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Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
Kpmg Evolving Insurance Regulation 2012 02
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Kpmg Evolving Insurance Regulation 2012 02

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The focus of the 2nd edition extends from risk management and prudential change to include the insurance regulatory reform initiatives.

The focus of the 2nd edition extends from risk management and prudential change to include the insurance regulatory reform initiatives.

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  • 1. FINANCIAL SERVICES Evolving InsuranceRegulation Time to get ahead... February 2012 kpmg.com
  • 2. Giles Williams Jim Low Simon Topping Partner Partner Principal Financial Services Financial Services Financial Services Regulatory Centre Regulatory Centre Regulatory Centre of Excellence, of Excellence, of Excellence, EMA region Americas region ASPAC region KPMG in the UK KPMG in the US KPMG in China About this report This report was developed by KPMG’s network of regulatory experts. The insights are based on discussion with our firms’ clients, our professionals’ assessment of key regulatory developments and through our links with policy bodies. We would like to thank members of the editorial and project teams who have helped us develop this report: Editorial team Contributing Project team Editor Weronika Anasz, KPMG in China Clive Briault, KPMG in the UK Kate Forgione, KPMG in the UK Mike Hamilton, KPMG in Canada Rachael Kinsella KPMG in the UK Meghan Meehan, KPMG in the US Frank Oberholzner, KPMG in Germany Annelize Snyman, KPMG in South Africa Brittany Spriggs, KPMG in the US Rob Curtis David Sherwood Martin Noble Mary Trussell Director US Head of Insurance Senior Manager Partner Liz White, KPMG in the UK Insurance Regulatory Insurance Insurance Giles Williams, KPMG in the UK Financial Services Financial Services Financial Services Accounting Advisory Regulatory Centre Regulatory Centre Regulatory Centre Services of Excellence, of Excellence, of Excellence, KPMG in the UK EMA region Americas region ASPAC region KPMG in the UK KPMG in the US KPMG in China© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 3. Contents Foreword 2 Executive Summary 4 Latest developments in the IAIS 6 – ComFrame – Systemic Risk Perspectives: ASPAC 14 – sia Pacific country updates: Regulatory, A solvency, IFRS and consumer protection Evolving global solvency developments: 24 beyond compliance, towards value creation – isk and finance transformation R Perspectives: Americas 28 – mericas country updates: Regulatory, A solvency, IFRS and consumer protection Moving the consumer protection agenda to the front line 38 – Key regulatory initiatives to impact insurers Perspectives: EMA 48 – Solvency II update – Consumer protection changes – Insurance Mediation Directive 2 (IMD 2) – Packaged Retail Investment Products (PRIPs) – Retail Distribution Review (RDR) – Latest developments in the UK and South Africa Financial reporting, valuation and disclosure – the latest developments 56 Abbreviations 63 Acknowledgements 64© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 4. 2 | Evolving Insurance Regulation | February 2012 Foreword Welcome to the second edition of Evolving Insurance Regulation. Economic pressures This publication is part of a series which focuses on the emerging regulatory developments currently facing the financial services Insurers have been affected by the industry and accompanies KPMG firms’ other publications on banking general economic malaise. Sluggish and investment management. economic growth, enduring high inflation and the failure to resolve the This year the focus extends from risk management and prudential Eurozone crisis continue to present change to insurance regulatory reform initiatives currently underway extreme challenges. Much of the around the world, including the increased focus by many jurisdictions world continues to have historically on the new consumer protection agenda and the likely implications low interest rates, impacting capital of these reforms on the insurance sector. markets, bond prices and shareholder returns. Political and systemic risk has increased due to continuing Eurozone concerns and budgetary difficulties At the beginning of 2011, many were in the US. This instability is creating hoping that the worst of the Global pressure for the banking system, Financial Crisis (GFC) might be nearing an particularly in Europe, where credit end. By contrast, 2011 further highlighted availability and liquidity remains an the fragility of the global economy. issue. This has a knock-on effect on The fiscal vulnerabilities of a number the wider economy. of Eurozone countries contributed significantly to continuing uncertaintyJeremy Anderson in global markets. In turn, this has led toGlobal Chairman, increased political volatility, social unrestKPMG’s Financial Services Practice and civil disturbance in many countries. While emerging economies in Asia and other regions continue to flourish, they For many insurers, regulatory nonetheless remain interconnected with requirements will present the fortunes of western markets. challenges to their existing Given the unrelenting pace of reform, distribution models and the strategic challenges facing cost structures. insurers continue to build. The pressure confronting insurers can beFrank Ellenbürger broadly grouped into five key drivers:Global Head of KPMG’s economic, regulatory, consumer,Insurance Practice strategic and operational. Insurers have significant challenges to face in 2012. The economic outlook remains uncertain and consumer expectations are higher than ever. Financial regulation is complex and interconnected and the unevenness of global requirements will ensure application remains problematic for many firms. However, for those insurers prepared to rise to these challenges, by transforming their business and embracing the new consumer agenda, the rewards could be great.© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 5. Evolving Insurance Regulation | February 2012 | 3Regulatory pressures Strategic and Consumer pressuresThe G20 and other political and operational pressures The industry continues to face thesupervisory bodies continue to drive Achieving operational excellence and challenges of generally low levels offinancial services sector reform – improving balance sheet performance consumer satisfaction and increasedboth globally and at a local level. In will be key strategic objectives for consumer uncertainty. In particular,response to many of these pressures many firms in 2012. Following a tough pension provision is increasinglyand to country specific issues, year in 2011, insurers are reviewing becoming a political and social issuesupervisors have focused heavily on their risk appetite limits, reassessing in many regions. The GFC and recentimproving their respective structures product lines and geographical exposure consumer financial sector mis-sellingand frameworks. The adoption of new to vulnerable areas, while continuing scandals in some countries haveInternational Association of Insurance to manage capital requirements and weakened investor confidence inSupervisors (IAIS) standards in increasing transparency demands the market. For firms, this is a starkOctober 2011 was a catalyst for many from regulators. This is all happening reminder that consumer protectionsupervisors to commence reform, against a backdrop of a general skills goes beyond transparency in financialparticularly in the Americas and Asia. shortage in the global insurance products to include the integrity of the The US market is undergoing industry, where the demand for sales process and consumer targeting.significant changes as a result of the talent to respond adequately to these The forthcoming customer protectionDodd-Frank Act (DFA) and from new increased financial, risk and regulatory regulatory initiatives are aimed atdevelopments arising from the challenges is intense. restoring consumer confidence,Solvency Modernisation Initiative, Maintaining and growing the establishing greater harmonisation,such as the Own Risk and Solvency business continues to be the key increasing competition and creating aAssessment (ORSA). This is likely objective for most insurers. In many level playing field in financial markets.to introduce a step-change in risk markets, consumer sentiment is Regulators hope to achieve this bymanagement practices by US insurers. at an all-time low. Historically stable taking action against firms that In Asia, prudential issues and consumer bases have been disrupted mistreat their customers. This willchanges to International Financial by poor practices and revolutionised focus on customer relations and theReporting Standards (IFRS) continue in some markets by the step-change provision of the right incentives toto be the main areas of focus for most in distribution channels. Firms are curtail inappropriate selling practices.firms. In Europe, insurance firms are becoming aware that they will need Although the regulatory focus oncontinuing to invest in development of to re-structure their operations and consumer protection has, until recently,adequate infrastructure and systems develop new capabilities to meet been largely Europe-centric, weto meet the extended 2014 Solvency rising customer expectations, while expect this trend to extend acrossII implementation date. In addition, working within the bounds of other regions in the near future, albeita raft of new customer protection regulatory constraints. manifesting itself differently. Forregulatory initiatives is due to be For many insurers, regulatory insurers, consumer confidence andimplemented, which will require requirements will present challenges trust are essential to promote long-firms to begin actively engaging in to their existing distribution models term financial stability, growth,such reforms. and cost structures. While insurers efficiency and innovation within their have endeavoured to enhance their firms. Insurance leaders face a series customer proposition (for example of tough judgement calls – particularly through simplifying their product concerning the strength of their portfolio and pricing across multiple relationships with customers – and channels), achieving such aims has will need to develop new strategies not always been easy. This will likely to maintain competitive positions. require a re-focusing on achieving internal operational efficiencies, to optimise capital, reduce cost structures and foster a customer- focused organisational culture. © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 6. Executive Summary Against the backdrop of the Despite 2011 being a milestone change differs across markets in the Eurozone and sovereign debt year for global financial regulation region, but the overriding direction of crises, 2012 is undoubtedly shaping implementation, the insurance sector travel for many Asian supervisors is the up as a challenging year for insurers is far from having a truly harmonised set implementation of the IAIS Insurance and financial markets generally. of international regulatory requirements. Core Principles (ICPs). These were This publication examines ways This report provides an update on the formally adopted in October 2011 and for firms to balance the competing latest developments in the IAIS, in will prove challenging for both supervisors particular their attempts to build a and firms to implement. We outline demands of both existing and new common framework for the supervision the progress being made in various prudential requirements, in addition of Internationally Active Insurance jurisdictions and the likely challenges to the growing importance of Groups (IAIG). We examine proposals facing insurers in those markets. consumer protection oversight. by the G20 and the Financial Stability From the plethora of legislation Board (FSB) to improve financial stability currently being proposed, we know and governance of the financial services that there will be a divergence of sector – most notably the additional global and national regulatory agendas. requirements on financial institutions Insurers need to act now to re-assess deemed to be of Global Systemic their business models and operating Importance (G-SIFIs) – and analyse what structures to be able to effectively further efforts could be undertaken to manage the required changes. Risk and achieve greater efficiencies in this area. finance functions will be required to The ASPAC Perspective provides transform into dynamic and influential a detailed overview of the important parts of the organisation. Strategic regulatory changes occurring in risk decision-making will need, more than management and solvency, IFRS and ever, to be informed by quality and consumer protection across the diverse timely information derived from risk Asia-Pacific region. Clearly the pace of management systems and processes.© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 7. Evolving Insurance Regulation | February 2012 | 5From the plethora of legislationcurrently being proposed weknow that there will be adivergence of global and nationalregulatory agendas. Insurersneed to act now to re-assesstheir business models andoperating structures.Evolving global solvency will be influential in how financial services Of course, no analysis of thedevelopments: beyond compliance companies do business in their markets developments affecting the globaland towards value creation explores with both clients and peers, especially insurance market would be completethe global solvency issues, providing as consumers themselves increasingly without examining the continuinginsights into what this may mean for expect to receive informed, fair and efforts by the International Accountinginsurers going forward. It is clear that in efficient service when it comes to Standards Board (IASB) and the Financialan increasingly uncertain world, insurers insurer-customer relationships and Accounting Standards Board (FASB)will require a simple, high performing products. We analyse the likely strategic to progress and seek convergence onrisk management system that is fully implications of the consumer protection the IFRS insurance contracts project.embedded within their respective firms agenda and provide a detailed review of Undoubtedly, this work will be an importantand driving informed decision-making. what increased consumer protection component to ensure global consistencyEffective risk management has never regulation could mean for insurers in in the provision of financial informationbeen more important in building and terms of the products offered and and reporting. In particular, the issue ofsustaining a competitive advantage. distribution channels used. insurance liability volatility and the The move to improve risk management While the speed of implementation presentation of such results remains aframeworks is not confined to European of reform is likely to vary considerably key area of debate around the globe.and Asian firms. Significant prudential across regions, the European Commission The review of the latest accounting,and consumer protection developments (EC) has been active in developing valuation and disclosure developmentsare also occurring in North and South new consultation proposals on consumer provides a snapshot of the elementsAmerica. The Americas perspective protection. These are expected to be already agreed and those still be to beoutlines the likely changes across various released in the first half of 2012, with resolved. We review the latest positionsmarkets and the expected impact such significant implications for insurers. on a number of the key areas stillreforms will have for insurers in these The EMA perspective analyses the being debated, such as discount rates,countries. The impact of these changes important conduct changes likely to unbundling, reinsurance, residual marginswill further influence the business affect insurers, particularly the second and disclosure issues. An overview is alsomodels and operating structures of Insurance Mediation Directive (IMD 2) provided of the similarities and differencesmost insurers in these markets and our and the Packaged Retail Investment between the IAIS standard on valuationinsights provide valuable information Products (PRIPs) consultation. Though and the proposals currently advancedregarding the likely changes such final rules are still being drafted, it is under IFRS, the impact of theseinitiatives may have. critical for companies to act now in developments on local markets, and The primary focus of supervisors in assessing the strategic and operational US GAAP and regulatory convergence.most jurisdictions for 2012 will continue impact such proposals may have acrossto be concentrated on capital, liquidity their businesses. These changes are 2012 will be a dynamic year. It’s timeand governance requirements. However, likely to have significant implications for to get ahead of the regulatory changeglobal policymakers, such as the G20, insurers’ products and distribution agenda – are you prepared?are increasingly turning their attention networks.to issues such as customer protection An update is provided on the latestas part of their financial services reform South African developments, along withinitiatives. The G20 has utilised the insights on the impact such proposalsOrganisation for Economic Co-operation may have on insurers and wider financialand Development (OECD) to develop services markets. This includes a detailedprinciples to address the conduct agenda. perspective of the South African market’sWe analyse what impact moving the current regulatory changes. It is likelyconsumer protection agenda to the that many of the Solvency II initiativesfront line may mean for insurers and the legislated will have wider implications forlikely changes required to strategic and insurers undertaking business on theoperational models. These developments African continent. © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 8. Latest developments in the IAIS IAIS completes major milestone to be considerable, especially in less The primary goal of ComFrame The IAIS, at their Annual General Meeting well-developed markets such as Eastern should be to establish a in Seoul on 1 October 2011, endorsed Europe, Africa, the Middle East and many framework for better supervisory their Insurance Core Principles (ICPs). parts of Asia and South America. These new ICPs herald a new regulatory co-operation, allowing a more environment for insurers and supervisors, ComFrame begins to take shape integrated and international essentially requiring supervisory regimes The IAIS continues to develop the approach. worldwide to establish risk-based ComFrame proposal – a comprehensive solvency requirements. This reflects supervisory framework for the supervision a total balance sheet approach on an of internationally active insurance groups economic basis, addressing all reasonably (IAIGs) – and in July 2011 presented its foreseeable and relevant material risks. initial concept paper. These solvency capital reforms are supplemented by required enhancements The IAIS has outlined the aims of in the role and activities of insurer risk ComFrame as: management, which effectively link the • Developing methods of operating front-end processes of accepting and group-wide supervision of IAIGs in monitoring risk more closely with the order to make group-wide supervision overall strategic goals and risk appetite more effective and more reflective at Board level. of actual business practices; For many jurisdictions, enacting • Establishing a comprehensive such changes into local frameworks framework for supervisors to address will require significant effort and the group-wide activities and risks and impact on the insurance sector is likely also set grounds for better supervisory© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 9. Evolving Insurance Regulation | February 2012 | 7 co-operation to allow for a more paper released in June 2011. Many KPMG continues to strongly support integrated and international approach; recognised that ComFrame needs to the overall aim of the IAIS: to foster and exist in order to address issues in the global convergence of regulatory and• Fostering global convergence of supervision of IAIGs and that the project supervisory measures and approaches regulatory and supervisory measures is therefore a significant development to insurance supervision. The primary and approaches. in international insurance supervision. goal of ComFrame should be to Supervisors are now trying to provide establish a framework for better ComFrame is split into five modules: further detail on the key components supervisory co-operation, allowing a of ComFrame. However, differences more integrated and international Module 1: among supervisors are beginning to approach. There are a number of key Scope of application surface, especially regarding solvency issues which remain to be addressed: Module 2: issues, for example: Group structure and business from • The use and scope of a total balance • What is a globally accepted level a risk management perspective sheet approach of policyholder protection? • Should a consolidated or aggregated If ComFrame is to achieve international Module 3: accounting measure be used? convergence and consistency in Quantitative and qualitative • How should risks actually be supervisory requirements, one of requirements measured? the most important issues to resolve Module 4: • How can a common methodology will be that of establishing an Supervisory process and co-operation on capital requirements be achieved? appropriate level of policyholder Module 5: • How can a common approach to protection – or put another way, Jurisdictional matters stress and scenario tests be achieved? determining the risk appetite of • How can a common methodology supervisors with regard to the failure to the supervisory assessment of an IAIG. An open and informedAlthough there are various approaches process be achieved? debate concerning minimumused globally to supervise IAIGs, the standards of global policyholdersituation still remains that no multilateral It is clear from various meetings of protection, and thereby capitalsystem is used by global supervisors the IAIS committees that a number requirements, is needed.to monitor IAIGs adequately. Some of key concerns still remain among As the international standard settersupervisors have taken a different jurisdictions: for insurance, it would be a curiousapproach by focusing heavily on a • What is the scope of an insurance decision for the IAIS to advocate ashareholding-centric model to analyse group? new, globally accepted commongroup structures. • What is the group capital assessment framework and not articulate the level As the international standard setter for designed to achieve? of policyholder protection it offers. Ininsurance, the IAIS has so far developed • How should solvency control levels addition to discussion and agreementa generic approach to building a global be determined? on the level of protection to whichframework for the supervision of IAIGs, • Should ComFrame require different policyholders are entitled, moreincluding developing the ICPs (of which intervention levels? debate is needed on the componentssome ICPs, such as ICP 23, specifically • Should ComFrame require a single of an effective global group-wideaddress group-wide supervision). methodology in determining capital supervisory regime, for example, Notwithstanding, the IAIS still lacks a requirements, or should multiple the determinants of key tools formultilateral response to the supervision methodologies be allowed? If so, how? an effective insurance supervisoryof IAIGs and ComFrame is intended • Does ComFrame mean one group regime. Failure by supervisors toto fill this void. Encouragingly, there supervisor or multiple supervisors reach satisfactory conclusions onwas generally broad support from IAIS involved in the supervision of an these important components willmembers and observers for the structure IAIG? What are the legal implications mean regulatory failure.and outline presented in the concept arising? © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 10. 8 | Evolving Insurance Regulation | February 2012 • What is the role and future of the should be given priority, especially as In November 2011, the IAIS released its IAIS as an international standard it is still unclear how ComFrame will preliminary findings and took a focused setter? interact with current supervisory view of whether insurers could pose The GFC highlighted the uncertainty structures. systemic risk – effectively being confined regarding the role, remit and ability of to the impact of non-core insurance the IAIS to facilitate, or be involved in, • Can there be greater international activities such as credit protection and any formal review process of an IAIG. co-operation amongst all standard asset leverage. However, it remains Key lessons learned by the industry setters? to be seen whether the G20, FSB and from the GFC were matters of IAIG It is clearly important that the IAIS national authorities will take a wider data confidentiality and information liaises closely with not only the view. For example, the EU Crisis and mechanisms to freely exchange Basel Committee for Banking and Management Directive is expected to sensitive information amongst International Organization of Securities apply to all credit institutions and could be supervisors. Commissions (IOSCO), but also the followed by a similar Directive for insurers. As the IAIS is developing ComFrame, Joint Forum and the Financial Stability In the meantime, the US authorities greater clarity and articulation Board (FSB) and G20 forums, if it is are expected to designate major insurers concerning its role and powers would to appropriately develop ComFrame. to be SIFIs, and to require them to be beneficial to both IAIS Members How IAIG supervision is envisaged to undertake resolution planning. The and Observers. For example, it remains interrelate with other sectors such as Dodd-Frank Act contains provisions for unclear as to whether the principal aim banking and conglomerates is critical non-bank financial institutions – which of the IAIS is to increase the intensity to avoid duplication and achieve includes insurance firms designated of supervision of the largest and most maximum efficiencies from supervisory by the Financial Stability Oversight complex global insurance groups, or processes. Further consideration Council (FSOC) as systemically important whether the primary intention is to of how ComFrame would be – to develop resolution plans. achieve greater global consistency. ‘operationalised’ on a conglomerate The first approach focuses on raising basis would therefore be beneficial. standards, and the latter focuses on wide and consistent application of Systemic Risk minimum standards. In their latest publication, arising from the G20 Cannes Summit held • What is the envisaged in November 20111, the G20 and FSB implementation of ComFrame? have outlined their clear intention to The path to implementation remains apply capital surcharges and a Recovery unclear. It has not yet been clearly and Resolution Plan (RRP) framework articulated how ComFrame is to all Significantly Important Financial envisaged to operate, for example, Institutions (SIFIs) – including insurers. whether ComFrame is intended to Additionally, the FSB is seeking national perform like the Basel Accord for authorities to put common powers Banking (with the intention that and tools in place for the resolution individual countries will implement of insurers. This takes into account ComFrame into their local law and that these tools may need to differ regulation and thereby replacing from the powers and tools necessary existing requirements) or whether a to resolve banks and recognises much looser supervisory arrangement that most national authorities is intended. Such uncertainty may slow already have powers in place to the overall development of ComFrame. transfer the business of insurance Resolution to such important matters undertakings. 