kmpg evolving insurance final 2012

7/30/2019 KMPG Evolving Insurance Final 2012

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FINANCIAL SERVICES

EvolvingInsurance

RegulationTime to get ahead...

February 2012

kpmg.com


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Giles Williams

PartnerFinancial ServicesRegulatory Centreo Excellence,EMA regionKPMG in the UK

Jim Low

PartnerFinancial ServicesRegulatory Centreo Excellence,Americas regionKPMG in the US

Simon Topping

PrincipalFinancial ServicesRegulatory Centreo Excellence,ASPAC regionKPMG in China

About this report

This report was developed by KPMGs network o regulatoryexperts. The insights are based on discussion with our rmsclients, our proessionals assessment o key regulatorydevelopments and through our links with policy bodies.We would like to thank members o the editorial and projectteams who have helped us develop this report:

Editorial team

Rob Curtis

DirectorInsuranceFinancial ServicesRegulatory Centre

o Excellence,EMA regionKPMG in the UK

David Sherwood

US Head o InsuranceRegulatoryFinancial ServicesRegulatory Centre

o Excellence,Americas regionKPMG in the US

Martin Noble

Senior ManagerInsuranceFinancial ServicesRegulatory Centre

o Excellence,ASPAC regionKPMG in China

Contributing

Editor

2012 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG network o independent rms are aliated with K PMG International. KPMG International provides no client services. N omember rm has any authority to obligate or bind KPMG International or any other member rm vis- -vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.

Mary Trussell

PartnerInsuranceAccounting AdvisoryServices

KPMG in the UK

Weronika Anasz, KPMG in China

Clive Briault, KPMG in the UK

Kate Forgione, KPMG in the UK

Mike Hamilton, KPMG in Canada

Rachael Kinsella KPMG in the UK

Meghan Meehan, KPMG in the US

Frank Oberholzner, KPMG in Germany

Annelize Snyman, KPMG in South Arica

Brittany Spriggs, KPMG in the US

Liz White, KPMG in the UK

Giles Williams, KPMG in the UK

Project team


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Contents

Foreword 2

Executive Summary 4

Latest developments in the IAIS 6 ComFrame Systemic Risk

Perspectives: ASPAC 14 Asia Paciic country updates: Regulatory,

solvency, IFRS and consumer protection

Evolving global solvency developments: 24beyond compliance, towards value creation Risk and inance transormation

Perspectives: Americas 28 Americas country updates: Regulatory,

solvency, IFRS and consumer protection

Moving the consumer protection agendato the ront line 38 Key regulatory initiatives to impact insurers

Perspectives: EMA 48 Solvency II update Consumer protection changes Insurance Mediation Directive 2 (IMD 2) Packaged Retail Investment Products (PRIPs) Retail Distribution Review (RDR) Latest developments in the UK and South Arica

Financial reporting, valuation and disclosure the latest developments 56

Abbreviations 63

Acknowledgements 64

2012 KPMG International. KPMG International is a Swiss cooperative. Member rms o the KPMG net work o independent rms are a liated with KPMG International. KPMG International provides no client services. Nomember rm has any authority to obligate or bind KPMG International or any other member rm vis- -vis third parties, nor does KPMG International have any such authority to obligate or bind any member rm. All rights reserved.


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Foreword

Jeremy Anderson

Global Chairman,

KPMGs Financial Services Practice

Frank Ellenbrger

Global Head o KPMGs

Insurance Practice

For many insurers, regulatory

requirements will present

challenges to their existing

distribution models and

cost structures.


2 | Evolving Insurance Regulation | February 2012

Welcome to the second edition o Evolving Insurance Regulation.This publication is part o a series which ocuses on the emergingregulatory developments currently acing the nancial servicesindustry and accompanies KPMG rms other publications on bankingand investment management.

This year the ocus extends rom risk management and prudentialchange to insurance regulatory reorm initiatives currently underwayaround the world, including the increased ocus by many jurisdictionson the new consumer protection agenda and the likely implicationso these reorms on the insurance sector.

At the beginning o 2011, many werehoping that the worst o the Global

Financial Crisis (GFC) might be nearing anend. By contrast, 2011 urther highlightedthe ragility o the global economy.

The iscal vulnerabilities o a number

o Eurozone countries contributedsigniicantly to continuing uncertaintyin global markets. In turn, this has led toincreased political volatility, social unrest

and civil disturbance in many countries.While emerging economies in Asia andother regions continue to lourish, they

nonetheless remain interconnected withthe ortunes o western markets.

Given the unrelenting pace of reform,

the strategic challenges facing

insurers continue to build. The

pressure confronting insurers can be

broadly grouped into five key drivers:

economic, regulatory, consumer,

strategic and operational.

Insurers have significant challenges

to face in 2012. The economic outlook

remains uncertain and consumer

expectations are higher than ever.

Financial regulation is complex and

interconnected and the unevenness

of global requirements will ensure

application remains problematic

for many firms. However, for those

insurers prepared to rise to these

challenges, by transforming their

business and embracing the newconsumer agenda, the rewards

could be great.

Economic pressures

Insurers have been aected by thegeneral economic malaise. Sluggisheconomic growth, enduring highinlation and the ailure to resolve the

Eurozone crisis continue to presentextreme challenges. Much o theworld continues to have historicallylow interest rates, impacting capital

markets, bond prices and shareholderreturns. Political and systemic risk has

increased due to continuing Eurozoneconcerns and budgetary diiculties

in the US. This instability is creatingpressure or the banking system,particularly in Europe, where credit

availability and liquidity remains anissue. This has a knock-on eect onthe wider economy.


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Regulatory pressures

The G20 and other political andsupervisory bodies continue to driveinancial services sector reorm both globally and at a local level. In

response to many o these pressuresand to country speciic issues,supervisors have ocused heavily onimproving their respective structures

and rameworks. The adoption o newInternational Association o Insurance

Supervisors (IAIS) standards inOctober 2011 was a catalyst or many

supervisors to commence reorm,particularly in the Americas and Asia.

The US market is undergoing

signiicant changes as a result o theDodd-Frank Act (DFA) and rom newdevelopments arising rom theSolvency Modernisation Initiative,

such as the Own Risk and SolvencyAssessment (ORSA). This is likelyto introduce a step-change in risk

management practices by US insurers.In Asia, prudential issues andchanges to International FinancialReporting Standards (IFRS) continueto be the main areas o ocus or most

irms. In Europe, insurance irms arecontinuing to invest in development oadequate inrastructure and systems

to meet the extended 2014 SolvencyII implementation date. In addition,a rat o new customer protectionregulatory initiatives is due to be

implemented, which will requireirms to begin actively engaging insuch reorms.

Consumer pressures

The industry continues to ace thechallenges o generally low levels oconsumer satisaction and increasedconsumer uncertainty. In particular,

pension provision is increasinglybecoming a political and social issuein many regions. The GFC and recentconsumer inancial sector mis-selling

scandals in some countries haveweakened investor conidence in

the market. For irms, this is a starkreminder that consumer protection

goes beyond transparency in inancialproducts to include the integrity o thesales process and consumer targeting.

The orthcoming customer protectionregulatory initiatives are aimed atrestoring consumer conidence,establishing greater harmonisation,

increasing competition and creating alevel playing ield in inancial markets.Regulators hope to achieve this by

taking action against irms thatmistreat their customers. This willocus on customer relations and theprovision o the right incentives tocurtail inappropriate selling practices.

Although the regulatory ocus onconsumer protection has, until recently,been largely Europe-centric, we

expect this trend to extend acrossother regions in the near uture, albeitmaniesting itsel dierently. Forinsurers, consumer conidence and

trust are essential to promote long-term inancial stability, growth,eiciency and innovation within theirirms. Insurance leaders ace a series

o tough judgement calls particularlyconcerning the strength o theirrelationships with customers andwill need to develop new strategies

to maintain competitive positions.

