ALPHA CONSULTANCY A Practical Understanding of Risk-Based Capital Regulatory Framework for Singapore Insurers (Life & Non-Life) 11th November 2022 Mr Raymond Cheung RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Introduction Raymond Cheung Actuary | GRC Consultant | Entrepreneur | Independent Director | Tech Advisor | Lecturer 20+ years as an entrepreneur, fund manager, actuary, insurance & risk and compliance specialist with regional experience Major in actuarial, capital modelling, ERM, product dev, compliance, motor telematics, fund mgmt, supply chain financing & insurtech Portfolio Manager of Lucerne Asset Management managing multi-strategy sub-funds under the VCC structure Managing Director of Alpha Consultant, providing professional trainings and consultancy projects in Asia Founder of Alpha Millennia Technology startup focusing on developing core systems for insurance companies and affinity partners Co-Founder and Chief Risk & Compliance Officer of Baseltech, a Multi-tier supply chain financing platform, in APAC Chief Risk Officer of ECXX, an MAS licensed digital asset exchange in Singapore CEO & Group Chief Risk Officer of Gathercare, a P2P medical expenses crowd sharing platform in Malaysia Independent Director of Beverly JCG Ltd, a SGX listed Company with a focus on aesthetic business in Malaysia Independent Director of Atlantic Partners Asia, an MAS-regulated Major Payment License Company Former APAC Chief Business Development Officer of Qumata, a UK based AI Underwriting Startup Former Chief Strategy Officer of Salvus Inti, an Indonesia digital broker Former Co-founder of Allcars, an automobile technology startup company in Singapore Former Chief Risk Officer for OneDegree, a licensed digital insurer in Hong Kong Former Regional Insurance Head with Grab, overseeing motor telematics and digital insurance ecosystem for 8 countries in APAC Former Group Chief Risk Officer and Group Head of Compliance with Asia Capital Reinsurance Group Former Chief Risk Officer with AIG Asia Pacific Insurance overseeing 15 countries in Asia Chairman of Risk-based capital framework (RBC2) taskforce with Singapore regulator MAS Former Honorary Secretary and Head of ERM Committee of Singapore Actuarial Society Lecturer on ERM, RBC, Insurtech, IoT, telematics, cyber risk & ESG modules with Singapore College of Insurance Lecturer of Actuarial Management with Nanyang Technological University Lecturer of Refresher Mathematics Module with ESSEC Business School Lecturer of Operationalise Risk Management in Decision Making with Singapore Management University Asia Lecturer of ERM and ORSA workshops with Risk Management Society (RIMS), US Email: raymond.cheung@alphacoasia.com; raymond.cheung@alphamillennia.com; raymond.Cheung@lucerne.com RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. 2 Introduction Take a few minutes to introduce yourself to the class: Your name, company, your role and experience One interesting thing about yourself Explain why you are interested in the RBC course What do you want to achieve in this course? RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. 3 Agenda Part 1 – Overview of RBC Framework & Regulations Background of RBC Framework Why do we need capital? The different types of capital Traditional approaches to determine regulatory capital requirements What is Risk-Based Capital Use of Risk-Based Capital Review of Singapore RBC Regulations Pre-RBC Framework in Singapore Short-comings of Rule-Based Framework Objectives and Principles Regulations relating to the Role of Actuaries RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. 4 Agenda Part 2 – Rationale and Development of RBC2 Framework Understanding Insurance Business Nature of Life Insurance Business Major risk areas of life insurance companies in Singapore Nature of General Insurance Business Major risk areas of general insurance companies in Singapore Implications of current RBC Framework Development of RBC2 Framework Recent Global Regulatory Changes & Factors driving RBC2 Progress Timeline – Singapore RBC / APAC Regulatory Environment Regulators’ Future Expectations RBC2 Proposal – Critical Elements / Progress Timeline Main issues in RBC2 RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. 5 Agenda Part 3 –Applications of RBC2 Framework Discussion on RBC2 Changes Discounting of liabilities in RBC2 Matching Adjustment and Illiquidity Premium Other matters relating to Valuation of Liabilities RBC2 Topics with most debates Further Development of RBC2 RBC2 Implementation Short Term Tactical Solutions Reinsurance Strategy Regulatory/Accounting Arbitrage Medium Term Strategic Solutions Capital Structure and Efficient Frontier Asset Liability Management Alternative Sources of Capital Long Term Holistic Solutions Enterprise Risk Management Framework RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. 6 Part 1(a): Background of RBC Framework RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. 7 Why do we need capital? Losses Capital is needed to avoid bankruptcy Expected Loss incorporated in pricing Save the positive years to build a buffer for the future Time RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. 8 Different types of capital The capital insurers must hold to meet their future claims obligations can be viewed through different lenses External Requirements • Regulatory capital: the minimum insurers must hold to comply with legal requirements designed to protect the interest of policyholders • Rating agency capital: rating agencies look at levels of capital needed to obtain and maintain certain credit or financial strength ratings Internal Requirements • Economic capital: the management’s view of the funds needed to successfully run the business, given its risk appetite, risk exposures and its assumptions about broader underwriting and financial market developments RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. 9 Different types of capital Probability distribution of P&L Unexpected Loss rating agency threshold AA - 99.98% regulatory threshold 99.95% Internal threshold Expected Loss 0 Profit economic capital regulatory capital rating agency capital RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 10 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Comparing available and required capital Rating agency capital requirements by rating agencies Buffer for losses calibrated up to certain rating level Required Capital Internal capital requirements by company (economic capital) Buffer for losses aiming to ensure continuity Regulatory capital requirements set by the supervisor Available Capital Buffer for losses to protect policyholder interest and ensure stable economic system RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 11 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Discussion If you are the regulator, what would be the key factors you would consider in designing a robust regulatory solvency capital requirements? RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 12 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Traditional approaches to determine capital requirements Absolute amount S$5 million Fixed factors 2 ~ 3% reserve + 0.1 ~ 0.2% sum at risk Absolute amount with fixed factors MAX[2 ~ 3% reserve + 0.1 ~ 0.2% SAR, S$5 mil] Dynamic solvency testing Solvency testing under prescribed scenarios RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 13 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Traditional approaches to determine capital requirements Absolute amount Simple, how to fix sum, frequent update amount, one-size-fits-all Fixed factors Proportional depend on size, can be manipulated (e.g., under-reserving) Absolute amount with fixed factors Ensure min level of capital, and adjust according to size of companies Dynamic solvency testing Using scenarios (typically chosen by regulators) to determine capital level None of the approaches above relate the capital requirements to the specific risks that a company may face RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 14 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Rule-based vs Risk-based regime In general, solvency rules can be rule-based, risk-based or in-between: Rule-Based Risk-Based Rule-Based Risk-Based Prescriptive rules / one-size-fits-all, does not differentiate insurers with different risk profiles The rules differentiate insurers with different risk profile – insurers of higher risks hold more capital Examples of prescriptive rules: ▪ Limits on types and amount of investments ▪ Investment in risky assets can be prohibited ▪ Risk requirements set as fixed amount or % of an exposure (e.g. x% of total sum assured) ▪ Solvency/capital requirement set as a fixed amount or % of asset Examples of risk-based rules: ▪ Insurers are free to invest in any assets, with higher capital requirements for “riskier” assets ▪ Reserve set based on risk profile, e.g., liabilities business has higher reserves than motor ▪ Capital requirement is set based on probability, e.g., 99.5% probability of being solvent in 1 year easy to administer and enforce, simple to understand and less expertise needed to compute the risk and solvency requirements responsive to changing risk profile of insurers, allow insurers flexibility to operate at different risk levels and rewards effective risk management Does not drive risk behaviour of companies Complicated, require more expertise to administer RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 15 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Solvency Rules for different Jurisdictions Different regulators in different countries/jurisdictions would impose different solvency rules based on the needs of the local insurance industry International Association of Insurance Supervisors (IAIS) ICP 17 Capital Adequacy: The supervisor establishes capital adequacy requirements for solvency purposes so that insurers can absorb significant unforeseen losses and to provide for degrees of supervisory intervention. Examples of solvency rules by different jurisdictions: FSA (UK): Solvency II APRA (Australia): Life and General Insurance Capital (LAGIC) NAIC (USA): Solvency Modernization Initiatives (SMI) FINMA (Switzerland): Swiss Solvency Test (SST) BNM (Malaysia): Internal Capital Adequacy Assessment Process (ICAAP) CIRC (China): China Risk Oriented Solvency System (C-ROSS) MAS (Singapore): Risk-Based Capital 2 (RBC2) RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 16 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. What is Risk Based Capital Risk Based Capital A realistic assessment of the capital requirements for the risks being run ⚫ Measure minimum amount of capital an insurer needs to support its overall business operations ⚫ Varies from company to company ⚫ Focus on key measurable and quantifiable risks ⚫ Has become common practice in many developed markets RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 17 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. What is Risk Based Capital RBC is used to set capital requirements considering the size and degree of risk taken by the insurer • RBC is a rough measure of risk • Each element of risk is assigned a "risk factor” • Each risk factor is multiplied by some measure of volume for each risk class which are then added together resulting in a total "risk requirement” • The major categories of risk include: • Liability risk – Insurance risk (e.g., reserving risk, pricing risk, etc) • Asset risk – Equity, bond, property, etc • Investment risk – Interest rate, FX, etc • Others – e.g., asset concentration, business risk, reinsurance risk etc Implication of RBC: The “riskier” the companies, the “greater” the supervision and the amount of regulatory capital RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 18 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. What is Capital Adequacy Ratio • Capital Adequacy Ratio (CAR), is the main test used to determine whether a firm’s capital level is adequate given the size and degree of risk