insurance regulatory developments in headline part 1...

HEADLINE PART 1

HEADLINE PART 2Insurance Regulatory Developments in

Asia Pacific: Risks and OpportunitiesHeng Loong Cheong

Joyce Chan

Jonathan Goacher

Roy Chan

DLA Piper's Asia Insurance Symposium, Singapore

9 October 2013

Malaysia

Regulatory Drivers for M&A (1/3)

RBC regime for conventional insurers (from January 2009) could result in more consolidation – RBC for takaful operators introduced end 2012;

FDI cap increased in 2009 to 70% (from 49%) and an even higher % holding on a case by case basis if foreign investors can “facilitate consolidation and rationalisation of the [Malaysian] insurance industry”; and

Regulator’s stated policy of encouraging consolidation in the sector

Policy (since 1997) of not issuing new licenses for direct insurance

Licenses for reinsurance still available

9 October 2013http://blogs.dlapiper.com/insuranceflashlight/ 2

Malaysia


Financial Services Act 2013 (Effective 30 June 2013)

Direct insurers may NOT carry on BOTH life and general business

5 year transitional period for current composite insurers


- Zurich Insurance Malaysia

- AIA (ING Insurance)

- Etiqa Insurance - MCIS Zurich Insurance

- Prudential Assurance Malaysia

Reorganise? Divest? By 29 June 2018

Malaysia


Individuals may not hold >10% interest in shares of a (re)insurer

"Interest in shares"

Direct interest

Effective interest

Legal / beneficial interest

5 year transition period (by 29 June 2018) for "sell down" to ≤10%

Sell downs by individual founders / substantial shareholders?

An additional investment "cap" for future M&As?


Indonesia


The Financial Services Authority ("FSA") authorised as of 31 Dec 2012 to regulate & supervise financial sectors (including the insurance sector)

Prior approval of FSA required for ownership change (no minimum threshold) in insurance / reinsurance companies

except transactions through the stock exchange which do not alter "control" of the insurance /reinsurance companies

Regulator’s policy of encouraging consolidation in the section


Indonesia


Local insurers could struggle to meet the mandatory increases in minimum capital by the stated deadlines (the next and last being 31 Dec 2014) creating investment opportunities

Minimum capital increase as follows:

Rp100 billion (~US$8.65m) for insurance companies (or Rp50 billion (~USD4.32m) for Takaful insurers)

Rp200 billion (~US$17.3m) for reinsurance companies (or Rp100 billion for Takaful reinsurers)

FDI cap of 80% MAY be exceeded IF an existing 80% foreign shareholder subscribes for new shares pursuant to capital increase requirements ANDthe Indonesian 20% shareholder is unable to purchase additional shares

resulting in dilution of its 20% holding


Singapore

Insurance (Amendment) Act 2013

Came into effect on 18 April 2013

Made significant changes to the Insurance Act (CAP 142)

Amendments made to change of control provisions (Sections 28 and 29 of the Insurance Act):

MAS approval must be obtained prior to a person obtaining "effective control" of a licensed insurer

"effective control" now includes circumstances where the directors are accustomed or obliged to act on the acquiror's instructions

MAS approval must be obtained prior to a person becoming a substantial shareholder in a licensed insurer (being a 5% interest or more in voting shares)


Singapore

New requirement re. insurers acquiring major stakes in other companies (Section 30B)

MAS approval must be obtained prior to a licensed insurer acquiring or holding a 'major stake' in any corporation

'Major stake' means (i) beneficial interest in 10% or more of issued shares; (ii) control over 10% or more of voting power; or (iii) any interest giving defactocontrol over the corporation

Clarification that an insurance business transfer (even via novation) requires MAS consent (Section 49FB)

The branch office exception

It appears that the change of control provisions continue to NOT apply to branch offices

However, note the clarified non-solicitation provisions (Section 6): branch offices may not solicit insurance business for their head offices


Hong KongProposed Independent Insurance Authority ("IIA") (1/2)

IIA

operational in 2015 with an expanded role and extensive new powers to enforce, greatly enhanced market conduct obligations for insurance companies, intermediaries and their directors and officers

2016 HK is likely to introduce some form of risk based capital regime

Key changes of IIA:

Intermediary regulation

ROs for insurers and intermediaries - duties on insurer ROs to secure compliance by intermediaries

