RBC 2, as it is called, covers a number of new proposals, particularly in the areas of calibration of required capital, alignment of available capital components with those in the MAS capital adequacy framework for banks, and the introduction of a matching adjustment for life business.
The consultation paper also contains technical specifications, which will guide insurers to conduct a comprehensive quantitative impact study (QIS) to fully understand the impact of the proposals of the RBC 2 review.
The MAS said it has reviewed the framework in light of evolving market practices and global regulatory developments, taking into account the practices of other major jurisdictions as well as the risk profile of the Singapore insurance sector.
In its proposals, the regulator said it considers it “prudent” to impose capital requirements at both the insurance fund and company levels.
The fund solvency requirements help to ensure that for each insurance fund, there are sufficient financial resources to cover the total risk requirements while the capital adequacy requirements at the company level help to ensure that there are also sufficient financial resources to cover the total risk requirements for the shareholders’ funds, the report said.
If an insurer’s capital falls below its prescribed capital requirement, the insurer will need to submit to the MAS a plan to restore its capital position within three months, the regulator said. MAS further said it will have the flexibility and discretion to allow insurers more time to restore its capital position, for example, during periods of exceptional market stresses.
The RBC framework for insurers was first introduced in 2004. It adopts a risk-focused approach to assessing capital adequacy and seeks to reflect the relevant risks that insurers face.
Recently, one of the MAS executive directors had said the regulator is reviewing the risk framework to make the industry more robust.
Key Proposals under RBC 2
MAS said it expects to finalise the calibration factors and features of the RBC 2 framework by 2014 and formally implement the RBC 2 requirements from 1 January 2017 in consultation with the industry.
Some key proposals from the consultation paper, which is open for comments until 30 June, are detailed below:
- Introducing “a matching adjustment” to the discount rate so as to address the risk posed by short-term interest rate movements on the valuation of the fixed income assets that are normally likely to be held to maturity.
- To gradually phase out over the next five years, the use of the long term risk free discount rate for SGD-denominated liabilities of duration 30 years or more.
- To recalibrate the risk requirements in order to ensure that an insurer holds sufficient capital to buffer against losses.
- In response to industry feedback from the first consultation, the MAS proposes to recognise diversification between the insurance and asset risk requirements, as well as between some of the underlying risk requirements within these two categories of risk.
- As an integrated supervisor overseeing all financial institutions including banks and insurers in Singapore, the MAS also aims for a level playing field and a consistent regulatory and supervisory framework for financial institutions.
The MAS noted that there have been developments in the capital framework for banks since RBC was introduced in 2004, and it was also modified in September 2012 to implement Basel III capital reforms.
Noting this, the MAS said: “It was thus an opportune time for MAS to conduct a more comprehensive review of the components of available capital for insurers and propose alignment where appropriate.”
Among its other proposals, the MAS said it plans to introduce a new category of Common Equity Tier 1 for licensed insurers incorporated in Singapore.
The MAS has directed all insurers (with the exception of captives, Lloyd’s insurers and marine mutuals) to conduct QIS 1 and submit the report by May 30.
According to the regulator, this will allow the insurers to understand the impact of RBC 2 proposals on their capital positions, as well as give them an opportunity to highlight any implementation issues experienced in conducting QIS 1.