that the firm has taken CAR = 𝑭𝒊𝒏𝒂𝒏𝒄𝒊𝒂𝒍 𝑹𝒆𝒔𝒐𝒖𝒓𝒄𝒆𝒔 𝒐𝒇 𝑰𝒏𝒔𝒖𝒓𝒆𝒓 𝑻𝒐𝒕𝒂𝒍 𝑹𝒊𝒔𝒌 𝑹𝒆𝒒𝒖𝒊𝒓𝒆𝒎𝒆𝒏𝒕𝒔 𝒐𝒇 𝑰𝒏𝒔𝒖𝒓𝒆𝒓 o Total Risk Requirements (TRR) – calculated by multiplying the risk factors by some measure of volume for each risk class and adding together the resulting “risk requirements” o Financial Resources (FR) – made up primarily capital & surplus, and asset valuation reserve • CAR determines the minimum amount of capital needed given its risks o e.g., 300% CAR means a firm holds $3 of capital for every $1 of “risk” assumed • RBC was designed to differentiate adequate capital from inadequate capital, but not to distinguish “good” from “better” • CAR ratio can be raised by either increasing FR and/or by lowering TRR RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 19 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Use of Risk-Based Capital 1. Used within a regulatory framework 2. to determine an acceptable minimum level of capital which an insurance company must hold as part of its solvency assessment Used within an insurance company to help determine the overall optimum level of capital in financial planning and control to provide a basis for allocating this capital across its various activities or operations RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 20 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Part 1(b): Review of Singapore RBC Regulations RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 21 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Pre-RBC Framework in Singapore Factor-Based Framework • Asset Valuation • • Lower of book value or market value No concentration risk adjustment • Policy Liability Valuation Life Insurance General Insurance • Net premium valuation – no reference to the actual premiums being charged • Claim liabilities – case estimates decided by insurer itself with some arbitrary IBNR adjustment • Prescribed interest rates and mortality tables • Premium liabilities – simply unexpired premium reserves with no consideration of corresponding risks • Lapse and surrender profits are not capitalized • Allowed reinsurance recoveries but ignored discounting • Implicit margin on PAD • Implicit margin on PAD RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 22 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Pre-RBC Framework in Singapore Factor-Based Framework • Solvency Margin Requirement Life Insurance • % of policy liability + % insurance risk exposure (liability risks only) • 3% and 2% of reserves on Non-PAR and PAR reserves; 0.1% and 0.2% on Sum At Risk for terms <2 yrs and >2 yrs • Available capital equals to net asset General Insurance • On Fund basis – % of net written premiums or claim reserves • On Company basis – asset values (including shareholders’ account) less liabilities for each fund to exceed fixed dollar amount RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 23 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Shortcomings of Factor-based Framework Some key shortcomings: Life Insurance • Net premium valuation • Hidden margin approach with no explicit allowance for key parameters e.g. expenses, surrender values & future bonuses. • Makes it difficult to establish adequacy of reserves • Solvency margins • No explicit allowance for assets & mismatching risks RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 24 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Shortcomings of Factor-based Framework Some key shortcomings: General Insurance • Case Estimates (CE) • Subjectivity caused concern among regulators • Auditors not able to properly assessed adequacy of CE • IBNR • Rather subjective • No actuarial certification of claim reserves and premium reserves required RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 25 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Objectives and Principles RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 26 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Objectives and Principles To develop a transparent and risk-focused framework that reflects all major financial risks of insurance business. The framework should encourage active risk management and serve as a good indicator of financial strength so as to facilitate progressive monitoring by insurers and the regulator Principles of a robust regulatory environment • Risk-focused to reflect the relevant risks the insurers face • Greater transparency to facilitate comparisons • Consistency in valuation of assets and liabilities • Provide clear information on the financial strength • Facilitate early and effective intervention by the regulators • Alignment with other financial institutions where applicable, e.g., banks • Minimise capital arbitrage RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 27 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Introduction – RBC Singapore Insurance (Valuation and Capital) Regulations 2004, implemented 1 Jan 2005 Summary of RBC framework Value of assets: valued at market/realistic value Value of liabilities: Life: gross premium valuation method based on best estimates plus PAD GI: “best estimate” basis plus PAD (PAD = Provision for Adverse Deviation, moved confidence level from 50% to 75%) Capital Requirements: Total risk requirements (“TRR”) = sum of C1, C2 and C3: C1 => insurance risk charges C2 => market, credit, mismatching risk charges on both assets / liabilities C3 => concentration risk charges on assets Financial resources (available capital): the admissible assets available to meet the solvency requirements: at least 100% of TRR for each fund, and at least 120% of TRR at company level, subject to min S$5m RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 28 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Overview of Singapore RBC Model FR Surplus > Liabilities TRR C1 C2 C3 Solvent Assets FR Surplus Surplus Subject to Risk Charge (C1 + C2 + C3) < TRR C1 C2 C3 Insolvent RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 29 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. FSR and CAR Two tier solvency requirement where each respective fund has to meet a Fund Solvency Requirement (“FSR”) while the insurer as a whole has to satisfy the Capital Adequacy Requirement (“CAR”) In respect of Insurance Fund of an insurer: 𝑭𝒊𝒏𝒂𝒏𝒄𝒊𝒂𝒍 𝑹𝒆𝒔𝒐𝒖𝒓𝒄𝒆𝒔 𝒐𝒇 𝑭𝒖𝒏𝒅 FSR = 𝑻𝒐𝒕𝒂𝒍 𝑹𝒊𝒔𝒌 𝑹𝒆𝒒𝒖𝒊𝒓𝒆𝒎𝒆𝒏𝒕𝒔 𝒐𝒇 𝑭𝒖𝒏𝒅 Where: FRFund = admissible assets (also known as available capital) TRRFund = C1 + C2 + C3 (also known as required capital) FSR needs to be at least 100% for each Insurance Fund RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 30 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. FSR and CAR Two tier solvency requirement where each respective fund has to meet a Fund Solvency Requirement (“FSR”) while the insurer as a whole has to satisfy the Capital Adequacy Requirement (“CAR”) In respect of an insurer as an aggregate: 𝑭𝒊𝒏𝒂𝒏𝒄𝒊𝒂𝒍 𝑹𝒆𝒔𝒐𝒖𝒓𝒄𝒆𝒔 𝒐𝒇 𝑰𝒏𝒔𝒖𝒓𝒆𝒓 CAR = 𝑻𝒐𝒕𝒂𝒍 𝑹𝒊𝒔𝒌 𝑹𝒆𝒒𝒖𝒊𝒓𝒆𝒎𝒆𝒏𝒕𝒔 𝒐𝒇 𝑰𝒏𝒔𝒖𝒓𝒆𝒓 Where: FRinsurer = Fund Solvency Requirement + Risk Charges of Shareholders’ Fund Life: TRRinsurer = Financial resources from life funds (excluding participating) + adjusted financial resources from PAR funds + Available Capital of Shareholders’ Fund GI: TRRinsurer = Financial resources from general funds + Available Capital of Shareholders’ Fund Need to be at least 120% to avoid regulatory action Also require financial resources of at least S$5 million Financial Resources from PAR Fund adjusted such that CAR excluding participating business will not be greater than the CAR after including the participating business RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 31 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Second Schedule – Total Risk Requirement for Life Insurance Calculated as C1 + 𝐶2 + 𝐶3 Total Risk Requirement C1 Policy Liability Mortality (non-annuity) Apply separately and aggregate Mortality (annuity) Surrender Value C2 Equity Investment C3 Asset Concentration Debt Investment & Duration Mismatch Property Investment Disability Dread Disease Other Insured Event Lapse FX Mismatch Expense Loan Investment Conversion of options Derivative Counterparty Miscellaneous RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 32 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Second Schedule – Total Risk Requirement for General Insurance Total Risk Requirement C1 Policy Liability Calculated as C1 + 𝐶2 + 𝐶3 C2 C3 Equity Investment Asset Concentration Debt Investment & Duration Mismatch Apply separately and aggregate Claims Liability Premium LIability Property Investment FX Mismatch Loan Investment Derivative Counterparty Miscellaneous RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 33 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Insurance (Actuaries) Regulations Appointment – Appointed Actuaries (AA) & Certifying Actuaries (CA) Submission to authority Insurer to furnish appointment of AA/CA to MAS in a specified form Required to notify insurer of engagement accepted to carry out duty or function of a AA/CA Fit and proper requirement Person with actuarial qualifications AA: Fellow of the Singapore Actuarial Society (SAS) CA: Fellow of an association recognised by the International Actuarial Association (IAA), and a Member of SAS Experience to perform the duties and functions as AA/CA Resignation as AA/CA of a licensed insurer Written notice to MAS stating circumstances and reasons Within 3 months, to appoint a new AA/CA Termination of appointment as AA/CA on insurer’s own initiative Notify MAS in writing and furnish reasons for the termination RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 34 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Approving Appointed Actuaries MAS Notice 106 on Appointment of Director, Chairman & Key Executive Person Revisions made in April 2013 to enhance transparency in approval criteria and monitor ongoing fitness & propriety Required more information to be submitted when insurers seek approval from MAS on new appointments e.g. reporting structure, additional engagements in equivalent AA/CA positions, additional executive officer positions, etc; written explanation from BoD on how certain circumstances may result in a conflict of interest or hamper the proposed appointee from discharging his statutory duties, and the measures that it has put into place, or proposes to put into place, to mitigate the risks arising from such concerns Need to submit ongoing information on changes in roles and responsibilities, and in reporting structure, as well as additional engagements in equivalent AA/CA roles RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 35 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Insurance (Actuaries) Regulations Roles & responsibilities of AAs 1. 