Disciplinary and penalties

Powers of inspection, investigation and suspension

Banks intermediary activities


Effect of industry:

Rise of legal & compliance costs

Additional senior management (responsible officers) time to monitor intermediary compliance

More common conduct investigations / enforcement actions


Hong KongProposed Independent Insurance Authority ("IIA") (2/2)

Hong KongMedical Insurance Proposed Health Protection Scheme ("HPS") (1/2)

Standardized, government-regulated (and funded ?) framework

Objectives

Facilitate greater use of private health services as alternative

Better control of healthcare expenditure

HPS Concept

Mandatory minimum requirements for plans under the HPS and indemnity hospital insurance products

Insurers may offer Standard Plans and top-up benefits ( Flexi and Top-up Plans)


Key features

1. Guaranteed acceptance and renewal

2. minimum coverage and benefit levels

3. cover pre-existing medical conditions subject to waiting period

4. permit to charge premium loading up to 200% on high-risk applicants and transfer to High Risk Pool

5. No-Claim discount (up to 30%)

6. Transparent premium structures and standard terms

7. Informed financial consent; No-gap/ known-gap arrangement

8. No restriction on entry for those below 65 ( Above 65 can join within 1st

year of HPS introduction)


Hong KongMedical Insurance Proposed Health Protection Scheme ("HPS") (2/2)

New investment regulations for life & non-life insurers.

Currently in draft form but believed to be final and shall become effective imminently.


Thailand

Thailand

NEW DRAFT INVESTMENT REGULATIONS FOR LIFE & NON-LIFE INSURERS

Investment committee must be appointed by the Board of the insurer:

Composition: at least three persons - directors/executives and investment experts with at least 3 years experience (can be internal or external persons).

Supervisory role: must develop investment policies & plans; supervise & manage investment; oversee transparency & accountability of investments; report investment results to the Board.

Investment unit should be developed by the insurer, responsible for the operational role in undertaking investment. Within two years, responsible person(s)/investment decision maker(s) must complete an official training course & have certain financial/economic qualifications & experience. Otherwise, an external party can be appointed to the investment unit: must be either a licensed personal fund manager or approved for the role by the insurance regulator, or the scope of the insurer's investments will be extremely limited.


Thailand

Documents to be developed and submitted to the regulator:

(i) investment policy & investment plan; (ii) risk management procedure; (iii) policy for conducting other business: review & submit annually & within 30 days of any "significant change".

investment manual: develop within 180 days of regulations becoming effective & submit within 30 days of completion.

risk management procedure for conducting other business: to be submitted within 30 days of any "significant change".

Compliance: When investment is not in compliance with the investment policy or manual, the regulator may request clarifications, set compliance conditions or order stoppage of such investment until compliance is achieved.

Types of permitted investment:

bank deposits; equity instruments (shares up to 10%); debt instruments; hybrid instruments (e.g. convertible debentures); investment units; futures contracts; structured notes; making loans; vehicle hire purchase; issuing avals & letters of suretyship; securities borrowing & lending transactions; securities buying or selling under repurchase agreements.


Possible conduct of other business:

let or sublet real estate; conduct back office services; hold more than 10% of shares in a foreign insurer, or a company holding shares in ASEAN insurers, with regulator permission; hold more than 20% of shares in certain insurance-related businesses (including brokers), with regulator permission; operate certain securities businesses, with regulator permission.

n.b. a supervisory committee and an internal control system must be established for the conduct of other business; income from other business must be separated according to GAAP.

FUTURE DEVELOPMENTS

Amendments to insurance acts (removal of consideration of voting rights in assessing whether a corporate shareholder is foreign or Thai).

100% foreign ownership of insurers on the horizon?


Thailand

China

Regulatory Update (1/2)

(A) Relaxation of Investment

CIRC issued more than eight investment regulations since early 2012 to encourage more diversified investment portfolio and hopefully higher investment yield

Implementing Rules of Interim Measures for Managing Foreign Investment of Insurance Funds dated 23 October 2012 opens up a wide range of overseas investment opportunities, eg. Ping An's acquisition of Lloyds Building in July 2013 for £260 million

(B) Tightening up control of intermediaries

China Insurance Regulatory Commission issued the Notice on FurtherRegulating Market Access for Insurance Intermediaries in June 2012

Suspended licensing of most sideline agents

Increased minimum registered capital requirement from RMB 10 millionto RMB 50 million