Strategic andoperational pressures

Achieving operational excellence andimproving balance sheet perormancewill be key strategic objectives or

many irms in 2012. Following a toughyear in 2011, insurers are reviewingtheir risk appetite limits, reassessingproduct lines and geographical exposure

to vulnerable areas, while continuingto manage capital requirements and

increasing transparency demandsrom regulators. This is all happeningagainst a backdrop o a general skillsshortage in the global insuranceindustry, where the demand or

talent to respond adequately to theseincreased inancial, risk and regulatorychallenges is intense.

Maintaining and growing the

business continues to be the keyobjective or most insurers. In manymarkets, consumer sentiment is

at an all-time low. Historically stableconsumer bases have been disruptedby poor practices and revolutionisedin some markets by the step-changein distribution channels. Firms are

becoming aware that they will needto re-structure their operations anddevelop new capabilities to meet

rising customer expectations, whileworking within the bounds oregulatory constraints.

For many insurers, regulatory

requirements will present challengesto their existing distribution modelsand cost structures. While insurershave endeavoured to enhance their

customer proposition (or examplethrough simpliying their productportolio and pricing across multiplechannels), achieving such aims has

not always been easy. This will likelyrequire a re-ocusing on achievinginternal operational eiciencies,

to optimise capital, reduce coststructures and oster a customer-

ocused organisational culture.


Evolving Insurance Regulation | February 2012 | 3


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Executive Summary

Against the backdrop o theEurozone and sovereign debtcrises, 2012 is undoubtedly shapingup as a challenging year or insurersand nancial markets generally.This publication examines waysor rms to balance the competingdemands o both existing and new

prudential requirements, in additionto the growing importance oconsumer protection oversight.

Despite 2011 being a milestone

year or global inancial regulationimplementation, the insurance sectoris ar rom having a truly harmonised seto international regulatory requirements.

This report provides an update on thelatest developments in the IAIS, inparticular their attempts to build acommon ramework or the supervision

o Internationally Active InsuranceGroups (IAIG). We examine proposalsby the G20 and the Financial StabilityBoard (FSB) to improve inancial stability

and governance o the inancial servicessector most notably the additionalrequirements on inancial institutionsdeemed to be o Global Systemic

Importance (G-SIFIs) and analyse whaturther eorts could be undertaken toachieve greater eiciencies in this area.

The ASPAC Perspective provides

a detailed overview o the importantregulatory changes occurring in riskmanagement and solvency, IFRS and

consumer protection across the diverseAsia-Paciic region. Clearly the pace o

change diers across markets in the

region, but the overriding direction otravel or many Asian supervisors is theimplementation o the IAIS Insurance

Core Principles (ICPs). These wereormally adopted in October 2011 andwill prove challenging or both supervisorsand irms to implement. We outline

the progress being made in variousjurisdictions and the likely challengesacing insurers in those markets.

From the plethora o legislation

currently being proposed, we knowthat there will be a divergence oglobal and national regulatory agendas.Insurers need to act now to re-assess

their business models and operatingstructures to be able to eectivelymanage the required changes. Risk andinance unctions will be required to

transorm into dynamic and inluential

parts o the organisation. Strategicdecision-making will need, more than

ever, to be inormed by quality andtimely inormation derived rom riskmanagement systems and processes.



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From the plethora o legislation

currently being proposed we

know that there will be a

divergence o global and national

regulatory agendas. Insurers

need to act now to re-assesstheir business models and

operating structures.


Evolving global solvency

developments: beyond compliance

and towards value creation exploresthe global solvency issues, providinginsights into what this may mean or

insurers going orward. It is clear that inan increasingly uncertain world, insurerswill require a simple, high perormingrisk management system that is ullyembedded within their respective irms

and driving inormed decision-making.Eective risk management has neverbeen more important in building andsustaining a competitive advantage.

The move to improve risk managementrameworks is not conined to Europeanand Asian irms. Signiicant prudential

and consumer protection developmentsare also occurring in North and SouthAmerica. The Americas perspectiveoutlines the likely changes across various

markets and the expected impact suchreorms will have or insurers in thesecountries. The impact o these changeswill urther inluence the business

models and operating structures omost insurers in these markets and ourinsights provide valuable inormationregarding the likely changes such

initiatives may have.The primary ocus o supervisors in

most jurisdictions or 2012 will continue

to be concentrated on capital, liquidityand governance requirements. However,global policymakers, such as the G20,are increasingly turning their attention

to issues such as customer protectionas part o their inancial services reorminitiatives. The G20 has utilised theOrganisation or Economic Co-operation

and Development (OECD) to developprinciples to address the conduct agenda.

We analyse what impactmoving theconsumer protection agenda to the

front line may mean or insurers and thelikely changes required to strategic andoperational models. These developments

will be inluential in how inancial servicescompanies do business in their marketswith both clients and peers, especiallyas consumers themselves increasingly

expect to receive inormed, air and

eicient service when it comes toinsurer-customer relationships and

products. We analyse the likely strategicimplications o the consumer protectionagenda and provide a detailed review owhat increased consumer protection

regulation could mean or insurers interms o the products oered anddistribution channels used.

While the speed o implementation

o reorm is likely to vary considerablyacross regions, the European Commission

(EC) has been active in developingnew consultation proposals on consumer

protection. These are expected to bereleased in the irst hal o 2012, withsigniicant implications or insurers.

The EMA perspective analyses theimportant conduct changes likely toaect insurers, particularly the secondInsurance Mediation Directive (IMD 2)

and the Packaged Retail InvestmentProducts (PRIPs) consultation. Thoughinal rules are still being drated, it iscritical or companies to act now in

assessing the strategic and operationalimpact such proposals may have acrosstheir businesses. These changes arelikely to have signiicant implications or

insurers products and distributionnetworks.

An update is provided on the latestSouth Arican developments, along with

insights on the impact such proposalsmay have on insurers and wider inancialservices markets. This includes a detailed

perspective o the South Arican markets

current regulatory changes. It is likelythat many o the Solvency II initiativeslegislated will have wider implications or

insurers undertaking business on theArican continent.

O course, no analysis o the

developments aecting the globalinsurance market would be completewithout examining the continuingeorts by the International Accounting

Standards Board (IASB) and the FinancialAccounting Standards Board (FASB)to progress and seek convergence onthe IFRS insurance contracts project.

Undoubtedly, this work will be an importantcomponent to ensure global consistencyin the provision o inancial inormationand reporting. In particular, the issue o

insurance liability volatility and thepresentation o such results remains akey area o debate around the globe.

The review o the latest accounting,

valuation and disclosure developmentsprovides a snapshot o the elements

already agreed and those still be to beresolved. We review the latest positionson a number o the key areas stillbeing debated, such as discount rates,

unbundling, reinsurance, residual marginsand disclosure issues. An overview is alsoprovided o the similarities and dierencesbetween the IAIS standard on valuation

and the proposals currently advancedunder IFRS, the impact o thesedevelopments on local markets, andUS GAAP and regulatory convergence.

2012 will be a dynamic year. Its time

to get ahead of the regulatory change

agenda are you prepared?


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The primary goal o ComFrame

should be to establish a

ramework or better supervisory

co-operation, allowing a more

integrated and international

approach.

Latest developments

in the IAIS


IAIS completes major milestone

The IAIS, at their Annual General Meetingin Seoul on 1 October 2011, endorsed

their Insurance Core Principles (ICPs).These new ICPs herald a new regulatoryenvironment or insurers and supervisors,essentially requiring supervisory regimes

worldwide to establish risk-basedsolvency requirements. This relectsa total balance sheet approach on an

economic basis, addressing all reasonablyoreseeable and relevant material risks.