2. Premium approval of life policy or Long-Term A&H policy. Consider: Impact of premium on financial condition of the insurer Product design Underwriting policies Other relevant matters Allocation of insurance fund to surplus account or PAR policies. Consider fairness and equity between different policies Impact on prospective financial condition of fund 3. Policy owners’ protection scheme Compute and report on protected liabilities under Deposit Insurance and Policy Owners’ Protection Scheme Act RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 36 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Insurance (Actuaries) Regulations Roles & responsibilities of AAs 4. Provision of actuarial advice Formulate policy on investment of insurance assets/funds Consider nature and terms of the liabilities of the insurer Availability of appropriate assets for purpose of ALM Risk management activity risk identification, risk quantification, risk management policies, controls relevant to the insurer’s financial condition Use of internal model for calculating liabilities and capital requirements Product pricing and development Identify appropriate rating factors for product pricing Design of product features Setting of underwriting standards RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 37 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Insurance (Actuaries) Regulations Roles & responsibilities of AAs 5. Financial Condition Investigation Valuing the policy liabilities for each class of business Conduct stress testing of direct insurers as specified by MAS Verify whether reinsurance arrangement involves significant insurance risk transfer between insurer and counterparty Prepare written report to CEO (and BOD) on any matter which: has come to attention of the actuary in carrying out his duties has material adverse effect on insurer’s financial condition requires rectification by the insurer Send a copy of the aforementioned report to MAS RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 38 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Insurance (Actuaries) Regulations Roles & responsibilities of CAs 1. Provision of actuarial advice Formulate policy on investment of insurance assets/funds Consider nature and terms of the liabilities of the insurer Availability of appropriate assets for purpose of ALM Risk management activity risk identification, risk quantification, risk management policies, controls relevant to the insurer’s financial condition Use of internal model for calculating liabilities and capital requirements Product pricing and development Identify appropriate rating factors for product pricing Design of product features Setting of underwriting standards RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 39 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Insurance (Actuaries) Regulations Roles & responsibilities of CAs 2. Financial Condition Investigation Valuing the policy liabilities for each class of business Conduct stress testing of direct insurers as specified by MAS Verify whether reinsurance arrangement involves significant insurance risk transfer between insurer and counterparty Prepare written report to CEO (and BOD) on any matter which: has come to attention of the actuary in carrying out his duties has material adverse effect on insurer’s financial condition requires rectification by the insurer Send a copy of the aforementioned report to MAS RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 40 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Insurance (Actuaries) Regulations Rights of Actuaries Interaction with board of directors Insurer has to ensure that its AA/CA meets its BOD at such frequency as the actuary may reasonably require Has free and unfettered access to BOD at all reasonable times AA/CA is entitled to report any matter to board committees, or BOD, without having to report to any executive officer of the insurer RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 41 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Agenda Part 2 – Rationale and Development of RBC2 Framework Understanding Insurance Business Nature of Life Insurance Business Major risk areas of life insurance companies in Singapore Nature of General Insurance Business Major risk areas of general insurance companies in Singapore Implications of current RBC Framework Development of RBC2 Framework Recent Global Regulatory Changes & Factors driving RBC2 Progress Timeline – Singapore RBC / APAC Regulatory Environment Regulators’ Future Expectations RBC2 Proposal – Critical Elements / Progress Timeline Main issues in RBC2 RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 42 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Part 2(a): Understanding Insurance Business RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 43 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Nature of Life & General Insurance Business • Insurance companies are in the business of taking long term risks ✓ ✓ ✓ • The company needs to have adequate capital and be solvent ✓ ✓ ✓ • Risk is about the probabilities of something happening in future Access to capital is required when something does happen The higher the perception of uncertainty, the larger capital is required The policyholders want the comfort that their insurer will be able to pay claims when due The regulators want to be assured that the company has enough capital to remain in business (i.e. going concern basis) The shareholders of the company want to make sure capital is used efficiently and the business is profitable RBC is a methodology that help to identify: ✓ ✓ ✓ the amount of capital required to remain solvent (“going concern”) where the risks are in its business portfolio (“risk based approach”) where the sources of capital are in the company (“financial resources”) RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 44 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Discussion 1. 2. 3. List some risks that are similar between life insurers & general insurers? List some risks that are different between life insurers & general insurers? Can you think of some new or emerging risks for the life insurers and general insurers? RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 45 45 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Major risk areas of a life insurance company Life insurance company risk universe Market risk Liquidity risk Investment risk Credit risk Currency risk Mismatch risk Operational risk Expense risk New business risk Insurance risk Counterparty Credit risk Emerging risk (e.g., Cyber) Regulatory risk Other risks Correlation between risks RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 46 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Internal and external risks – Examples Internal External Bonus structure and policyholders’ expectation of a smoothed return has meant that the fall in investment markets cannot be fully passed on Regulatory issues ⚫ Increased compliance costs ⚫ Compensation costs from mis-selling ⚫ Government imposed product pricing ⚫ Increasing solvency requirements (RBC2) High level of guaranteed investment returns and mismatching as a result of falling investment returns Distribution pressures ⚫ Rising costs ⚫ Competition from cheaper channels ⚫ Disintermediation (lower reliance on agents) Operational issues Systems can’t cope with business volume ⚫ Expense overruns ⚫ Internal fraud ⚫ Regulatory breaches ⚫ Uncertain investment markets ⚫ Low interest rate environment ⚫ Volatile and low investment returns Merger and acquisition activity (Declining value in acquisitions) RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 47 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Nature of General Insurance Business Product types Property Marine • Property damage • Cargo • Fire only • Hull • Fire plus perils • Household • Business Interruption Liabilities • Engineering • Workmen Compensation • Contractor all risks • Liabilities (e.g., oil pollution at • Erection all sea) risks • Product liability • Public liability • Professional Indemnity Motor PA/Health • Comprehensive • Third party liabilities Engineering • Personal Accident • Private Medical Insurance Others e.g. suretyship, credit, pecuniary etc RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 48 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Major risk areas of a general insurance company General insurance company risk universe Reserving risk Expense risk Insurance risk Pricing risk Underwriting risk CAT risk Investment risk Operational risk Credit risk Emerging risk (e.g., Cyber) Regulatory risk Other risks Correlation between risks RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 49 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Internal and external risks – Examples Internal External Under-reserving due to inadequate allowance for claim inflation leading to higher claim payouts than expected Regulatory issues Over-pricing leading to low volume, insufficient to cover fixed expenses Catastrophic events ⚫ Increased compliance costs ⚫ Increasing solvency requirements (RBC2) ⚫ Poor underwriting results ⚫ Higher payouts due to demand surge Under-pricing leading to selection risks and future losses ⚫ Contingent Business Interruption Fierce competition ⚫ Pressure on product pricing Operational issues Systems can’t cope with business volume ⚫ Internal fraud ⚫ Regulatory breaches ⚫ Uncertain investment markets ⚫ Volatile and low investment returns Merger and acquisition activity (Declining value in acquisitions) RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 50 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Implications of RBC Framework • More complex regime than traditional approach • Greater reliance on actuaries & auditors • Need to have more sophisticated modelling technique to estimate PAD • Impact on capital requirement varies • Insurers writing classes of business with claims that are long-tailed, or classes with higher risk exposure, are likely to need more capital RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 51 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Implications of RBC Framework • Profit emergence • May be more volatile, depending on extent of assets liabilities mismatching • Impact on participating fund • Consistent asset and liability valuation enables more robust PAR fund management • Explicit allowance for future bonuses encourages more active review of supportable bonuses and facilitates greater disclosure on bonuses • Greater clarity on shareholders’ interest with introduction of surplus account RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 52 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Implications of RBC Framework • Pricing • Too aggressive pricing may imply additional reserves (AURR), so higher margin and higher risk charges. This reduces likelihood and impact of mis-pricing • Capital management • Greater room to manage required capital e.g. reduce asset risk charges by switching to lower risk assets, or adopt active ALM to reduce mismatching risk charges • There are wider choices of capital forms under the Tier 1 & Tier 2 structures RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 53 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Implications of RBC Framework • Asset liability management (ALM) • Greater incentive for active ALM • Can use matching by duration (immunisation) and convexity to reduce mismatching risks due to changes in interest rate (see later slide) • Taxation • Change in taxation basis for the participating fund • Need to engage the tax authorities RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 54 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Implication of RBC Framework Advantage of active Asset Liability Matching • Helps to understand the nature of the assets and liabilities sensitivity to interest rate • To formulate a better matched asset-liability portfolio to protect the Company’s statutory surplus against interest rate risks Matching by Duration (Immunisation) example Durationassets = 8, DurationLiabilities = 8 Durationassets = 5, DurationLiabilities = 8 Asset Value Liabilities Surplus Base i 100.0 90.0 10.0 i + 50bps 97.5 86.4 11.1 i – 50bps 102.5 93.6 8.9 Change Asset Value Liabilities Surplus Change Base i 100.0 90.0 10.0 11% i + 50bps 96.0 86.4 9.6 -4% -11% i – 50bps 104.0 93.6 10.4 4% • In RBC context, a well A/L matched portfolio will help to reduce the interest rate risk charges and improved resilience to interest rate movements • Immunising the duration gap between assets and liabilities will improve the surplus resilience to interest rate and consequently capital strain will reduce (i.e. improve capital efficiency) RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 55 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Implication of RBC Framework Convexity in the context of active Asset Liability Matching • Convexity measures how the duration of assets and liabilities will change when interest rate changes • For life insurance, liabilities generally have higher convexity compared to assets Convexity – change in duration of A/L against change in interest rate Duration Asset Duration Liability Duration Low i • Interest Rate (i) As interest rate drops, duration for liabilities increases faster