Current capital requirements in the United States are set at a legal-entity level. Yet there are currently no global requirements for companies that operate in more than one country, and calculation formulas for capital requirements typically vary in each jurisdiction. Solvency II is the closest to mandating a group standard. Solvency II uses the concept of “equivalence” to deal with differing capital regimes between the European Union and the rest of the world including the United States, instead of forcing Solvency II standards on a third country.
Posts Tagged ‘RBC’
The average balance of payments in Indonesian reinsurance transactions over the past five years has been in a deficit of IDR5.65 trillion (USD455 million) per year. This has been a point of frustration for the Indonesian government. As such, the Indonesia Financial Services Authority (OJK) has instructed insurers to retain more risk and to reinsure more business with domestic reinsurers, including the recently-formed state reinsurer, Indonesia Re, to “improve and optimize capacity in the country.” The OJK has also encouraged all domestic reinsurers to obtain an international rating in order to improve competitiveness with foreign reinsurers. However, it is anticipated that high cessions to other unrated, domestic companies will increase credit risk charges and pressure capital adequacy ratios.
Other countries, such as the Philippines and Indonesia, have instituted rules that may, conversely, impede the development of a healthy, profitable insurance market. The Indonesian regulator’s recent steps to reduce capital outflows, with a focus on reinsurance premiums ceded to international reinsurers, remain highly debated and will be explored in greater detail later. The Philippines, in addition to a risk-based capital (RBC) framework, has instituted a minimum paid-up capital requirement (starting in 2006 and revised in 2013) that increases every two years and will result in a PHP2 billion (approximately USD44 million) minimum threshold in 2020. This will put minimum capital levels in the Philippines well above those of more developed markets, including Australia, Japan and Singapore. The policy applies uniformly across the industry regardless of premium volume, line of business or geographic scope and therefore its impact is more strongly felt by smaller carriers that will most likely be forced out of the market or into the arms of larger players. The Philippines Insurer and Reinsurer Association (PIRA) has been outspoken against the minimum capital requirement and stated a preference for a standalone RBC metric.
Asia Pacific is a diverse mix of countries encompassing nearly one-third of the earth’s landmass and more than one half of its population. Given the broad spectrum of economic and regulatory sophistication across the region, the approach to insurance regulation has varied on a country-by-country basis as each regime adapts solvency principles to their own needs and political realities.
Guy Carpenter today published an assessment of the development of solvency requirements and regulatory initiatives that are impacting (re)insurers in the Asia Pacific (APAC) region. According to the report, these developments are driven by four key motivators, including the need to improve resiliency post-catastrophic loss; to increase oversight in a post-Great Recession world; to follow best practices from the banking and international insurance sectors; and finally, to satisfy domestic political pressures.
In the wake of the global financial crisis in 2008, significant regulatory change aimed at preventing/mitigating future crises was implemented. While the U.S. insurance regulatory framework did remarkably well in the protection of insurance consumers and companies in the United States during the financial crisis, it was, and will be affected by these reforms. Today, the results are having a profound impact on companies’ balance sheets and risk management practices. Although primarily aimed at larger, global insurers, the changes are so extensive that they may impact medium and small insurers to some extent. The question that most (re)insurers are asking today is how can they cope with the myriad regulatory, legislative and ratings changes and continue to maximize opportunities and maintain profitable growth.
Markus Müller, Global Partners & Strategic Advisory EMEA, Capital Optimization
Increased capital efficiency remains at the forefront of (re)insurers’ strategies - owing largely to the pending introduction of the Solvency II regime, rating agency capital requirements and the continued pressure around shareholder expectations.
Micah Woolstenhulme, Senior Vice President
This post is Part II of an earlier post that reviewed a session held at the Casualty Actuarial Society Annual Meeting. In that session, attendees hypothetically viewed the P&C industry as a single large company. Audience members were shareholders and session panelists adopted various executive and leadership roles in the company. The meeting’s task was to vet an economic capital model before the board of directors, allowing individual shareholders the freedom to openly question the model’s input and results. This model, if properly developed and embedded into the company’s strategic management, would represent a key component of the Own Risk and Solvency Assessment (ORSA) Summary Report that will be required of large companies in the industry as early as 2015. Along the way, the presentation and board discussion were interrupted to poll the audience members on several interesting questions.