These solvency capital reorms aresupplemented by required enhancements

in the role and activities o insurer riskmanagement, which eectively link theront-end processes o accepting andmonitoring risk more closely with the

overall strategic goals and risk appetite

at Board level.For many jurisdictions, enacting

such changes into local rameworks

will require signiicant eort and theimpact on the insurance sector is likely

to be considerable, especially in lesswell-developed markets such as Eastern

Europe, Arica, the Middle East and manyparts o Asia and South America.

ComFrame begins to take shape

The IAIS continues to develop theComFrame proposal a comprehensivesupervisory ramework or the supervision

o internationally active insurance groups(IAIGs) and in July 2011 presented itsinitial concept paper.

The IAIS has outlined the aims oComFrame as:Developing methods o operating

group-wide supervision o IAIGs inorder to make group-wide supervisionmore eective and more relective

o actual business practices;Establishing a comprehensive

ramework or supervisors to addressgroup-wide activities and risks andalso set grounds or better supervisory


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co-operation to allow or a moreintegrated and international approach;

and Fostering global convergence o

regulatory and supervisory measures

and approaches.

ComFrame is split into ive modules:

Module 1:

Scope o application

Module 2:

Group structure and business roma risk management perspective

Module 3:

Quantitative and qualitativerequirements

Module 4:

Supervisory process and co-operation

Module5:

Jurisdictional matters

Although there are various approachesused globally to supervise IAIGs, the

situation still remains that no multilateralsystem is used by global supervisorsto monitor IAIGs adequately. Somesupervisors have taken a dierent

approach by ocusing heavily on ashareholding-centric model to analysegroup structures.

As the international standard setter or

insurance, the IAIS has so ar developeda generic approach to building a globalramework or the supervision o IAIGs,

including developing the ICPs (o whichsome ICPs, such as ICP 23, speciicallyaddress group-wide supervision).

Notwithstanding, the IAIS still lacks a

multilateral response to the supervision

o IAIGs and ComFrame is intendedto ill this void. Encouragingly, therewas generally broad support rom IAIS

members and observers or the structureand outline presented in the concept

paper released in June 2011. Many

recognised that ComFrame needs toexist in order to address issues in thesupervision o IAIGs and that the projectis thereore a signiicant development

in international insurance supervision.Supervisors are now trying to provide

urther detail on the key componentso ComFrame. However, dierences

among supervisors are beginning tosurace, especially regarding solvencyissues, or example:

Theuseandscopeofatotalbalance

sheet approach Should a consolidated or aggregated

accounting measure be used? How should risks actually be

measured? How can a common methodology

on capital requirements be achieved? How can a common approach to

stress and scenario tests be achieved? How can a common methodology

to the supervisory assessmentprocess be achieved?

It is clear rom various meetings o

the IAIS committees that a numbero key concerns still remain amongjurisdictions: What is the scope o an insurance

group? What is the group capital assessment

designed to achieve? How should solvency control levels

be determined? Should ComFrame require dierent

intervention levels? Should ComFrame require a single

methodology in determining capitalrequirements, or should multiplemethodologies be allowed? I so, how?

Does ComFrame mean one groupsupervisor or multiple supervisorsinvolved in the supervision o an

IAIG? What are the legal implications

arising?

KPMG continues to strongly supportthe overall aim o the IAIS: to oster

global convergence o regulatory andsupervisory measures and approachesto insurance supervision. The primary

goal o ComFrame should be toestablish a ramework or bettersupervisory co-operation, allowing amore integrated and international

approach. There are a number o keyissues which remain to be addressed:

Whatisagloballyacceptedlevel

of policyholder protection?

I ComFrame is to achieve internationalconvergence and consistency in

supervisory requirements, one o

the most important issues to resolvewill be that o establishing anappropriate level o policyholder

protection or put another way,determining the risk appetite osupervisors with regard to the ailureo an IAIG. An open and inormed

debate concerning minimumstandards o global policyholderprotection, and thereby capital

requirements, is needed.As the international standard setter

or insurance, it would be a curiousdecision or the IAIS to advocate anew, globally accepted commonramework and not articulate the level

o policyholder protection it oers. Inaddition to discussion and agreementon the level o protection to whichpolicyholders are entitled, more

debate is needed on the componentso an eective global group-widesupervisory regime, or example,

the determinants o key tools oran eective insurance supervisory

regime. Failure by supervisors toreach satisactory conclusions on

these important components willmean regulatory ailure.


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WhatistheroleandfutureoftheIAIS as an international standard

setter?

The GFC highlighted the uncertaintyregarding the role, remit and ability o

the IAIS to acilitate, or be involved in,any ormal review process o an IAIG.Key lessons learned by the industryrom the GFC were matters o IAIGdata conidentiality and inormation

and mechanisms to reely exchangesensitive inormation amongstsupervisors.

As the IAIS is developing ComFrame,greater clarity and articulationconcerning its role and powers would

be beneicial to both IAIS Members

and Observers. For example, it remainsunclear as to whether the principal aimo the IAIS is to increase the intensity

o supervision o the largest and mostcomplex global insurance groups, orwhether the primary intention is to

achieve greater global consistency.The irst approach ocuses on raisingstandards, and the latter ocuses onwide and consistent application o

minimum standards.

Whatistheenvisagedimplementation of ComFrame?

The path to implementation remainsunclear. It has not yet been clearly

articulated how ComFrame isenvisaged to operate, or example,whether ComFrame is intended toperorm like the Basel Accord or

Banking (with the intention thatindividual countries will implementComFrame into their local law and

regulation and thereby replacingexisting requirements) or whether a

much looser supervisory arrangementis intended. Such uncertainty may slow

the overall development o ComFrame.Resolution to such important matters

should be given priority, especially asit is still unclear how ComFrame willinteract with current supervisorystructures.

Can there be greater internationalco-operation amongst all standard

setters?

It is clearly important that the IAIS

liaises closely with not only theBasel Committee or Banking andInternational Organization o SecuritiesCommissions (IOSCO), but also the

Joint Forum and the Financial StabilityBoard (FSB) and G20 orums, i it isto appropriately develop ComFrame.How IAIG supervision is envisaged to

interrelate with other sectors such asbanking and conglomerates is criticalto avoid duplication and achievemaximum eiciencies rom supervisory

processes. Further considerationo how ComFrame would beoperationalised on a conglomerate

basis would thereore be beneicial.

Systemic Risk

In their latest publication, arising

rom the G20 Cannes Summit heldin November 20111, the G20 and FSBhave outlined their clear intention toapply capital surcharges and a Recoveryand Resolution Plan (RRP) ramework

to all Signiicantly Important FinancialInstitutions (SIFIs) including insurers.Additionally, the FSB is seeking nationalauthorities to put common powers

and tools in place or the resolutiono insurers. This takes into accountthat these tools may need to dier

rom the powers and tools necessaryto resolve banks and recognises

that most national authoritiesalready have powers in place to

transer the business o insuranceundertakings.

In November 2011, the IAIS released itspreliminary indings and took a ocused

view o whether insurers could posesystemic risk eectively being coninedto the impact o non-core insurance

activities such as credit protection andasset leverage. However, it remainsto be seen whether the G20, FSB andnational authorities will take a widerview. For example, the EU Crisis

Management Directive is expected toapply to all credit institutions and could beollowed by a similar Directive or insurers.

In the meantime, the US authorities

are expected to designate major insurersto be SIFIs, and to require them toundertake resolution planning. The

Dodd-Frank Act contains provisions ornon-bank inancial institutions whichincludes insurance irms designatedby the Financial Stability Oversight

Council (FSOC) as systemically important to develop resolution plans.


1. Communiqu: G20 Leaders Summit. Cannes, 4 November 2011.



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It would be ineective and

disproportionate to apply a

banking style RRP ramework

to the insurance sector.

Implications or irms

In KPMGs August 2011 publication,

Recovery and Resolution Plans or

Insurers the need or a broader

debate, we articulated our view that aundamentally dierent policy approachshould be adopted or insurers,

compared to the banking industry.

