Risk based supervision in Asia Pacific

In a business driven by the identification, assessment, management and improvement of risk, insurance supervisors in Asia Pacific continue to move toward risk based supervision as a means of identifying key prudential and conduct risks in the pursuit of financial stability and policyholder protection. A key aspect of this is the implementation of enterprise risk management frameworks within insurers.

The International Monetary Fund (IMF) requires 29 jurisdictions globally to submit to a Financial Sector Assessment (FSA) run by the IMF with the World Bank every five years. In Asia Pacific, the countries participating in the mandatory FSAs are Australia, Mainland China, Hong Kong, and Singapore – five of the total of 29. Last year an FSA was undertaken in Mainland China. This year an FSA is underway in Australia while in 2019 an FSA is due for Singapore. A little further out, Hong Kong is due for an FSA in 2020.

Part of the focus of the FSAs is a detailed assessment of the extent to which jurisdictions are observing the Insurance Core Principles (ICPs) of the International Association of Insurance Supervisors (IAIS). Keys aspects of these assessments include a review of regulations relating to corporate governance, risk management and internal controls and supervisory review and reporting. This adds significantly to the importance of the work of the Financial Stability Board (FSB) and the IAIS and the contribution to and implementation of the agreed, the new and the emerging international regulatory norms in Asia Pacific, particularly risk based supervision.

We move from North to South... and consider some key developments...

We begin in the largest territory by population, Mainland China. In Mainland China, the 2017 FSA revealed that the approach of the then China Insurance Regulatory Commission (CIRC) was being enhanced through the implementation of the Solvency-Aligned Risk Management Requirements and Assessment (SARMRA) framework taking a tailored approach to certain aspects of the requirements by reference nature, scale and complexity of an insurer and the “evolution of Chinese insurance regulation [was] bringing the market closer to international best practice”. This followed the implementation of the China Risk Oriented Solvency System in 2015. Earlier this year the insurance and banking regulators were merged creating the China Banking and Insurance Regulatory Commission (CBIRC).

In Hong Kong, in May this year the relatively new and independent Insurance Authority released its detailed Draft Guideline on Enterprise Risk Management for consultation, adopting a principles based approach, as part of the ongoing development of Hong Kong’s new risk based capital regime. Hong Kong at the same time works towards achieving equivalence with C-ROSS with a significant milestone being achieved in the middle of the year with the announcement of a consensus on certain preferential treatment for Hong Kong professional reinsurers.

A little further south, in late 2017 the Office of the Insurance Commission (OIC) in Thailand issued its “Notifications on Rules, Procedures, and Conditions for Prescribing the Minimum Requirements of Risk Management for Insurance Companies”. Those minimum requirements became effective early this year and support its risk based capital regime.

In Malaysia following the last FSA performed in 2013, Bank Negara Malaysia (BNM) published in 2016 updated corporate governance standards and practices outlining the expectations of the board of directors and management along with BNM’s policy document relating to operational risk.

In late 2013 the Monetary Authority of Singapore (MAS) published its rules for Enterprise Risk Management for Insurers setting out set out its expectation of insurers on how they should “identify and manage interdependencies between key risks, and how these are translated into management actions related to strategic and capital planning matters”. Following this in July 2017 the MAS released its “Guidance on Insurers’ Own Risk and Solvency Assessments” to require insurers to annually assess their risk management and future solvency positions.

In Indonesia, the FSA undertaken earlier this year reveals that the financial services regulator, Otoritas Jasa Keuangan, or OJK, had recently introduced key corporate governance measures for insurers and was working toward consolidated supervision of bank and non-bank financial institutions including insurers and improving risk based supervision. This supports the risk based capital regime introduced in Indonesia in 2013.

In Australia a wide ranging “Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry” (Royal Commission) is well underway. The Royal Commission which was established in late 2017 published its interim report in September and later this month moves to consider policy related issues in insurance. The Royal Commission’s final report is due in February 2019 which can be expected to consider amongst many things possible changes to regulations, and the ongoing powers of the Australian Securities and Investments Commission (ASIC) and the Australia Prudential Regulation Authority (APRA). This may in turn have some impact on enterprise risk management frameworks for insurers.

As the IAIS continues to finalise the Common Framework for Internationally Active Insurance Groups, including the Insurance Capital Standard, (CommFrame) it also focuses on the revision of ICP 16 (Enterprise Risk Management for Solvency Purposes) including the CommFrame material. This will form important new aspects for future FSAs in Asia Pacific.

This article was first published by Insurance Day on 10 October 2018