than assets duration => Value of liabilities will increase faster than assets in low interest environment RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 56 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Implication of RBC Framework Key takeaways • RBC Framework helps companies to focus on active ALM • Constructing an asset portfolio to immunise interest rate sensitivities of the surplus is not always possible: • Basis risks in both assets and liabilities • Cash flow from liabilities might deviate from expected • Duration for assets might be different from what is expected due to the movement of credit spreads to risk-free interest rate • In a matching portfolio, it is advisable to apply longer duration for assets relative to liabilities to compensate for the convexity drag in liabilities • For PAR fund or products that the Company could adjust the future liabilities payout (e.g. bonus), the ALM strategy should be carefully considered in terms of such underlying options and policyholder reasonable expectation on the future bonus. A simple A/L duration matching might not be sufficient • Life insurance companies are more susceptible to decreasing interest rate environment than increasing interest rate RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 57 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Industry behaviour on RBC Framework For General insurance: • Change of the mix of business between shorttailed and long-tailed classes • Greater use of reinsurance to lower regulatory capital requirements • Some companies began to use more sophisticated reserving methodology (e.g., stochastic reserving techniques) to estimate claim liabilities and PAD RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 58 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Part 2(b): Development of RBC2 Framework RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 59 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Discussion What are some new challenges faced by the insurance industry? RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 60 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Global developments in insurance Key Global Regulatory Drivers Group wide supervision Solvency II equivalence IAIS Launched in 2016 Consulted SII equivalence of Bermuda, Japan and Switzerland Key themes: • System of governance • Professional secrecy and the exchange of information • Effective risk management • Solvency • Powers and Responsibilities of supervisory authorities EIOPA Insurance Core Principles (ICPs) issued in 2011 Risk-based Global Insurance Capital Standard (“ICS”) CP: issued on 17 Dec 2014 IAIS’s future ComFrame for IAIGs, apply at group consolidated level for IAIGs (≈ 50) and G-SIIs (FSB) Key themes: • Group supervision • Systemic risk • Recovery & Resolution Plans • Higher Loss Absorption Capacity Global Regulatory Landscape Accounting Convergence IFRS4 PII ED released on 25 Jul 2013. Replaced by IFRS17 Insurance Contracts published in 18 May 2017, effective annual periods 1 Jan 2023: IASB Key themes: • Recognition, measurement, presentation and disclosure of insurance contracts • Assessment of financial position, financial performance and cash flows RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 61 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Global developments in insurance Regulatory change will play out differently in key markets Regulatory reform Asia Pacific Regulatory drivers Capital 4 Most challenging for mid to large tier insurers Liquidity 2 Greater focus will occur Systemic risk 1 Significant burdens for ‘G-SIFIs’ could arise Supervision 5 Major changes in focus and structure Governance 5 Embedding renewed accountabilities is a challenge Remuneration 2 Challenge will be to retain talent Customer treatment 4 Increasing prominence on the regulatory agenda Investments 1 Increased focus on prudent person Accounting and disclosure 3 Significant changes with knock on impacts for capital * Key: 5 = significant pressure 3 = moderate pressure 1 = low pressure. RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 62 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Factors driving RBC2 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: assets/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 aims 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 RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 63 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Factors driving RBC2 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 • Development of IFRS17 focusing on fair value of assets and liabilities RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 64 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Singapore RBC Development Process and Timeline Singapore RBC framework has served the Singapore insurance industry well, with insurers largely weathered through major financial crises over time Singapore Insurance Industry st 1 CP RBC LI WG Factorbased RBC GI WG 3 CP issued 3 QIS 1973 1992 1995 1999 2000 Aust Aust (RBC LI) (RBC GI) QIS1 QIS2 ORSA QIS3 //run RBC RBC 2 3 CP issued 3 QIS Cosmic 2002 2003 3rd CP RBC CP 1 CP issued 2 QIS DCC 2nd CP GFC AFC 2004 2005 2006 2007 2008 2009 COVID SDC 2016 2011 2012 2013 2014 2018 2020 2022 Aust (LAGIC) Solv I (EU) USA Canada Swiss IAIS (RBC) (DCAT) (SST) (ICP) USA (SMI) Solv II (launch) RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 65 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. APAC Regulatory Environment & Progress Timeline Some APAC countries have implemented RBC regime in recent years. These countries have very different rules & requirements in their RBC regime… Legend: PH RBC2 HK RBC TH 99.5% RBC2 CH C-ROSS P2 – APAC countries – other regions Indo P’pines M’sia Thai (RBC) (Factor) (RBC) (RBC) 1992 Thai SG (95% RBC2) (RBC2) Japan Taiwan Spore China S.Korea Japan P’pines China (RBC) (RBC) (RBC) (Solv 1) (RBC) (Group) (RBC) (C-ROSS) DCC 1973 M’sia (takaful) 1995 1996 1999 2000 2002 Aust Aust (RBC LI) (RBC GI) 2003 2004 2005 2006 2007 COVID GFC AFC SDC 2008 2009 2011 2012 2013 2014 2016 2019 2020 2021 2022 Aust Solv I (EU) USA Canada Swiss IAIS (RBC) (DCAT) (SST) (ICP) (LAGIC) Solv II (EU) USA (SMI) RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 66 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Solvency Regime Evolving in Asia Pacific From Rule-Based to Risk-Based to Enhanced Risk-Based FactorBased • • • Solvency I type Required Capital: – Prescribed % of reserves and/or ‘sum at risk’ – Percentages varied by type of product Capital Adequacy Ratio = % of Req. Cap. Example: India, Hong Kong, Brunei • • • Required Capital: – Depends on several risks being exposed to, e.g. insurance risk, market risk, credit risk, etc. – Either prescribed factor or stress-test basis – Diversification allowed Available Capital based on Prescribed Formula Capital Adequacy Ratio = Ratio of Available Cap and Req. Cap. RiskBased I Example: Malaysia, Philippines, Indonesia • RiskBased II 3 Pillars approach (or similar): – Quantitative ▪ Total Balance Sheet approach ▪ Full coverage of risks ▪ Mainly stress-test basis ▪ Categorizing capital base (e.g. Tier 1 & 2) ▪ Value-at-risk at certain confidence level – Qualitative (e.g. ERM, ORSA) – Disclosure and Transparency Example: Singapore, Thailand RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 67 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. What do we expect from regulators in future? Supervision Surveillance Have you done this? What have you done? Follow the law… Follow the principle… (Do not speed…) (Do not speed, it is dangerous…) Commandment Consultation (Thou shall not…) (Have you consider…) Basic practice Best practice (this is right thing to do…) (this is good thing to do…) Police Detective Set rules Set boundaries Now and present Forward looking RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 68 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. RBC2 development timeline in Singapore RBC1 Since 2004 • • • • • • • • • • • • RBC2 1st CP RBC2 2nd CP & QIS 1 RBC2 3rd CP, QIS 2 mid 2012 Early to mid 2014 Mid 2015 to End 2016 ORSA feedback, QIS 3 Mid 2017 to End 2018 Parallel run, RBC2 begin 2019 to 2020 RBC2 Amendment 2011 to 2022 1st CP was issued in mid 2012 2nd CP together with 1st quantitative Impact Studies (QIS) issued in mid 2014 3rd CP was issued on 15th July 2016, together with 2nd QIS MAS has issued formal sharing of ORSA observations in July 2017 3rd QIS was conducted from Sep to Nov 2018, before finalization of RBC2 MAS conducted a final parallel run for year ended 31 Dec 2019, results submitted by insurers by 30 May 2020 MAS issued Amendment Regulations and Notice “MAS Notice 133”, effective 31 Mar 2020 Insurers submitted their first statutory return on RBC2 basis for quarter ending 31 Mar 2020 by 21 Apr 2020 MAS issued updated guideline on preparation of actuarial investigation report [ID 01/20] in Q2 2020 MAS issues Notice 133 (Amendment) 2020 dated 23 Dec 2020, with effect from 31 Dec 2020 MAS issues Notice 133 (Amendment) 2021 dated 28 Jun 2021, with effect from 1 Jul 2021 MAS issues Notice 133 (Amendment) 2022 on 29 Mar 2022, with effect from 31 Mar 2022 69 RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 69 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. RBC2 Regulations in Singapore Insurance (Valuation and Capital) (Amendment) Regulations 2020 and MAS Notice 133, implemented 31 Mar 2020 Summary of RBC2 framework Value of assets: valued at current market value Value of liabilities: Life: discounted prospective cashflow method, “best estimate” basis plus PAD GI: Claim Liabilities and URR Premium Liabilities valued at “best estimate” basis plus PAD (PAD = Provision for Adverse Deviation, moved confidence level from 50% to 75%) Capital Requirements: Total risk requirements (“TRR”) = σ1𝑖 𝐶12 + 𝐶22 + 𝑂𝑅𝑅 : C1 => insurance risk charges C2 => asset risk charges on both assets / liabilities ORR => operational risk charges Financial resources (available capital): the admissible assets available to meet the requirements at a higher solvency intervention level (PCR and MCR): at least 100% of FSR for each fund, and at least 100% of CAR at company level, subject to min S$5m RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 70 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. What has been discussed/enhanced in RBC2? 1. Assets and liabilities to be valued on more consistent basis • • • Liabilities to be discounted using risk free discount rates (SG government bond yields), instead of historical average risk free rates Introduce Matching Adjustments / Illiquidity Premium as positive adjustments to discount rate to enhance ALM For General Insurance, no need discounting if impact is immaterial 2. Solvency available capital rules • Aligned to Basel III framework 3. Consider comprehensive list of risks facing insurers • • Additional risks: Operational, catastrophic, spread Liquidity risk is not included but monitored through stress test RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 71 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. What has been discussed/enhanced in RBC2? 4. Solvency requirement to cater to 99.5% CL over one year • • • Explicit diversification benefits when aggregating capital risk requirements between insurance and asset risks (i.e. between C1 and C2) Explicit diversification benefits within liability portfolio (within C1) Explicit diversification benefits within asset portfolio (within C2) 5. Two regulatory intervention points • • • MCR: calibrated to the 90th 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 99.5th percentile scenario over 1 year period • Required to submit capital plan to restore financial strength within 3 months MCR is calibrated as 50% of PCR RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 72 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. What has been discussed/enhanced in RBC2? 