1. Communiqué: G20 Leaders Summit. Cannes, 4 November 2011.© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 11. It would be ineffective andImplications for firms disproportionate to apply a banking style RRP frameworkIn KPMG’s August 2011 publication, • The capital structure of the insuranceRecovery and Resolution Plans for industry does not lend itself to to the insurance sector.Insurers – the need for a broader ‘run-on-the-bank’ type risksdebate, we articulated our view that a • The matching principle of assetsfundamentally different policy approach to liabilities has always been ashould be adopted for insurers, cornerstone of most insurance asset-compared to the banking industry. liability management practices The report highlighted that given • Insurance supervisors, have a betterthe significant differences between understanding and insight into thebanks and insurance firms; it would intrinsic risk in business models andbe ineffective and disproportionate the activities of insurers throughto apply a banking style RRP framework using catastrophe modellingto the insurance sector. Instead, a • Failure of an insurer’s particularmuch more pragmatic set of policy strategic plan or strategy does nottools is required to achieve an enhanced usually have the same immediatesupervisory framework for insurers. effects as it does in banking givenTo reflect the inherently different the liquidity considerations involvedoperating models and therefore • The engagement of rating agenciessystemic differences that exist and particularly their role inbetween banks and insurers, policy determining the level of reinsuranceoptions for recovery and resolution counterparty worthiness has hadfor the insurance sector should be a moderating influence over thede-coupled. For example: management and risk appetite of• Insurers are not direct participants of many insurers the payments and settlement system • In some markets, such as the US• Insurers are not dependent on the model of insurance regulation is short-term market funding, ie. unlike such that more than one regulator is banks, insurers do not borrow in the typically responsible for supervising short-term to finance risks over the a large insurer providing additional long-term scrutiny and challenge © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 12. 10 | Evolving Insurance Regulation | February 2012 Risk Management Continuum Risk Spectrum Preservation of franchise value Franchise risk/profit deterioration Franchise destruction Overview and Operations Risk Assessment Stress Testing Recovery Plan Resolution Plan Governance Structure and Current Exposures As-Is State Recovery Plan Resolution Plan • usiness and B • ignificant operations S • ignificant risk S • tress and reverse S • ontingent capital C • x-ante options and E strategic overview and activities exposures stress and liquidity priority (LOCs) • isk appetite, R • egal and functional L • Material’ business ‘ • olicies describing P • sset sales A • isposition D thresholds and structure units and legal permissible and business protocols and metrics • ey activity K entities activities and dispositions prioritisation based • isk management R inter-dependencies • ystematically S required corrective • xternal E on stress results oversight • aterial asset M important operations actions communication plan • iquidation DOAs L • eriodic (ie., annual) P mapping and technologies • vents triggering E • vents triggering E • egal and tax L with additional • redit and counter- C (trade settlement, etc.) recovery plan resolution plan planning refresh, review and party exposures • iabilities mapped L execution execution • egal entity review L approval as required • IS and critical M to entities • oordination with C • rocess and system P • upervisory S vendor relations • oncentration of C parent and liquidity deficiency reporting authorities • nconsolidated BS U business review priority Leverage Existing Materials Business plan ALM reporting – ORSA analysis Scenario analysis Liquidity contingency Regulator takes and overview credit concentration plans control as receiver Risk Appetite Legal entity ORSA/Internal Other stress testing Capital management Bankruptcy, bridge Statement documentation Model reports and insurer, purchase and documentation assumption Risk vision and policy excerpts Current view of ability to release capital and liquidity Develop and document contingent management actions Ability to ‘unplug’ legal and review ability to release capital and liquidity in response entities or economic to stress critical functions and wind-down the firm Stress builds from BAU To severe To fatal Building an appropriate policy models would also provide further of RRPs could be practically applied as framework – providing the link supervisory mechanisms to facilitate part of the ORSA analysis that insurers between RRPs and better risk effective assessment of the risk would be expected to review and include, management management techniques, capital and applicable to all firms. Specifically, a A fresh approach by policymakers is solvency positions of supervised entities. distinction can be drawn between policy required to properly address some of Our view is that the ORSA should be options to take forward aspects related the weaknesses in insurance supervision revised to take into account the lessons to recovery (which would provide a learned from the GFC. Perhaps the learned from the financial crisis. Many direct link with the ORSA), and issues greatest lesson learned is that all of the requirements set out in the IAIS pertaining to actual resolution, which insurers, irrespective of notional Enterprise Risk Management for should be considered separately by designations as systemically important, Solvency Purposes Insurance Core supervisors. need to ensure better risk management Principle (ICP 16) reflect, largely, the The following new analysis could be practices are applied. Importantly, from structure of requirements as prepared expected of insurers: a supervisory perspective, the need to for the ORSA by the Solvency Sub- address the deficiencies of current Committee pre-GFC. This also largely Potential economic impact supervisory risk management tools applies for the Solvency II ORSA considerations: remains urgent. framework. We suggest that, given The ORSA is a new policy tool being Supervision needs to view an insurer’s the lessons learned, the IAIS considers introduced requiring insurers to risk management as a continuum. augmenting its current ICP 16 to provide undertake an assessment of their own Using the continuum outlined above, a policy framework for FSB consideration risks, complemented by an assessment one of the most effective supervisory which can provide a pragmatic and of the capital required to meet such tools available to supervisors in the proportionate link between notions of risks. The focus of this assessment could assessment of risk management is the RRPs and improved risk management now incorporate risks posed to the Own Risk and Solvency Assessment for all insurers. By expanding the ORSA wider economic environment. In some (ORSA). Additionally, allowing internal requirements, the conceptual framework markets, supervisors are already moving© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 13. Evolving Insurance Regulation | February 2012 | 11The ORSA should be revised totake into account the lessonslearned from the financial crisis.towards requiring forward assessments as they were not designed for the type A practical policy option available toof the financial condition of an insurer, of extreme market event that occurred. supervisors is to formalise links betweenunder a range of scenarios. For example, Many firms’ stress tests failed to the strategic objectives and options ofin the UK, the Individual Capital adequately consider the magnitude insurers with risk appetite, establishingAdequacy Standards (ICAS) requires of shocks, the duration of the shock, formal reporting mechanisms. Extendingextensive testing of capital, insurance, risk concentrations and the extent of such arrangements to, for example,market, credit, liquidity and operational correlation (and contagion) between instances of acquisitions and mergers,risks, in addition to other relevant risks different positions, risk types and may also assist regulators to bettersuch as reinsurance, strategic risks, markets. Nevertheless, while there assess the systemic relevance of firms,and corporate governance risk. Such has been much discussion of the flaws as well as enabling insurers to articulaterequirements will ostensibly be extended and inappropriate usage of stress potential impacts to the business model.in Solvency II, (in the US via the ORSA tests prior to the crisis, there has These requirements could usefully formrequirements), and for those firms using also been concurrent recognition that part of the ORSA set of requirementsan internal model – including the capital such tests must be an essential tool expected of insurers.methodology proposed for calculating in building a resilient financial sector.capital requirements. A widening of The challenge for supervisors and Greater focus on non-core insurancethese existing and proposed supervisory importantly, for firms, is to set tests activities and off-balance sheet items:tools to take account of potential which are appropriately severe and Part of the ORSA analysis shouldeconomic impact considerations broad but not so implausible as to be of therefore be focused on examining thewould largely complement the analysis no use. As part of their ORSA analysis, impact that non-core insurance activitiesperformed. In this context, it would be firms should consider building in more and off-balance sheet items may havea cost effective and proportionate hypothetical sets of assumptions for on the financial condition of the firm.method for the insurance industry. how exposures may change in light Such an approach should adopt a total Regulators will look to groups – of unexpected shocks. balance sheet approach, where theparticularly those in Europe – seeking impact of the totality of the insurer’sinternal model approval, to demonstrate Risk appetite and strategy: material risks are fully recognised on anthey have a comprehensive understanding At its basic level, risk appetite defines economic basis. The GFC demonstratedof their business, contractual the level of risk a firm accepts. This that failure to appropriately recognisearrangements, structures, capital and is set from Executive and Board level the risks such activities can pose to aintra and extra group relationships. and is intertwined with the company’s group highlights a material weakness inThe extension of such analysis could strategy. A poor risk appetite or risk the overall risk management capabilitiesrequire insurers to have mechanisms tolerance setting and lack of goal clarity and functions of a group. Specificin place to restore the group in the case for the insurer can cause considerable requirements of this nature couldof solvency and/or going concern issues financial distress. One of the lessons therefore form part of the broader– or at least to consider such scenarios from the GFC has been that supervisors, ORSA requirements.within their ORSA or internal model and a number of insurance groups, The investments ICP (ICP 15) alreadyanalysis – and in a worse case situation, were not cognisant of the inherent exists and essentially requires insurersto deconstruct the group in an orderly underlying risks, particularly those risks to invest in assets with risks it canmanner. To be in a position to affect which may have systemic relevance. properly assess and manage. Thisappropriate mechanisms, insurers How risk appetite is effectively used especially concerns the use of morewill need insight into the potential and monitored is less well understood by complex and less transparent assettriggers. These are likely to require supervisors, as this has not traditionally classes and investment in markets orscenario analysis to understand the formed a key component of the financial instruments that are subject to lesspressure points and the likely sequence statutory returns of most supervisory rigorous governance or regulation.of events. jurisdictions – in particular, how the risk However, the current proposals are not It was also evident that many pre-GFC appetite of an insurer fits with the specific on which assets may requirestress tests were not fit for purpose, strategic direction of the company. further regulation, and it is clear from the © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 14. 12 | Evolving Insurance Regulation | February 2012 events of the GFC that further analysis identify scenarios that are most likely to be seen as a replacement. Preventative would be beneficial. For example, cause an insurer to fail) should also form action should remain integral to consistent requirements relating to part of a firm’s overall risk management prudential regulation. inherently risky financial instruments analysis and assessment and could that are likely to require greater scrutiny therefore form part of the ORSA. The Requiring an analysis of the by both firms and supervisors. These benefit of requiring such analysis is concentration of business written: include: special purpose vehicles, that it can provide both management HIH, the Australian insurance group that hedge funds, derivatives, private equity, and supervisors with the necessary ultimately collapsed in 2000, was a good structured credit products, insurance information to assess the adequateness example of the impact of its collapse linked instruments, and hybrid instruments of the management actions proposed, being detrimental to the local insurance that embed derivatives and dynamic in order to avoid business failure. This market in Australia. (HIH was the hedging programs. A first step would leads to an element of specific focus – dominant provider of indemnity coverage be to require firms to undertake specific that of resolvability and associated to the building industry). However, the analysis of such instruments within planning. Insurance failures are typically consequences of its collapse were not their ORSA assessments, with particular resolvable through an orderly run-off, on a global scale. The failure of HIH regard to whether such assets lead to but exceptions to this have occurred starkly demonstrated the impact that a an increased systemic risk scenario. and remain plausible. There may concentration of business underwritten therefore be a case for putting in place in a particular market or segment can Mandatory use of reverse stress ex ante arrangements to ensure an cause on the local economic system. The testing: orderly conclusion to various scenarios. dominance of HIH’s professional indemnity The use of reverse stress testing, or Such developments would complement business was allowed unchecked, test-to-destruction analyses (which prudential requirements, but should not amassing a disproportionate market share. The industry, as well as regulators, need to be reflective of their role and responsibilities in the wake of the Global Financial Crisis.© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 15. Evolving Insurance Regulation | February 2012 | 13The analysis of whether the sudden taken ensuring sufficient liquidity and for the risk function, including thewithdrawal of such cover could give rise solvency is retained. Board composition, veracity of risk decisions made. Ultimateto any wider economic impact on the role and effectiveness are a critical responsibility for the ORSA would belocal market had not been fully appreciated. component of any insurer’s financial maintained by the Board.The introduction of measures to assess condition and therefore play a crucialand determine market share criteria role in prudential regulation. The GFC Expanding the ORSA requirements tocould be one option available to highlighted that poor decision-making include company culture and ethicsinsurance supervisors, included within at either Board or senior management Although potentially challenging, thea firm’s ORSA. The inclusion of such level can contribute to financial malaise. notion of regulators playing a greater roleanalysis would likely expand the current Strengthening board competence in considering a company’s behavioursfocus of what is presently envisaged requirements, including various risk and or ethics may be a necessary additionfor most ORSA requirements. The auditing subcommittees and applying to effective supervision. Typically, aforward-looking nature of the ORSA increased assurance measures, are firm’s culture has not been the remitshould provide an additional tool to very likely to considerably strengthen of regulation, but it is hard to argue thatassist insurance supervisors in better the robustness of oversight functions behavioural issues were not deeplyunderstanding the existing local market within most firms. rooted in many of the causes of theconcentrations prevailing. Requiring demonstration of such crisis. A company’s culture affects A market concentration analysis analysis via the ORSA by key approved the leadership and strategy of the firm,requirement would also allow firms persons within firms, particularly in and ultimately shapes decision-making.to undertake discussions with their regards to complex financial transactions, The emergence of news concerningsupervisors in advance of any stress could provide an additional layer of excessive executive compensationenvironment, allowing for constructive expertise and assurance for insurers may reflect society’s general belief thatdialogue to occur regarding a firm’s to avoid some of the GFC experiences. the financial sector is not as ethicallystrategic objectives and marketing plans. sound as it could be. Excessive Formalising a Chief Risk Officer compensation itself was not a catalystEstablishing a better ladder of (CRO) role: for the GFC, but it represents a cultureintervention: The role and structure of risk of incentivised risk taking and a need forThe ladder of intervention provides an management has received considerable potential structural reform. It is thereforeopportunity for regulators to establish attention post-GFC. A consideration likely that further developments area new control level, based on the risk going forward is the need to enshrine necessary to embed more responsibleassessment posed by insurers. This its role with a distinct function or attitudes and a change of culture withinspecifically assesses whether the insurer ‘line of defence’, which holds an the industry. The industry, as well asconcerned presents any systemic risk to aggregate view of risk across the regulators, need to be reflective of theirthe local market. Such an intervention insurer, independent of the business. role and responsibilities in the wake oflevel could take the form of additional Consideration could be given to the the GFC. In light of these, examiningrisk management requirements and be benefits of formalising the role of the ways to allow the ORSA to capturebased on the insurer’s ORSA. Chief Risk Officer (CRO) at the head information about the company’s culture of the risk management function and and ethics may therefore be a usefulEnhanced corporate governance their accountability for risk within the addition to the overall risk managementrequirements: organisation. This is similar to the general framework.Corporate governance is a key direction of development in manycomponent of solvency. The GFC markets, and within Solvency II, of anbrought into relief ongoing shortcomings actuarial function. The formalisation ofwithin the ability of many Boards in a CRO role and function could provideensuring that the firm provides firms and supervisors with a level ofadequately against the risks being enhanced independence and challenge © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 16. 14 | Evolving Insurance Regulation | February 2012 Perspectives: ASPAC There have been a number of important regulatory advances that are expected to have an impact in the region in the coming months and years. The region is experiencing increased transaction activity in the insurance sector, and many organisations are looking to capitalise on the potential growth opportunities. This year’s Perspectives: ASPAC section has been expanded to provide a more in-depth coverage of market and regulatory movements across the region, beginning with an overview of two key areas – Prudential Regulation and Customer Treatment. The country summaries provide further localised focus. Prudential regulation: The impact region will need to substantially upgrade data privacy impacting direct marketing of the new IAIS standards their ERM and capital management and cross-selling (eg. between banking The adoption by the IAIS of a new suite capabilities over the next few years. and insurance entities of a group), of Insurance Core Principles (ICPs) will Even though the ICPs currently take controls over multi-ties and who may have a significant impact on the form the form of high-level principles-based sell insurance in bank branches, and and extent of prudential regulation within requirements, they nonetheless require increased disclosures. the Asia Pacific insurance markets. all supervisors to enact the requirements In particular, the IAIS capital adequacy into their local supervisory frameworks. Asia-Pacific regulatory developments – standard includes general requirements If they do not, they risk receiving an country focus on the use of internal models to determine adverse finding from the IMF/World The following provides an update of key regulatory capital requirements (where Bank in their Financial Sector Assessment regulatory and market developments this is allowed by the supervisor) which Programme (FSAP) reviews. There are within the Asia-Pacific region, followed will herald a major step forward in the some who argue that the ICPs do not go by a summary table of the main risk Asia-Pacific supervisory arena. far enough – they do not, for example, management and solvency, IFRS, and However, of all the new IAIS require consistent calibration of capital consumer protection activities within standards, the ICP on Enterprise Risk requirements between countries. each market. Management (ERM), ICP 16, is likely Nevertheless the ICPs are undoubtedly to be the most significant. The ICP a step in the right direction. Australia requires supervisors to seek high Similar to other markets covered in standards of risk management and Customer treatment: changing this section, natural catastrophes have governance from insurers and, critically, conduct of business received a lot of attention in Australia supervisors are being encouraged to Models of consumer protection vary in the last 12 months. Larger Australian challenge the insurers they regulate on considerably in Asia Pacific, but generally insurers were not only exposed to risk management issues. In particular, it has not yet embraced the principles- events in Queensland – many were also the IAIS ERM standard requires insurers based customer-centricity seen in the exposed to the Christchurch earthquake to produce an ORSA, under which an UK and parts of the EU. In Asia, many in New Zealand. As an example of insurer undertakes its own forward- countries use an alternative model, possible regulatory reaction, flood cover looking self-assessment of its risks, its with a focus on achieving customer may become mandatory for homeowner capital requirements and the adequacy protection through regulatory pre- property insurance policies in Australia. of its capital resources. Many of these approval of product designs and pricing. Insurers are also looking to streamline requirements are new to the Asia-Pacific Current areas of regulatory focus include operations and increase operating region. We expect insurers across the increasingly more stringent controls over efficiency to protect profitability, in an© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 17. industry faced with volatile investment Hong Kong for policies denominated in across both life and non-life sectors.markets, strong competition (price and the appreciating Chinese currency. Penetration levels are expected tochurn), significant claims inflation for The Office of the Commissioner of increase as economic growth continues,certain lines, and increases in reinsurance, Insurance (OCI; Hong Kong’s insurance and recent natural catastrophes inregulatory and staffing costs. regulator), may be replaced by an neighbouring countries are also expected Against this backdrop, insurers are Independent Insurance Authority (IIA) to increase awareness for propertyin the process of understanding the as soon as 2013, which is expected to protection.new life and general insurance capital bring enhanced regulation of insurance The steep increases in minimum(LAGIC) standards, which are due companies and intermediaries. In the regulatory solvency capital requirementsfor release this year. The Australian meantime, the OCI continues to outline are expected to drive consolidation inPrudential Regulation Authority (APRA; short, medium and long-term insurance the market.the prudential insurance regulator) has regulatory reform, and is regularly citingbeen very active in developing the LAGIC the recently adopted IAIS ICP standards Japanreform since announcing the overhaul as examples of the likely changes To expand their footprint and in search ofof the capital framework in 2009. APRA needed to be adopted at the local level profitable growth, a number of Japaneseis an active member of the IAIS, and including much talked about RBC reform. insurers are keen to look for opportunitiesLAGIC is expected to be compliant with in overseas insurance markets, andthe new ICPs. India in particular in the Asia Pacific region. The dramatic shift in the availability of The earthquake in March 2011China products in the market has helped to impacted the domestic insuranceAs the insurance industry in China fuel the Indian insurance market across market, particularly non-life insurers,continues its rapid expansion, the the life, non-life, and health sectors. and continues to influence the overallregulatory environment needs to The numbers of policies sold in the past economy by way of the recovery plans.evolve to keep pace with the additional decade have risen significantly. Industry Post earthquake, insurers will bechallenges created in a dynamic market figures indicate that this has increased influenced directly by increases in theenvironment. The China Insurance the total penetration of insurance cost of reinsurance, a desire to restoreRegulatory Commission (CIRC; China’s (premium as a percentage of GDP) from an appropriate level of reserves, managinginsurance regulator) has spoken about 2.3 percent in 2001 to 5.2 percent in 2011. earthquake insurance coverage limits,the importance of managing the capital The Insurance Regulatory and and so on. In addition, the recent Bangkokstrain of new business. As with other Development Authority (IRDA; the floods have had an impact on theregulators in the region and other IAIS insurance regulator), which is a member Japanese non-life insurance marketmembers, the CIRC is keeping a close of the IAIS, has introduced a number due to the location of many off-shoreeye on international regulatory of reform packages in recent years. Japanese industrial operations.developments – in particular we have This includes regulation on investments Japan’s Financial Services Agencyseen recent enhancements to ERM, that insurance companies can make, (JFSA, whose role includes that of theand anticipated reforms to solvency risk management guidelines, and insurance regulator) is a member of thecapital standards in the medium-term. customer treatment regulation (in IAIS, and like many other jurisdictions in particular relating to the sales of unit the region, we are expecting regulatoryHong Kong linked insurance policies). developments resulting from adoptionHong Kong’s insurance industry of the ICPs in due course.continues to grow strongly, with growth Indonesiarates in both the life and non-life sectors As in other Asia Pacific insurance Koreaof above 10 percent in the first nine markets, much attention is being placed Seoul hosted this year’s IAIS Annualmonths of 2011. RMB-denominated on Indonesia as a country with significant Conference. At the welcoming addressproducts have seen particular growth, growth potential. We have seen of the conference, the Financialstemming from customer demand in increased transaction activity and interest Supervisory Service (FSS; the insurance © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 18. 