The report highlighted that giventhe signiicant dierences betweenbanks and insurance irms; it would

be ineective and disproportionateto apply a banking style RRP rameworkto the insurance sector. Instead, amuch more pragmatic set o policy

tools is required to achieve an enhancedsupervisory ramework or insurers.To relect the inherently dierentoperating models and thereore

systemic dierences that existbetween banks and insurers, policyoptions or recovery and resolution

or the insurance sector should bede-coupled. For example: Insurers are not direct participants o

the payments and settlement system Insurers are not dependent on

short-term market unding, ie. unlikebanks, insurers do not borrow in theshort-term to inance risks over the

long-term

The capital structure o the insuranceindustry does not lend itsel to

run-on-the-bank type risksThe matching principle o assets

to liabilities has always been acornerstone o most insurance asset-

liability management practices

Insurance supervisors, have a betterunderstanding and insight into the

intrinsic risk in business models andthe activities o insurers throughusing catastrophe modelling

Failure o an insurers particular

strategic plan or strategy does notusually have the same immediateeects as it does in banking giventhe liquidity considerations involved

The engagement o rating agenciesand particularly their role indetermining the level o reinsurancecounterparty worthiness has had

a moderating inluence over themanagement and risk appetite omany insurers

In some markets, such as the US

the model o insurance regulation issuch that more than one regulator istypically responsible or supervising

a large insurer providing additionalscrutiny and challenge



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Risk Management Continuum

Overview andGovernance

OperationsStructure and

Current Exposures

Risk Assessment Stress Testing Recovery Plan Resolution Plan

Risk vision andpolicy excerpts

Business planand overview

Current view of ability to release capital and liquidity Develop and document contingent management actions Ability to unplug legal

and review ability to release capital and liquidity in response entities or economic

to stress critical functions and

wind-down the firm

Risk AppetiteStatement

Scenario analysis

Other stress testing

ALM reporting credit concentration

Liquidity contingencyplans

Legal entitydocumentation

Capital managementORSA/InternalModel reports anddocumentation

Bankruptcy, bridgeinsurer, purchase andassumption

ORSA analysis Regulator takescontrol as receiver

Business andstrategic overview

Risk appetite,thresholds andmetrics

Risk managementoversight

Periodic (ie., annual)with additionalreresh, review andapproval as required

Supervisory

authorities

Signicant operationsand activities

Legal and unctionalstructure

Key activityinter-dependencies

Material assetmapping

Credit and counter-party exposures

MIS and criticalvendor relations

Unconsolidated BS

Signicant riskexposures

Material businessunits and legalentities

Systematicallyimportant operationsand technologies(trade settlement, etc.)

Liabilities mappedto entities

Concentration o

business review

Stress and reversestress

Policies describingpermissibleactivities andrequired correctiveactions

Events triggeringrecovery planexecution

Contingent capitaland liquidity

Asset salesand businessdispositions

Externalcommunication plan

Events triggeringresolution planexecution

Coordination withparent and liquidity

priority

Ex-ante options andpriority (LOCs)

Dispositionprotocols andprioritisation basedon stress results

Liquidation DOAs

Legal and taxplanning

Legal entity review

Process and systemdeciency reporting

Stress builds rom BAU To severe To atal

Resolution PlanRecovery PlanAs-Is State

Leverage Existing Materials

Franchise destructionFranchise risk/proft deterioration

Risk Spectrum

Preservation o ranchise value

Building an appropriate policy

ramework providing the link

between RRPs and better risk

management

A resh approach by policymakers isrequired to properly address some othe weaknesses in insurance supervision

learned rom the GFC. Perhaps thegreatest lesson learned is that allinsurers, irrespective o notionaldesignations as systemically important,

need to ensure better risk managementpractices are applied. Importantly, roma supervisory perspective, the need toaddress the deiciencies o current

supervisory risk management toolsremains urgent.

Supervision needs to view an insurersrisk management as a continuum.

Using the continuum outlined above,

one o the most eective supervisorytools available to supervisors in theassessment o risk management is the

Own Risk and Solvency Assessment(ORSA). Additionally, allowing internal

models would also provide urthersupervisory mechanisms to acilitateeective assessment o the risk

management techniques, capital andsolvency positions o supervised entities.

Our view is that the ORSA should be

revised to take into account the lessonslearned rom the inancial crisis. Manyo the requirements set out in the IAISEnterprise Risk Management or

Solvency Purposes Insurance CorePrinciple (ICP 16) relect, largely, thestructure o requirements as preparedor the ORSA by the Solvency Sub-

Committee pre-GFC. This also largelyapplies or the Solvency II ORSAramework. We suggest that, giventhe lessons learned, the IAIS considers

augmenting its current ICP 16 to providea policy ramework or FSB consideration

which can provide a pragmatic andproportionate link between notions o

RRPs and improved risk managementor all insurers. By expanding the ORSArequirements, the conceptual ramework

o RRPs could be practically applied aspart o the ORSA analysis that insurers

would be expected to review and include,applicable to all irms. Speciically, adistinction can be drawn between policy

options to take orward aspects relatedto recovery (which would provide adirect link with the ORSA), and issuespertaining to actual resolution, which

should be considered separately bysupervisors.

The ollowing new analysis could beexpected o insurers:

Potential economic impact

considerations:

The ORSA is a new policy tool beingintroduced requiring insurers toundertake an assessment o their ownrisks, complemented by an assessment

o the capital required to meet suchrisks. The ocus o this assessment couldnow incorporate risks posed to thewider economic environment. In some

markets, supervisors are already moving




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towards requiring orward assessments

o the inancial condition o an insurer,under a range o scenarios. For example,in the UK, the Individual Capital

Adequacy Standards (ICAS) requires

extensive testing o capital, insurance,market, credit, liquidity and operationalrisks, in addition to other relevant risks

such as reinsurance, strategic risks,and corporate governance risk. Suchrequirements will ostensibly be extendedin Solvency II, (in the US via the ORSA

requirements), and or those irms usingan internal model including the capitalmethodology proposed or calculatingcapital requirements. A widening o

these existing and proposed supervisory

tools to take account o potentialeconomic impact considerationswould largely complement the analysis

perormed. In this context, it would be

a cost eective and proportionatemethod or the insurance industry.

Regulators will look to groups particularly those in Europe seekinginternal model approval, to demonstrate

they have a comprehensive understandingo their business, contractualarrangements, structures, capital andintra and extra group relationships.

The extension o such analysis couldrequire insurers to have mechanismsin place to restore the group in the caseo solvency and/or going concern issues

or at least to consider such scenarioswithin their ORSA or internal modelanalysis and in a worse case situation,to deconstruct the group in an orderly

manner. To be in a position to aectappropriate mechanisms, insurerswill need insight into the potentialtriggers. These are likely to require

scenario analysis to understand thepressure points and the likely sequenceo events.

It was also evident that many pre-GFCstress tests were not it or purpose,

The ORSA should be revised to

take into account the lessons

learned rom the nancial crisis.


as they were not designed or the typeo extreme market event that occurred.

Many irms stress tests ailed toadequately consider the magnitudeo shocks, the duration o the shock,

risk concentrations and the extent ocorrelation (and contagion) betweendierent positions, risk types andmarkets. Nevertheless, while therehas been much discussion o the laws

and inappropriate usage o stresstests prior to the crisis, there hasalso been concurrent recognition thatsuch tests must be an essential tool

in building a resilient inancial sector.The challenge or supervisors and

importantly, or irms, is to set tests

which are appropriately severe andbroad but not so implausible as to be ono use. As part o their ORSA analysis,irms should consider building in more

hypothetical sets o assumptions orhow exposures may change in lighto unexpected shocks.