6. The C1 Requirements for General Insurance • The current premium and claim liability factors are retained in RBC2 1st phase. Any re-calibration of C1 requirements together with CAT risk requirement for GI business will be implemented in later stage 7. Partial or full Internal model in replacement of standard • Not expected in 1st phase 8. Introduce ERM 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 split into 2 parts, with “self-select” scenarios covered under ORSA scope RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 73 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. RBC 2 – Critical Elements Asset Risks (C2) Financial Resources • Introduction of: - Common Equity Tier 1 (CET1) - Additional Tier 1 (AT1) Solvency Levels • Articulation of specific VaR confidence levels for management action and supervisory intervention. Valuation of Liabilities • Gradually removing the stable long-term risk free discount rate. • Matching adjustment/Illiquidity Premium • Recognition of some negative reserves • Allowance of APNGB for Par Fund Insurance Risks (C1 & ORR) • Remove reference to prescribed mortality table, replace with margins over best estimate. • Some fine-tuning of the margins over best estimate. • Explicit co-relation matrix for C1 • Catastrophic risk (C1) • Diversification of C1 between life and GI for composite insurer • Operational risk Requirement (ORR) • Explicit co-relation matrix for C2 • Counter-cyclical adjustment for equities • Significant increase in equity risk requirement. 35% to 50% • Significant increase in property risk requirement 30%-50% • Credit spread risk requirement to replace the debt specific risk requirement. Significant increase to the requirements. • Foreign currency mismatch risk requirement: 12% • Consolidation of counterparty default risk requirement under one approach. Asset Concentration (C3) • Removed in RBC2 but instead treated as a deduction from the Financial Resources RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 74 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. RBC vs RBC2: Calibration of Solvency Level Capital Buffer Assets (MV) Min CAR 120% MAS Verbal CAR: Capital Buffer of at least 80% of Required Capital for most insurers Calibrated to 1-in-7yrs Risk Charges Assets (MV) Capital Buffer Capital Add-ons for selected insurers Prescribed Capital Reqmnts (PCR) Calibrated to 1-in-200yrs Calibrated to 1-in-10yrs Min Req. (MCR) Risk Margin Policy Liability • Best Est.+ PAD • Disc @ LTRFDR Best Estimate Liability RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) New risk modules: •C1 - Ins. CAT •C2 - Int. rate mismatch •C2 - Credit spread •C2 - Counterparty •C4 - Operational • Best Est. • Disc @ SGS 75 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. RBC2 – Risk Requirements for Life Insurance Risk Requirement C1 Policy Liability Mortality (non-annuity) Disability Apply separately and aggregate Other Insured (A&H) Event Lapse Mortality (annuity) C2 ORR Equity Investment Operational Interest Rate Mismatch Replaces Debt General and Liability Adjustment Credit Spread Dread Disease Expense Conversion of options Insurance Catastrophe New risk requirements Calculated as σ1𝑖 𝐶12 + 𝐶22 + 𝑂𝑅𝑅 Property Investment FX Mismatch Counterparty Default Replaces Debt Specific Replaces Loan Investment, Derivative Counterparty Miscellaneous RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 77 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. RBC2 – Risk Requirements for General Insurance Calculated as σ1𝑖 𝐶12 + 𝐶22 + 𝑂𝑅𝑅 Risk Requirement C1 Policy Liability Claims Liability Apply separately and aggregate C2 ORR Equity Investment Operational Interest Rate Mismatch Credit Spread Premium Liability Insurance Catastrophe Property Investment FX Mismatch Counterparty Default New risk requirements Replaces Debt General and Liability Adjustment Replaces Debt Specific Replaces Loan Investment, Derivative Counterparty Miscellaneous RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 78 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Insurance Catastrophe Risk Charge Life Insurance CAT Risk Requirement Defined as risk associated with extreme or irregular events (e.g., pandemic) which effects are not sufficiently captured in risk requirements under C1 for life business • • • Apply LI CAT risk to policies contingent on mortality risk only Calculated as the difference of: • Total death benefit payable after applying prescribed shock of an absolute increase in the rate of policyholders dying over following year of 1 per 1000 • Reduction in policy liability due to lesser no. of policies remaining after the prescribed shock Take into account effect of reinsurance General Insurance CAT Risk Requirement Defined as risk associated with extreme or irregular events (e.g., earthquake) which effects are not sufficiently captured in premium / claim liability risk requirements • • • Currently being calibrated by an industry workgroup and will be incorporated within the computation of the C1 requirement when finalised MAS will separately consult on the calibration of the GI CAT risk requirement To be introduced no earlier than 1 January 2021 RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 79 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Agenda Part 3 –Applications of RBC2 Framework Discussion on RBC2 Changes Discounting of liabilities in RBC2 Matching Adjustment and Illiquidity Premium Other matters relating to Valuation of Liabilities RBC2 Topics with most debates Further Development of RBC2 RBC2 Implementation Short Term Tactical Solutions Reinsurance Strategy Regulatory/Accounting Arbitrage Medium Term Strategic Solutions Capital Structure and Efficient Frontier Asset Liability Management Alternative Sources of Capital Long Term Holistic Solutions Enterprise Risk Management Framework RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 80 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Part 3(a): Discussion on RBC2 Changes RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 81 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Discounting of Liabilities under RBC2 Current RBC Durations 0 to year 15: use prevailing yields of Singapore government securities (“SGS”) Durations year 15 to 20: Interpolated yields and stable long tern risk free discount rate (“LTRFDR”) Durations year 20 and above: weighted average (90/10) between historical average yields (since inception) and latest 6-month average yield of 20 year SGS LTRFDR in RBC Regime: • 15 years LTRFDR makes liability values less sensitive to market movement in yields, resulting in short-term earnings volatility due to differences in discounting of assets and liabilities (i.e. Assets Liabilities Mismatching) • Due to growth in supply of long-dated Singapore Dollar-denominated bonds, MAS’ proposal to phase out LTRFDR mechanism over time • In particular, MAS wants to enhance the market consistency of the discount rate by incorporating the use of 30year SGS yield RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 82 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Discounting of Liabilities under RBC2 • Removal of the Long-Term Risk-Free Discount Rate (LTRFDR) allowing more consistent valuation of assets and liabilities • Better outcomes in Asset-Liability Management, and with the introduction of MA/IP (covered later) • Due to concern that 30-year bond market would not be deep and liquid enough, and issuance of 30-year SGS may not keep pace with liabilities, MAS adopted Solvency II method by extrapolation from Last Liquid Point (LLP) and convergence to Ultimate Forward Rate (UFR) RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 83 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Discounting of Liabilities under RBC2 Life Insurance General Insurance 3-segment approach to derive riskfree yield curve: One year or less: Not required Segment 1: Liquid segment based on market info on govt bonds More than one year: If immaterial, not required If material: discounting use same method for life insurance Segment 2: Extrapolate between segment 1 & 3 between the last liquid point (“LLP”) to Segment 3 Segment 3: Convergence to the Ultimate Forward Rate (“UFR”) * Note: * UFR will be determined as sum of expected real interest rate and expected inflation rate. RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 84 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Discounting of Liabilities under RBC2 RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 85 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Adjustments to risk-free discount rates (MA/IP) 1. Matching Adjustment (MA) – was introduced, but subject to eligibility criteria 2. Illiquidity Premium (IP) – was introduced for insurers with illiquid liabilities which could not meet the criteria under MA or do not want to apply MA 3. Both the MA and IP are positive adjustments to the discount rate, hence giving rise to a lower liability value 4. MA and IP would not be applicable for direct insurers and reinsurers writing general business, given the nature of such liabilities RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 86 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Matching Adjustment RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 87 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Matching Adjustment RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 88 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Matching Adjustment Rationale of Matching Adjustment RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 89 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Illiquidity Premium - rationale • Eligible Criteria for MA is too restrictive – illiquidity premium aims to provide alternative adjustment to the discount rate even if MA is not/cannot be applied • Rationale: Products that do not qualify for the MA may still be sufficiently illiquid: • Bonds supporting these products still have a greater likelihood to be held to maturity • A partial recognition of illiquidity can be recognized • Any adjustment to the discount rate to reflect illiquid nature of an insurance contract should apply throughout the entire term structure (i.e. both before and after LLP) RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 90 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Illiquidity Premium Criteria Details Eligibility For direct life and life reinsurance business, all SGD- and USDdenominated products classified as Whole Life, Endowment, or Annuity are eligible. ILPs are not eligible. Illiquidity Premium To be specified as 50%* of the Reference Spread, subject to a possible cap. Reference Spread The Reference Spread (“RS”) will be determined based on average credit spread of a notional Reference Portfolio of assets Impact of IP on Valuation Framework IP will be the spread added to the valuation discount rate. The IP will apply uniformly in full up to the LLP The IP will not be applicable to products where the MA is applied. *Note: If the Reference Spread for corporate bonds held in the Par and Non-par funds combined was determined to be 110 bps. The IP for the Reference Portfolio is hence 50% * 110 = 55 bps The final fund level IP to be applied should be calculated by the insurer based on the SAA extracted from the latest board-approved investment policy RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 91 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Illiquidity Premium – Computation Example Par Fund Asset Instruments Non-Par Fund SAA(%) Spread(%) SAA(%) Spread(%) Corporate Bonds 40% 0.55%* 60% 0.55% Government Bonds 25% 0% 25% 0% Equities 20% 0% 10% 0% Property 5% 0% 0% 0% Policy Loan 5% 0% 0% 0% Cash & Deposits 5% 0% 0% 0% Fund Level IP (weighted avg) 100% 0.22% 100% 0.33% • From above, the fund level IPs are 22 bps and 33 bps for the par fund and non-par fund respectively • The fund level IPs are to be added to the spot risk-free discount rates up to the LLP in valuing the liabilities for guaranteed benefits for eligible products RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 92 