keeping pace with regulatory and rating agency changes gi seminar 2014/03 sifang... · 3 •...

Sifang Zhang

October 8, 2014

Keeping Pace with Regulatory and Rating Agency Changes

2

• Why the Changes Matter

• Regulatory Evolution across Asia Pacific

• Rating Agency Trends and Criteria / Methodology Updates

• ERM Trends

• Key Topics for 2014 / 2015

Agenda

3

• Although hard to quantify, strategic risks have huge impact on insurers.

• Regulatory and Rating Agency changes fall into the Strategic Risk category.

From the ERM Perspective

Data source: Standard & Poor’s

Risk Management Culture

Risk and

Economic Capital

Modeling

Emerging Risk

Management

Risk Control Process

Strategic Risk Management

4

M&A and Strategic investment activities in South-east Asian countries

Regulatory Change Matters – Recent Examples

0

10

20

2010 2011 2012 2013 2014 (YTD)

Thailand

Malaysia

Indonesia

Data source: Bloomberg and Aon Benfield Analytics

5

Many insurers in China substantially increased capital in Q2 and Q3.

Regulatory Change Matters – Recent Examples

Company from to change (%) Timing

Allianz (China) 420 495 18% April

An Bang 9,000 19,000 111% May

Hyundai (China) 300 550 83% 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 2,104 110% August

Ding He 1,518 2,018 33% August

Fubon 500 700 40% September

Lloyd's China 220 1,000 355% September

Note: Numbers in RMB million. Numbers are from CIRC announcement except for those in italic which are from Insurance Association of China.

6

• 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

Rating Agency Change Matters – Recent Examples

7




• ERM Trends


Agenda

8

APAC Regulatory Timeline

1995 2005

Sin

gapo

re, 2

004

Bru

nei,

1995

Phi

lippi

nes,

20

06

HK

/Mac

au,

1997

Indi

a, 2

000

Pak

ista

n, 2

002

Can

ada/

Ber

mud

a, 2

008

PN

G, 2

010

Mal

aysi

a, 2

009

Vie

tnam

, 200

7

Kor

ea/T

haila

nd,

2011

US

A,

1994

Japa

n, F

Y199

6

Indo

nesi

a, 1

999

Chi

na,

2001

Taiw

an,

2003

Aus

tralia

, 200

2

2015

Solvency Margin RBC

Chi

na, 2

015?

H

ong

Kong

Data source: Aon Benfield Analytics

9

Three Pillars

Hong Kong Migrating to RBC

PILLAR 1

Quantitative

Aspect –

Capital Adequacy

Data source: Hong Kong Office of the Commissioner of Insurance

PILLAR 2

Qualitative

Aspects

PILLAR 3

Disclosure

And Transparency

10

Four phases

Hong Kong Migrating to RBC

Phase I

• Framework • Key approaches

Phase II

• Detailed rules • QIS

Phase III • Amendment of Legislation

Phase IV • Implementation

Data source: Hong Kong Office of the Commissioner of Insurance

11

China C-ROSS

2001 1st-generation

solvency regime began

March 2012 Roadmap of

2nd-generation solvency

regime (C-ROSS)

published

May 2013 C-ROSS

conceptual framework published

April 25, 2014 Version 1

Non-life C-ROSS

discussion papers

released

July 25, 2014, Version 2

Non-life and Version 1 Life

C-ROSS Discussion

Papers released

Version 3 Non-life

coming soon?

Implementation in 2015?