16 | Evolving Insurance Regulation | February 2012 regulator) highlighted the growing focused on evaluating the costs of the The financial crisis provided interconnectedness in the global catastrophe, with knock-on effects on valuable lessons on corporate marketplace, stressing the importance the pricing of policies in earthquake- governance, including the of the various initiatives of the IAIS to prone regions and the reinsurance market. promote a globally accepted framework At the same time, the New Zealand importance of effective risk- for the safe and sound supervision of life and general insurance sectors are based oversight, monitoring the insurance sector. The FSS also about to enter into a more focused of activities, and remuneration highlighted the area of micro-insurance regulated regime, since the September at Board level. as an important development for low- 2010 Insurance Act replaced the income populations. Insurance Act of 1908. The Reserve Separately, Korea’s retirement Bank of New Zealand, the insurance pension market has grown significantly regulator, is currently processing all since the second half of 2010, where insurer provisional licence applications, the new retirement pension has replaced which are required to be in place by the retirement insurance and retirement 7 March 2012 in order to continue writing trust system that was terminated at the new business. Insurers will need to end of 2010. A relaxation of regulation on obtain full licences by 7 September 2013. the sale of retirement pension products, This first-time regulation of the industry is as well as an expansion of tax incentives, expected to have its challenges, as both has accelerated growth in this market. the regulator and insurers determine what is required. Malaysia Top of insurance Board concerns in the Philippines Malaysian marketplace are regulatory The Philippines insurance market compliance, increased competition due is another market where there is to the liberalisation of the market, and an opportunity for insurers to take a shortage in insurance resources as advantage of the expected growth the industry continues to grow. Merger in insurance penetration rates. and acquisition activity continues to The top three concerns of Boards of be buoyant, and Malaysia has recently insurers in the Philippines are currently seen the expansion of the Takaful market profitability, regulatory compliance, and with the issuance of four new licenses coverage and penetration, which match in 2010. concerns in other key growth markets. Bank Negara Malaysia (BNM), the Increases in the minimum capital country’s insurance regulator, has a requirements are also expected to keen interest in emerging international drive consolidation in the Philippines regulatory developments including the insurance market. newly adopted IAIS standards relating to investments, ERM, and capital adequacy. Singapore The Monetary Authority of Singapore New Zealand (MAS) keeps the insurance law and The insurance industry in New Zealand regulations under continuous review, and is still managing the impact of the engages in industry-based consultation earthquake and subsequent aftershocks as it seeks to apply international that struck Christchurch in February 2011. regulatory developments and new local In particular, general insurers remain requirements in the local market.© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 19. Evolving Insurance Regulation | February 2012 | 17The MAS frequently shares information The Taiwanese insurance regulator, disclosure and introduced agenton regulatory developments in the Insurance Bureau (IB), is a member qualifications and conduct standards.Singapore publicly on its website and of the IAIS. The IB, like their regional Some insurers may face issues fromat international meetings. counterparts, has been in the process products sold in the past, particularly The market is poised for further of studying the current regime with relating to the sales practices for non-reform as the MAS seeks to gather international developments such as guaranteed bonus policies.more granular information to help it to Solvency II, FATCA, and IFRS 4 Phase II.strengthen macroeconomic surveillance The Taiwanese market is also keen to Vietnamand insurance supervision. This includes track changes to the US supervisory The Vietnamese insurance industry is inthe possibility of the implementation of regime, to which Taiwan’s current RBC a relatively early stage of development,a group supervisory regime, which could system takes reference. and projections of future growth remainhave wider impacts for Singapore-based bullish for both life and non-life insurancegroups or sub-groups. Thailand sectors. The insurance market continues The financial crisis provided valuable Despite the political uncertainty in to generate much inbound interest, withlessons on corporate governance, Thailand over the last 18 months, the some notable investments made inincluding the importance of effective risk- total insurance premium is forecasted recent years. These are adding to thebased oversight, monitoring of activities, to grow at over 20 percent in 2011. increasing talent pool, which insurersand remuneration at Board level. The However, the Thailand floods in the are keen to retain to support futureMAS’s Corporate Governance Council, second half of 2011 had a significant profitable growth.established in 2010, has played a part financial impact on the non-life insurance The Ministry of Finance (MoF),in enhancing regulations in this area. industry, with many insurers not meeting Vietnam’s insurance regulator, is a It is also expected that the MAS will the capital requirements of the new Risk member of the IAIS, and is in due courserelease an ORSA consultation paper in Based Capital (RBC) regime, introduced expected to follow the State Bank ofthe first half of 2012. from September 2011. As a result of the Vietnam (SBV), the banking regulator, floods and the introduction of the RBC which has developed a suite of detailedTaiwan regime, it is expected that there will be requirements for the banking sector.The Taiwanese insurance industry has further capitalisation of the industry andundergone much change in recent times, possible consolidation of the 70 non-lifeand the market is now dominated by insurers in the market. The Thai marketdomestic participants but is attracting has also generated interest fromrenewed interest from other firms overseas investors.based nearby in the region. Taiwanese One of the issues for life insurers isinsurers are growing their footprint in the Asset-Liability Management (ALM)overseas markets, where we see recent risk charge under the new RBC system,investment in countries including China as the limited investment options inand Vietnam. Thailand make optimising asset portfolios High savings rates in the country difficult. As in other markets, we expectare positive for the life insurance that enhancements to risk managementindustry, although the sector remains regulation (as promulgated by the IAIS)constrained by the negative interest will provide an important guide tospread issues under the sustained low regulators in the management of ALM.interest rate environment. Life insurers Conduct of business is a continuingin particular are, like others in the region, area of focus for the Office of Insurancechallenged in selecting assets with a Commission (OIC), the Thai insurancesimilar long duration to their liability regulator, who over the past few yearsprofiles. has required greater clarity over product © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 20. 18 | Evolving Insurance Regulation | February 2012 Asia-Pacific regulatory developments – at a glance The significant ASPAC regulatory developments across risk management and solvency, IFRS, and consumer protection are outlined below: Country Regulatory solvency capital Draft received considerable comment Australian commentators certain aspects and risk management following its issue in July 2010, with of the Exposure Draft feel like a step comment letters issued by many backwards. Australia New life and general insurance capital constituents including APRA, the (LAGIC) standards are poised for In our view the Australian market prudential regulator, and accounting, release, and are proposed to be provides one of the best case studies of actuarial, and insurance industry effective on 1 January 2013. These a ‘current current’ measurement model representative bodies. proposals are widely expected to in practice. increase capital requirements, include Australian reactions to the Exposure the option for a Pillar 2 supervisory Draft are particularly interesting because Consumer Protection capital adjustment, and increase the Australia is one of the few countries to regulatory burden. These proposals will have formulated its own standards for The Future of Financial Advice (FOFA) result in the introduction of a Three-Pillar insurance accounting – whereas IFRS 4 reforms are expected to have a approach to solvency, which is closely only includes limited improvements to significant impact on the operations aligned with the EU requirements of accounting for insurance contracts and of life insurers and superannuation Solvency II, and in particular include an disclosure requirements, AASB 1023 for providers. This legislation is designed Internal Capital Adequacy Assessment General Insurance and AASB 1038 for life to protect consumers and rebuild trust Process (ICAAP), which is similar to the insurance, which address all aspects of in the financial planning profession – ORSA as defined in the new IAIS ICP the recognition, measurement and there will be a ban on commission and as being implemented in Europe disclosure of life insurance contracts. structures and non-monetary benefits for example. These standards anticipate many of the that might influence advice, an increase key features of the Exposure Draft, by in disclosure requirements and an IFRS/Financial reporting requiring a current valuation of both increase in the powers of the regulator. financial instruments and insurance There are parallels here between the IFRS has been required for all private liabilities, with the measurement of FOFA reforms and the UK Retail sector reporting entities since 2005 and insurance liabilities updated at each Distribution Review proposals. so the Insurance Contracts Exposure reporting date – indeed to many Country Regulatory solvency capital Chinese insurers experienced a year Features, suggesting that the choice of and risk management of significant financial reporting change technique to be used in estimating the affecting their 2009 results when the risk adjustment should not be limited China We are anticipating changes to the Ministry of Finance, with the co- and proposing, unless impracticable, current regulatory solvency capital operation of CIRC, issued a package of full retrospective restatement on initial standards to a more risk-based approach pronouncements which substantially adoption. in the medium-term; the current overhauled the accounting for insurance approach remains similar to a European contracts, anticipating many of the Consumer Protection Solvency I-style volume approach. changes that were expected from Regulation in the risk management and Phase II of the IASB’s insurance ERM arena was enhanced at the end of There are signs that relatively strict contracts project. 2010, where the life and health sector is regulation on product design and pricing These changes require amongst other may be relaxed. This follows from trials required to enhance governance of risk things that insurers: unbundle contracts of sales of variable annuities in 2011, and and establish a role equivalent to a if the insurance risk component can in the motor insurance market where Chief Risk Officer, and to adopt the be separately identified and measured trials of pricing reform of policies have quantitative measure of Economic from other components, such as for been conducted. There are also plans Capital as a key risk management tool unit-linked and universal life contacts; to open up the compulsory third-party to be used within the business. These measure policy liabilities based on liability motor insurance market to requirements are consistent with the discounted expected future net foreign-owned insurers. These proposals IAIS ICP on ERM, and include items contractual cash flows on a gross may drive greater innovation around such as risk appetite and enhanced premium valuation basis – which includes product variability and choice – although risk reporting. Similar ERM regulatory a risk margin, plus a residual margin both the regulator and the market are change is expected to include the non- which is released to the income keeping a close eye on the likely life insurance sector in due course. statement over the period of insurance competitive pressures that a relaxation coverage. Measurements are current in the pricing controls may trigger. IFRS/Financial reporting and updated at each reporting period. The bancassurance channel has recently Comments on the IASB’s Exposure witnessed regulation, including a ban China’s national standards (New PRC Draft largely focused on eliminating on insurance agents selling insurance GAAP) are substantially converged with differences between the Exposure Draft policies in bank branches, and restricting IFRS. Like Australia, China is a country and new PRC GAAP for insurers, such the number of insurance partners that, in the absence of a consistent as challenging the use of a summarised per branch. international standard for insurance margin approach and the treatment of accounting has developed its own contracts with Discretionary Participation national standard.© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 21. Evolving Insurance Regulation | February 2012 | 19Country Regulatory solvency capital IFRS/Financial reporting Consumer Protection and risk managementHong Kong The topic of RBC is a popular one in Hong Kong has adopted national Regulation of Self-Regulatory Hong Kong, and the market is expecting standards identical to IFRS, referred Organisations (SROs) has received reform in the management of risk and to as HKFRS, although in some cases focus of late, in particular in relation to enhancements to the assessment of transition arrangements and effective their role as brokers and agents in the solvency capital. The OCI is taking dates differ from IFRS. Close sales of insurance products. The OCI is reference to the IAIS ICPs and other coordination between the Hong Kong set to establish a supervisory regime overseas developments, and has an aim Institute of Certified Public Accountants targeted at regulating market conduct of aligning Hong Kong with international (HKICPA) and the International and consumer protection, whereby practice; however, the regulator is Accounting Standards Board is important the OCI is expected to take over direct keen to stress that implementation of to the success of achieving convergence regulation of intermediaries. proposed changes will follow only after of HKFRSs with IFRSs. The Council of A notable recent change in customer a market assessment and there is no the HKICPA has aligned the Institute’s protection regulation has been the intention to simply copy from other due processes, including the timing of consultation on the Policyholder jurisdictions. issuing exposure drafts, standards and Protection Fund, which would provide interpretations, as close as possible to financial protection to policyholders in the IASB’s processes as a result of its the event of insolvency of an insurer. convergence policy. Many of the insurers which operate in Hong Kong are affiliated with regional or global insurance companies and the development of the IASB’s Exposure Draft is being followed closely.Country Regulatory solvency capital IFRS/Financial reporting Consumer Protection and risk managementIndia The IRDA is proposing changes to Subsequent to the announcement One of the major changes relates to investment options available to of the proposal by the Institute of rules on the sales of unit linked insurance companies, with the aim Chartered Accountants of India (ICAI) insurance plans (ULIPS). These changes of improving flexibility in investment to converge the Indian accounting were in part aimed at curbing the mis- decisions. standards (Indian GAAP) with IFRS selling of insurance policies as short- The IRDA’s ERM regulation calls for effective 1 April 2011, there has been term investment products, which companies to establish a Risk significant debate among the standard resulted in a decrease in volume of sales Management Committee (RMC) setters, regulators, corporate India and but in turn the industry placed a greater with direct access to the Board, and professional accounting firms, on the focus on cost control, customer focus defines a clear Chief Risk Officer role. roadmap to convergence, and its and alternative distribution channels. Board certification was required from implications. Indeed, these changes have brought 31 March 2011 relating to compliance focus on building new and innovative India is converging with IFRSs, but with the terms of reference of the RMC. products. at a date to be confirmed. The IRDA Recent proposals to allow insurance generally supports convergence with firms with ten years’ operational history IFRS and is an active participant in the to raise funds on the equity markets comment process. has stirred some interest. The IRDA’s As a regulator, however, the IRDA lays specific nod will be required before a strong emphasis on capital adequacy, company can proceed with obtaining solvency and risk management and may other listing-related approvals. not necessarily accept all IFRS guidance from a regulatory reporting standpoint. © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 22. 20 | Evolving Insurance Regulation | February 2012 Country Regulatory solvency capital IFRS/Financial reporting Consumer Protection and risk management Indonesia The Indonesian regulator is currently Indonesia implemented IFRS 4 Phase I In the area of customer treatment, we studying the newly adopted IAIS ICPs. on 1 January 2012. Many insurers are have seen draft regulatory proposals There is discussion in the market that implementing significant accounting and on disclosures and solvency related the regulator may apply enhancements system changes in response, although measurement. In addition, a new set of in risk management and investments, some implementation issues are still ‘Know Your Customer’ regulation has although the market is awaiting the being discussed. been issued. next regulatory move. That said, some Overall, the convergence process to insurers in the market are seeking to IFRS is ongoing, and a decision about a enhance areas such as ERM and are target date for full compliance with IFRS keen to learn from international best is expected to be made in either late practice, ahead of the introduction of 2012 or in 2013. any specific regulatory change. Similar to the Philippines, Indonesia has introduced step-change increases in insurer minimum capital requirements, which we understand may result in consolidation in the industry. The increases in minimum capital requirements apply to conventional insurers and reinsurers, and there are separate requirements for Sharia insurers and reinsurers. Country Regulatory solvency capital Japanese companies currently report in particular focusing on the short-term and risk management under Japanese GAAP and before the fluctuations in profit or loss if the announced delay a road map was put in Exposure draft were to be adopted Japan In terms of risk and capital, the JFSA place by the Japanese Financial Services as a standard. plans to introduce new regulation in Agency (FSA) that would have led to a a similar vein to the EU’s Solvency II In addition to these uncertainties, decision in 2012 as to whether it would regime. Japanese insurers were particularly become mandatory for Japanese public The JFSA conducted a quantitative concerned about harmonising companies to report under IFRS in 2015 accounting changes with other impact study (QIS) field-test two or 2016. regulatory changes, particularly in years ago, and is currently analysing The government and the FSA have now the risk arena. the results and developing a more abandoned the mandatory adoption for sophisticated version. Some Japanese fiscal 2015 and are yet to make a final Consumer Protection insurers continue to actively track and decision on whether or not to adopt research European solvency regulatory IFRS. The FSA also said that in the event reform, including taking the step of The treatment of individual’s information Japan decides to require IFRS there will communicating their views to the JFSA is under strict regulation in Japan, where be a transition period of five to seven to feedback on local development. financial institutions are keen to maintain years prior to mandatory adoption in a close eye on this sensitive matter. order to allow companies sufficient time IFRS/Financial reporting Regulation in terms of claim and benefit to prepare for a new reporting standard. payment is also strict in Japan, where According to Japanese news reports, (for example) we have seen regulatory The Japanese government has said it is the government is said to be keeping a action taken in recent years in response delaying the road map towards adoption close eye on the pending US decision to certain ‘rider’ benefit claims that were of IFRS for publicly traded companies – whether or not to adopt IFRS and that not automatically paid by insurers. one of the main reasons being the it will make any further decisions over additional cost for already struggling IFRS adoption on the back of the path Japanese companies, following the the US decides to take. earthquake and tsunami which hit Japan The Exposure Draft was issued prior to in May 2011, since this would result in the announced delay and so received extra investment and administrative considerable comment from Japanese costs for companies damaged by the insurers, regulators and standard setters disaster.© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 23. Evolving Insurance Regulation | February 2012 | 21Country Regulatory solvency capital IFRS/Financial reporting and the need for more detailed and risk management implementation guidance to aid comparability between insurers.Korea In the area of risk-based supervision, Insurers, in common with other financial the FSS regime consists of a combination institutions and state-owned institutions, of components across three pillars. Consumer Protection have been required to adopt IFRS from This includes RBC, the Risk Assessment 2011. Accordingly, the IASB’s Exposure and Application System (RAAS ) and Draft was the subject of detailed A FSS speaker at the recent 2011 IAIS Risk Disclosure. The RBC regime was comments from, amongst others, annual conference hinted that, in the introduced in 2009, and there are current the Korea Accounting Standards Board area of customer treatment, and with efforts in place to enhance the internal and the Korea Accounting Institute, ever more complex insurance products assessment of risk by encouraging the reflecting comments from a number being developed, regulators should take development of internal economic capital of interested parties including the care that customers retain the ability models, including regulatory model Financial Supervisory Service, and the to make fully informed decisions. This qualification and approval standards. Institute of Actuaries of Korea. points towards possible regulatory These enhancements are in line with development ahead in Korea. Amongst comments raised was the elements of the newly adopted IAIS need to maintain a consistent principle ICPs on internal models. Future governing the discount rates to be enhancements of RBC and the internal applied in various international standards model are anticipated to be similar to the such as IFRS4 and IAS 19 on employee EU Solvency II standards. benefits, concerns about the increased volatility in insurers’ reported results,Country Regulatory solvency capital IFRS/Financial reporting onerous nature of the disclosure and risk management provisions of the Exposure Draft.Malaysia Malaysia introduced an RBC regime for During 2011 the Malaysian Accounting Reflecting important features of conventional insurers in 2009, and is Standards Board (MASB) achieved the local financial services market in planning on expanding this for Takaful a significant milestone, issuing a December 2011 the MASB has issued operators in one to two years time. new MASB approved accounting discussion papers on the accounting While maintaining an awareness of framework, the Malaysian Financial implications of Takaful, Sukuk and international regulatory developments Reporting Standards (MFRS Shariah-compliant profit sharing contracts. in these areas, BNM maintains a close Framework) in conjunction with IFRS for takaful operators remains eye on assessing the impact of new the Board’s plan to converge with a relatively unknown quantity and regulations in the local market, bearing International Financial Reporting there is much discussion as to what in mind (amongst other factors) the state Standards (IFRSs) in 2012. The MFRS the Phase II proposals might mean for of readiness of local players. The industry Framework is a fully IFRS-compliant Takaful operators. awaits further announcements on risk framework and equivalent to IFRSs. and capital regulatory developments in Since convergence with IFRS was Consumer Protection due course. announced in 2008, various initiatives Regulation on insurance insolvencies have been done to instil awareness On the conduct of business side, a was established in 2011, which is amongst numerous stakeholders and Takaful operational framework was administered by an independent other affected parties. issued in 2011 to govern matters such statutory body, Perbadanan Insurans Interesting issues raised by the MASB as product design and operational Deposit Malaysia (PIDM), which was in commenting on the IASB Exposure processes in this expanding sector. established under the Malaysia Deposit draft were the potential difficulty in We also note proposals to relax Insurance Corporation Act 2011. determining reliable discount rates for regulation on the pricing of the motor long duration insurance contracts given insurance market in a step-by-step the lack of long-dated risk free assets in approach, which may drive further certain markets and the potentially product innovation and diversity.Country Regulatory solvency capital sustainability of their profit margins. The Consumer Protection and risk management Insurance Act of 2010 will require life insurers to establish statutory funds forNew Zealand In particular there is expected to be a New Zealand’s privacy and fair trade their policyholders, where such funds do more focused and frequent compliance legislation was supplemented with not yet exist. process with enhanced solvency additional Financial Adviser legislation standards, and as a member of the IAIS in July 2011. IFRS/Financial reporting the New Zealand regulator will no doubt be monitoring ICP requirements in this regard. Furthermore, the solvency Early adoption of IFRS was allowed for standards are based on NZ IFRS4, and so financial periods beginning on or after any changes in the insurance accounting 1 January 2005, and mandatory for standards will require a re-think on most reporting entities from 2007. solvency standards. Following new tax As with Australia, the regulator and the legislation that was introduced in July insurance industry are watching Phase II 2010, and in particular relating to tax developments as they unfold. liabilities rather than tax losses that the changes effect, life insurers are monitoring lapse rates and the © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 24. 