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Other matters relating to Valuation of Liabilities 1. Valuation of Universal Life (UL) Policies ▪ Reserving basis each non-participating UL policy currently calculated as the highest of the following values: (a) projecting cash flows at guaranteed crediting rate and discounting at the risk-free rate; (b) projecting cash flows at current crediting rate and discounting at the best estimate investment return; (c) surrender value. ▪ Feedback from UL writers is that the surrender value floor produces asset liability mismatching issues, in particular when interest rates or spreads are high RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 93 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Other matters relating to Valuation of Liabilities 1. Valuation of Universal Life (UL) Policies • Under high interest rate environment, BEL and MCL may fall due to impact of discount rate. Policy liability would then be driven by the surrender value • Continued increase in interest rates or credit spreads will cause assets to further decrease without a corresponding offset in liabilities, giving risk to volatile financial resource movements due to assets being marked-to-market • Duration mismatch requirement will increase significantly due to the Liability Adjustment Requirement being floored to zero Interest rate increase reduces assets and liabilities but .... SV Floor Liabilities will decrease until SV floor is hit Subquent increases in interest rates will have no impact of liabilities Assets Monetary Authority of Singapore Liabilities RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) Duration mismatch requirements increases significantly Slide 53 of 136 94 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Other matters relating to Valuation of Liabilities 1. Valuation of Universal Life (UL) Policies • SV floor distorts ALM and runs counter to economic valuation principle and should be removed • The ALM mismatching does not incentivise insurers to invest long term when interest rates are high, to avoid a large duration mismatch charge • Any buffer against lapse risk should be addressed through capital requirement or some other forms of control • Appointed Actuary to ensure the policy liability takes into consideration of policyholder behaviour and any guarantees MAS: A broader review of the valuation basis under RBC2 should be carried out in the future to enable products that have a significant element of policyholder behaviour to be appropriately reserved RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 95 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Other matters relating to Valuation of Liabilities 2. Treatment of Negative Reserves • Aim: to allow part of negative reserves to be recognised as form of positive regulatory adjustment under Financial Resources • Part of the negative reserves will be recognised as positive regulatory adjustment to the available capital • MAS has been working with the insurance industry to enhance valuation practices for consistency. For example, for direct life business, the following business lines have been identified: • Long-term health policies – variation in current practices: General reserving approach based on Unearned Premium Reserve (UPR), Unexpired Risk Reserves (URR);or life discounting approach based on GPV; or hybrid • Linked fund – consistency between projection and discount rate. Do we test on two approaches 1) BE fund growth rate on projection and discount rate; or 2) Risk free rate on projection and discount rate for linked business RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 96 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Other matters relating to Valuation of Liabilities Valuation of Long-Term Medical Policies • Policy liabilities for LT Medical Policies comprises of amounts covering: • Cost of future expected claims and expenses, allowing future expected premiums and investment income, including PAD • Report by not settled (RBNS) and incurred but not reported (IBNR) claims The term of projection depends on “contract boundary” “Contract Boundary” - Arises due to differences in valuation methodology for LT Medical Policies • Ensures consistency in valuation approach and avoid undue recognition of large negative reserves (given that premium rates are adjustable), including: 1. Cash flows are within boundary of the insurance contract if they arise from rights and obligations that exist during the period 2. When assessing whether the insurer has the practical ability to set a price that fully reflects the risks in the contract or portfolio 3. Actuary should justify its practical ability to reassess the risks and set price or benefits that fully reflect the portfolio of contracts, in actuarial report 4. Any change in circumstances that may affect its practical ability to reprice RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 97 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Other matters relating to Valuation of Liabilities Valuation of Long-Term Medical Policies • Contract Boundary Criteria The insurer has a substantive obligation to provide policyholder with the contracted insurance coverage or other services as long as within the boundary of the contract. A substantive obligation ends if: • the insurer has the unconstrained practical ability to reassess the risks of the contract or portfolio of contracts, and can set a price or level of benefits that fully reflects the reassessed risk of that contract or portfolio; and • the pricing of premiums for the coverage up to the date when risks are reassessed, do not reflect risks related to periods beyond the reassessment date If restrictions to practical ability to reassess risk and to set a price or level of benefits, the liabilities of the portfolio should be valued based on a longer term of projection (i.e. up to the natural expiry of the policies within the portfolio) RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 98 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Other matters relating to Valuation of Liabilities Valuation of Life Catastrophe Risk • In calibrating the Life Insurance Catastrophe risk charge, MAS considered only three pandemic events in Singapore, as follows: 1) Spanish influenza 1918-1919 : 7.76 per 1000 lives died 2) Asian influenza 1957-1958 : 0.47 per 1000 lives died 3) Hong Kong influenza 1967-1968 : 0.27 per 1000 lives died • SARS was not considered a pandemic event because less than 300 people in Singapore were infected • In applying LI CAT risk charge, MAS only considered policies contingent on mortality risk only. The feedback was morbidity component is unrealistic to assume 4% of population requiring hospitalisation especially given the capacity limitations of Singapore hospitals • Morbidity shock to be applied on claims outgo instead of valuation assumption RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 99 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Other matters relating to Valuation of Liabilities Valuation of Life Catastrophe Risk Some feedbacks from industry/SAS: • The pandemic risk may be better assessed via MAS industry-wide stress testing exercise • From a technical perspective, morbidity shocks should not be excluded from a life catastrophe risk requirement • Rather than ignoring morbidity risk, a broad approach could be considered, e.g. capital for morbidity risk to be a manageable percentage of that for mortality risk • A study on the calibrations for morbidity shocks could be useful, but would require more time. This may be considered in the revision of RBC2 implementation later on RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 100 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. RBC2 topics with most debates 1. C4 Operational Risk Previous formula: Revised formula: • x% of the higher of the past 3 years’ • The higher of : a) 4% of GP1+ Max (0, 4%*((GP1-GP0)- averages of a) Gross written premium income; and b) Gross (of reinsurance) policy liabilities where x = 4% (except for investmentlinked business, where x = 0.25%) Subject to cap of 10% of the total risk requirements (after applying diversification benefits but excluding the operation risk requirement itself to avoid circularity in computation) 20%*GP0)) b) 0.5% of gross (of reinsurance) policy liabilities where GP1 refers to the gross written premium income for the most recent financial year up to the valuation date; and GP0 refers to the gross written premium income for the preceding 12 months Subject to the same cap of 10% as under QIS1 RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 101 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. RBC2 topics with most debates 1. C4 Operational Risk The revised formula still penalizes the size of the insurance company and does not influence risk management practices. A percentage of the total of the C1 – C3 risk requirement (apart from the catastrophe risk requirement) can be considered. MAS asked for the data which may be collected to derive a more risk-sensitive requirement. Some examples of operational losses (or near misses) that can be collected include: excess claims at early durations (indicating underwriting weaknesses); ex-gratia claim payments (indicating weaknesses in contract design); legal costs; credit defaults; regulatory sanctions; repairs; abandoned projects, etc. Gross liability is not auditable and not in current statutory reporting requirement so some GI companies do not collect these information on a regular basis and therefore difficult to ensure accuracy and consistency. RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 102 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. RBC2 topics with most debates 1. C4 Operational Risk – SAS Op Risk WP Extract ❑ Address operational risk through a capital charge should not be preferred approach: ▪ No industry consensus regarding the way to assess operational risk in terms of models and data. No study shows there is a reliable methodology to measure it ▪ Using % of premium or reserves does not capture some of the operational risks (system failure, legal risk, etc). Operational risk charge is hard to estimate accurately due to no agreed model, methodology as well as lack of data ▪ Part of operational risks are included in other risk charges like C1. Adopting the banking approach of deriving operational risk charge from ground-up will lead to double-counting of risk ▪ The default of insurance companies in history are not operational risk triggered (with an exception of HIH Insurance group in 2001 due to misselling), so the significance of an operational risk charge is questionable ▪ A qualitative approach via the ERM framework may be more suitable to promote sound risk management practices and incentivise organisations to better understand the causes of operational failure RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 103 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. RBC2 topics with most debates 2. Discounting Approach for General Insurance MAS final proposal: ✓ For general insurance business, no discounting required for liability durations of >1 yr, if impact not material; For liability durations of <=1 yr, discounting will not be necessary. ✓ Where discounting is carried out, approach will be same as for life business, for both SGD and non-SGD denominated liabilities SAS proposes to conduct a study of the predictability of various types of general insurance liabilities to ascertain if any products with long tailed liabilities should, in principle, be suitable to use MA and IP for the purpose of discounting, as well as the materiality of the application. For discounting of general insurance liabilities with durations > 1 year, the SAS recommends to rely on certifying actuaries to decide on the discounting factors and the definition of “materiality”. RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 104 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. RBC2 topics with most debates 3. Reinsurance