Risk appetite and strategy:

At its basic level, risk appetite deinesthe level o risk a irm accepts. This

is set rom Executive and Board leveland is intertwined with the companysstrategy. A poor risk appetite or risktolerance setting and lack o goal clarity

or the insurer can cause considerableinancial distress. One o the lessonsrom the GFC has been that supervisors,and a number o insurance groups,

were not cognisant o the inherentunderlying risks, particularly those riskswhich may have systemic relevance.How risk appetite is eectively used

and monitored is less well understood bysupervisors, as this has not traditionally

ormed a key component o the inancialstatutory returns o most supervisory

jurisdictions in particular, how the riskappetite o an insurer its with thestrategic direction o the company.

A practical policy option available tosupervisors is to ormalise links betweenthe strategic objectives and options o

insurers with risk appetite, establishingormal reporting mechanisms. Extending

such arrangements to, or example,instances o acquisitions and mergers,

may also assist regulators to betterassess the systemic relevance o irms,as well as enabling insurers to articulatepotential impacts to the business model.

These requirements could useully ormpart o the ORSA set o requirementsexpected o insurers.

Greater focus on non-core insurance

activities and off-balance sheet items:

Part o the ORSA analysis shouldthereore be ocused on examining theimpact that non-core insurance activitiesand o-balance sheet items may haveon the inancial condition o the irm.

Such an approach should adopt a totalbalance sheet approach, where theimpact o the totality o the insurersmaterial risks are ully recognised on an

economic basis. The GFC demonstratedthat ailure to appropriately recognisethe risks such activities can pose to agroup highlights a material weakness in

the overall risk management capabilitiesand unctions o a group. Speciicrequirements o this nature could

thereore orm part o the broaderORSA requirements.

The investments ICP (ICP 15) alreadyexists and essentially requires insurers

to invest in assets with risks it canproperly assess and manage. Thisespecially concerns the use o morecomplex and less transparent asset

classes and investment in markets or

instruments that are subject to lessrigorous governance or regulation.However, the current proposals are not

speciic on which assets may requireurther regulation, and it is clear rom the



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events o the GFC that urther analysiswould be beneicial. For example,

consistent requirements relating toinherently risky inancial instrumentsthat are likely to require greater scrutiny

by both irms and supervisors. Theseinclude: special purpose vehicles,hedge unds, derivatives, private equity,structured credit products, insurancelinked instruments, and hybrid instruments

that embed derivatives and dynamichedging programs. A irst step wouldbe to require irms to undertake speciicanalysis o such instruments within

their ORSA assessments, with particularregard to whether such assets lead toan increased systemic risk scenario.

Mandatory use of reverse stress

testing:

The use o reverse stress testing, or

test-to-destruction analyses (which

identiy scenarios that are most likely to

cause an insurer to ail) should also ormpart o a irms overall risk managementanalysis and assessment and could

thereore orm part o the ORSA. The

beneit o requiring such analysis isthat it can provide both managementand supervisors with the necessary

inormation to assess the adequatenesso the management actions proposed,in order to avoid business ailure. Thisleads to an element o speciic ocus

that o resolvability and associatedplanning. Insurance ailures are typicallyresolvable through an orderly run-o,but exceptions to this have occurred

and remain plausible. There may

thereore be a case or putting in placeex ante arrangements to ensure anorderly conclusion to various scenarios.

Such developments would complementprudential requirements, but should not

The industry, as well as

regulators, need to be

refective o their role

and responsibilities in

the wake o the GlobalFinancial Crisis.

be seen as a replacement. Preventativeaction should remain integral to

prudential regulation.

Requiring an analysis of the

concentration of business written:HIH, the Australian insurance group thatultimately collapsed in 2000, was a goodexample o the impact o its collapse

being detrimental to the local insurancemarket in Australia. (HIH was thedominant provider o indemnity coverageto the building industry). However, the

consequences o its collapse were noton a global scale. The ailure o HIHstarkly demonstrated the impact that aconcentration o business underwritten

in a particular market or segment cancause on the local economic system. Thedominance o HIHs proessional indemnitybusiness was allowed unchecked,

amassing a disproportionate market share.




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The analysis o whether the suddenwithdrawal o such cover could give riseto any wider economic impact on thelocal market had not been ully appreciated.

The introduction o measures to assess

and determine market share criteriacould be one option available to

insurance supervisors, included withina irms ORSA. The inclusion o suchanalysis would likely expand the currentocus o what is presently envisaged

or most ORSA requirements. Theorward-looking nature o the ORSAshould provide an additional tool toassist insurance supervisors in better

understanding the existing local marketconcentrations prevailing.

A market concentration analysisrequirement would also allow irms

to undertake discussions with theirsupervisors in advance o any stressenvironment, allowing or constructivedialogue to occur regarding a irms

strategic objectives and marketing plans.

Establishing a better ladder of

intervention:

The ladder o intervention provides anopportunity or regulators to establish

a new control level, based on the riskassessment posed by insurers. Thisspeciically assesses whether the insurerconcerned presents any systemic risk to

the local market. Such an interventionlevel could take the orm o additionalrisk management requirements and bebased on the insurers ORSA.

Enhanced corporate governance

requirements:

Corporate governance is a key

component o solvency. The GFC

brought into relie ongoing shortcomingswithin the ability o many Boards in

ensuring that the irm providesadequately against the risks being


taken ensuring suicient liquidity andsolvency is retained. Board composition,

role and eectiveness are a criticalcomponent o any insurers inancialcondition and thereore play a crucial

role in prudential regulation. The GFChighlighted that poor decision-makingat either Board or senior managementlevel can contribute to inancial malaise.Strengthening board competence

requirements, including various risk andauditing subcommittees and applyingincreased assurance measures, arevery likely to considerably strengthen

the robustness o oversight unctionswithin most irms.

Requiring demonstration o such

analysis via the ORSA by key approvedpersons within irms, particularly inregards to complex inancial transactions,could provide an additional layer o

expertise and assurance or insurersto avoid some o the GFC experiences.

Formalising a Chief Risk Officer

(CRO) role:

The role and structure o riskmanagement has received considerableattention post-GFC. A consideration

going orward is the need to enshrineits role with a distinct unction orline o deence, which holds an

aggregate view o risk across theinsurer, independent o the business.Consideration could be given to thebeneits o ormalising the role o the

Chie Risk Oicer (CRO) at the heado the risk management unction andtheir accountability or risk within theorganisation. This is similar to the general

direction o development in manymarkets, and within Solvency II, o an

actuarial unction. The ormalisation oa CRO role and unction could provide

irms and supervisors with a level oenhanced independence and challenge

or the risk unction, including theveracity o risk decisions made. Ultimate

responsibility or the ORSA would bemaintained by the Board.

Expanding the ORSA requirements toinclude company culture and ethics

Although potentially challenging, thenotion o regulators playing a greater role

in considering a companys behavioursor ethics may be a necessary additionto eective supervision. Typically, airms culture has not been the remit

o regulation, but it is hard to argue thatbehavioural issues were not deeplyrooted in many o the causes o thecrisis. A companys culture aects

the leadership and strategy o the irm,and ultimately shapes decision-making.The emergence o news concerningexcessive executive compensation

may relect societys general belie thatthe inancial sector is not as ethicallysound as it could be. Excessivecompensation itsel was not a catalyst

or the GFC, but it represents a cultureo incentivised risk taking and a need orpotential structural reorm. It is thereore

likely that urther developments arenecessary to embed more responsibleattitudes and a change o culture withinthe industry. The industry, as well as

regulators, need to be relective o theirrole and responsibilities in the wake othe GFC. In light o these, examiningways to allow the ORSA to capture

inormation about the companys cultureand ethics may thereore be a useuladdition to the overall risk managementramework.



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Perspectives:ASPAC

There have been a number o important regulatory advances that areexpected to have an impact in the region in the coming months and years.The region is experiencing increased transaction activity in the insurancesector, and many organisations are looking to capitalise on the potentialgrowth opportunities. This years Perspectives: ASPAC section has beenexpanded to provide a more in-depth coverage o market and regulatorymovements across the region, beginning with an overview o two key areas Prudential Regulation and Customer Treatment. The country summariesprovide urther localised ocus.