22 | Evolving Insurance Regulation | February 2012 Country Regulatory solvency capital IFRS/Financial reporting Consumer Protection and risk management Philippines A key market challenge at present is The Philippines has adopted IFRSs as On the customer treatment front, in managing the change of regulatory Philippines Financial Reporting Standards the Philippines is continuing with on- increases in required minimum capital with some transitional reliefs. going measures to amend the existing and net worth, which are set in the Insurance Code, which focuses on the The Philippines Financial Reporting context of an evolving RBC system. growth of the Philippine Insurance Standards Council monitors the These changes may result in further industry and seeks to ensure a fair and technical activities of the IASB and consolidation in the industry, particularly equitable treatment of customers. The invites comments on exposure drafts of for those companies facing mandatory country already possesses a security proposed IFRSs as these are issued by capital increases. fund mechanism, the purpose of which the IASB, including the IASB Exposure As a member of the IAIS, the Philippine is to pay valid claims relating to insolvent Draft on Insurance Contracts. regulator will be aware of the new insurance companies. IAIS ICPs, which (for example) would require significant enhancements in the application and embedding of risk and capital management within insurers’ management business decision-making frameworks. Country Regulatory solvency capital Reporting Standards (SFRS). This 75 percent probability of sufficiency for and risk management usually occurs at about the same time. each line of non-life insurance business. It consults locally and takes into account Singapore In particular in the risk and capital arena, Life insurance liabilities are accounted for the local economic and business the MAS is likely to supplement its using prescribed methods developed by circumstances and context as soon existing risk management guidelines on the insurance regulators, with the result as an exposure draft is issued. core insurance activities with additional that life insurance liabilities are valued guidelines on ERM, based on a review The joint response of the ASC and the in a fairly consistent way across the life of the IAIS ICPs and other overseas Institute of Certified Public Accountants insurance industry. endeavours such as Solvency II. This of Singapore on the IASB Exposure Draft may be of particular interest for groups on insurance contracts highlighted a Consumer Protection operating out of Singapore, where the number of application challenges and the ICPs include provisions for group-wide need for application guidance to amplify frameworks, which could potentially principle-based requirements in order to Relating to customer treatment widen the scope of impact beyond achieve the IASB’s objective of enhanced regulation, a notable change is the Singapore’s shores. The MAS has also comparability between insurers. recent enhancements to the Policy strengthened insurer stress testing Owner’s Protection Scheme, which Currently, the only significant IFRS of requirements as a key risk management provides compensation to insurance relevance to insurers not yet adopted in tool, with requirements at senior policy owners in the event of the default Singapore as an SFRS is IFRS 9 Financial management and Board level, having of a registered insurer. The MAS has Instruments, which is the same as the extended these requirements from life also recently extended its focus on position in the European Union. insurers to cover general insurers. An technology risk management and ORSA consultation paper is expected to Singapore’s statutory accounting outsourcing, plus further strengthening be released in the first half of 2012. practices are generally in line with SFRS, of core investment requirements with some significant differences. All including safeguards to enhance IFRS/Financial reporting properties and financial investments investor protection. have to be carried at fair value and all non-life insurance liabilities are The Accounting Standards Council discounted at risk-free discount rates, of Singapore (ASC) adopts new with a risk adjustment (provision for International Financial Reporting adverse deviation) to achieve at least a Standards (IFRS) as Singapore Financial© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 25. Evolving Insurance Regulation | February 2012 | 23Country Regulatory solvency capital some length the size and characteristics Product strategy, if the Exposure Draft and risk management of the life insurance market in Taiwan, were to be adopted in its current is likely with total assets of NTD 10.81 trillion to be concentrated on those productTaiwan The IB has announced that they will at the end of 2009. In contrast, the bond types with short coverage periods due gradually adopt the IAIS ICPs. This market in Taiwan was only some NTD to the constraint of available financial follows recent developments in 6 trillion at the end of 2009, with the instruments, reducing guarantee regulation in the risk and capital arena, government accounting for two thirds horizons to avoid adverse duration where the IB has enhanced the ERM of bond issuance. Only 21 percent of matching. regime in recent years. In October 2011, bonds have maturities of 10 years or over. additional internal governance requirements were implemented. In addition to difficulties in matching Consumer Protection The IB also encourages companies to the duration of their liabilities, in the build economic capital models, and a current low interest rate environment, The IB has placed more emphasis on system of stress and scenario tests is insurers face severe challenges from customer treatment issues in the recent expected to be enhanced. negative spreads on the guarantees past. This has included reform in which have proved so popular with companies engaged in telemarketing customers. As a result, insurers in IFRS/Financial reporting aimed at safeguarding the interests of Taiwan have very serious concerns over consumers, the Personal Information the implementation of Phase II in the Protection Act which spells out The Financial Supervisory Commission current low interest rate environment, of Taiwan announced its roadmap for full requirements on the collection, particularly in the event of ‘big bang’ adoption of IFRS in Taiwan, adopting a processing or use of personal adoption. information, and the Financial two phase approach, with insurance As well as the financial impact insurers Consumers Protection Act which aims companies in the first wave, required to are concerned that they will no longer be at protecting customers’ interests adopt IFRS starting in 2013. able to offer long duration products to including in the resolution of disputes. The response of the Life Insurance their customers. Alternative proposals Association of the Republic of China on include retaining Phase I with the the IASB Exposure Draft sets out at addition of a liability adequacy test .Country Regulatory solvency capital IFRS/Financial reporting Consumer Protection and risk managementThailand The Risk Based Capital regimes became The Thai accounting framework is Over the last 2–3 years, the focus of the effective on 1 September 2011 with the slowly moving to IFRS, with the major OIC has been on non-agency distribution first returns, as at 30 September 2011, pending standards being IAS 39/IFRS 9, channels, such as telemarketing, being submitted by insurers at the end IAS 12 and IFRS 4 Phase I. direct marketing and the use of mobile of December 2011. phones. Guidance issued by the OIC are We understand that IFRS4 Phase I will Due to the significant impact of the quite prescriptive, such as specifying become effective in 2013. Although it is floods, some relief has been provided the script for telemarketing. not intended to introduce IFRS 9 until on the risk charges for flood related 2016, as an interim measure the assets and liabilities for a period of Federation of Accounting (FAP) will have approximately one year. available a version of IAS 39 which can No changes are expected to the be voluntary adopted by all entities framework until 2015, when we except banks. understand that the OIC will reconsider the risk charges and consider enhancements, particularly focused on stress testing and operational risk.Country Regulatory solvency capital IFRS/Financial reporting Consumer Protection and risk managementVietnam The MoF and other IAIS members in Partial convergence of the IFRS has On the customer protection side, a the region will gain from the frequent been achieved in Vietnam, where from worthy area of comparison to other interaction between regulators, and in 1 January 2011 all entities in all industries countries in the region are the particular the many forums to discuss were required to apply IAS 32 and educational requirements for agents, experiences and insight relating to IFRS 7. Some companies in the market where Vietnamese insurers are required implementation of the new IAIS provide IFRS accounts voluntarily, for to obtain clearance from the MoF on an standards. example some of the joint-ventures in agent training programme. This includes the market. areas such as agent responsibility and ethics, an understanding of approved products, and the product rating table. Regulation also exists for life insurance companies on the separation of owners’ and policyholders’ funds, and we understand the MoF is drafting regulation for a possible policyholder protection fund. © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 26. Evolving global solvency developments: beyond compliance, towards value creation Around the world, many jurisdictions are beginning to reform their insurance requirements, providing insurers with a unique window of opportunity in which to transform their risk management and finance operations. Insurance risk management has historically focused on value protection, specifically reducing the incidence and severity of losses, lowering maintenance costs and informing investment and underwriting decisions. While these remain critical considerations, a forward-looking value creation approach is emerging. This more efficient and cost effective approach goes further to support business strategy and improve decision-making through enhanced information quality and understanding. Crucial in the current environment, this new approach can result in more optimal utilisation of capital.© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 27. Evolving Insurance Regulation | February 2012 | 25 As markets increasingly demand value creation in addition to regulatory compliance, insurers will need to build on their Solvency platforms to optimise business performance and facilitate competitive advantage.Risk management: the value challenge what additional benefits could be driven efficiencies through changes in legalOver the last few years, the broader from Solvency II developments, based entity structures or changing capitalfinancial services industry has been on current implementation plans. allocations and types to best fit the profilefocused on myriad issues and concerns, Solvency II requires the European of the current business model. We expectas the world attempts to come to terms insurance industry to change significantly. to see this focus shift imminently to awith the economic crisis of 2007–2008, It has stipulated: more forward-looking perspective toits immediate repercussions and the • he use of sophisticated risk and T consider the way the business is operateddeepening crisis currently being capital models in setting capital more holistically, from end to end.experienced. requirements and supporting Most commentary to date around The ability to determine which decision-making Solvency II optimisation has focused onindustries, services, or even products • igh minimum standards in respect H the minimisation of capital requirements.might offer safety and security is of governance structures, internal While this is a critical area of focus, weincreasingly uncertain. As a result, control, policies and data quality see capital optimisation as a much moreinvestors are demanding much more • ransparency in approach and insight T relevant goal, taking into account whatcertainty to win their investment allocation into an insurer’s solvency health the leading insurers of the future needthan was previously the case. It is through detailed public disclosure to look and act like and what needs totherefore likely that insurers will not be and private reporting to the regulator be done by these insurers to developable to rest on their compliance laurels, from their current state of compliance tobut rather be driven to look forward to In the UK alone, in excess of £2bn has become the natural selection of investorsthe medium to longer-term, beyond already been spent by the insurance in the future. Two key areas requiringcompliance and drive value enhancing industry to prepare for these changes, particular attention are the financeinitiatives. As markets increasingly designed to make companies more function and risk management.demand value creation in addition to secure for policyholders and alsoregulatory compliance, insurers will need reduce the potential systemic risk to Finance operationsto build on their Solvency platforms to the economy. However, in itself, the Finance processes for insurers,optimise business performance and investment made by any individual particularly in the life sector, havefacilitate competitive advantage. organisation to meet these new historically been convoluted. There are Solvency II in Europe provides regulations does not guarantee long-term large volumes of complex policy dataa good case study of the progressive survival; no matter how intelligent the sets, processed across multiple systemstransformation that is beginning to build of an internal model may be, and platforms which were typicallyemerge in risk and finance operations. or how complex the assessment and built pre-2000. These systems generallyThe key lessons to be learned from the measurement of risk, long-term lack flexibility and do not facilitate theSolvency II experience will particularly commercial success will likely come provision of information at the level ofbenefit those insurers about to to those that best adapt to the broader granularity required by finance toexperience regulatory change in change of operating in a Solvency II deliver insightful decision supportingtheir home markets. environment, using this as a platform management information across the Two years ago, insurers began in to seek competitive advantage and required reporting bases. Typically,earnest to set out their Solvency II optimise their approach across all areas accounting and actuarial teams haveimplementation programmes against of the business. operated in silos, with the accountingthe original timeframe of 1 January Our recent Solvency II benchmarking teams having little involvement in the2013, considered stretching by many survey (Checking the temperature of risk calculation of technical liabilities, and theinsurers and resulting in the scoping of maturity – October 2011) illustrated that actuaries being subject to limitedprogrammes to achieve ‘compliance’ for the majority of insurers, consideration challenge, often as a result leading theor ‘compliance plus’ at best. The of the strategic impact of Solvency II is development of [Solvency II] systemssubsequent delay of a further year to still very much in its early stages. Where and processes. More often than not,the implementation deadline presents this has been considered, focus has new requirements have been met byan opportunity for insurers to reassess generally been on generating capital new ‘workarounds’. © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 28. 26 | Evolving Insurance Regulation | February 2012 A flexible and open risk management ‘system’ forms the basis of a leaner risk operating model, reducing duplication of effort and inefficiencies. Solvency II implementation challenges the analysis provided by this team, at a central to management’s deliberations, for finance functions need be set against level of granularity that can be mined and optimised risk management can this background. As Solvency II is a presented as required. This data will then contribute directly to more intelligent regulatory requirement, there is little feed an integrated finance, actuarial and risk-taking and general improvement flexibility in a number of key areas that risk system. Key performance indicators in efficiency and effectiveness. For traditionally present difficulties to (KPIs) will be redefined to focus on the instance, more efficient use of capital insurers: metrics that matter most to stakeholders and effective capital allocation (or • isclosures: Under Pillar 3 insurers D post Solvency II implementation, lower capital requirements) can result will need to provide granular detail in cutting through the raft of new granular directly from greater understanding all areas of the balance sheet and PL information being released into the public and quantification of risk. Margins may attribution that is robust enough to domain as a result of the Solvency and also benefit from enhanced investment bear regulatory scrutiny, including Financial Condition Report (SFCR). The and underwriting results, an improved to some extent external audit Board will have greater transparency on reinsurance structure and the identification • imetable: Quantitative Reporting T key performance drivers against these of cost control opportunities. Templates (QRTs) will be required metrics through a suite of relevant, A flexible and open risk management within 6 weeks. An annual return reliable and comprehensive Management ‘system’ (RMS – overall risk framework) will be required within 3 months, Information (MI). The period end close forms the basis of a leaner risk operating and the more sophisticated internal process will become a largely automated model, reducing duplication of effort and model calculations within 6 months affair, built into a comprehensive risk inefficiencies. A flexible and scalable • ata: Data in scope for reporting D and control framework. system is also more likely to be adaptive must be ‘complete, accurate and Some insurers have attempted to to environmental changes and enable appropriate’ and there must be reflect this finance ambition to varying the organisation to remain ahead of complete traceability from reporting degrees in their Solvency II plans, competitors and to represent leading back to underlying data while others are now considering what practice in the eyes of key stakeholders. elements of this could be achieved either Those who can look to the longer We expect Solvency II to drive the in the additional implementation year term will drive real competitive finance focus of market leaders to shift or in the medium-term. Those able to advantage through the effective away from a model where understanding deliver this valuable finance focus will embedding of a transparent and historical numbers, challenging their have a clear information advantage over persuasive risk culture throughout the quality and drawing out implications competitors who will be left trying to decision-making process. The benefits for the business going forward is the piece together the historical numbers of a comprehensive risk management norm and takes 90 percent of finance for reporting purposes. framework will be achieved by those time, to a model based on a dashboard who not only fully understand the risks of performance orientated metrics, Risk management facing the business at present, but also supported by a single version of robust In essence, risk under Solvency II what risks they may face in the future. data, delivered by a team that invests the focuses on: If business strategy can be matched majority of its time in providing insight • reater quantification and G to capital strategy, and also to the risk to inform business critical decisions. understanding of risk pricing profile of the organisation, this will enable To achieve this, we anticipate • reater understanding of the internal G the more accurate prediction of cash- organisations will move towards a management of risks and their impact flow variations. Potential issues may risk and finance Centre of Excellence on the decision-making process then be more effectively planned for model – high quality, business-focused • reater transparency of risk information G and, where possible, mitigated. professionals drawn from finance, Where risk management disciplines actuarial and risk, forming a single, For many, risk is still very much the are well aligned to business strategy, cohesive team functioning at the core domain of the few in the organisation capital planning and product development of the business, seen as a key driver of who really understand its nuances and processes, there will be a better value. A single source of data supports complexities. With risk and capital being understanding of the incremental© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 29. Evolving Insurance Regulation | February 2012 | 27profit of each product line or business An effective RMS typically has the following key features:unit at a more granular level whichmay drive a much more complete ORSAunderstanding of the Risk Adjusted tiveness ReviewReturn on Capital, facilitating the Effecallocation of available capital towards Risk culturethe most strategically important andprofitable products and businesses. Risk training CapitalThis will generate a real improvement and comms managementin shareholder value. Implications for firms Risk data, MI Risk and reporting Risk strategy appetite and vision • ptimal risk and finance structures O have clear benefits for performance Risk Risk methodology governance results, such as higher returns from risk-adjusted capital, improved capital Risk operating allocation and an optimised business model mix, distribution channels, customer segmentation and product development based on higher quality risk and value data • uperior management information S can also be derived from a better understanding of risk-adjusted Risk strategy and vision Risk methodology returns across lines of business and Long-term plan of how risk management Processes, procedures and systems for investment alternatives, as well as effectively supports the achievement of identifying, measuring, monitoring, managing the organisation’s goals and reporting risk a clearer view of value drivers and destroyers Capital management Risk data, MI and reporting • rior to investing in the risk P Processes, procedures and systems for Information and associated storage and delivery understanding the impact of risk on the mechanisms which provide management management system, management organisation’s capital and utilising this with a view of the organisation’s risks and should undertake a diagnostic information in its decision-making how these are being managed analysis in order to align risk Risk appetite Risk training and communications management with the organisation’s Articulation of the organisation’s tolerance Processes by which the risk capability, strategic goals and the business for risk-taking to achieve its commercial understanding and awareness of the model to identify opportunities objectives organisation’s people is developed and for value creation Risk governance maintained • pecifically, it should consider S Structure within which responsibility and Risk culture efficiency, effectiveness and accountability for risk management and Embedded risk behaviours of the organisation embeddedness. CROs and CFOs oversight is defined and communicated Effectiveness review need to be fluent in articulating the throughout an organisation Internal processes by which the Board derives value the RMS and finance systems Risk operating model assurance that the framework is effective add, not just protect Structure within which risk management is ORSA delivered across the organisation, typically • Firms should invest in achieving Forward-looking self-assessment of the defined as three Lines of Defence optimal outcomes. Compliance alone organisation’s risks, capital requirements and will not deliver benefits sought capital adequacy © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 30. 