with Head Office and Downstream Entities RBC 2 Proposal: • Current RBC framework gives recognition to a branch’s reinsurance arrangement with its head office (HO) as long as there is a written agreement between the branch and HO. • MAS proposed to remove such recognition given the views that reinsurance ceded from a branch to its HO does not results in effective risk transfer since the branch and HO are considered as a single legal entity. This would also be in line with practices of other jurisdictions. • Along the same lines of thinking, MAS also proposed to remove recognition of reinsurance arrangements with downstream entity. This was proposed as such an arrangement would not constitute effective risk transfer since the risk continues to be retained in the consolidated accounts of the insurer. For branch operations in Singapore, it was stated in the Jun 2014 RBC 2 consultation paper that downstream entities would also include subsidiaries of the head office. For reinsurance with downstream entities, we noted that other jurisdictions do not have such constraints. RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 105 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. RBC2 topics with most debates 3. Reinsurance with Head Office and Downstream Entities RBC 2 Proposal (cont’d): • • • MAS notes that it is common and economical for the risks written by the branch in Singapore to be included in the HO’s reinsurance arrangements with third party reinsurers. It is also noted that the consolidation of reinsurance arrangements within a group by reinsuring with a related downstream subsidiary would usually be done for risk management and tax reasons. In view of the business case, in the Jun 2014 consultation paper, MAS stated that it was prepared to recognise reinsurance arrangements with HO (regardless of whether the Singapore insurer has a legal right to receive the recoveries directly from third party reinsurer) in cases where the HO reinsures with a third party reinsurer. However safeguards or conditions should be set. MAS also stated that it was prepared to recognise reinsurance arrangements with downstream entities in cases where the downstream entity reinsures with a third party reinsurer, or has in place other reinsurance arrangements that can results in effective risk transfer out of the group. Again, the necessary safeguards or conditions should be set. RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 106 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. RBC2 topics with most debates 3. Reinsurance with Head Office and Downstream Entities Argument for recognition of reinsurance between branch and head office: It is not reasonable to have 100% credit recognised for reinsuring with a post office box reinsurer in some offshore countries with no credit rating, but 0% credit if reinsuring with your HO which might be AA rated, well capitalised and regulated by a credible authority. If and when a large enough event happens, be it in the region or not, the likelihood of the reinsurer being there to pay recoveries could be doubtful. Where the HO is well capitalised enough to accept inwards reinsurance at attractive (arms length) terms, it makes commercial and technical sense. Both from a geographical diversification point of view as well as a financial one. To the extent whether the parent company is appropriately capitalized/ well regulated, that is the question that should determine the appropriate risk charge or haircut to be applied (similar to third party reinsurance). RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 107 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. RBC2 topics with most debates 3. Reinsurance with Head Office and Downstream Entities The issue for a branch reinsuring with head office is that they are the same entity. So the branch is effectively reinsuring with itself. As the parent is not regulated locally, MAS has no control over the capital adequacy of the branch. This seems more of a liquidity issue than a solvency issue. If a company meets the solvency requirements of an approved country, then it should meet the local solvency requirements. However, the local regulator may require assets backing a certain proportion of the liabilities/risk charge to be kept locally (“ring-fence”), with reasonable compromise between local security and global asset pooling. How to overcome the conflict of recognising reinsurance with yourself, with Head Office under a different regulator and wanting to protect local policy holders against contagion from the parent, is a technical issue. The SAS General Insurance Committee has agreed to work on it to provide more feedback in due course. RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 108 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Future Development of RBC2 Countercyclical Adjustment (CCA) QIS 1 Proposal: • Two consultation questions were posed on the usefulness of a countercyclical adjustment (“CCA”) mechanism within the equity risk requirements and the design of a suitable mechanism for RBC2 Main Consultation Feedback: • Most respondents agreed that CCA is necessary to avoid the industry being forced to take selling actions during times of stress. • The CCA would also prevent triggering of supervisory interventions during an economic downturn and ensure that the RBC2 framework better reflects the long term nature of life insurance business. • Some respondents highlighted that CCA should not be restricted to just Singapore equities; it should be applied to all market risk with mean reverting tendencies. RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 109 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Future Development of RBC2 Countercyclical Adjustment (CCA) Revised Proposal: • From SAS’ CCA Working Party paper, MAS noted that it is a challenge to derive a CCA mechanism that could meet the various stated objectives consistently and reliably. • Given the revisions in MA and introduction of illiquidity premium, MAS proposed to focus on those and deprioritise CCA for the time being. MAS will continue working with the industry on the development of a CCA, to be carried out in phases throughout the RBC2 timeline. RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 110 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Discussion What would be the key considerations in designing an appropriate Countercyclical Adjustment mechanism? RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 111 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Part 3(b)(i): RBC2 Implementation – Short Term Tactical Solutions RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 112 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. RBC2 – Short Term Solutions • Capital • • • • • Operational • • • • • Higher utilisation of reinsurance to cope with higher regulatory capital cost To have robust capital structure to manage and optimise capital utilisation Active liquidity and cash management More robust stress testing / scenario analysis To build infrastructure/template and new processes for regulatory reporting => higher regulatory compliance cost Allowance for additional resources, time & cost of implementation Continuous maintenance – focus on data quality Automation of certain reporting processes (e.g., use modelling) Business / Strategy • • • Review overall business plan / product strategy Review risk appetite and adjust internal capital trigger point Review ALM / investment strategy RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 113 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Reinsurance Strategy The main reasons for signing a reinsurance treaty are either increasing upside (reward) or reducing downside (risk) or both By giving up some upside & expected profit (a) In exchange for downside protection Net of reinsurance Gross of reinsurance (b) reduce volatility of payouts (c) freeing up capital Gross Expected payout Net Expected payout $0 99.5% 99.5% Net Capital Gross Capital RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 114 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Reinsurance Strategy The main reasons for signing a reinsurance treaty are either increasing upside (reward) or reducing downside (risk) or both ✓ Increasing Upside ✓ Increase homogeneity of insurance portfolio (increase predictability and reduce uncertainty) ✓ Help financing of acquisition costs ✓ Help financing support for new business ✓ Getting access to reinsurance services (underwriting manual, product development support etc) ✓ Business arbitrage (reinsurance less costly than direct business) ✓ Reducing Downside ✓ Reduction of individual large losses ✓ Reduction of average insurance liabilities per risk ✓ Reduction of solvency capital requirements ✓ Reduction of volatility of annual results With RBC2, implementing an appropriate reinsurance strategy is essential RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 115 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Regulatory/Accounting arbitrage Insurers can use well-designed reinsurance programme to gain from regulatory and accounting arbitrage from other jurisdictions in Asia… ✓ Reinsurance can help to determine: ▪ How much premium and risk to reside within the Group ▪ Where the premium and risk to reside within the Group ✓ Reinsurance programme can be structured as powerful lever to drive capital efficiency: ▪ e.g., if a particular LoB is heavily charged in Country A in an RBC environment, could the risk be ceded to Country B within the Group with reduced regulatory risk charges? ▪ No change to Group accounting, but better capital usage in the region ✓ Reinsurance optimisation to maximize capital and tax benefits ▪ Evaluate retention levels in individual countries ▪ Higher retention in the region as a whole Regulatory/accounting arbitrage will be more difficult to achieve over time! RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 116 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Part 3(b)(ii): RBC2 Implementation – Medium Term Strategic Solutions RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 117 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Capital Structure & Efficient Frontier How do capital requirements differ in an RBC2 environment under different types of capital structure using risk & reward measures? Capital against Return on Capital 2500 70% 63% 2000 60% Capital ($) 50% 1100 1000 40% Return on Capital (%) 1500 500 30% 0 20% 24% 28% 32% 36% 40% 44% 48% 52% 56% 60% 64% 68% 72% 76% 80% 84% 88% 92% 96% Gross 20% Retention (%) Capital Return on Capital RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 118 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Capital Structure & Efficient Frontier An efficient frontier can be used as a tool to provide an optimal design for any given level of capital structure ✓ Different capital structures ▪ Availability of capital ▪ Hurdle rate ▪ Risk appetite ▪ Model constraints ✓ External: ▪ Availability of reinsurance ▪ Acceptable price ▪ Broker relationship ▪ Market capacity Efficient Frontier 0.90 0.80 0.70 Expected Profit (1 Year) can be tested out to arrive at an optimal design ✓ Optimal design may not be possible due to practical constraints ✓ Internal: 0.60 Same risk, better reward 0.50 0.40 Same reward, lower risk 0.30 0.20 0.10 1 in 100 - 2.0 4.0 6.0 8.0 10.0 Capital at Risk: VaR at 1 year RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 119 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Asset Liability Management An ALM strategy essentially integrates insurance strategy (Liability side) & investment strategy (Asset side) to redefine efficient frontier for better gains ✓ An investment strategy focusing on traditional assets only does not work well for insurers with longterm insurance liabilities which reduces volatility of liabilities helps to enhance assetliability matching ✓ Current portfolios can be further (C) No investment constraints (D) Optimised With Investment constraints 0.70 optimised