Prudential regulation: The impact

o the new IAIS standards

The adoption by the IAIS o a new suite

o Insurance Core Principles (ICPs) willhave a signiicant impact on the orm

and extent o prudential regulation withinthe Asia Paciic insurance markets.In particular, the IAIS capital adequacystandard includes general requirements

on the use o internal models to determineregulatory capital requirements (wherethis is allowed by the supervisor) which

will herald a major step orward in theAsia-Paciic supervisory arena.

However, o all the new IAISstandards, the ICP on Enterprise Risk

Management (ERM), ICP 16, is likelyto be the most signiicant. The ICPrequires supervisors to seek highstandards o risk management and

governance rom insurers and, critically,supervisors are being encouraged tochallenge the insurers they regulate onrisk management issues. In particular,

the IAIS ERM standard requires insurersto produce an ORSA, under which aninsurer undertakes its own orward-

looking sel-assessment o its risks, its

capital requirements and the adequacyo its capital resources. Many o theserequirements are new to the Asia-Paciic

region. We expect insurers across the

region will need to substantially upgrade

their ERM and capital managementcapabilities over the next ew years.

Even though the ICPs currently takethe orm o high-level principles-basedrequirements, they nonetheless requireall supervisors to enact the requirementsinto their local supervisory rameworks.

I they do not, they risk receiving anadverse inding rom the IMF/WorldBank in their Financial Sector AssessmentProgramme (FSAP) reviews. There are

some who argue that the ICPs do not goar enough they do not, or example,require consistent calibration o capitalrequirements between countries.

Nevertheless the ICPs are undoubtedlya step in the right direction.

Customer treatment: changing

conduct o business

Models o consumer protection varyconsiderably in Asia Paciic, but generally

it has not yet embraced the principles-based customer-centricity seen in theUK and parts o the EU. In Asia, manycountries use an alternative model,

with a ocus on achieving customer

protection through regulatory pre-approval o product designs and pricing.Current areas o regulatory ocus include

increasingly more stringent controls over


data privacy impacting direct marketingand cross-selling (eg. between banking

and insurance entities o a group),

controls over multi-ties and who maysell insurance in bank branches, andincreased disclosures.

Asia-Paciic regulatory developments

country ocus

The ollowing provides an update o keyregulatory and market developmentswithin the Asia-Paciic region, ollowedby a summary table o the main risk

management and solvency, IFRS, andconsumer protection activities withineach market.

Australia

Similar to other markets covered inthis section, natural catastrophes have

received a lot o attention in Australiain the last 12 months. Larger Australianinsurers were not only exposed toevents in Queensland many were also

exposed to the Christchurch earthquakein New Zealand. As an example opossible regulatory reaction, lood covermay become mandatory or homeowner

property insurance policies in Australia.Insurers are also looking to streamline

operations and increase operating

eiciency to protect proitability, in an



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industry aced with volatile investmentmarkets, strong competition (price and

churn), signiicant claims inlation orcertain lines, and increases in reinsurance,regulatory and staing costs.

Against this backdrop, insurers arein the process o understanding thenew lie and general insurance capital(LAGIC) standards, which are dueor release this year. The Australian

Prudential Regulation Authority (APRA;the prudential insurance regulator) hasbeen very active in developing the LAGIC

reorm since announcing the overhaulo the capital ramework in 2009. APRAis an active member o the IAIS, andLAGIC is expected to be compliant with

the new ICPs.

China

As the insurance industry in China

continues its rapid expansion, theregulatory environment needs toevolve to keep pace with the additionalchallenges created in a dynamic market

environment. The China InsuranceRegulatory Commission (CIRC; Chinasinsurance regulator) has spoken about

the importance o managing the capitalstrain o new business. As with otherregulators in the region and other IAISmembers, the CIRC is keeping a close

eye on international regulatorydevelopments in particular we haveseen recent enhancements to ERM,and anticipated reorms to solvency

capital standards in the medium-term.

Hong Kong

Hong Kongs insurance industrycontinues to grow strongly, with growthrates in both the lie and non-lie sectors

o above 10 percent in the irst ninemonths o 2011. RMB-denominatedproducts have seen particular growth,stemming rom customer demand in

Hong Kong or policies denominated inthe appreciating Chinese currency.

The Oice o the Commissioner o

Insurance (OCI; Hong Kongs insuranceregulator), may be replaced by an

Independent Insurance Authority (IIA)as soon as 2013, which is expected to

bring enhanced regulation o insurancecompanies and intermediaries. In themeantime, the OCI continues to outlineshort, medium and long-term insurance

regulatory reorm, and is regularly citingthe recently adopted IAIS ICP standardsas examples o the likely changes

needed to be adopted at the local levelincluding much talked about RBC reorm.

IndiaThe dramatic shit in the availability oproducts in the market has helped touel the Indian insurance market acrossthe lie, non-lie, and health sectors.

The numbers o policies sold in the pastdecade have risen signiicantly. Industryigures indicate that this has increased

the total penetration o insurance(premium as a percentage o GDP) rom2.3 percent in 2001 to 5.2 percent in 2011.

The Insurance Regulatory and

Development Authority (IRDA; theinsurance regulator), which is a membero the IAIS, has introduced a numbero reorm packages in recent years.

This includes regulation on investmentsthat insurance companies can make,risk management guidelines, andcustomer treatment regulation (in

particular relating to the sales o unitlinked insurance policies).

Indonesia

As in other Asia Paciic insurance

markets, much attention is being placedon Indonesia as a country with signiicant

growth potential. We have seenincreased transaction activity and interest

across both lie and non-lie sectors.Penetration levels are expected toincrease as economic growth continues,and recent natural catastrophes in

neighbouring countries are also expected

to increase awareness or propertyprotection.

The steep increases in minimum

regulatory solvency capital requirementsare expected to drive consolidation inthe market.

Japan

To expand their ootprint and in search oproitable growth, a number o Japanese

insurers are keen to look or opportunitiesin overseas insurance markets, and

in particular in the Asia Paciic region.The earthquake in March 2011

impacted the domestic insurancemarket, particularly non-lie insurers,and continues to inluence the overall

economy by way o the recovery plans.Post earthquake, insurers will beinluenced directly by increases in thecost o reinsurance, a desire to restore

an appropriate level o reserves, managingearthquake insurance coverage limits,

and so on. In addition, the recent Bangkok

loods have had an impact on theJapanese non-lie insurance marketdue to the location o many o-shoreJapanese industrial operations.

Japans Financial Services Agency(JFSA, whose role includes that o theinsurance regulator) is a member o theIAIS, and like many other jurisdictions in

the region, we are expecting regulatorydevelopments resulting rom adoptiono the ICPs in due course.

Korea

Seoul hosted this years IAIS AnnualConerence. At the welcoming address

o the conerence, the FinancialSupervisory Service (FSS; the insurance



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regulator) highlighted the growinginterconnectedness in the global

marketplace, stressing the importanceo the various initiatives o the IAIS topromote a globally accepted ramework

or the sae and sound supervision othe insurance sector. The FSS alsohighlighted the area o micro-insuranceas an important development or low-income populations.

Separately, Koreas retirementpension market has grown signiicantlysince the second hal o 2010, wherethe new retirement pension has replaced

the retirement insurance and retirementtrust system that was terminated at theend o 2010. A relaxation o regulation on

the sale o retirement pension products,as well as an expansion o tax incentives,has accelerated growth in this market.

