Singapore: The next big step towards RBC2

While the Risk-Based-Capital (RBC) framework has served Singapore insurers well over the last 12 years, the Monetary Authority of Singapore (MAS) is driving a major overhaul on a new capital regime (RBC2) in light of evolving market practices and global regulatory developments.

The new capital framework should enhance risk assessment so that capital requirements are more aligned to an insurer's business and risk profiles.

A third consultation paper coupled with specifications for a second Quantitative Impact Study (‘QIS2'), aiming to understand the potential financial impact on Singapore insurers, were recently released in July and August 2016 by the MAS. Insurers were expected to complete QIS2 and submit results to the MAS by late October 2016.

The Capital framework has a direct impact on consumers purchasing insurance products in Singapore. Potentially higher capital requirement means higher cost of running business for insurers, and potentially increased prices for consumers if insurers choose to pass on the additional cost.

Similarly, reduced capital requirement means more affordable insurance products to the market.

During an EY event held in early August 2016, impact analysis based on the new RBC2 QIS2 specification was shared with the insurance industry with the simulation of a mock life company which is representative of a medium-sized life insurer in Singapore.

EY shared that the solvency position of the companies are likely to improve with participating business funds compared to the current RBC framework whilst it will lead to a slight drop in solvency position for the non-participating business and investment-linked business funds.

Compared to the results of the first QIS under the new capital regime, the MAS has relaxed capital requirements for insurance companies, considering the current solvency positions were mostly adequate and to ensure the Singapore market remains competitive.

Key changes to the RBC2 QIS2 include revision on the capital requirement for universal life, investment linked and participating products, re-calibration of requirement on equities, and operational risk.

Although the methodology in determining capital required to address insurance risk has changed significantly (which seems to converge slightly to a Solvency II approach), rising cost to holding equities and other type of assets contribute mostly to the financial results.

However, this is expected to be relieved with the allowance of having replicating asset portfolios to better match the risks of liabilities on insurers' books.

Under the RBC2 QIS2, insurers who are able to source good quality assets to back up long duration liabilities will benefit significantly from better asset and liability management.

During the session with EY, half of the participants felt that ongoing management of the asset portfolio is necessary to ensure proper matching so insurers can enjoy the benefit of capital reduction due to this will be a key challenge.

However, a quarter of the participants expressed concerns around challenges to find suitable assets for the unique nature of insurance liabilities (i.e. uncertainty and long-duration).

Better asset and liability matching will not be optimised without a liquid long-term market, and insurers will need government initiatives to help achieve that outcome.

The MAS did not provide clear timeline on the implementation and effective date of RBC2 yet. Over 40% of the participants at the EY event would like the effective implementation to be after 2021 (to be in line with the timeline for a new international insurance accounting standard).

Despite uncertainty on the timeline, it is expected that insurers will have to undergo significant changes in their development and pricing of products given the higher cost involved in complying with regulatory changes.

Expense management and efficiency gains will be on top of insurers' agenda in order to manage cost and remain competitive in the market.

We have seen several insurers starting to plan for change in product mix, to review their reinsurance arrangement and their asset allocation in an effort to optimise economic capital.

At the same time it is important that insurers also align their future strategies with anticipated consumer needs, protection gap and potential future market trends.

Disclaimer: The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.