28 | Evolving Insurance Regulation | February 2012 Perspectives: America The Americas as a region is undergoing its own structural reform of insurance solvency requirements. Countries within the region are setting or revising their own regulatory standards and are adopting timelines for implementation. Like the European experience of Solvency II, many of these regulations are yet to be written and adopted. This leaves the industry with a degree of uncertainty concerning steps to be taken towards implementation, what compliance looks like and the expected implementation time frames. Prudential Regulation: The impact of Americas regulatory developments – company’s internal controls on an Solvency Reform on the Americas country focus ongoing basis. Insurance companies A key building block for many of these The following provides an update are also required to develop an annual revised standards is the recently adopted of key regulatory and market internal control plan, to be approved IAIS Insurance Core Principles as set in developments within the Americas by the Board of Directors, and issue October 2011. Throughout the region, region, followed by a summary table regular reports on the observations requirements such as the ORSA process of the main risk management and arising from the internal process review. are new to countries, regulators and solvency, IFRS and consumer In addition, the provisions require companies alike. At a time when many protection activities within each insurance companies to have written and companies are faced with financial market. documented standards and procedures pressures from the wider economic in place. environment, additional regulatory Argentina The Argentine insurance market requirements are presenting a challenge The Argentine Insurance Regulator is still highly fragmented and, as a result, to organisations, particularly when the (SSN) is the body responsible for the SSN does not grant any new requirements and benefits are not always regulating insurance activity in Argentina, licenses. The only way to access the clearly defined. through the issuance of technical, domestic market is through the accounting and administrative standards. acquisition of shares of stock of an Consumer protection: The impact of This body has not yet issued any existing corporation (either in whole or reform on the Americas standards in relation to the notion of in part) or a company under a run-off Throughout the Americas there are solvency, as it is understood in the (which is technically inactive and has differing regimes for market conduct – international market. It has, however, been duly granted a license that has at the federal, state, or provincial level. In set some requirements in relation to been temporarily suspended). the more developed markets, consumer minimum capital and internal controls Further reforms in the region include protection is high on the list of regulatory for accounting purposes. insurance companies in the domestic priorities and there have been a number The regulator has issued some market being banned from placing of examples where regulators have been internal control standards, whereby reinsurance in foreign companies, intrusive in putting right market conduct insurance companies are required to except for some specific cases and failures. The costs of such remediation appoint an individual responsible for with the prior authorisation from the have run into hundreds of millions of internal controls and an internal control Insurance Regulator. This new standard US dollars. committee aimed at monitoring the was adopted in September 2011,© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 31. but because of transition arrangements insurance sector is unique, with two Throughout the region,the new standard will not have full impact distinct elements – 1) the third largest requirements such as the ORSAuntil June 2012. As a consequence, reinsurance centre in the world, home process are new to countries,some foreign reinsurance companies to many internationally recognisedare establishing operations in Argentina. insurance and reinsurance franchises; regulators and companies alike. In October 2011, the Argentine and 2) the leading captive domicile withInsurance Regulator surprised the over 60 years of history. These twodomestic market again by introducing market segments present very differenta new standard, where Argentine regulatory risk profiles, a fact recognisedreinsurance companies are not allowed by the BMA.to place funds or make investments To date, the development ofabroad, except for some specific cases Bermuda’s regulatory framework hasand with the prior authorisation from been focused largely on the commercialthe Insurance Regulator. In addition, property casualty insurance sectorit granted a 50-day term to repatriate (Class 3A, 3B and 4) with similar changesthe funds invested abroad. Until then, to be rolled out into the commercial lifereinsurance companies were allowed sector in 2012. Changes have beento place all or part of their funds and made to capital (Pillar 1) requirements,make investments in foreign entities with risk-based capital measuresand instruments, although upon making (standard models and own models) andcertain technical calculations (such as quality of capital tiers (eligible capital)minimum capital requirements and introduced. Risk management andcoverage of debts with insurance and corporate governance enhancementsreinsurance companies), they might only (Pillar 2) have also been establishedcompute the related amount up to the through the introduction of a Code oflimit set by the standards in force. Conduct, Own Risk Solvency AssessmentThis new resolution is in line with the (ORSA), risk returns and stress testing.Argentine government’s decision that Disclosure requirements (Pillar 3)it be again obligatory to settle and continue to develop, with the introductionnegotiate in the exchange market all of additional regulatory filings as well asforeign currency derived from the export public financial statements – and thereof crude oil and its by-products, gas and is still more to come. In addition, a groupmining operations. Furthermore, this wide supervisory regime is in placenew resolution will allow the insurance and further development of the groupmarket in general to absorb a higher supervisory regime will continueportion of both current and future through 2012.public debt. Although there are currently no proposals to change capitalBermuda requirements, annual reportingBoth the Bermuda government and requirements will be enhanced. Thisthe Bermuda Monetary Authority will be facilitated by an electronic filing(BMA) have a longstanding objective process which will enable an efficientof maintaining Bermuda’s position as response from the market. This improveda leading financial service jurisdiction, regulatory filing is designed to capturewith regulation at the forefront of all reporting requirements for the sectorinternational best practice. Bermuda’s in a single return. It includes: © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 32. 30 | Evolving Insurance Regulation | February 2012 • The audited statutory financial the amounts required, and they are not In the more developed markets, statements (as currently required); taken into account in the determination consumer protection is high on supplemental unaudited financial data of Additional Capital (AC). the list of regulatory priorities including investment, underwriting, reserving and collateral information Canada and there have been a number (currently largely provided through Canadian insurance solvency regulation of examples where regulators an annual survey) has been following a path of evolution, have been intrusive in putting • A qualitative risk self-assessment rather than revolution. Canadian financial right market conduct failures. • A confirmation of compliance with institutions survived the ongoing other aspects of the license, including economic upheavals that began in The costs of such remediation changes to controllers and the ability 2008 without requiring government have run into hundreds of to continue to operate at current rescues, and Canadian regulators have millions of US Dollars. capital levels been able to take a measured approach to regulatory change. This return has been constructed The Canadian regulatory framework sweeping changes have been imposed recognising the principles of a 3 pillar for insurers already has many elements by government or the courts, such as the regime and is designed to enable the in common with those of Pillars 1, 2 UK’s ‘treating customers fairly’ initiatives, BMA to execute supervision in an and 3 of Solvency II. Even though Canada or the EU prohibition on using gender as effective and risk-focused way. is not actively seeking ‘equivalence’, the a basis for determining premium rates. federal regulator (OSFI) and provincial Legislative and regulatory restrictions Brazil regulatory authorities have been active are also shaping the competitive In 2006, the National Council of Private contributors to the IAIS and other global environment. For example, while banks Insurance (CNSP) introduced rules regulatory forums, and some of the and other federally chartered deposit- aligned to the risk-based capital framework. terminology of Solvency II is appearing taking institutions may own insurance Minimum capital standards were in regulatory communications and underwriting subsidiaries, regulatory established for insurers, composed of discussion papers. Some aspects, constraints have largely prevented them minimum capital, which should be met such as allowing greater use of an from using their branch networks to sell upon request for authorisation to operate. insurer’s own capital model for regulatory insurance, or from using their customer This minimum capital requirement is purposes, are likely to be slower in bases for direct marketing and cross- comprised for a Base Capital (BC) plus coming. This reflects both regulator selling. Since Canadian federal laws a variable amount called Additional and user caution about the reliability of regarding financial services are reviewed Capital (AC). complex models and the anticipation of every five years, the banking sector will Historically, calculation formulas have significant measurement changes with no doubt continue to challenge these been regulated for the coverage of the the eventual introduction of the ‘phase 2’ and other restrictions in future reviews. insured against underwriting and credit IFRS insurance accounting standard. Insurance distribution is also impacted risks. Insurance companies should at all In Canada, insurance market conduct by Canada’s geography and regional times maintain a solvency requirement requirements continue to be set and differences. Independent agents remain equal to or higher than the higher supervised by provincial governments. a significant factor, particularly in non-life value between the Minimum Capital As a result, there continue to be insurance. In fact, their marketplace Requirement (MCR) and Solvency differences between provinces which leverage means that many insurers are Margin (SM). Insurance companies have must be monitored and complied with reluctant to pursue alternate distribution been encouraged to develop internal by insurers. Personal automobile channels, for fear of offending key models for the measurement of amounts insurance continues to be a ‘hot button’ agents who might move their business. required to cover the insured against the issue, with considerable attention from Independent agents have also been various risk factors. The presentation politicians on issues such as affordability, very influential, along with the insurers of internal models, however, enables and possible discriminatory approaches themselves, in opposing insurance sales just the use of impairment factors to to premium rates. Nevertheless no through bank branches.© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 33. Evolving Insurance Regulation | February 2012 | 31Nevertheless, as methods and risk management. These two pillars are comprehensive review of the existingtechnology have improved, direct complemented by the market discipline legislation (Insurance Law, 2008 Revision),distribution channels such as affinity of transparency and disclosures. the new Law includes provisions togroups, call centres and the internet have Further amendments include: address global regulatory initiatives likemade significant gains in market share. • Specific requirements to improve Solvency II and aspects of the Dodd-Consumers’ increased comfort with corporate governance, including higher Frank Act. It also seeks to addressusing self-service channels to research requirements for accountability by the several recommendations made by theand purchase insurance products is a Board within the Company’s definition International Monetary Fund following anoteworthy trend. So far, regulators have of risk management policies March 2009 assessment, including:not acted to increase restrictions on • Creation of a register of external audit • Adopting a risk-based approach tothese methods, except to prevent banks firms that can provide audit services supervisionfrom using the internet to circumvent to insurers • Developing more effective tools torestrictions on the use of their bank • Requirements for authorising diagnose and monitor riskier licenseesbranches for the sale of insurance. existence and transfer of share • Further strengthening of the regulatory ownership by insurance companies relationships with other regulatorsChile • Developing appropriate capital andThe Superintendencia de Valores y Grand Cayman solvency requirementsSeguros (SVS) has been improving As at 30 November 2011, the Caymanthe regulatory environment in Chile Islands was home to 28 domestic While Government efforts to finaliseby adopting the International Financial insurance companies – 731 captives and the insurance regulations underpinningReporting Standards (IFRS); implementing 1 reinsurer. (The latter two categories Insurance Law 2010 are still ongoing,the Risk-Based Supervision Model, representing gross premiums and assets these regulations are now in the stagewhich considers specific corporate under management of US$9.6bn and of final public consultation, so marketgovernance standards for the insurance US$58.3bn, respectively.)2 Over the participants are hopeful that theirmarket and the best practices adopted course of 2010, the Cayman Islands passage will soon be forthcoming.internationally. Monetary Authority (CIMA) approved Not only do they create new Changes in the regulatory framework 31 new captive licenses, with 10 more in regulations regarding reinsuranceare mainly focused on solvency. The goal the pipeline, representing a 93 percent companies (which may even includeis for insurers to have sufficient financial increase in captive license applications immigration incentives like 10-yearresources to meet their obligations and year-on-year. With the impending working permits and a faster workimprove market behaviour, in order to passage of regulations to support the permit application process), but theyprotect the rights of policyholders. It also new Law, these numbers only look set also implement prescriptive capital andconsiders aspects such as fairness and to increase. solvency requirements for 3rd partytransparency in the trade of insurance In September 2010, the Cayman writers (Cayman has opted out of aproducts and settlement and payment Islands Government passed Insurance Solvency II equivalent framework) andof obligations. Law 2010 (the ‘Law’). Designed not updated reporting and application forms. The SVS began the Solvency evaluation only to bring the jurisdiction’s domesticand design process in 2003; however, and reinsurance markets up to the Mexicothe implementation is expected to begin highest international regulatory In 2008, the Mexican Insurance regulatorformally in the insurance market during standards, the new Law is also set up a project to reform the Insurance2012. The draft of the Law creates two business-friendly and includes a range and Surety Bonds Law (ISBL), whichfoundations. One relates to the basic of measures to support the growth will change the way in which institutionsregulatory level with minimum solvency and development of the international manage their businesses.and capital requirements. The other insurance and reinsurance marketsrelates to the complementary oversight in Cayman.level based on the principles or best Developed in consultation withpractices of corporate governance and the private sector and following a 2. Figures correct at 30 September 2011. © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 34. 32 | Evolving Insurance Regulation | February 2012 Timeline for regulatory implementation – Mexico 2008 2009 2010 2011 2012 2013 2014 Implementation period In force data Industry Gap Analysis Mexican Draft of ISB Analysis and QIS rules (secondary discussion regulation period Set-up a ISBL project The most recent anticipated timeline control and actuarial functions and proper and reinsurance). Particular attention for adoption in Mexico is detailed in the requirements of individuals. is given to asset requirements and diagram above. However, given the very The ultimate intention is to deliver a technical obligations. recent legislative developments, these ‘three lines of defense’ model where Standards have been approved for timescales are likely to be delayed further. the first line of defence would be the contracting and managing reinsurance During the last three years, the business unit, followed by internal including a maximum limit for retaining Mexican insurance industry has been control and ultimately internal audit. general risks based on the regulatory working to establish a regulatory It is anticipated that a stronger system net worth of the company. These framework similar to the European of governance, will facilitate a robust standards also seek to understand Solvency II approach. implementation of the various solvency unacceptable exposures and risks. This framework is not yet fully components. The insurer’s reinsurance plan must defined. Important components are be submitted to the Superintendent missing, such as a standard model Peru on an annual basis. to determine the solvency capital In light of international solvency In order to adapt the regulatory requirement and the definition of the developments, the Superintendent framework to international standards, standards to build a solvency balance of insurance companies established the regulations related to the sheet. The analysis and regulatory the Basel 2 Special Committee – Consolidated Supervision of Financial consultation has however been Solvency II. The aim is, within the context and Combined Conglomerates were performed. Moreover, some insurers of the Peruvian insurance market, to updated, which helped improve the have undertaken gap analysis projects evaluate the proposed solvency models, oversight of concentration limits for based on a draft of ISB rules and have undertake an impact assessment on the the consolidated group. taken into account the principles market and better understand the Additionally, a new regulation was established by the European framework regulatory framework that will be applied approved for the rating of insurance for the undefined items. to align regulation and supervision to the companies to refine the rating process Governance requirements in the best international practices and trends. of supervised companies, implementing region focus on the establishment of Currently the supervision of insurance mechanisms that promote a level policies, standards and assessments companies is performed through a of independence between these firms related to risk management, internal risk-based approach (market, technical and risk rating companies.© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 35. Evolving Insurance Regulation | February 2012 | 33The state-by-state practiceof insurance regulation in theUS means that state insurancedepartments cover bothprudential and market conductregulations, which includesconsumer protection. Thisallows for a holistic approachto insurance regulation and afull cycle of oversight.United States Insurance product sales within the years and not all states will adopt a newThe state-by-state practice of insurance US are made directly with the insurance model law. As a consequence, insuranceregulation in the United States means company or through insurance companies seeking to do business inthat state insurance departments cover producers. Insurance companies are the United States must understand eachboth prudential and market conduct licensed within the states they operate state’s requirements, in all 50 states asregulations, which includes consumer and for the products that they sell. well as in US territories.protection. This allows for a holistic Products must be filed within a state. The US insurance industry is alsoapproach to insurance regulation and Given the state-by-state regulatory going through its own solvency reform,a full cycle of oversight from product model, the National Association of spearheaded by the NAIC. The workdevelopment, to management of the Insurance Commissioners (NAIC) seeks being performed is referred to as theproduct throughout the life cycle, through to harmonise the potentially fragmented Solvency Modernization Initiative (SMI).to product maturity. system by producing model laws and This review is focused on a number of The US is going through its own guidance that could be adopted within areas, including a review of the Riskregulatory reform. The Dodd-Frank Act each state. An accreditation process Based Capital requirement; governanceestablished two key bodies within the exists, which seeks to encourage states as it pertains to insurers; and groupareas of insurance regulation and to adopt model laws and guidance. supervision, which is linked to theconsumer protection – the Federal However, this process can take many adoption of its own ORSA requirements.Insurance Office (FIO) and the ConsumerFinancial Protection Bureau (CFPB).The FIO is not a rulemaking body, andat this stage has no powers to overseethe insurance industry in the US. It is,however, becoming more activeinternationally. It is a member of theIAIS and has started to enter the variousinternational debates surroundingsolvency reform, including Solvency II.Importantly, the FIO has been taskedwith performing a study of the USinsurance industry. This report was dueat the end of January 2012, but has beendelayed by a number of weeks. It isexpected that the report will highlightareas of improvement for the industry.This will bring yet further regulatorychange. The CFPB is investment andbanking focused and currently has limitedauthority over insurance activities. Asa consequence of recent reforms,market conduct and prudential standardsremains the domain of state regulators.However, as this new body becomesestablished it will become clearer asto how the insurance industry may ormay not become impacted, eitherdirectly or indirectly. © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 36. 34 | Evolving Insurance Regulation | February 2012 Americas’ regulatory developments at a glance Country Regulatory solvency capital IFRS/Financial reporting Consumer Protection and risk management Argentina In Argentina, the entities conducting The Argentine Securities and Exchange During the first half of 2011, the business in the insurance industry (both Commission (CNV) has determined that Argentine Insurance Regulator insurance and reinsurance companies) registered companies shall adopt IFRS promoted a major reform to the are under the obligation to set a as the basis for preparing their financial standards applicable to the reinsurance minimum capital amount. The minimum statements as from fiscal year 2012. business in the domestic market. capital amount results from a technical The reasons for any such reform Additionally, the Central Bank of calculation made on the basis of the would be associated with the serious Argentina (BCRA) has determined that highest fixed amount according to the observations made by the Financial banks and financial institutions shall line or lines with which the entity Action Task Force (FATF) to Argentina adopt IFRS as the basis for preparing operates, a certain amount depending in relation to the money laundering and their financial statements as from fiscal on the premiums issued over the last terrorist financing issue. In addition, the year 2014, although such adoption 12 months prior to the date of the Argentine Government is interested in might be delayed. calculation, or a certain amount having national reinsurance companies depending on the losses incurred over At this time, however, the Argentine with the necessary technical, economic the last 36 months prior to the date of Insurance Regulator’s Office has issued and financial capability to retain risks and the calculation. no regulation in this regard. foreign currency in the country. Country Regulatory solvency capital IFRS/Financial reporting Consumer Protection and risk management Bermuda Bermuda is a first-wave country in the The Bermuda solvency framework has The Bermuda market is a wholesale EU equivalence assessment process. historically used statutory accounting market – the domestic insurance The European Insurance and principles with the largest (re)insurers market represents only 0.01 percent Occupational Pensions Authority also required to file general purpose of total premiums. Consequently, there (EIOPA) published its preliminary financial statements drawn up using is limited need for a market conduct/ assessment of Bermuda’s regulatory any recognised generally accepted consumer protection regime. The framework in relation to Solvency II accounting principles (GAAP), including principal requirements around market in August of 2011. The report itself IFRS. conduct are embedded in the code of distinguishes the approach that the conduct requirements discussed above. As the BMA develops its solvency BMA has taken for the Class 3A, 3B regime, the requirement for GAAP and 4 regimes and the Class 1, 2 and 3 financial statements has been extended regimes. In broad terms EIOPA to include smaller commercial (re) concluded in its report that the insurers. The BMA have not indicated commercial non-life sector was largely that this requirement will be extended to or partially equivalent (recognising limited purpose insurers (ie. captives). that life-sector requirements will be introduced through 2012) and that The BMA is currently developing its remaining market segments were economic balance sheet model. One not. The primary caveat for the option may be to use current GAAP commercial sector was the need for with the addition of prudential filters. an Economic Balance Sheet. The A consultation paper is expected in the Bermuda framework uses GAAP as first quarter of 2012. the basis for accounting and the BMA Given the significance of the IASB and expect to use the revised insurance FASB proposals for insurance contracts, accounting standards as the basis for the use of both IFRS and US GAAP in the Economic Balance Sheet. the Bermuda market and the ongoing development of Solvency II and the Bermuda solvency regime, it is likely that the development of IFRS will continue to be monitored closely by the regulator and the market.© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 37. Evolving Insurance Regulation | February 2012 | 35Country Regulatory solvency capital IFRS/Financial reporting Consumer Protection and risk managementBrazil Further elements in the structure of the In Brazil, insurance companies are In Brazil, market conduct regulation is insurance companies’ solvency regime required to issue audited financial very limited. The primary reason for this in Brazil include: statements and consolidated financial has been that insurance products have statements, prepared in accordance not traditionally seen strong demand. – inding of investments to coverage B with international accounting standards of technical provisions As macroeconomic factors stabilise, (IFRS). such as inflation and interest rates, – estrictive rules for investment of free R IBRACON, the Brazilian institute of we may see an increase in demand assets (non-restricted investments Independent Auditors, presented a by consumers. This situation may used in the coverage of technical detailed response to the IASB Exposure drive an increase in market conduct provisions) Draft which broadly welcomed the requirements. – nspection Regime at group level I proposed measurement model as an In addition, the Argentine Government improvement from the exit value model is interested in having national proposed in the IASB’s 2007 Discussion reinsurance companies with the Paper. necessary technical, economic and As with many commentators, IBRACON financial capability to retain risks and identified the need to re-visit the foreign currency in the country. transition arrangements proposed in the Exposure Draft, supporting full retrospective restatement except on the grounds of impracticability permitted by IAS 8.Country Regulatory solvency capital IFRS/Financial reporting hard to sustain in future unless the and risk management problem of volatility can be solved for regulatory capital as well as reportingCanada OSFI has introduced fine-tuning The adoption of IFRS in 2011 has of income. OSFI has indicated that it changes to existing capital rules, without added another dimension for Canadian is reluctant to use regulatory capital a stated intention of increasing overall insurers. Unlike many jurisdictions, measures that are less demanding capital requirements. Changes are Canadian regulatory capital than the accounting definition of capital. being made to improve measurements requirements are based on GAAP However, some insurers believe of risks, or in some cases, to add an accounting rather than statutory that this could result in a competitive explicit measure of a risk not previously accounting rules. The volatility resulting disadvantage for Canadian insurers. measured in the capital rules – for from fair market value measures has example, the addition of an interest rate been very visible since 2008, particularly risk margin for non-life insurers, effective for insurance products with significant Consumer Protection in 2012. These changes will have the investment return guarantees. Still effect of increasing capital requirements greater volatility can be expected under In Canada, insurance market conduct for some insurers, and reducing them for the proposed ‘phase 2’ IFRS insurance requirements continue to be set and others, based on their circumstances. accounting rules, which increases the supervised by provincial governments. OSFI has also embarked on in-depth temperature of the debate about the As a result, there continue to be consultations with the both life and IFRS proposals, since this would affect differences between provinces which non-life insurers to develop a capital Canadian regulatory capital too. Having must be monitored and complied with framework for the longer term, reflecting the same accounting and regulatory by insurers. both future IFRS changes and more basis for capital has been considered an sophisticated approaches to risk. enviable situation by many, both within and outside Canada, but this could be © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 38. 