry responses and assess financial impact
on insurers
„„ Insurers would have to reconsider their business
plans and capital management plans in order to
optimize profit and capital
Looking ahead
„„ RBC 2 features address shortcomings of
previous approach
„„ More emphasis on qualitative risk measures,
with stress testing and consideration of
additional risks

14. 14Risk-based capital and governance in Asia-Pacific: emerging regulations
„„ Understand the operational implications
„„ Make adjustments to their future business plans
and investment needs
„„ Consider both specific tactical modifications
and broader strategic initiatives with potentially
dramatic effects on entity rationalization and
capital optimization
„„ Draw upon the experiences and challenges in
more developed markets relative to regulation,
economic shifts and the purchasing behavior
of policyholders
With many changes to come, insurers must:
Looking ahead in Asia-Pacific

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Martin Bradley
Global Risk & Regulatory Leader
mbradley@uk.ey.com
+44 20 7951 8815
Ranjit Jaswal
Asia-Pacific Risk & Regulatory Leader
ranjit.Jaswal@hk.ey.com
+852 2846 9888
Jonathan Zhao
Asia-Pacific Insurance Leader
jonathan.zhao@hk.ey.com
+852 2846 9023
Contacts