Risk Based Capital in the Philippines:Are ‘Cats’ the ‘Elephant in the room’?
ICRM Symposium 2014, 24-25 April 2014Financing of Natural Catastrophes in Asia
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Contents
►Overview of NMG►The elephant in the room►What is Capital►What is ‘Risk Based Capital’►The situation in the Philippines5th
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Matthew Maguire
□ Matthew is a Partner with NMG Consulting, based in Singapore and Kuala Lumpur and has nearly 20 years general insurance experience in Australia, the UK, Hong Kong and South-East Asia
□ Matthew’s experience covers all of the major areas where GI actuaries work including: a large personal lines focused direct insurer, a London Market commercial risks insurer, a reinsurer, a reinsurance broking team, a direct broking team and now as a consultant.
□ His experience covers the full range of actuarial activities such as: the pricing of standard risks (personal lines), the pricing of unique risks (corporate and reinsurance), reserving, reinsurance commutation negotiations, Alternative Risk Transfer modelling and structuring, operational risk modelling, Risk Based Capital model development and implementation, business planning and forecasting, Mergers and Acquisition valuations.
□ Matthew is currently the signing actuary for companies in four countries throughout the region. He is the Vice President of the Singapore Actuarial Society, and past-Chair of the General Insurance Committee. He is also a member of the MAS Natural Catastrophe working party.
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NMG Actuarial regional footprint 2014
MALAYSIA• Statutory liability valuation• Pricing of Personal Lines • Retirement Benefits Valuation
SINGAPORE• Statutory liability valuation• Pricing of Personal and
Commercial Lines
PHILIPPINES• Earthquake
Catastrophe Insurance
INDONESIA• Statutory liability valuation• Pricing of Personal LinesSRI LANKA
• Statutory liability valuation• RBC Advisory Services• Pricing of Personal Lines• Retirement Benefits Valuations
THAILAND• Statutory liability valuation• Pricing of Personal Lines 5th IC
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Elephant in the Room?
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Cats?
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Catastrophes (Cats) in the Philippines - 2013
Flood: – Aug 2013
Quake: – Oct 2013
Wind: – Nov 2013
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What is capital?
Different ‘types of capital’ for insurance companies
Regulatory Capital• What level of risk can
society accept?• What happens to the
company if its capital falls below this level?
Management/ Economic Capital• What is the Risk
Appetite of the Company’s Management?
Rating Agency Capital• What is the external
perspective of the riskiness of the company
Purpose of Capital in insurance companies□ Meet policyholder’s obligations when premiums have proved insufficient □ Provide confidence in a company□ Meet the regulator’s requirements
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Evolution of regulatory capital
As the global insurance landscape evolves andbecomes increasingly sophisticated over time,the demand for more robust and tailoredregulatory capital models has increased toensure that risk-profiles of different insurersare adequately captured
bal insurance landscape evolves andncreasingly sophisticated over time,nd for more robust and tailored
capital models has increased toat risk-profiles of different insurersately captured
Simple Formulae (Traditional Solvency Rules)• Minimum $ Value• % of Premiums• % of Reserves
Advanced Formulae (RBC models)• More detailed risk
interaction• Industry
benchmarks
Internal Capital Assessment (Solvency II)• Captures the
individual risk characteristics
• Requires regulator validation
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Fair competition between different players
- More capital required for volatile businesses written
- Better reflection of financial strength and differentiation between insurers with varying profiles
Gain international credibility- Local regulators may enforce this to
meet the Financial Sector Assessment Program (FSAP) expectations by IMF
- Encourage market entry of foreign players
Better regulation- Provide specific capital levels as
early warning indicators to respond to emerging risks in a more pre-emptive manner
- Explicit charges enhance transparency of risks
Enhance risk management practices
- Ensure insurance companies remain solvent on an on-going basis
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Components of RCR
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Risk-based Capital
Required (RCR)
Credit Risk
Concentration Risk
Market Risk
Insurance Liability
Risk Reinsurance Risk
Catastrophe Risk
Operational Risk
Components of Risk-based Capital Required (RCR):
Losses from asset defaults
and inability to meet contractual
financial obligations
Reduction in market value due to exposures to equity, interest rate, property and
currency Limits on assets to
avoid overconcentration
on a certain class of asset
Risk of insufficient PL and higher outstanding CL
Default risk of an reinsurer
Extreme of irregular events over and above
liability risk
Losses arising from inadequate
or failed internal
processes, people & systems
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Key principles underlying RBC
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Key underlying principles: - Risk-sensitive capital requirements versus the ‘one size fits all’ approach
- Total balance sheet approach – recognise all relevant risks and the interdependence between assets, liabilities and capital
- Market consistent valuation of assets and liabilities on an economic basis
- Incentivise active risk management
- Early warning mechanism for capital deterioration for timely supervisory intervention
- Robust framework to incorporate international developments on capital adequacy and accounting standards
IAIS framework links regulatory components & supervisory actions
Preconditions
Supervisory Action
Regulatory requirements
Supervisory assessment and intervention
• Insurance Supervisory authority• Insurance Sector and Supervision
Market Conduct
GovernanceFinancial
ts & supervisory actions
visory assessment and intervention
Market Governancecial
RBC forms part of the ‘financial’
component
LEVEL 1
LEVEL 3
LEVEL 2
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Key features of RBC Formula Approach
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Level of capital that is commensurate with risk level□ Higher risk, potentially higher rewards, but need more capital to sustain
volatility of results□ Risk-adjusted return on capital
Typical RBC Framework□ Formula-based□ Higher risk charge on higher risks□ General considerations:
- Exposure to risk, parameters, correlation, risk charges, capital available□ Enables comparison and more transparency
Total Balance Sheet Approach□ Insurance markets are moving away from the ‘one-size-fits-all’ solvency
regime where insurers are only required to maintain a solvency margin□ ie the difference between the value of the assets and the value of the liabilities
□ The RBC framework is based on a ‘total balance sheet’ approach, with specific rules on capital resources and capital requirements
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Snapshots of global developments in RBC
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European Union:Solvency II - 1 Jan 2014Public consultation on draft standards and guidance in late autumn 2012Approval of Omnibus IIExpected implementation in 2016?