36 | Evolving Insurance Regulation | February 2012 Country Regulatory solvency capital IFRS/Financial reporting Consumer Protection and risk management Chile The draft of the law that creates the In 2007, the SVS began the evaluation Chile does have market conduct Risk – Based Monitoring System (SBR) process for adopting IFRS, with the legislation and self-regulatory standards. for insurance companies, was filed with creation of a task-force, and, in 2011, the The Consejo de Autorregulación de the Comisión de Hacienda de la Cámara SVS developed the necessary process las Compañías de Seguros (Insurance de Diputados on 28 September 2011. for adopting IFRS, for accounting Company Self-regulation Council), is The draft gathers the approaches periods beginning on 1 January 2012. the entity in charge of ensuring that the developed by the IAIS (International Insurance companies must submit standards of Good Corporate Practices Association of Insurance Supervisors); the first set of financial statements as Code are applied properly, and is aimed Solvency II developed by the European of 31 March 2012 prepared under IFRS at developing an insurance market that Union and international best practices to the SVS by 30 April 2012. is in line with the principles of free adopted by OSFI in Canada, NAIC for competition and good faith between insurance supervision in the US and The SVS has defined that IFRS adoption companies and their customers. APRA in Australia. is based on IFRSs as issued by the IASB amended or overruled by specific rules DEFENSOR DEL ASEGURADO Changes in the law include a new by the local regulator SVS such as the (DdA) (Insurance Ombudsman) is an requirement for Risk-Based Capital recognition of technical reserves, autonomous independent private (RBC), a system for assessing and financial investments and real estate institution, whose objective is to solve measuring Solvency of insurers, a investments that depart from IFRS. potential issues that insurance policy new investment regime, and other holders may wish to rise in relation to modifications to the Insurance Act Reflecting the growing importance of insurance contracts or related service consistent with the new supervision IFRS in Chile, the SVS issued comment provision agreements entered into with approach. letters on the IASB’s Exposure draft, one of the companies adhering to the Insurance Contracts. The response of The next activities that the SVS will system. the SVS focused particularly on the consider: publication of the RBC potentially negative impact arising from methodology for consultation during the Exposure Draft’s proposed use of the first half of 2012. During the second current interest rates on the market for half of 2012 the SVS will focus on pensions annuities, which they noted developing the standard formulas to represents more than 80 percent of life be applied on a risk by risk basis to the and non-life technical provisions in new supervision model. Chile, where the business model of the insurer is to earn a spread between the differential rate at which the annuities are sold and the investment return earned on the matching assets. Country Regulatory solvency capital IFRS/Financial reporting with discretionary participation and risk management features, for example, requirements for unbundling, the application of an Mexico The proposed solvency reform treats Mexico is not currently adopting IFRS. adjustment for illiquidity to the discount several topics in a similar way as the However, some of the principles of Solvency II European Directive does rate and contract boundaries. IFRS are being built into its proposed and its purpose is also the same: the Insurance Law. In addition, a task force adequate protection of policyholders has been working to merge accounting Consumer Protection and beneficiaries by means of a sound criteria issued by the regulator with local and prudent management of the financial reporting standards, and the insurance business that guarantees Mexican Accounting Board has been Market conduct requirements are the solvency of Institutions. working to harmonize Mexican financial currently being reviewed in Mexico. This solvency regime encourages reporting standards with IFRS. The first stage of this market-wide insurance companies to adopt a risk- Reflecting the growing interest in IFRS review is a product mapping exercise to based approach, which provides in Mexico, a working group including identify the various insurance product incentives related to the proper way representatives from insurers, the features. Once this has been completed to measure and manage their risks by regulator and accounting bodies issued the regulator will determine the best reinforcing their governance systems, a detailed comment letter on the IASB’s way to adapt the current regime. particularly regarding risk management, Exposure draft on Insurance Contracts, The mapping work will include actuarial and internal control functions. noting the importance of the ED given contractual agreements, investment Important changes in the determination the objective of the local solvency components, other contractual benefits, of the company’s liabilities are required reforms to achieve greater convergence features omitted from products, by this new framework, mainly those with Solvency II. commissions, expenses, interest rates, related to technical provisions and pricing and distribution channels. In particular, the response highlights solvency capital requirements. A third concerns the earnings volatility derived Companies will have to be able to component of this framework refers from changes in the fair value of assets establish or adjust their policies, to disclosure requirements, which and liabilities, especially in combination procedures, standards and methodologies increases the information that the with the application of IFRS 9, Financial according to the revised regulatory company has to disclose those publicly, Instruments, as well as concerns requirements, so as to align them to particularly that related to the risks faced about divergence from the regulatory the regulatory framework. and its solvency condition. framework of Solvency II, in particular in the areas of investment contracts© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 39. Evolving Insurance Regulation | February 2012 | 37Country Regulatory solvency capital IFRS/Financial reporting Consumer Protection and risk managementPeru Superintendent of Insurance Companies The Superintendent is engaged in As established in the current legislation of Peru established the Basel 2 Special implementing the international in Peru, insurance companies freely Committee – Solvency II in order to accounting and financial reporting determine the terms of policies, rates evaluate the proposed international standards to encourage transparency and other commissions, which are made models and to assess their impact on for public, local and international available to the public. the Peruvian market. investors. The adaptation of accounting In 2011, a regulation on information The regulatory framework is being standards from the Superintendency transparency project and provisions reviewed in light of new international to International Financial Reporting applicable to insurance contracting was standards, such as Solvency II. Standards is projected for 2012. In established. order to coordinate the harmonisation However, The Peruvian regulator process, the Superintendency promoted does not yet have an implementation the mixed working groups involving schedule for identified solvency insurers and the Peruvian Institute of reforms. Auditors.Country Regulatory solvency capital In the progress report on its work plan project jointly. In the second half of and risk management issued in 2010, the SEC set forth six 2010, the FASB issued a separate specific areas relevant to SEC’s decision discussion paper containing itsUSA The NAIC continues with its review of on adopting IFRS, including: preliminary views on the Phase 2 US solvency standards through its Solvency Modernization Initiative (SMI). proposals. • reas most relevant for the SEC’s A SMI reforms are aimed at areas such decision to adopt IFRS: Many US commentators also chose to as the RBC solvency calculation and respond, some in considerable detail, to 1 ufficient development and S missing risk factors such as catastrophe the IASB’s request for comments on its application of IFRS and risk, as well as areas that fail to clearly Exposure Draft insurance contracts. The meet the international standards set by 2 ndependence of standard setting I FASB is aiming for an exposure draft on the IAIS ICP’s such as group supervision. for the benefit of investors its proposals on insurance contracts in To this end, the US progressed in its • Transitional considerations: the third quarter of 2012. development of a US ORSA. US ORSA standards are near final but still need to 1 nvestor understanding/education I be adopted by the States. regarding IFRS Consumer Protection ORSA will be a fundamental change 2 xamination of how the US E for insurers and insurance groups with regulatory environment would be Market conduct regulations in the US a focus on enterprise-wide risk affected cover areas like, complaint handling, management and group capital. 3 mpact on issuers, such as changes I financial promotion, disclosures, advice, to accounting systems, including rates and product filings. The NAIC evaluation for both large and small announced on 19 December 2011 IFRS/Financial reporting issuers and that in 2012 its Market Regulation and Consumer Affairs Committee would 4 uman capital readiness, such as H As of the current date, the US Securities be leading its plan to improve market education and audit capacity and Exchange Commission (SEC) regulation and its ongoing commitment requires domestic registrants to In November 2011, the SEC released to maintain the highest level of prepare financial statements included in two Staff Papers on IFRS, ‘An Analysis consumer protection. filings with the SEC in accordance with of IFRS in Practice’ and ‘A Comparison Under Dodd-Frank, the Consumer accounting principles generally accepted of US, GAAP and IFRS.’ Each of these Financial Protection Bureau was in the US (US GAAP). papers addresses some of the issues established. As this federal body begins identified above as relevant to a decision In 2007, the SEC issued a ruling that to organise itself it will become clearer on adoption of IFRS in the US. permitted foreign-domiciled registrants what impact there will be for to file financial statements prepared The SEC has not yet commented the insurance industry. in accordance with IFRS with a officially on its perception of the reconciliation to US GAAP. In November progress in addressing the six relevant 2008, the SEC issued a roadmap for issues noted above, nor has it provided the potential adoption of IFRS by US any guidance on a timeline for the domestic registrants and, subsequently, potential adoption of IFRS. has issued periodic statements of Although the United States already has support for a set of global accounting an accounting framework for insurance, standards. The SEC also solicited some constituents believe that comments on its proposed work plan insurance reporting should be improved. and received more than 230 comments Therefore,given its significance that demonstrated a diversity of views internationally to the insurance industry, on the potential adoption of IFRS in since 2008, the IASB and the FASB have the US. carried on the insurance contracts © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 40. Moving the consumer protection agenda to the front line Consumer confidence and trust is critical to promote financial stability, For insurers, this is a stark reminder growth, efficiency and innovation over the long-term. The financial services of the importance to ensure clear and industry is a mature, diverse and highly regulated market and traditionally, concise information is provided to regulatory and supervisory frameworks adopted have focused heavily on customers concerning financial services developing appropriate prudential measures based on ensuring adequate products and largely accounts for solvency levels being maintained by insurers. However, major mis-selling the supervisors’ increased role to episodes and the continuing Global Financial Crisis (GFC) highlighted that it re-establish responsible selling in institutional and retail sectors to regain is not only matters of solvency which are important; the role and oversight consumer trust and confidence. of consumer protection is being increasingly recognised by all supervisory All of these developments jurisdictions as a major and equal objective. demonstrate that, along with prudential requirements, consumer protection and conduct of business regulation are also moving into the spotlight. The diagram opposite illustrates key global regulatory policies currently put forward, highlighting the sectors in the financial services industry where they are likely to have the biggest impact.© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 41. Evolving Insurance Regulation | February 2012 | 39Key global regulatory initiatives to impact insurersPackaged Retail Investment Products Dodd-Frank Act (Investment Managers, Corporate Governance (Investment(Funds, Banks, Insurers) Banks, Insurers, Financial Advisers) Managers, Banks, Insurers, Financial• Aims to put in place and update existing • Sets new standards including changes Investment Advisers) regulation for complex packaged products to rules on OTC derivatives and new • The green paper put forward by the EC sold to the retail investment market, registration requirements on corporate governance aims to establish where products can take on differing • Created the Federal Insurance Office. It best practice governance principles forms but provide comparable functions has no regulatory authority but will assist • Principles illustrate the role and required• Focus on providing standardised, pre- with the oversight of the insurance industry demographics of the board as well as contractual information for packaged and have a place in international dialogue. clearly specified duties of the directors products to limit conflict of interest and Tasked with performing a study into the US • Enhance the status of the CRO to promote fair distribution of products insurance market, has a role in the potential strengthen the independence and authority• Product-focused regulation that will align designation of an insurer as a SIFI of the Risk Management Function sales rules of products across sectors • A raft of measures for banks including SIFI • Co-operation between external auditors identification, transfer of powers from OTS and supervisory authorities need to beG20 – Consumer Protection (Investment to OCC. Increased Federal oversight and strengthened so that authorities canManagers, Banks, Insurers, Financial powers. Rules on proprietary trading activities benefit from their knowledge of theInvestment Advisers) • Created the Consumer Financial Protection financial sector• The Consumer Protection principles aims Bureau (CFPB) to further enhance • Supervisory authorities given the power to raise standards in the way firms carry consumer protection to check the correct functioning and on their business by introducing changes effectiveness of the board of directors that will benefit consumers and increase Insurance Mediation Directive (IMD 2) • Shareholder engagement should be their confidence in the financial services (Insurers, Financial Advisers) improved if shareholder control of industry • Seeks effective regulation in the retail financial institutions is still realistic• Based on principles that minimise the sale insurance market by improving the Single • Conflicts of interest should at least be partly of unsuitable products by encouraging Market for insurance and reinsurance regulated by very clear rules rooted in law best practice before, during and after a intermediaries objective put forward in sale; thus covering the complete product IMD 1 Markets in Financial Instruments life cycle • Expanded scope of regulation will also be Directive (MiFID 2) (Banks, Investment• Education-focused principles help applicable to direct insurance undertakings Advisers) customers fully understand the features, and not just insurance intermediaries • Enhance conduct rules with significant benefits, risks and costs of the financial • Aims to limit conflict of interest issues by increase in conduct of business rules products that they buy reviewing inducement and remuneration and investor protection framework of sales rules Packaged Packaged Corporate Packaged Markets in Retail Retail Governance Retail Financial Investment Investment Investment Instruments Products Products Products Directive 2 UCITS Markets in Deposits Investor Corporate Insurance Financial Schemes Compensation Governance Mediation Instruments Directive Directive Directive 2 Directive 2 Dodd-Frank Corporate Dodd-Frank Investor Dodd-Frank Insurance Alternative Dodd-Frank Governance Compensation Guarantee Investment Directive Schemes Fund Managers (White Paper) Directive Consumer Alternative Consumer Market Abuse Consumer Insurance Consumer Corporate Protection Investment Protection Directive Protection Mediation Protection Governance Fund Managers Directive 2 Directive Investment management Banking industry Insurance industry Financial industry • Funds • Retail banks • Life insurers • Independent advisers • Asset managers • Wholesale banks • Non-life insurers • Intermediaries • Brokers Global – G20 European Union United States © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 42. 40 | Evolving Insurance Regulation | February 2012 The global issue Summary of the ten key Consumer – Consumer Protection Protection principles Principle 1 Legal and Regulatory Framework: The fair treatment of customers is not a The OECD has advanced principles that • Financial consumer protection national or even regional issue anymore. should be integrated by supervisors should be an integral part of the The G20 Finance Ministers have into their broader regulatory framework; legal, regulatory and supervisory expressed concern that without the alongside prudential regulation, framework and should reflect the restoration of consumer trust and governance and competition policies. diversity of national circumstances confidence in financial services, the basis The ten principles3 shown on the and global market and regulatory for global economic recovery may be right are voluntary and designed to developments within the financial limited. A commonly held view is that complement, not substitute for, existing sector. commercial companies and individual international financial principles or • Regulation should be tailored to households have had to bear the brunt of guidelines that are already in force within the characteristics, type, and the consequences of the financial crisis member countries. The principles can variety of the financial products and that this has jeopardised growth. broadly be classified into the three pillars and consumers, their rights and On this basis the G20, in February of: protection, access and education. responsibilities and be responsive 2011, requested the OECD to develop Principles are set on a global level and to new products, designs, guidelines for advancing financial do not aim to address sector-specific technologies and delivery consumer protection through informed issues dealt with by the relevant mechanisms. choices that include disclosure; international organisations and the • Financial services providers and transparency and education; protection financial standard setters such as the authorised agents should be from fraud, abuse and errors; along with International Organisation of Securities appropriately regulated. recourse and advocacy. This approach Commissions (IOSCO), Basel Committee • Relevant non-governmental is very similar to that pursued by the on Banking Supervision (BCBS) and the stakeholders should be consulted Financial Services Authority (FSA) in the IAIS. The principles may need to be when policies related to financial UK since the early 2000s. In response, adapted to specific national and sectoral consumer protection and education the OECD, in close co-operation with contexts and should be reviewed are developed. the Financial Stability Board and other periodically by relevant international bodies. international bodies and standard setters, developed a set of ten key principles Principle 2 which was endorsed during the 3. Organisation for Economic Co-operation and Development (OECD), Role of Oversight Body: G20 High-Level Principles on Financial Consumer Protection – November 2011 Cannes G20 meeting. November 2011 • There should be oversight bodies explicitly responsible for financial consumer protection, with the necessary authority to fulfil their mandates and they require clear and objectively defined responsibilities and appropriate governance. • Oversight bodies should observe high professional standards, including appropriate standards of confidentiality of consumer and proprietary information and the avoidance of conflicts of interest.© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 43. Evolving Insurance Regulation | February 2012 | 41Principle 3 Principle 5 Principle 7Equitable and Fair Treatment Financial Education and Awareness: Protection of Consumer Rights:of Consumers: • Financial education and awareness • Relevant information, control and• All financial consumers should be should be promoted by all relevant protection mechanisms should treated equitably, honestly and fairly stakeholders and clear information appropriately and with a high degree at all stages of their relationship with on consumer protection, rights and of certainty protect consumers’ financial service providers. responsibilities should be easily deposits, savings, and other similar• Treating consumers fairly should accessible by consumers. financial assets, including against be an integral part of the good • Appropriate mechanisms should be fraud, misappropriation or other governance and corporate culture developed to help existing and future misuses. of all financial services providers. consumers develop the knowledge,• Special attention should be skills and confidence to appropriately dedicated to the needs of understand risks, including financial Principle 8 vulnerable groups. risks and opportunities, make Protection of Consumer Data informed choices, know where to and Privacy: go for assistance, and take effective • Consumers’ financial and personalPrinciple 4 action to improve their own financial information should be protectedDisclosure and Transparency: well-being. through appropriate control and• Financial services providers and • All relevant stakeholders should protection mechanisms. authorised agents should provide be encouraged to implement the consumers with key information international principles and that informs the consumer of the Principle 9 guidelines on financial education fundamental benefits, risks and Complaints Handling: developed by the OECD International terms of the product. • Jurisdictions should ensure that Network on Financial Education• Appropriate information should consumers have access to adequate (INFE). be provided at all stages of the complaints handling and redress relationship with the customer. mechanisms that are accessible,• Standardised pre-contractual Principle 6 affordable, independent, fair, disclosure practices (eg. forms) Responsible Business Conduct of accountable, timely and efficient. should be adopted where applicable Financial Services Providers and • Such mechanisms should not and possible to allow comparisons their Authorised Agents: impose unreasonable cost, delays between products and services of • Financial services providers and or burdens on consumers. the same nature. authorised agents should have as• The provision of advice should an objective, to work in the best Principle 10 be as objective as possible and interest of their customers and be Competition: should in general be based on the responsible for upholding financial • Nationally and internationally consumer’s profile considering the consumer protection. competitive markets should be complexity of the product, the risks • Financial services providers should promoted in order to provide associated with it as well as the also be responsible and accountable consumers with greater choice customer’s financial objectives, for the actions of their authorised amongst financial services and knowledge, capabilities and agents. create competitive pressure on experience. providers to offer competitive products, enhance innovation and maintain high service quality. © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 44. 42 | Evolving Insurance Regulation | February 2012 Consumer Protection: A Case Study of existing regulation in play UK The FSA, in 2006, outlined six core they do business with firms where the Even though Consumer Protection consumer outcomes that it wishes fair treatment of customers is an principles were put forward recently to see companies demonstrate as a integral part of company culture. This by the G20, in the UK regulation has result of the TCF initiative: invites two questions; what does a been in place for the better part of the • utcome 1: Consumers can be O good culture entail and what are the last decade making the UK market one confident that they are dealing with benefits of a high performing culture? of the most advanced jurisdictions firms where the fair treatment of The changes expected from new concerning consumer protection. customers is central to the corporate customer oriented regulation are likely The following provides a brief culture to require insurers to adopt a more overview of the consumer protection • utcome 2: Products and services O consumer focused agenda. Those firms requirements, branded Treating marketed and sold in the retail market seeking a real competitive advantage Customers Fairly (TCF), implemented are designed to meet the needs of will unlikely achieve this desired state in the UK. We expect similar measures identified consumer groups and are unless they significantly change their to be implemented across Europe over targeted accordingly culture. the next few years. • utcome 3: Consumers are provided O Culture is often considered ‘soft’ The objective behind the TCF with clear information and are kept and ‘immeasurable’, therefore not initiative is to deliver improved appropriately informed before, during worthy of a place at the forefront of outcomes for consumers and investors and after the point of sale strategic conversations, linked to in dealing with companies in the • utcome 4: Where consumers receive O profit estimates or of systematic and financial industry. The Financial advice, the advice is suitable and takes structured long-term investment. Services Authority (FSA) began to account of their circumstances Culture is, put simply, ‘how we do focus on TCF principles from 2001 and • utcome 5: Consumers are provided O things around here’; an effect that quite for the past three years, companies had with products that perform as firms often happens without the conscious to demonstrate to the regulator that have led them to expect, and the thought of individuals within the firm; they treat customers fairly as a matter associated service is of an acceptable but has resonating impacts for those of course. Failure to prove such standard and as they have been led to outside the firm. commitment has led to companies expect A high performing customer-centric being fined and the payment of • utcome 6: Consumers do not face O culture is articulated and driven from compensation to disadvantaged unreasonable post-sale barriers the Board and Executive suite. Senior investors. These principles aim to help imposed by firms to change product, Managers follow the lead-by-example consumers fully understand the switch provider, submit a claim or approach and in addition, enact the features, benefits, risks and costs of make a complaint operational processes and systems that the financial products they buy and also drive behaviours. It exists when each minimise the sale of unsuitable A consequence of Outcome 1 of the and every interaction with another products by encouraging best practice TCF requirements is that the regulator person, internal or external, is before, during and after a sale. wants consumers to be confident that considered a customer relationship.© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 45. Evolving Insurance Regulation | February 2012 | 43A high performing customer-centric culture is articulatedand driven from the Board andExecutive suite. Engagement wins the hearts and minds of employees, so they know they are An embedded customer-centric culture supported and believe in the benefits increases profit and minimises risk losses they bring to customers. Customer trust A strong customer-centric culture is Customer-centric leadership not about, ‘the customer being right’ it is a two-way beneficial relationship that results in a win-win outcome. The Employee engagement employee has the knowledge, skills and Articulate vision Clear lines of Encourage staff Quality flexibility to meet, or adjust as required, responsibility and development performance the customer’s needs. accountability feedback Operational drivers Regulatory context The constructive elements of the culture foster and reward innovation, allowing interactions with customers High performing, customer-centric culture to generate new ideas from conception Customer trust Operational drivers Organisational resilience to development. Firms that exhibit exceptional work practices generally attract the most talented employees; Retain existing and Attract the best Minimise creating a self-perpetuating cycle of attract new customers people reputational risk capability development as the talent base strengthens. Regain consumer Innovative and Adapt to external Organisational resilience trust and confidence desirable products disruption A high performing culture enables an organisation to respond effectively and adapt faster to external disruption. Risk is reduced through awareness, capability development and behavioural change to improve decision-making and risk mitigation across all three lines of defence. © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 46. 44 | Evolving Insurance Regulation | February 2012 The rising consumer agenda – both their business and operating Firms are likely to experience a Implications for firms models. Firms will have to pay close significant impact on both their Though policymakers continue to debate attention to the regulatory requirements the final details around implementation with regards to the consumer agenda put business and operating models. and adoption of guiding principles, a forward in order to identify opportunities broad outline is already known. Looking in pursuit of a competitive advantage, through the principles put forward by as well as ensuring compliance. the OECD it is clear that insurers will be Using KPMG’s Nine Lever approach increasingly affected by supervisors detailed below, which illustrates the adopting a consumer agenda. Ultimately, interaction between the business model market participants will be most (strategy) and operating model, the concerned with the practical and following summary provides our view operational challenges; we believe on how the key consumer protection the mentioned principles will have requirements are likely to impact the significant implications for insurers insurance market: across all aspects of their organisation. For example, firms are likely to experience a significant impact on KPMG’s Nine Lever approach Financial and strategic objectives Markets and competition Products and brands Customers and distribution Business Model Revenues Core business processes Operating Model Costs Operations and technology Structure, governance and risk People and culture Management Information Measures and incentives© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 47. Evolving Insurance Regulation | February 2012 | 45 Insurers will need to take stock of existing and prospective regulatory requirements and their impacts on the strategic direction, cultural change and appetite initiatives within their organisation.From a Business Model From an Operating Modelor Revenue opportunity or Cost Driver perspective,perspective, implications implications include:include:• Insurers and intermediaries of • Initiating a corporate culture shift • New rules focusing on the all sizes will have to take major to ensure effective implementation management of conflict of interest decisions on how they sell, of these new requirements. will significantly impact the advise on and provide products • Reporting requirements will increase, distribution of insurance products to customers in order to identify especially in terms of post-sale in particular changes with regard potential advantages for value reporting on products’ performance. to remuneration could change the add given the new requirements. This will likely require additional functioning of the insurance market.• Business models will need to adjust investment from firms, not only • Increased transparency and reporting to the changing regulatory and with regard to infrastructure and requirements will result in significant market landscape and insurers will operations, but also with the infrastructure and systems need to take stock of existing and implementation/update of forecasting investment. The biggest impact of prospective regulatory requirements methodologies. this is likely to be on those market and their impacts on the strategic • Firms will have to understand the participants previously not under direction, cultural change and risk implications of limiting post-sales the scope of current requirements. appetite initiatives within their barriers on their operations and • Higher professional requirements organisation. systems as well as training will likely result in increased training• Strategically, insurers will have requirements for staff. cost for insurers’ client facing staff. to re-think their appetite for selling • Going forward, client targeting complex products as there may and product design will have to be be additional cost implications more precise as clients’ needs, associated with customer investment aims and profiles will disclosure requirements. have to be appropriately matched• In addition, firms must take a with products provided to avoid undue strategic view of the type of mis-selling. This will likely require corporate culture they need to firms to introduce system changes, promote and maintain, providing operational changes, enhanced testing a customer focused environment requirements and update training with the tone being set from provided to client-facing personnel. the top. © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 48. What can you do now? • Have you taken full account of the 3. Market positioning This combination of changes will impact impact existing and prospective Consider your role in the new market every part of your business. For insurers regulatory requirements might have place. In future, will it be more sensible in particular, there will be fundamental on the strategic direction, cultural to become a distributor of own products decisions about which lines of business change and risk appetite initiatives and trim down other distribution and products to continue with, how within your company? channels? What additional services products will be distributed, through • Have you considered the impact will clients require and what will be whom and where. All participants in of these requirements on your the impact on pricing models? the insurance market will be affected business model, including the type by consumer protection issues and and range of products you sell and 4. Join up the dots... regulation. The implications of higher advise on? There are significant opportunities to costs and compliance complexity will • Do you have the necessary systems, be realised for firms that plan ahead be a strategic challenge for all firms. data and reporting in place to across the regulatory spectrum and take There are a number of steps firms meet these new regulatory an all-encompassing strategic approach can take now to position the business requirements? to applying regulation; as opposed to an for advantage: • Have your client-facing staff been ad-hoc or short-sighted legislation-by- provided adequate training in terms of legislation compliance based approach. 1. Know your business conduct and protection requirements Therefore all regulatory requirements The impact of these proposals will when selling products and providing should be viewed as a once-off change depend on the products you sell, advice to clients? project in order to avoid undue cost distribution channels you use, your client • Do you reinforce the appropriate implications and implementation overlap. base and your operational systems. protection requirements of staff Understanding the interaction of these through performance, reward and ASPAC Perspective: will help you plan and react quickly to incentives? As we mentioned in the Perspectives: the rules and new opportunities. • Do your client-facing staff meet the ASPAC section on page 14, models of minimum professional requirements consumer protection vary considerably 2. Prioritise change as required? in the region, but generally have not Identify processes and systems most • Do you have the systems, data and yet embraced the principles-based likely to be impacted and prioritise reporting in place to meet these customer-centricity seen in the UK and issues which can be remediated quickly regulatory requirements considering parts of the EU. That said, we expect before embarking on implementing annual updates and communication many jurisdictions in the region to new requirements. These include: with clients? develop and enhance customer© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 49. Evolving Insurance Regulation | February 2012 | 47protection regulation, although some The financial crisis also highlighted, macroeconomic factors change, we maycountries, like Australia, are already through significant policyholder losses see a shift to insurance products andwell advanced. in a range of financial products sold subsequently the further development of Many countries focus on achieving through insurance wrappers, as well as market conduct regulations. In addition,customer protection through controls other more traditional insurance policies, as the middle class grows and disposableon product pricing and design. There the ever-present risk of mis-selling. As a income increases, the affordability andare signs, however, that some markets result we have seen several regulators demand for insurance may increase.may be about to relax these controls. tighten up controls and educational Many jurisdictions within the In China, for example, following a requirements for agency-based and Americas region appreciate thatsuccessful trial in Shenzhen, we other insurance sales teams. This is consumer protection requirementsunderstand the CIRC is planning to expected to have a significant impact are a key component of any developedimplement pricing reform that will enable in certain countries where insurers rely financial centre. Indeed, consumergreater flexibility for insurers in setting significantly on their agency salesforces. protection is absolutely critical inprices, including the use of risk-based In China, the regulators have introduced maintaining consumer and investorfactors. regulation in the bancassurance sector to confidence in the financial system. We are also witnessing the process reduce the risk of mis-selling, and going They provide investors with confidenceof pricing reform in other jurisdictions, forward, we expect them to focus on that there are enforceable standards infor example in the Malaysian motor policyholder rights, risk awareness and which to do business and ultimatelyinsurance market, which is currently increasing disclosure to policyholders, provide a degree of investor protection.implementing the first rate increases as well as improved training of insurance The IAIS 2011 summit put forwardfor 30 years in the compulsory third sales staff within banks. that more needed to be done in the areaparty motor market. Further reform of market conduct highlighting that ais expected in Malaysia where Bank Americas Perspective: good place to start was in the area ofNegara Malaysia has announced a In 2012 many regions within the product disclosures. We thereforetarget of 2016 for de-tarrifing motor America’s are set to see a continued expect to see many more initiatives topremiums. focus on market conduct regulation. commence this year and beyond. Alongside this reform, we expect That said, market conduct regulation infurther regulation focused on appropriate some territories remains undeveloped.and sound corporate governance around This is further complicated by differingthe sales process and underwriting and regimes for market conduct already inpricing risk management, similar to that existence; some at federal, state andseen in other markets including Australia, provincial level. Consequently, there areHong Kong and Singapore. varying states of maturity in terms of the Not unsurprisingly, in the aftermath level of consumer protection and theof the financial crisis, regulators in approach and focus can be very differentAsia in many ways reverted to their core when compared to other regions suchaim of policyholder protection. Several as Europe.policyholder protection schemes, with This is often a reflection ofa goal of providing financial protection macroeconomic factors. For example,to policyholders in the event of the long-term insurance savings productsinsolvency of an insurer, have recently are not popular in countries with highbeen established or are in the process inflation and low or negative real ratesof being implemented, which add to the of return. Consumers do not have annumber of schemes already in place. This appetite for less liquid products whosewill bring many Asian jurisdictions in line value may erode over time. Traditionallywith their international counterparts in investors in these markets have lookedmore developed markets. to more liquid banking products, but as © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 50. 48 | Evolving Insurance Regulation | February 2012 Perspectives: EMA In 2012 the EMA region will continue to witness significant regulatory action. Solvency II continues to be the dominant focus for most insurers within Europe, with policymakers trying to finalise critical aspects of the Directive requirements. At the same time, new consumer protection proposals have been trailed by the European Commission, which are likely to add more pressure for European insurers going forward. Meanwhile, specific UK and South African regulatory initiatives will drive other major changes in these countries. Solvency II update firms may be forced to innovate further, Omnibus 2 Despite various announcements of for example, to offer more ‘with-profit’ As the framework that amends the delays in Omnibus 2 and other related varieties, such as variable annuities. original Solvency II Framework Directive, implementation issues, 2012 is expected Unless the capital charges basis Omnibus 2 is critical to the Solvency II to see the finalisation of most of the applied to asset classes is changed, journey, but has been subject to outstanding Solvency II framework many insurers may seek to move out of regular delays. As well as dealing with rules and guidance. There are still a long-term corporate debt into lower risk procedural matters, such as the creation number of fundamentally important (and therefore lower return) investments. of the EIOPA, it also drives a number of technical components of Solvency II Apart from the impact on policyholders’ fundamental changes to the legislation where reaching agreement amongst the returns, there are far-reaching impacts passed, not least of which relate to European Insurance and Occupational on the wider economy. Many European transitional measures and the actual Pensions Authority (EIOPA), the insurers have been significant investors implementation date of Solvency II. European Commission, European in infrastructure and real estate Solvency II still legally has an Parliament and the industry are likely investments, which provide reliable and implementation date of 1 November 2012, to prove difficult. For some markets, the stable cash flows, hence providing which demonstrates the importance of final Solvency II proposals could have a a good match to the cash outflows on publishing Omnibus 2 in its agreed final real impact on their pension market and annuity type products. By imposing high form in the very short term. Unfortunately, on the wider macro economy. capital charges on these investment this does not look likely to happen, with In particular, the final requirements classes for regulatory purposes, the regular delays announced in the Omnibus on issues such as the matching premium risk-adjusted returns may become 2 approval timetable. and counter cyclical premium could unattractive and insurers needing The remaining issues regarding materially impact many European firms’ additional solvency will likely choose Solvency II must be resolved in a manner capital requirements. In the UK, this to change their investment portfolios – that is appropriate to the market and could mean that annuities may need to potentially resulting in a significant those it seeks to protect, as well as the be priced at such a level that consumers withdrawal of funds, which could have wider economy. Delays are causing great would find unacceptable, and potentially an impact on the wider European growth frustration in the industry. At this stage of become uneconomical for insurance agenda. the process, firms need clarity regarding firms to offer. This in turn would be Re-examination of the European the likely final rules, but virtually all of the unwelcome news for pensioners, who Commission’s proposals on charges on latest official papers regarding Solvency II could be forced to accept the investment investment products, combined with remain closely guarded. Insurers still risk on their pension savings, as insurers another quantitative impact assessment face an enormous level of uncertainty will increasingly be expected to offer unit exercise – albeit on a smaller scale than on Solvency II, which is holding up their linked pension products. Alternatively, previous ones – would be prudent. implementation plans, and there are a© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 51. number of key areas still open to change (ORSA) and draft Pillar 3 requirements that there is unlikely to be any furtherawaiting the finalisation of the level 2 of Solvency II. detailed guidance on the ORSA afterimplementing measures. the finalisation of this paper. The delays to Omnibus 2 also mean ORSA One significant step in thethat it is impossible to get an official The notable feature from the ORSA consultation paper has been to provideSolvency II timetable. Given the consultation paper is that EIOPA have further detail on documentation and alsoproposed European Parliament vote in recognised that there is no single the need to separate ORSA reportingApril, our best estimate on the likely ORSA approach. EIOPA state that the from the Pillar 3 reporting. The papertimetable (assuming there is no further guidelines focus on “what is to be refers to an ORSA supervisory reportdelay in implementation by firms beyond achieved by the ORSA rather than on which can leverage an insurer’s ownthe current proposed date of 1 January how it is to be performed” so are not internal ORSA documentation, results2014) is set out below. Further slippage directive in nature. From the outset, and conclusions. Insurers will, however,is possible – some would say inevitable, insurance supervisors established their have to determine for themselves theand this perpetuates the uncertainty. intention to avoid prescriptive extent and quality of this report. requirements on the ORSA to ensureEIOPA developments they were not dictating the way that Pillar 3EIOPA has just closed its latest insurers operate, leaving firms to decide Reporting and the ORSA have been theconsultation process regarding the how best to address the requirements two areas where industry has most beenOwn Risk and Solvency Assessment internally. A clear message for firms is most vocal that they need more clarity Current implementation timetable for Solvency II Jan Mar Jun Sep Dec Mar Jun Sep Dec Jan 2012 2012 2012 2012 2012 2013 2013 2013 2013 2014 Implementation Level 1 Transposition 21 March: 17 April: Trialogues between October committee EP Plenary Parliament, Council Publication in vote on O2 on O2 and Commission Official Journal Level 2 Commission Level 2 text largely Endorsement of Regulatory and Implementing technical standards drafted by frozen – ongoing discussion delegated acts EIOPA (timing depends on final agreed O2 – could extend until re outstanding matters (once O2 published 2016 if Council’s proposed Omnibus II text followed) in OJ) Level 3 Level 3 pre-consultation Level 3 formal consultations Adoption (can only commence once Level 2 text published) Firms Implementation SII compliance plan (June or (with transitional July) measures) © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 52. 50 | Evolving Insurance Regulation | February 2012 and moves to finalise these requirements Consumer Protection changes Insurers should review other will give some much needed certainty It is not only in prudential regulation sectors’ regulation to indicate on the final shape of Solvency II. The where significant change is occurring in the direction that sales rules and recent Consultation deadline was the EMA region. In the EU for example, 20 January 2012 – KPMG provided a substantial changes are being made to inducements will take. These detailed response to the Consultation, the conduct of business requirements include MiFID 2. which can be found on kpmg.com.4 and the fair treatment of customers. Anecdotally, reporting has also been The changes proposed are complex and the Solvency II pillar which thus far has involve multiple Directives. To limit the received the least attention from firms. complexity, we focus on two significant One of the main proposals likely to conduct of business proposals being be welcomed by smaller insurers will put forward – the Insurance Mediation be the proposal to eliminate quarterly Directive 2 (IMD 2) and the Packaged reporting of investments on a security- Retail Investment Products (PRIPs), by-security basis, although it appears that which will complement the Consumer many larger companies will still need to Protection requirements already enacted provide this information every quarter. by some countries. The publication of the Pillar 3 requirements marks an important Insurance Mediation Directive 2 milestone for the industry across Europe. Insurance intermediaries play an important In essence, the insurance sector is role in the distribution of insurance moving closer to having a transparent products. The existing Insurance Mediation and consistent reporting method to Directive (IMD) is applicable to insurance provide timely and relevant information and re-insurance intermediaries within 4. ee KPMG’s response to EIOPA on the Own Risk and Solvency S about the solvency and risk position of the EU and aims to guarantee a high level Assessment (ORSA) consultation paper – https://www.kpmg.com/ UK/en/IssuesAndInsights/ArticlesPublications/Pages/ insurance companies. of consumer protection. eiopa-consultation-paper-on-the-ORSA.aspx© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 53. Evolving Insurance Regulation | February 2012 | 51The Directive has an established • MD 2 aims to put in place clear and I investment will be required to ensurelegal framework that introduces effective rules on the management of that those providing advice areminimum professional requirements conflict of interest for the distribution appropriately qualifiedfor all intermediaries across Europe of all insurance products and for • here is potentially also great Tand requires them to register with a intermediaries to be obliged to act opportunities to be realised for firmscompetent authority in their Member honestly, professionally and in the with a cross border presence in theStates to facilitate cross-border activities. best interest of their clients. The EU as the Directive aims to establishThe Directive also institutes the provision MiFID 2 proposals contain clear rules on maximum harmonisation and theof comprehensive information to conflict, transparency and inducements. passporting process will be muchconsumers prior to the conclusion of The consultation paper suggests using smootherany initial insurance contract and, if these as a benchmark for the • nsurers should review other sectors’ Inecessary, upon amendment or renewal management of conflicts of interest, regulation that will indicate theof the contract. notably looking at remuneration and direction sales rules and inducements The post-implementation review, transparency (intermediaries and will take, these include MiFID 2initiated in 2005, summarised undertakings), as well as disclosure • nsurance companies will have to Ishortcomings in the way the market regarding remuneration strategically review the distributionfunctioned, notably the difference in • nder single passport principles, U of their products in order to identifythe interpretation of the Directive. The the legal framework for cross border potential advantages for value addspecific problems identified concluded insurance intermediation will be given the new regulatory requirementsthat consumers often have insufficient/ improved in relation to the notification and extended scope of the Directiveinadequate understanding of insurance processproducts and their rights post-sale. In • ommon principles will establish C Packaged Retail Investment Productsaddition it was concluded that sellers professional requirements for all The European Commission’s Packagedhave conflicts of interest. sellers of insurance products Retail Investment Products (PRIPs) The EU Commission is preparing initiative focuses on the regulation forlegislative proposals and is expected What are the implications for firms? packaged products5 sold to the retailto publish these in Q1 2012, with • ncreased transparency and reporting I investment market. These mid to long-implementation from 2014. The following requirements will result in significant term products can take on various legalchanges have been put forward as part infrastructure and systems investment. forms. In summary, the products are of the consultation: The biggest impact of this will be felt marketed directly to retail investors• MD 2 will build upon the first I by insurance undertakings previously and entail a degree of investment risk. Insurance Mediation Directive by not covered in the directive Examples include structured deposits, expanding the scope of regulation to • ransparency requirements will T derivative instruments, and investment include direct insurance undertakings have an impact on the annual reporting funds. Sellers and providers of these (accounting for the specificities of on products to customers and this products to the retail market will be existing distribution channels). The will potentially result in additional affected, including insurance companies, activity-based definition for insurance investment costs around infrastructure, independent advisers, brokers, banks mediation will be retained and process and staff training and asset management firms. reinsurance intermediaries and • ew rules focusing on the N In most EU countries6, information insurance undertakings selling management of conflicts of interest available to clients on products is products from other undertakings will have a significant impact on perceived as poorly drafted and difficult to will be in scope the distribution of insurance products. use. A customer’s ability to compare• he changes have the aim of T In particular, the changes regarding products is compromised by this. Conflict strengthening policy holder protection remuneration could change the 5. “A PRIP is a product where the amount payable to the investor is and ensuring a level playing field functioning of the insurance market exposed to fluctuations in the market value of assets or payouts from assets, through a combination or wrapping of those assets, between all participants involved in • iven the new professional G or other mechanisms than a direct holding.” European Commission PRIPs Consultation 26-11-2010 the selling of insurance products requirements, additional training 6. Except in the UK where similar rules already exist © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 54. 