Malaysia

Top o insurance Board concerns in theMalaysian marketplace are regulatorycompliance, increased competition due

to the liberalisation o the market, anda shortage in insurance resources asthe industry continues to grow. Merger

and acquisition activity continues tobe buoyant, and Malaysia has recentlyseen the expansion o the Takaul marketwith the issuance o our new licenses

in 2010.Bank Negara Malaysia (BNM), the

countrys insurance regulator, has akeen interest in emerging international

regulatory developments including thenewly adopted IAIS standards relating toinvestments, ERM, and capital adequacy.

New Zealand

The insurance industry in New Zealand

is still managing the impact o theearthquake and subsequent atershocksthat struck Christchurch in February 2011.In particular, general insurers remain

ocused on evaluating the costs o thecatastrophe, with knock-on eects onthe pricing o policies in earthquake-

prone regions and the reinsurance market.At the same time, the New Zealand

lie and general insurance sectors areabout to enter into a more ocused

regulated regime, since the September2010 Insurance Act replaced theInsurance Act o 1908. The ReserveBank o New Zealand, the insurance

regulator, is currently processing allinsurer provisional licence applications,which are required to be in place by

7 March 2012 in order to continue writingnew business. Insurers will need toobtain ull licences by 7 September 2013.

This irst-time regulation o the industry isexpected to have its challenges, as boththe regulator and insurers determinewhat is required.

Philippines

The Philippines insurance marketis another market where there is

an opportunity or insurers to takeadvantage o the expected growthin insurance penetration rates.

The top three concerns o Boards o

insurers in the Philippines are currentlyproitability, regulatory compliance, andcoverage and penetration, which matchconcerns in other key growth markets.

Increases in the minimum capitalrequirements are also expected todrive consolidation in the Philippinesinsurance market.

Singapore

The Monetary Authority o Singapore

(MAS) keeps the insurance law andregulations under continuous review, and

engages in industry-based consultationas it seeks to apply international

regulatory developments and new localrequirements in the local market.

The nancial crisis provided

valuable lessons on corporate

governance, including the

importance o eective risk-

based oversight, monitoringo activities, and remuneration

at Board level.




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The MAS requently shares inormationon regulatory developments in

Singapore publicly on its website andat international meetings.

The market is poised or urther

reorm as the MAS seeks to gathermore granular inormation to help it tostrengthen macroeconomic surveillanceand insurance supervision. This includesthe possibility o the implementation o

a group supervisory regime, which couldhave wider impacts or Singapore-basedgroups or sub-groups.

The inancial crisis provided valuable

lessons on corporate governance,including the importance o eective risk-based oversight, monitoring o activities,

and remuneration at Board level. TheMASs Corporate Governance Council,established in 2010, has played a partin enhancing regulations in this area.

It is also expected that the MAS willrelease an ORSA consultation paper inthe irst hal o 2012.

Taiwan

The Taiwanese insurance industry hasundergone much change in recent times,

and the market is now dominated bydomestic participants but is attractingrenewed interest rom other irmsbased nearby in the region. Taiwanese

insurers are growing their ootprint inoverseas markets, where we see recentinvestment in countries including Chinaand Vietnam.

High savings rates in the countryare positive or the lie insuranceindustry, although the sector remainsconstrained by the negative interest

spread issues under the sustained lowinterest rate environment. Lie insurers

in particular are, like others in the region,challenged in selecting assets with a

similar long duration to their liabilityproiles.

The Taiwanese insurance regulator,the Insurance Bureau (IB), is a membero the IAIS. The IB, like their regional

counterparts, has been in the processo studying the current regime with

international developments such asSolvency II, FATCA, and IFRS 4 Phase II.

The Taiwanese market is also keen totrack changes to the US supervisoryregime, to which Taiwans current RBCsystem takes reerence.

Thailand

Despite the political uncertainty in

Thailand over the last 18 months, thetotal insurance premium is orecastedto grow at over 20 percent in 2011.

However, the Thailand loods in thesecond hal o 2011 had a signiicantinancial impact on the non-lie insuranceindustry, with many insurers not meetingthe capital requirements o the new Risk

Based Capital (RBC) regime, introducedrom September 2011. As a result o theloods and the introduction o the RBCregime, it is expected that there will be

urther capitalisation o the industry andpossible consolidation o the 70 non-lieinsurers in the market. The Thai markethas also generated interest rom

overseas investors.One o the issues or lie insurers is

the Asset-Liability Management (ALM)

risk charge under the new RBC system,as the limited investment options inThailand make optimising asset portoliosdiicult. As in other markets, we expect

that enhancements to risk managementregulation (as promulgated by the IAIS)will provide an important guide toregulators in the management o ALM.

Conduct o business is a continuing

area o ocus or the Oice o InsuranceCommission (OIC), the Thai insuranceregulator, who over the past ew years

has required greater clarity over product

disclosure and introduced agent

qualiications and conduct standards.Some insurers may ace issues romproducts sold in the past, particularly

relating to the sales practices or non-

guaranteed bonus policies.

Vietnam

The Vietnamese insurance industry is ina relatively early stage o development,and projections o uture growth remainbullish or both lie and non-lie insurance

sectors. The insurance market continuesto generate much inbound interest, withsome notable investments made inrecent years. These are adding to the

increasing talent pool, which insurers

are keen to retain to support utureproitable growth.

The Ministry o Finance (MoF),Vietnams insurance regulator, is amember o the IAIS, and is in due courseexpected to ollow the State Bank o

Vietnam (SBV), the banking regulator,which has developed a suite o detailedrequirements or the banking sector.




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Asia-Paciic regulatory developments at a glance

The signiicant ASPAC regulatory developments across risk management and solvency,IFRS, and consumer protection are outlined below:

Country

Australia

Regulatory solvency capitaland risk management

New lie and general insurance capital(LAGIC) standards are poised orrepi

elease, and are proposed to beective on 1 January 2013. Theseroposals are widely expected to

ncrease capital requirements, includethe option or a Pillar 2 supervisorycapital adjustment, and increase theregulatory burden. These proposals willresult in the introduction o a Three-Pillarapproach to solvency, which is closelyaligned with the EU requirements o

Solvency II, and in particular include anInternal Capital Adequacy AssessmentProcess (ICAAP), which is similar to theORSA as deined in the new IAIS ICPand as being implemented in Europeor example.

IFRS/Financial reporting

IFRS has been required or all privatesector reporting entities since 2005 andso the Insurance Contracts Exposure

Drat received considerable commentollowing its issue in July 2010, withcomment letters issued by manyconstituents including APRA, theprudential regulator, and accounting,actuarial, and insurance industryrepresentative bodies.

Australian reactions to the ExposureDrat are particularly interesting becauseAustralia is one o the ew countries tohave ormulated its own standards orinsurance accounting whereas IFRS 4only includes limited improvements toaccounting or insurance contracts and

disclosure requirements, AASB 1023 orGeneral Insurance and AASB 1038 or lieinsurance, which address all aspects othe recognition, measurement anddisclosure o lie insurance contracts.

These standards anticipate many o thekey eatures o the Exposure Drat, byrequiring a current valuation o bothinancial instruments and insuranceliabilities, with the measurement oinsurance liabilities updated at eachreporting date indeed to many

Australian commentators certain aspectso the Exposure Drat eel like a stepbackwards.

In our view the Australian marketprovides one o the best case studies oa current current measurement modelin practice.

Consumer Protection

The Future o Financial Advice (FOFA)reorms are expected to have asigniicant impact on the operationso lie insurers and superannuationproviders. This legislation is designedto protect consumers and rebuild trustin the inancial planning proession there will be a ban on commissionstructures and non-monetary beneitsthat might inluence advice, an increasein disclosure requirements and anincrease in the powers o the regulator.There are parallels here between theFOFA reorms and the UK RetailDistribution Review proposals.

Country

China


We are anticipating changes to thecurrent regulatory solvency capitalstandards to a more risk-based approachin the medium-term; the currentapproach remains similar to a EuropeanSolvency I-style volume approach.