Taiwan (2003):Tracks closely to NAIC RBCRegime with total adjusted netcapital to risk-based capital maynot be lower than 200%
yRegime with total ustedadj netcapital to risk-based apitalca maynot be lower than 200%%
Malaysia (2009):RBC introduced in 2009, followed by additional ‘quick-fix’ in 2011Broadly similar to Australia’s RBC framework
Australia (2002):Prudential standards on Capital AdequacyGPS and LPS 110 etc.Aims to align capital requirements forgeneral and life insurersAPRA actively developing New life andgeneral insurance capital (LAGIC) reformssince announcing the review of the capitalframework in 2009
United States (1992):RBC model by NAICContinuous review through its Solvency Modernisation Initiative
cy
Singapore (2004):Broadly similar to Australia’s RBC framework2012 review in light of global regulatory developments- Revise capital available
definition in light of Basel III- Macroeconomic surveillance &
group-wide supervision- Explicit levels of capital- Strengthen ERM and stress
testing
ac
n capital requirements fofe insurersy developing New life ananceance capitalcapital (LAGIC)(LAGIC) reformreformcing the review of the capita2009
cy
or
dmsms
al
-
--
Indonesia (1999):Current minimum requirement for the ratio is 120%, an improvement from its initial minimum requirement of only 15% in 1999
Canada (2003):Minimum Capital Test for GIMinimum Continuing Capital andSurplus Requirements (MCCSR) for LIo Continuous fine-tuning by OSFI
2):
nts (MCCSR) for LItuning by OSFI
Switzerland (2006):Swiss Solvency Test (SST)The use of an internal model is compulsory if standard model do not adequately reflect the risk profile of the insurer
Worldwide trend shows that RBC has already been implemented or being developed, in various forms in many jurisdictions
stralia (2002):Prudential standards on Capital AdequGPS and LPS 1
andards on Capital Adequ10Indonesia (1999):00 etcetc..
Sri Lanka (2009):RBC introduced in 2014 (soft), followed by full in 2016Broadly similar to Australia’s RBC framework
not be lower than 200%%by additional ‘quicknotnot bebe lowerlower thanthan 22- in 2011fix’ 0000%%%Broadly similar to alia’s Austra RBC framework
Philippines (2006):Based on the NAICFocus is on Asset Risk5th
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Key features of Philippine RBC
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□ Commenced in 2006
□ Based on the US NAIC system at the time
□ RBC Ratio = Networth / RBC Requirement
□ “Every non-life insurance company is annually required to maintain a minimum RBC ratio of 100% and not fail the Trend Test”□ Insurance Memorandum Circular – July 2006
□ Trend Test: Linear extrapolation of RBC Ratio from last year to this year to next year
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Key features of Philippine RBC
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□ Heavily weighted to the Asset Risks□ Fixed Interest Securities – based on bond rating□ Equity Securities□ Credit Risk
□ High level loading for liability risks□ Premium risk – adjustment for ‘high growth’□ Unpaid Claim risk5th
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Key features of Philippine RBC
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□ Company Action Event (RBC ratio 75% - 100%)□ Submission of a business plan that explained how the event occurred and corrective
action planned
□ Regulatory Action Event (RBC ratio 50% - 75%)□ Commissioner can perform such examination as deemed necessary and issue a
Corrective Order
□ Authorised Control Event (RBC ratio 35% - 50%)□ Commissioner can place the company under regulatory control if deemed to be in the
public interest
□ Mandatory Control Event (RBC ratio < 35%)□ Commissioner required to place the company under regulatory control
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Key features of Philippine RBC
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□ Missing many of the ‘modern’ risk sensitivities□ Underwriting risk by type of business□ Credit risk for non-investment assets eg Reinsurance by counter party rating□ Operational risk□ Concentration risk□ Catastrophe risk
□ Time for an update.5th IC
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Matthew MaguirePartnerTel: +65 6325 9842 [email protected]
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