by diversifying into alternative assets (e.g., real estate, private equity, infrastructure debt) ✓ Enhanced portfolio efficiency helps to achieve higher rewards with lower risks Risk appetite 0.80 Expected Profit (1 Year) ✓ An appropriate insurance strategy Efficient frontier 0.90 0.60 (B) Capital 0.50 minimised portfolio Same risk, better reward 0.40 Same reward, lower risk 0.30 (A) Current Portfolio Risk constraints 0.20 A more efficient portfolio with an appropriate ALM strategy 0.10 - 2.0 1 in 100 4.0 6.0 8.0 10.0 Capital at Risk: VaR at 1 year RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 120 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Alternative Sources of Capital Insurance-Linked Securities (ILS) are instruments that allow insurance risk to be transferred directly to the capital markets from the insurance markets • Natural catastrophe bonds (CAT bonds) and other types of ILS are usually issued in order to provide re-insurance protection to insurers, reinsurers, governments, and corporations • CAT bonds allow companies to obtain reinsurance protection from a new pool of capital separate from traditional reinsurers • Money managers, hedge funds, and pension funds represent a new pool of capital for insurers and reinsurers to gain protection from • Investor capital provides collateralized cover • Investor capital sits in a segregated collateral account, meaning that if an event occurs, dedicated funds are available to make a payment • This minimises the credit risk inherent in traditional re-insurance program RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 121 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Alternative Sources of Capital An appropriate ILS solutions helps to reduce capital requirements under RBC2 1. The insurer enters into a risk transfer contract with a SPV established for the transaction 2. The SPV capitalizes itself by issuing Notes ("Cat Bonds") to Investors in the capital markets in an amount equal to the limit of the risk transfer contract 3. Proceeds from the securities offering are transferred into a collateral trust account and invested to provide a stable return 1 2 Risk transfer contract Note proceeds Insurer SPV Premium Coupon: DIY + [ ]% Return remaining principal Directed Investments yield Investments Stable Value Investments • • Investors 3 No covered event occurs – bonds redeemed at 100% of face value Covered event meeting thresholds – funds withdrawn from the collateral account to make event payment to insurer. Redemption price of bonds is reduced accordingly RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 122 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Part 3(b)(iii): RBC2 Implementation – Long Term Holistic Solutions RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 123 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. What is Enterprise Risk Management? • ERM deals with risks (“downside” -- 危) and opportunities (“upside” -- 机) affecting value creation or value preservation • Value is maximized when there is optimal balance between growth, return and risks (i.e., maximizing risk-adjusted returns) • The value of ERM is realised over time and therefore it is a long-term holistic strategy for management. • Management needs to deploy resources in pursuit of its objectives. A holistic ERM framework that helps to deploy resources effectively is a competitive advantage! ERM = Return Maximization + Risk Management (value creation) (value preservation) RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 124 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Holistic Strategy in an ERM Framework • Clear understanding of risk management and business objectives • Risk appetite / risk tolerance considerations ✓ Gross/Net capacity – e.g., how much risk to write/retain ✓ Exposure – e.g., maximum PML • Return considerations ✓ Financial targets and profit projections ✓ Stability of earnings – volatility of financial results, diversification ✓ Use of risk measures – e.g., ROE, VaR, TVaR, Probability of ruin • Capital considerations ✓ Capital objective – capital preservation vs utilisation ✓ Financial flexibility – access to and cost of different sources of capital ✓ Expectation of stakeholders – policyholders, regulators, rating agencies Modelling different risk/return structure requires balancing several entity’s objectives from maximising profits to limiting losses RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 125 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Holistic RBC Strategy in an ERM Framework A Simple Case Study Selected Statistics Net After Gross Surplus 1 Surplus 2 QS Gross XL Stop Loss Premium 12,900 9,023 10,213 7,276 11,628 12,511 Commission (1,935) (1,935) (1,935) (1,935) (1,935) (1,935) Expense (2,580) (2,580) (2,580) (2,580) (2,580) (2,580) 0 1,266 742 1,914 0 0 Incurred (6,518) (4,394) (4,946) (3,604) (5,542) (6,352) Result 1,867 1,380 1,494 1,071 1,571 1,644 487 373 796 296 223 R/I Commissions Net cost of reinsurance Loss Ratio % 50.5% 48.7% 48.4% 49.5% 47.7% 50.8% Combined Ratio % 85.5% 84.7% 85.4% 85.3% 86.5% 86.9% Incurred - coefficient of variation 21.2% 15.6% 15.0% 16.4% 14.5% 16.8% RoC: result / 1-in-200 yr Incurred 17.5% 22.5% 22.0% 21.0% 20.8% 21.2% Result - coefficient of variation 74.1% 61.0% 59.0% 69.3% 66.2% 64.9% 1-in-200 year Combined Ratio 117.8% 108.5% 107.3% 109.4% 109.4% 98.0% • Based on the criteria of minimising total payout under RBC2 (1-in-200 year basis), the stop loss was the best design because it gives a lowest Combined Ratio RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 126 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Holistic RBC Strategy in an ERM Framework A Simple Case Study • • On reviewing the risk appetite and other capital and return considerations, the senior management identified six key objectives: ✓ Maximising retained premium ✓ Minimising net cost of reinsurance ✓ Minimising combined ratio ✓ Maximising return on notional capital (Result/1-in-200 year incurred) ✓ Minimising result – coefficient of variation ✓ Minimising 1-in-200 year combined ratio The results for each objective were measured, ranked and then weighted to reflect their relative importance in the decision making process A holistic ERM framework helps to consolidate the various pieces of information into a consistent decision-making process for reinsurance RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 127 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Holistic RBC Strategy in an ERM Framework A Simple Case Study Min/Max Surplus 1 Surplus 2 Retained premium Max 9,023 10,213 Net cost of reinsurance Min 487 Combined Ratio % Min RoC: result / 1-in-200 yr incurred QS Gross XL Stop Loss 7,276 11,628 12,511 373 796 296 223 84.7% 85.4% 85.3% 86.5% 86.9% Max 22.5% 22.0% 21.0% 20.8% 21.2% Result - coefficient of variation Min 61.0% 59.0% 69.3% 66.2% 64.9% 1-in-200 year Combined Ratio Min 108.5% 107.3% 109.4% 109.4% 98.0% Retained premium 20% 2.60 3.69 1.00 4.99 5.79 Net cost of reinsurance 15% 3.28 4.12 1.00 4.69 5.23 Combined Ratio % 25% 6.00 4.46 4.65 1.85 1.00 RoC: result / 1-in-200 yr incurred 20% 6.00 5.11 3.62 3.29 3.97 Result - coefficient of variation 15% 5.21 6.00 1.98 3.19 3.71 1-in-200 year Combined Ratio 5% 1.43 1.92 1.00 1.03 6.00 Average result 4.09 4.22 2.21 3.17 4.28 Weighted average result 4.57 4.49 2.58 3.35 3.84 • Based on simple average results, stop loss treaty is preferred • Based on weighted average results, surplus 1 treaty is preferred RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 128 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Holistic RBC Strategy in an ERM Framework A Simple Case Study Min/Max Surplus 1 Surplus 2 Retained premium Max 9,023 10,213 Net cost of reinsurance Min 487 Combined Ratio % Min RoC: result / 1-in-200 yr incurred QS Gross XL Stop Loss 7,276 11,628 12,511 373 796 296 223 84.7% 85.4% 85.3% 86.5% 86.9% Max 22.5% 22.0% 21.0% 20.8% 21.2% Result - coefficient of variation Min 61.0% 59.0% 69.3% 66.2% 64.9% 1-in-200 year Combined Ratio Min 108.5% 107.3% 109.4% 109.4% 98.0% Retained premium 20% 2.60 3.69 1.00 4.99 5.79 Net cost of reinsurance 20% 3.28 4.12 1.00 4.69 5.23 Combined Ratio % 15% 6.00 4.46 4.65 1.85 1.00 RoC: result / 1-in-200 yr incurred 20% 6.00 5.11 3.62 3.29 3.97 Result - coefficient of variation 20% 5.21 6.00 1.98 3.19 3.71 1-in-200 year Combined Ratio 5% 1.43 1.92 1.00 1.03 6.00 Average result 4.09 4.22 2.21 3.17 4.28 Weighted average result 4.39 4.55 2.27 3.56 4.19 • With a different choice of weights, surplus 2 treaty is now the preferred structure under the weighted average results RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 129 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. A picture of an Integrated ERM Framework ANNUAL PLANNING Strategic, multi-year view Coordinated across entity Strategic Planning Iterative process Capital Strategy Legal Entity Board Iterative process Business Planning Risk Appetite Monitor execution vs. strategy & feedback Committees and EXCOs Portfolio Risk & Capital Analysis Risk & Capital Modelling Monitor execution vs. strategy & feedback Claims Finance & Actuarial Operations Capital Integrated Management Reporting ORSA Finance & Actuarial Optimised Portfolio Profit Centre Reinsurance Plans Strategy Underwriting Reinsurance ERM Investment Planning & Forecasting Regulatory Reporting Risk Taking Operations Treasury Technical Provisions ONGOING OPERATIONS Operational 1-year plans Risk Governance People Management Monitor execution vs. strategy & feedback Outputs Asset Allocation Legal Entity Reporting ERM Operations Identification Assessment Control Performance Remuneration Risk Culture Internal Model Data & Systems Monitoring & Reporting Documents Internal 130 Controls RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) Compliance Internal Audit 130 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Concluding Remarks RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 131 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. RBC2 questions worth thinking about… Actuarial Capabilities Risk Management Management Oversight Do I have adequate actuarial and modelling capabilities to perform these assessments? How robust is my current Risk Framework? Do I have a process to assess and review risk appetite? Do I have clear corporate governance framework in place to provide proper management oversight? Capital Management Asset Liability Management Can I assess and evaluate new capital requirements? What is the most efficient capital structure? Integrating RBC2 Can I assess and evaluate the types of assets to hold or avoid for matching or hedging purpose? Resources Management Business Strategy Change Management What are the increase in compliance cost? What do I need to prioritise activities and resources? Do I need to change my business strategy to align with the new regulatory environment? How prepared am I to carry on the day-to-day business while making the changes for the new requirements? RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) 132 This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. Challenges ahead for the insurance industry… • Impact of covid-19 pandemic and the new normal post-covid • Global uncertain macroeconomic and political environment • Climate change and the impact of ESG movement • Technological advancements influencing insurance business • Regulatory, tax, and accounting requirements RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents. THANK YOU RISK-BASED CAPITAL FOR SINGAPORE INSURERS (LIFE & NON-LIFE) This document is being furnished to you on a confidential basis and solely for your information and may not be reproduced, disclosed or distributed to any other person without the prior written consent of Alpha Consultant Pte. Ltd. ("Alpha"). Neither Alpha nor its advisers and representatives shall have any liability whatsoever for any loss arising, whether directly or indirectly, from any use or distribution of this presentation or its contents.