China

Regulatory Update (2/2)

(C) Opening up of mandatory auto insurance market

Allowing full access of Mandatory Motor Vehicle Third Party Liability Insurance market to foreign insurers

Eight foreign insurers have been allowed to operate Mandatory Motor Vehicle Third Party Liability Insurance: Allianz (安联财险), Cathay Insurance (国泰产险), AIG Insurance (美亚财险), Fubon Insurance (富邦产险), Generali China Insurance (中意财险), Groupama AVICInsurance (中航安盟), Liberty Insurance (利宝保险) and Samsung Fire and Marine Insurance (三星财险)

AXA acquired 50% of Tian Ping Auto Insurance Company Limited (天平汽车保险股份有限公司), and AXA's existing Chinese Property & Casualty operations are expected to be integrated with the new join venture

Such market will be extremely competitive, price deregulation in this segment may drive prices even lower, putting further pressures on profits


China

Industry Update

(A) Expanding role of banks in insurance market

BoCommLife Insurance 交银康联人寿 (previously China CMG Life Insurance, 2010); CCB Life 建信人寿 (previously CPIC-ING, 2011); ICBC-AXA Life 工银安盛人寿 (previously AXA-China Metal, 2012); ABC Life 农银人寿 (perviously Jiahe Life Insurance, 2013) adopting different models

(B) Potential pension and medical / health insurance market

PRC may allow foreign insurers to take part in the long-waited tax-deferred pension pilot scheme in Shanghai and expected to have major impact on the pension market

Shanghai Free Trade Zone – further relaxation and development on medical and health sector

(C) Expanding role of internet

Internet will play an increasingly important role in distributing personal lines insurance - Zhong An Online Property Insurance Company Ltd. (众安在线财产保险公司) – JV between Alibaba, Tencent, Ping An


China

Shanghai - Pilot Free Trade Zone Update (1/3)

Officially launched on 29 September 2013

First of its kind on the Chinese mainland, includes the special customs zones of the Yangshan Deep Water Port, Pudong Airport and WaigaoqiaoPort, covering a total of 28 square kilometers

Following the State Council approval of the positioning of Shanghai as the two centres: financial and shipping

It will create tax-friendly facilities for trade and investment within the free trade zone, promote China's interest-rate liberalization and, eventually, Renminbi convertibility

It will encourage financial product innovation and promote the development of offshore businesses

Set to play an important part in the negotiations for the Trans-Pacific Partnership Agreement (TPP) and become the first open window to help China join the TPP


China


Supporting policies proposed by CIRC relating to China (Shanghai) Pilot Free Trade Zone ("FTZ") dated 29 September 2013:

1. To support the establishment of foreign-invested professional health insurance entities in the FTZ

2. To support insurance companies to set up branches in the FTZ to carry out cross-border RMB reinsurance business, and to support research and explore catastrophe insurance mechanism in Shanghai

3. To support insurance entities in the FTZ to carry out pilot schemes of overseas investment, and to actively research on expanding the scope and scale of overseas investments of insurance entities in the FTZ

4. To support international renowned professional insurance intermediaries, other service / social organizations and individuals in reinsurance to operate in the FTZ, in order to provide professional technical support services to the development of the insurance industry


China


Supporting policies proposed by CIRC relating to China (Shanghai) Pilot FreeTrade Zone ("FTZ") dated 29 September 2013:

5. To support Shanghai to carry out marine insurance business, to nurtureshipping insurance operators and marine insurance brokers, and todevelop a marine insurance association in Shanghai

6. To support the development of innovative insurance products frominsurance companies, and to expand the field of liability insurance services

7. To support improving the insurance market in Shanghai, to promoteinstitutional building of marine insurance pricing centre, reinsurance centreand insurance funds centre etc

8. To support innovations in financial reform and innovation in the FTZ, andthe linkage mechanism between FTZ and the establishment of Shanghaias an international financial centre, will continue to strengthen and expandmemorandum cooperation mechanism between CIRC and the Shanghaigovernment


HEADLINE PART 1

HEADLINE PART 2Insurance Regulatory Developments in

Asia Pacific: Risks and OpportunitiesHeng Loong Cheong

Joyce Chan

Jonathan Goacher

Roy Chan

DLA Piper's Asia Insurance Symposium, Singapore

9 October 2013