Data source: CIRC and Aon Benfield Analytics

12

China C-ROSS

Data source: CIRC

13

MCP&C = SQRT (MC2insurance + MC2

market + MC2credit + 2ρ1MCinsuranceMCmarket +

2ρ2MCinsuranceMCcredit + 2ρ3MCmarketMCcredit)

China C-ROSS

• Allowance for deterioration in future claims and expenses • Based on past 12 months’ net premium • Covers all lines of business

Premium 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

Reserve Risk

• Allowance for typhoon (and typhoon-induced flood) and earthquake risk

• Based on net retained exposures • Applies only to Property (including residential) and Engineering

Catastrophe Risk


14

China C-ROSS

V10.1%1.3%15.7%26.1%74.5%

reinsurance assets collateralized 30%reinsurance assets not collateralized 60%

partial or all solvency adequacy ratios fail regulatory requirement 90%

Solvency of Reinsurer

On-shore Reinsurers

all solvency adequacy ratios meet regulatory requirementOff-shore Reinsurers

>200%[150%, 200%)[100%, 150%)[50%, 100%)

<50%

V20.1%1.3%15.7%26.1%74.5%19.2%58.8%86.7%

V20.1%1.3%15.7%26.1%74.5%

AAA 0.2%AA+ 2.80%AA 7.70%AA- 13.30%

A/A-/A+ 24.60%BBB+ / BBB / BBB- 65.80%

lower ratings 65.80%

[50%, 100%)<50%

Off-shore Reinsurers International Rating

Solvency of Reinsurer

On-shore Reinsurers

>200%[150%, 200%)[100%, 150%)


15

• 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.

China “New 10 Guidelines from State Council”

Dat

a so

urce

: CIR

C a

nd A

on B

enfie

ld A

naly

tics

16

• 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

China Agriculture

Data source: Ministry of Finance of P.R. China and Aon Benfield Analytics

17

• RBC framework was first introduced in 2004.

• 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 2017.

Singapore RBC 2

Data source: Monetary Authority of Singapore and Aon Benfield Analytics

18

• 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 value-based 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).

Japan

Data source: Financial Services Agency and Aon Benfield Analytics

19

• Taiwan

• 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.

• Labuan

• 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.

• Other

• Enhancement of RBC solvency regime.

Other Markets in APAC

Data source: Taiwan Executive Yuan, Labuan Financial Services Authority, and Aon Benfield Analytics

20

Evolving Regulations

21




• ERM Trends


Agenda

22

A.M. Best Upgrades vs. Downgrades (APAC Non-life)

0

10

2007 2008 2009 2010 2011 2012 2013 2014 (YTD)

Upgrade

Downgrade

Note: YTD 2014 as of Sept. 30, 2014. Data source: A.M. Best Bestlink

23

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

Criteria Updates – Standard & Poor’s


24

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

Criteria Updates – A.M. Best

Data source: A.M. Best

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

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

Current Model Goals

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

26

• 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?

Criteria Updates -- Fitch

Data source: Fitch

27

• 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.

Criteria Updates – Moody’s

Data source: Moody’s

28




• ERM Trends


Agenda

29

If we remove those affiliates of USA / European / Australian insurers

Asian (P&C) Insurer’s ERM Status

0

10

20

30

40

50

very strong strong Adequatewith strongrisk controls

adequate weak NA

0

10

20

30

40

50

very strong strong Adequatewith strongrisk controls

adequate weak NA


30

2014 / 2015 ERM Hot Topics

Solvency Regime

Unusual Risks

Terrorism / Pandemic

Risk Tolerance/Risk Appetite

C-ROSS / HK RBC not just about capital requirement. Note the Pillar 2

Mt. Ontake (Japan), Umbrella Movement, etc.

Terrorism threat in China, ISIS threat, Ebola, etc.

Practical Implementation Challenges

Macro-Economic Trends GDP Growth Headwinds / Low Interest Rate Environment

ORSA / ERM Regulations

ORSA Requirement Spreads in Asia, ERM regulation enhancement in Australia, China,

Taiwan, etc.

Regulatory Catastrophe Capital C-ROSS, NZ regulatory requirement evolution.

31




• ERM Trends


Agenda

32

1. 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

Key Topics for 2014 / 2015

33

Evolving Criteria

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.

35

Contact Information

Sifang Zhang

Aon Benfield Analytics

+852 28616493

[email protected]

mailto:[email protected]

keeping pace with regulatory and rating agency changes gi seminar 2014/03 sifang... · 3 •...

Documents