Following were the proposals raised in the paper. MAS proposes to implement the RBC 2 requirements for the accounting year ending 31 December 2013. There will be at least 2 years of parallel run with the existing RBC framework and appropriate floors imposed to prevent sudden release in capital requirements.
Proposal 1: MAS proposes to incorporate an explicit risk charge to capture spread risk within the RBC 2 framework.
Proposal 2: MAS proposes not to impose an explicit risk charge for liquidity risk. MAS will work with the industry to conduct liquidity stress-testing, and assess the soundness of the insurer's liquidity risk management practices as part of MAS‟ risk-based supervision.
Proposal 3: MAS proposes to incorporate an explicit risk charge to capture operational risk within the RBC 2 framework, calculated as: x% of the higher of the past 3 years‟ averages of (a) earned premium income; and (b) gross policy liabilities, subject to a maximum of 10% of the total risk requirements. Where x = 4% (except for investment-linked business, where x = 0.25% given that most of the management of investment-linked fund is outsourced)
Proposal 4: MAS proposes to incorporate an explicit insurance catastrophe risk charge in the RBC 2 framework. This would be done through prescribing a number of man-made and natural catastrophe scenarios, with an explicit risk charge computed accordingly from a combination of these scenarios. MAS intends to work with the industry associations, reinsurance brokers and the other risk institutes/academia in Singapore to design relevant standardised catastrophic scenarios. For life business, the explicit insurance catastrophic risk charge can be derived based on a pandemic event.
Proposal 5: MAS proposes to recalibrate risk requirements using the Value at Risk (“VaR”) measure of 99.5% confidence level over a one year period. MAS will be engaging the industry on the calibration exercise, and target to finalise the calibration factors/shock scenarios by 1Q 2013. Data would need to be collected for this purpose. The recommended calibration factors or scenarios will be consulted prior
Proposal 6: MAS proposes not to allow for diversification benefits when aggregating the capital risk requirements. MAS is, however, prepared to consider diversification benefits if the industry is be able to substantiate, with robust studies and research conducted on the local insurance industry, that there are applicable correlations which can relied on during normal and stressed times.
Proposal 7: MAS proposes to allow the use of partial or internal model in the next phase of the RBC 2 review, after the implementation of the standardised approach. The internal model, which will be subject to approval by MAS, will have to be calibrated at the same level as the standardised approach.
Proposal 8: MAS proposes to incorporate the same Basel III features (i.e. equity conversion or write-down on breach of regulatory capital requirements) for the Approved Tier 1 resource. This means that instruments that qualifies as Approved Tier 1 resource must:
(a) automatically convert to ordinary share capital, as and when the insurer needs to absorb losses, and in any case, when the insurer breaches its regulatory capital requirement;
(b) be subject to write down as long as losses persist, as and when the insurer needs to absorb losses, and in any case when the insurer breaches its regulatory capital requirement.
The limits on the amount of Approved Tier 1 resource that can be recognised, as set out in the existing Insurance (Valuation and Capital) Regulations 2004, will remain unchanged.
Proposal 9: MAS proposes to allow a part of the negative reserves to be recognised as a form of positive financial resource adjustment under Financial Resources. MAS will consult further on the amount to be recognised.
Proposal 10: MAS proposes to classify Aggregate of Allowances for Provision for Non-Guaranteed Benefits, where applicable, as a form of positive financial resource adjustment, rather than as a capital item.
This applies to an insurer maintaining any participating fund, and subject to the condition that the unadjusted capital ratio remains below the adjusted capital ratio, where:
Adjusted capital ratio, in relation to the insurer, means the ratio of the financial resources of the insurer (excluding the financial resources of any participating fund) to the total risk requirement (calibrated at 99.5% VaR over a one-year period) of the insurer (excluding such requirement arising from any participating fund); and Unadjusted capital ratio, in relation to the insurer, means the ratio of the financial resource of the insurer (including the financial resources of any participating fund) to the total risk requirement (calibrated at 99.5% VaR over a one-year period) of the insurer (including such requirement arising from any participating fund).
Proposal 11: PCR is the higher supervisory intervention level at which the insurer is required to hold sufficient financial resources to meet the total risk requirements which corresponds to a VaR of 99.5% confidence level over a one-year period.
An insurer which breaches its PCR will need to submit a plan on how to restore its capital position within 3 months. If the PCR is met, MAS will not normally intervene on capital adequacy grounds. This does not preclude MAS from requiring an insurer to maintain financial resources above the PCR if there are other supervisory concerns.
As a countercyclical measure, MAS will have the flexibility and discretion to allow insurers more time to restore its capital position, for example, during periods of market stresses.
PCR needs to be maintained at both the company level, as well as at an insurance fund level.
Proposal 12: MCR is the lower supervisory intervention level at which the insurer is required to hold sufficient financial resources to meet the total risk requirements which corresponds to a VaR of 90% confidence level over a one year period. If an insurer breaches its MCR, MAS may choose to invoke the strongest supervisory action (such as stopping new business, withdrawal of licence etc). MCR will be calibrated as a fixed percentage of the PCR. This percentage will be determined after quantitative impact studies are done. MCR needs to be maintained at both the company level, as well as at an insurance fund level.
Proposal 13: MAS proposes the following two approaches with regards to the risk-free discount rate for SGD-denominated liabilities.
(a) To keep to the same LTRFDR formula as set out in paragraph 5.5, but X and Y will now be 20 and 30 respectively. This is on the expectation that the 30-year SGS will have adequate liquidity when RBC 2 is implemented. This means:
- Durations 0 to year 20: Use prevailing yields of SGS
- Durations 30 year and above: 90% of historical average yields (since inception) and 10% of latest 6-month average yield of 30-year SGS
- Durations 20 to year 30: Interpolated yields
- Durations 30 year and above: Keep the yield flat at the prevailing yield of 30-year SGS
(b) To remove the LTRFDR formula altogether, ie.,
- Durations up to 30 Years: Use prevailing yields of SGS
Proposal 14: MAS proposes that insurers follow the regulatory requirements pertaining to discounting as prescribed by the insurance supervisory authority in the jurisdiction issuing the currency, for valuing non-Singapore dollar denominated liabilities for both life and general business.
Proposal 15: MAS proposes to extend the discount rate requirements for life business to general business as well, for liability durations above 1 year. For liability duration of 1 year and less, no discounting would be required.
Proposal 16: MAS proposes to introduce Enterprise Risk Management requirements, including those relating to Own Risk and Solvency Assessment, to insurers. We will consult industry on the ERM requirements and target to issue a final document by end of 2012.