Regulation in the risk management andERM arena was enhanced at the end o2010, where the lie and health sector isrequired to enhance governance o riskand establish a role equivalent to aChie Risk Oicer, and to adopt thequantitative measure o Economic

Capital as a key risk management toolto be used within the business. Theserequirements are consistent with theIAIS ICP on ERM, and include itemssuch as risk appetite and enhancedrisk reporting. Similar ERM regulatorychange is expected to include the non-lie insurance sector in due course.


Chinas national standards (New PRCGAAP) are substantially converged withIFRS. Like Australia, China is a countrythat, in the absence o a consistent

international standard or insuranceaccounting has developed its ownnational standard.

Chinese insurers experienced a yearo signiicant inancial reporting changeaecting their 2009 results when theMinistry o Finance, with the co-operation o CIRC, issued a package opronouncements which substantiallyoverhauled the accounting or insurancecontracts, anticipating many o thechanges that were expected romPhase II o the IASBs insurancecontracts project.

These changes require amongst otherthings that insurers: unbundle contractsi the insurance risk component canbe separately identiied and measured

rom other components, such as orunit-linked and universal lie contacts;measure policy liabilities based ondiscounted expected uture netcontractual cash lows on a grosspremium valuation basis which includesa risk margin, plus a residual marginwhich is released to the incomestatement over the period o insurancecoverage. Measurements are currentand updated at each reporting period.

Comments on the IASBs ExposureDrat largely ocused on eliminatingdierences between the Exposure Dratand new PRC GAAP or insurers, suchas challenging the use o a summarisedmargin approach and the treatment ocontracts with Discretionary Participation

Features, suggesting that the choice otechnique to be used in estimating therisk adjustment should not be limitedand proposing, unless impracticable,ull retrospective restatement on initialadoption.

Consumer Protection

There are signs that relatively strictregulation on product design and pricingmay be relaxed. This ollows rom trialso sales o variable annuities in 2011, andin the motor insurance market wheretrials o pricing reorm o policies have

been conducted. There are also plansto open up the compulsory third-partyliability motor insurance market tooreign-owned insurers. These proposalsmay drive greater innovation aroundproduct variability and choice althoughboth the regulator and the market arekeeping a close eye on the likelycompetitive pressures that a relaxationin the pricing controls may trigger.

The bancassurance channel has recentlywitnessed regulation, including a banon insurance agents selling insurancepolicies in bank branches, and restrictingthe number o insurance partnersper branch.




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Country

Hong Kong


The topic o RBC is a popular one inHong Kong, and the market is expectingreorm in the management o risk andenhancements to the assessment osolvency capital. The OCI is takingreerence to the IAIS ICPs and otheroverseas developments, and has an aimo aligning Hong Kong with internationalpractice; however, the regulator iskeen to stress that implementation oproposed changes will ollow only atera market assessment and there is no

intention to simply copy rom otherjurisdictions.


Hong Kong has adopted nationalstandards identical to IFRS, reerredto as HKFRS, although in some casestransition arrangements and eectivedates dier rom IFRS. Closecoordination between the Hong KongInstitute o Certiied Public Accountants(HKICPA) and the InternationalAccounting Standards Board is importantto the success o achieving convergenceo HKFRSs with IFRSs. The Council othe HKICPA has aligned the Institutes

due processes, including the timing oissuing exposure drats, standards andinterpretations, as close as possible tothe IASBs processes as a result o itsconvergence policy. Many o theinsurers which operate in Hong Kongare ailiated with regional or globalinsurance companies and thedevelopment o the IASBs ExposureDrat is being ollowed closely.

Consumer Protection

Regulation o Sel-RegulatoryOrganisations (SROs) has receivedocus o late, in particular in relation totheir role as brokers and agents in thesales o insurance products. The OCI isset to establish a supervisory regimetargeted at regulating market conductand consumer protection, wherebythe OCI is expected to take over directregulation o intermediaries.

A notable recent change in customerprotection regulation has been theconsultation on the PolicyholderProtection Fund, which would provideinancial protection to policyholders inthe event o insolvency o an insurer.

Country

India



The IRDA is proposing changes toinvestment options available toinsurance companies, with the aimo improving lexibility in investmentdecisions.

The IRDAs ERM regulation calls orcompanies to establish a RiskManagement Committee (RMC)with direct access to the Board, anddeines a clear Chie Risk Oicer role.Board certiication was required rom31 March 2011 relating to compliancewith the terms o reerence o the RMC.

Recent proposals to allow insuranceirms with ten years operational historyto raise unds on the equity marketshas stirred some interest. The IRDAsspeciic nod will be required beore acompany can proceed with obtainingother listing-related approvals.


Subsequent to the announcemento the proposal by the Institute oChartered Accountants o India (ICAI)to converge the Indian accountingstandards (Indian GAAP) with IFRSeective 1 April 2011, there has beensigniicant debate among the standardsetters, regulators, corporate India andproessional accounting irms, on theroadmap to convergence, and itsimplications.

India is converging with IFRSs, butat a date to be conirmed. The IRDA

generally supports convergence withIFRS and is an active participant in thecomment process.

As a regulator, however, the IRDA laysstrong emphasis on capital adequacy,solvency and risk management and maynot necessarily accept all IFRS guidancerom a regulatory reporting standpoint.

Consumer Protection

One o the major changes relates torules on the sales o unit linkedinsurance plans (ULIPS). These changeswere in part aimed at curbing the mis-selling o insurance policies as short-term investment products, whichresulted in a decrease in volume o salesbut in turn the industry placed a greaterocus on cost control, customer ocusand alternative distribution channels.Indeed, these changes have broughtocus on building new and innovativeproducts.



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Country

Indonesia


The Indonesian regulator is currentlystudying the newly adopted IAIS ICPs.There is discussion in the market thatthe regulator may apply enhancementsin risk management and investments,

although the market is awaiting thenext regulatory move. That said, someinsurers in the market are seeking toenhance areas such as ERM and arekeen to learn rom international bestpractice, ahead o the introduction oany speciic regulatory change. Similarto the Philippines, Indonesia hasintroduced step-change increases ininsurer minimum capital requirements,which we understand may result inconsolidation in the industry.The increases in minimum capitalrequirements apply to conventionalinsurers and reinsurers, and there areseparate requirements or Sharia

insurers and reinsurers.


Indonesia implemented IFRS 4 Phase Ion 1 January 2012. Many insurers areimplementing signiicant accounting andsystem changes in response, althoughsome implementation issues are still

being discussed.Overall, the convergence process toIFRS is ongoing, and a decision about atarget date or ull compliance with IFRSis expected to be made in either late2012 or in 2013.

Consumer Protection

In the area o customer treatment, wehave seen drat regulatory proposalson disclosures and solvency relatedmeasurement. In addition, a new set oKnow Your Customer regulation has

been issued.

Country

Japan



In terms o risk and capital, the JFSAplans to introduce new regulation ina similar vein to the EUs Solvency IIregime.

The JFSA conducted a quantitativeimpact study (QIS) ield-test twoyears ago, and is currently analysingthe results and developing a moresophisticated version. Some Japaneseinsurers continue to actively track andresearch European solvency regulatoryreorm, including taking the step ocommunicating their views to the JFSA

to eedback on local development.


The Japanese government has said it isdelaying the road map towards adoptiono IFRS or publicly traded companies one o the main reasons being theadditional cost or already strugglingJapanese companies, ollowing theearthquake and tsunami which hit Japanin May 2011, since this would result inextra investment and administrativecosts or companies damaged by thedisaster.

Japanese companies currently reportunder Japanese GAAP and beore theannounced delay a road map was put inplace by the Japanese Financial ServicesAgency (FSA) that would have led to adecision in 2012 as to whether it wouldbecome mandatory or Japanese publiccompanies to report under IFRS in 2015or 2016.

The government and the FSA have nowabandoned the mandatory a

kmpg evolving insurance final 2012

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