52 | Evolving Insurance Regulation | February 2012 of interest further complicates the fair • nsurers should review other sectors’ I The FCA: Significant new powers distribution of products, as brokers could regulation that will indicate the In what may prove to be a wake-up call have a dual role as advisers to clients and direction PRIPs sales rules will take to parts of the financial services industry; as a distribution channel for the insurers. such as MiFID 2 the FCA will be equipped with a variety This could potentially impair the objectivity • ompanies will have to review C of powers to support its statutory duty of the advice they provide to their clients. the implications of the legislation to protect consumers from detriment. Further, current regulation around across a product lifecycle to identify Among these is the ability to ban the the single market is fragmented and pressure points from design to sale of particular products from a given inconsistent. A patchwork of claims handling financial institution for up to 12 months, uncoordinated regulation for these • n order to establish consistency I to take action over misleading adverts or products has grown up at both national across the market, provide adequate promotions and to disclose disciplinary and European levels. This has led to transparency for consumers and actions against individuals or firms at significant differences in the level of increase competition across the EU an earlier stage. It will also be able to standards between sectors. Some (highlighted as some of the main initiate referrals to the Office of Fair products and channels are not regulated objectives for the review), regulators Trading (OFT). at all in some countries. and companies will have to strike a The EU Commission has estimated fine balance between recognising Greater market-wide review and the cost of implementation for banks and intrinsic differences between types policy intervention insurers to be between €350 and €550 of PRIPs and overburdening One of the FCA’s priorities will be to million as a one-off expense with a further consumers with information provide higher-level views of the market €110 million or €220 million in annual costs. • urrent national regulation should C and of the business models of individual For advisers and brokers the one-off cost be reviewed to determine links firms as it seeks to identify potential risk is estimated to be between €50 and with the new proposals as correct areas for consumers. This is likely to €125 million with a further €50 to €80 alignment will be crucial to ensure signal a clear and unequivocal move million in annual costs. It is expected that harmonisation and level playing field towards sector and thematic supervision, the European Commission will consult objectives are met together with increased use of the on PRIPS in the first quarter of this year. consumer redress process under s404 Other changes occurring within of the Financial Services and Markets What are the implications for firms? the EMA region Act (FSMA). • trategically, insurers will have to S re-think their appetite for selling The UK ‘twin peaks’ model of Two regulators: Twice the burden PRIPs type products given the cost supervision on firms? implications (pre-contract disclosure Changes in the UK regulatory landscape A key concern is how the FCA and and sales rules), but also in took a significant step forward in PRA might be able to work in concert. understanding the impact a cultural and May and June 2011, when the Bank There are already multiple touch-points more customer focused environment of England (the Bank) and the Financial between the FSA and regulated firms will have on the overall business Services Authority (FSA) published and there is some concern that the • lient targeting and product design will C documents outlining the approach to formation of the PRA and FCA will have to be more precisely matched as be taken by the new Financial Conduct make coordination and management clients’ needs, investment aims and Authority (FCA) and Prudential of the interactions between firms profiles will have to be appropriately Regulation Authority (PRA). The new and regulators even more complex, matched with products provided to model will engender substantial burdensome and expensive. avoid mis-selling. This will require changes, including the separation of The PRA and FCA may have the best firms to introduce system changes, prudential and conduct supervision intentions to work together wherever operational changes, enhanced testing for dual FCA/PRA regulated firms, and possible, such as on authorisations, in requirements and update training the introduction of new risk analysis order to avoid overlap and duplication. provided to client facing personnel approaches and tools. However, the crux of the reform is to© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 55. Evolving Insurance Regulation | February 2012 | 53Changes in the UK regulatory The UK Retail Distribution Review experience – what next?landscape took a significant stepforward in May and June 2011, In the UK, the Retail Distribution Review significant changes to comply with thewhen the Bank of England and (RDR) is less than a year away from new requirements such as removingthe Financial Services Authority implementation across the financial commission from product chargespublished documents outlining services industry. The new rules will and implementing raised professional come into force on 31 December 2012 standards, but also changes whichthe approach to be taken by the and will represent a major change to will enable them to continue to trade,new Financial Conduct Authority the way retail investment providers such as adviser/consultancy chargingand Prudential Regulation and distributors do business and the facilitation, and competitive strategiesAuthority. relationship they have with their which firms adapt to new market customers – particularly when providing dynamics that the RDR is likely to advice. hasten. Its key aims remain: increased Industry, political and consumer disclosure around regulated advice; groups have voiced controversy over raised professional standards for retail the RDR since it was conceived due to financial advisers; and the removal the likely impact on retail consumers of product bias through a ban on who, once they are explicitly charged for commission on advised packaged retail advice for the first time, are likely to be investments. Simple life products (eg. put off by the charges and increasingly term life products with no investment not have access to regulated financial element, non-life products such as advice as firms find them unprofitable travel/health insurance, mortgages, to service. In addition, the adviser other loans (secured and non secured) community has long been concerned and retail banking products like current by the likely impact on those advisers accounts remain out of scope. who feel forced out of the market by Additionally, any non-advised sales – the cost of the new regulation and where customers do not receive advice, falling revenues. termed ‘execution only’ – are also out Firms directly impacted by the RDR of scope for the new rules. are facing an unprecedented level of Impacted firms include distributors business and operational change in of retail investment products, such 2012 due not only to this legislation, as independent and linked advisers, but also Solvency II, UK Pensions bancassurers and direct sales forces Reform and the pressure of tough owned by life or other retail investment economic conditions. Similar regulation providers as well as the providers of is planned in Australia and in Europe; products themselves such as life indeed in many ways a variant of the insurance companies, banks and RDR is likely to have a wider impact asset managers. In addition, nominee than forthcoming European legislation platform firms are likely to be such as MiFID 2 and PRIPs. As a result, significantly affected by the rules in the UK industry is the centre of attention general and specific new rules that in 2012 as European and Global are shortly expected in relation to this observers watch with interest to see class of business. how successfully the industry will adapt To prepare for the RDR both commercially and operationally. implementation firms are making © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 56. 54 | Evolving Insurance Regulation | February 2012 It is encouraging to note that create two independent regulators. requirements of a third country the majority of participants Despite sharing insights and analyses equivalence assessment that will be at the macro level, coordination on the outlined by Solvency II (appropriately already met the proposed ground might prove substantially more adapted to South African circumstances) new requirements in terms difficult to achieve. There is a real risk with a targeted implementation date of of the capital and solvency of independent visits and approaches, 1 January 2014. The proposed new regime coverage ratio. and a divergence of agendas over time, will include a standardised and internal particularly in clearly overlapping areas model approach for both the long-term such as firms’ corporate governance, and short-term insurance industries. senior management and systems Interim measures have already been and controls. introduced for non-life insurers in respect While the challenge for the FCA is to of the solvency capital requirements pre-empt issues relating to new products effective from 1 January 2012. and distribution channels, the PRA’s The South African SAM project will challenge centres on the sustainability feature many of the same requirements and resilience of each firm’s entire as Solvency II, for example, SAM will business model. This overlap, yet be based on the Solvency II capital fundamental difference, in the scope and adequacy (Pillar 1), risk governance statutory objectives of the two regulatory (Pillar 2), and risk disclosure (Pillar 3) bodies will ultimately mean two separate regime being implemented for European agendas with firms. The changes insurers and reinsurers. The Solvency II underway are far more significant than framework has been selected as a model most in the industry currently appreciate. given South Africa’s strong economic Financial institutions must stand back links with Europe, and will align the and think through their entire business prudential regulatory framework for the through the lens of the new regulators. insurance sector in South Africa to This includes strategy, business model, international standards being developed customer products and services, by the IAIS. distribution, processes, risk appetite, The SAM regime will mirror Solvency II governance and controls, and their requirements by establishing key overall impact on the financial system. responsibilities at the highest level of Viewing the situation as ‘more of the insurers’ governance structures, same’ may leave many insurers exposed particularly for the Board of Directors to a rude awakening. and senior management. The core of the South African Financial Services Board South Africa requirements will mean insurers will While most of Europe is involved in need to develop systems to assess Solvency II, within the EMA region capital adequacy and capital planning, there have been considerable to implement systems of governance developments in Africa, South Africa and the management of all risks, and in particular. to address reporting and disclosure requirements. Insurers are expected to South Africa is also facing significant have already made some progress in changes, having recently embarked their SAM projects, as implementation on its Solvency Assessment and is now only two years away. Management (SAM) project. SAM is Encouragingly, substantial representation effectively trying to meet the on behalf of industry in the project© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 57. Evolving Insurance Regulation | February 2012 | 55 Aggregate Capital Impact of SA QIS 1 on Respondents (R’bn) Life insurers Non-life insurers All insurers Current position SA QIS 1 Current position SA QIS 1 Current position SA QIS 1 Available Capital 105.5 157.4 33.7 39.1 139.1 196.5 Capital Requirement 31.7 89.8 13.6 25.9 45.3 115.6 Free Surplus 73.8 67.7 20.0 13.2 93.8 80.8 Capital Coverage Ratio 3.3 1.8 2.5 1.5 3.1 1.7process is being sought by the Financial The Financial Services Board will further 8. Source: FSB Solvency and Assessment – Report on the results of the 1st South Africa Quantitative Impact Study (SA QIS1) –Services Board to ensure ultimate investigate the potential impacts with December 2011delivery of an effective solvency regime a second QIS later in 2012, focusing onimplementation for the South African ring-fenced funds, contract boundaries,insurance industry. Various SAM task the treatment of tax and the solvency ofgroups, established to facilitate the groups.development of the new regime, have As with Solvency II and all regulatoryalready prepared numerous discussion change of this nature, it will benefitdocuments that are used in the insurers (and has already) to take part inregulatory drafting process. At the time the working groups being established toof publishing, the second draft of primary ascertain the likely impact of the regimelegislation is expected for comment. on their business, understand whatSecondary legislation is then expected preparations are required, and use theseto follow shortly thereafter. forums to voice any concerns they may The results of the first quantitative have.impact study (QIS 1), measuring the There will be a parallel run of thepotential direct impacts of the proposed standard approach scheduled for allrules on insurers, were published by the insurers for year-ends ending in 2013.FSB in December 2011. On an individual Although the new SAM regulations areinsurer level, the majority of insurers still not finalised, insurers can refer tohave shown an increase in available Solvency II text and EIOPA advice to thecapital and capital requirements European Commission which providescompared to current levels. The study a useful early indication of what the finalfurther revealed that the median capital requirements are likely to contain, evencoverage ratio level will decrease under when these may be adapted to Souththe new regime (see table above)8. African circumstances. It is encouraging to note that themajority of participants already met theproposed new requirements in terms ofthe capital and solvency coverage ratio. © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 58. Financial reporting, valuation and disclosure – the latest developments In the second half of 2010, the IASB released its Exposure Draft Insurance Contracts and the FASB issued a separate Discussion Paper containing its preliminary views on the proposals, which collectively marked the next phase to a global insurance accounting standard, which we refer to as ‘Phase 2’.© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 59. Evolving Insurance Regulation | February 2012 | 57What is the problem? claims). An insurer would apply to that Accounting methods haveCurrent IFRS 4 Insurance Contracts package of cash flows a measurement evolved from meeting thepermit wide diversity in accounting approach that uses the following building historical requirements ofand presentation by insurers. It permits, blocks:subject to limited improvements, (a) current estimate of the expected A insurance regulators concernedinsurers to carry forward their previous value of future cash flows to fulfil with financial stability andaccounting policies in measuring the contract policyholder protection ratherinsurance contracts prior to the adoption (b) discount rate that adjusts those A than meeting the needs ofof IFRS, allowing diverse practices which cash flows for the time value ofmay not provide a coherent framework money investors and other capitalfor dealing with more complex contracts (c) n explicit risk adjustment A providers.or resolving emerging issues with new (d) residual margin that eliminates Atypes of insurance contract. Accounting any profit arising on inceptionmethods have evolved from meeting and gives rise to volatile results, whichthe historical requirements of insurance The FASB has proposed an approach will not be meaningful to users.regulators concerned with financial using three building blocks, combining While most insurers think that thestability and policyholder protection the adjustment for risk and the residual building block approach (or a variant of it)rather than meeting the needs of margin into a single composite margin. may be appropriate for measuring lifeinvestors and other capital providers. For most short-duration contracts, a insurance contracts, many think that the As a result, accounting practices used modified version of the measurement building block approach is overly complexby insurers are, currently, even permitted approach would apply: for short-duration contracts. Many non-to be internally inconsistent within the • uring the coverage period, the insurer D life insurers that apply US GAAP believesame group. These differences impede would measure the contract using an that the ED fails to recognise importantcomparisons between insurers and other allocation of the premium received, distinctions between non-life and lifefinancial institutions and arguably do on a basis largely similar to much insurance contracts. The currentnot provide users of financial statements existing practice approach for non-life contracts basedwith information that is relevant and • he insurer would use the building T on unearned premiums is consistentrepresentationally faithful. This has block approach – including discounting with the basis of accounting for mostbecome more pressing as IFRS has – to measure claims liabilities for non-life contracts used globally andbecome widely accepted and as the insured events that have already many believe this approach is time-insurance industry has globalised. occurred tested, readily understood, and should Consequently, many interested be retained, allowing a user of financialparties believe that it is important and How was the Exposure Draft received? statements to readily understand theurgent to replace IFRS 4. Comment letters on the Exposure Draft relationships between the premiums (ED) and the Discussion Paper are a received to accept risk and the paymentsWhat is proposed? matter of public record, and, while almost made to fulfil the obligation under theseThe Exposure Draft proposes a all respondents agreed that change same contracts.comprehensive measurement approach was needed and indeed overdue, fewfor all types of insurance contracts, could agree on its key components. Where are we now?although a modified version of that While users generally support a current The Boards have been workingapproach would apply for some short- measurement model and a building block methodically through the observationsduration contracts. The approach is approach with a separate and explicit on the Exposure Draft: KPMG’s IFRS-based on the principle that insurance risk margin because they think it will give Insurance Newsletter provides a detailedcontracts create a bundle of rights them a clearer picture of the profit drivers update on the discussions and decisionsand obligations that work together to and earnings streams of insurers, many each time the Boards meet. Ingenerate a package of cash inflows expressed concern that the proposed commenting on the Exposure draft(premiums) and outflows (benefits and model is highly dependent on estimates the industry has proposed compromises © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 60. 58 | Evolving Insurance Regulation | February 2012 We consider it positive that the IASB has demonstrated its willingness to reopen IFRS 9 in order to bring financial instruments and insurance accounting into line. that are broadly accepted by users, many holds (possibly because assets are not term and transient changes in value of which, to date have been tentatively available with sufficiently long durations) recognised directly in equity (so called accepted by the Board. or when the insurance contract includes ‘other comprehensive income’ or ‘OCI’), Of the remaining issues, the most minimum interest rate guarantees. rather than in the profit or loss account. critical is undoubtedly that of volatility: The IASB has acknowledged the need This would be supported by many users, increased volatility of results and financial to get the ‘volatility issue’ solved and who support a segregation of long-term position under the proposed model is eliminate accounting mismatches, movements which are a good indicator a critical issue raised in almost all accepting that: for performance, from short-term, jurisdictions and by users, preparers • hanges in liquidity spreads that C market-driven volatility. and other interested constituencies. impact assets can be considered in We consider it positive that the IASB Many insurers are concerned that discounting the liabilities through has demonstrated its willingness to the current measurement of insurance modelling of interest rates by a ‘top reopen IFRS 9 in order to bring financial liabilities (specifically for interest rates) down approach’ instruments and insurance accounting would, in effect, constrain them from • ppropriate modelling of interest A in to line, by agreeing the scope for measuring some financial assets at rates for non-observable long durations considering targeted improvement to amortised cost as permitted by IFRS 9. should not simply reflect the IFRS 9 Financial Instruments. The scope While these concerns could be alleviated extrapolation of volatile short-term of the review will include expanded by measuring assets at Fair Value interest rates use of OCI or a third business model Through Profit or Loss (FVPL), many • articipating features typical for life P for some debt instruments. insurers suggest that this places them insurance contracts can be modelled So perhaps a compromise – and at a disadvantage compared to banks, in a way where the values of investments the potential conclusion of a saga that which compete with insurers in attracting on which the policyholders’ has been running for 15 years – may be capital. participation is based are mirrored in sight. Under IFRS 9, whether assets are in measuring the liabilities The table opposite summarises measured at fair value or at amortised • he impact of changes in some of the T progress on the remaining six critical cost, their measurement reflects the relevant parameters for measuring issues which the IASB and FASB risk of non-performance by the issuer. insurance liabilities can be buffered identified in their January 2011 summary In contrast the proposed measurement by the ‘residual margin’, a floating of comments received on the Exposure approach for insurance liabilities excludes element of the liabilities which Draft (ED). the risk of non-performance by the represents a form of deferred insurer. As a result, fluctuation in credit unrealised profit spreads is not matched with corresponding changes in the measurement of the However, this is a mélange of limited insurance liability. When changes in fair measures that does not eliminate all value are presented in profit or loss, the of the short-term volatility. mismatch causes volatility in profit or One solution proposed by some loss. This effect is exacerbated during insurers would be to lock-in the interest times of financial stress. rates used for discounting, corresponding Another cause of volatility occurs to the amortised cost model used by when the measurement of insurance banks – this was rejected by the IASB liabilities and the measurement of (a view supported by most analysts as assets that an insurer holds to back those well). An alternative compromise offered liabilities respond in different ways to by the industry would be to use ‘current/ changes in interest rates. This can occur current’ measurement in the balance either when an insurer has not matched sheet, ie. valuing investments at fair the duration of the insurance liabilities value and discounting at a current rate with the duration of the assets that it for liabilities, but with potentially short-© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 61. Issue ED proposals Update to proposalsDiscount rate An insurer would adjust Proposals in the ED have been tentatively confirmed. • ype 1, which adjust for differences between the T the future cash flows for timing of cash flows to ensure that the assets in The Board tentatively decided to provide guidance the time value of money the portfolio (actual or reference) selected as a regarding matters to be considered in determining using a discount rate starting point are matched to the duration of the the discount rate and clarified that the discount that is consistent with liability cash flows rate should reflect only the effect of risk and cash flows whose uncertainties that are not reflected in other • ype 2, which adjust for the risks inherent in T characteristics reflect building blocks in the measurement of the liability. the assets that are not inherent on the liability. those of the insurance The Boards tentatively decided that in applying If there is no observable market risk premium, contract liability. the top-down approach to determining the then the entity uses an appropriate technique discount rate: to determine that the market risk premium is consistent with the estimate • n appropriate yield curve should be determined A by an insurer based on current market • n insurer using a top-down approach need not A information and reflecting current market returns make adjustments for remaining differences for the actual portfolio of assets the insurer between the liquidity inherent in the liability holds or for a reference portfolio of assets cash flows and liquidity inherent in the asset with similar characteristics to those cash flows of the insurance contract liability The IASB discussed whether changes in the • he insurer should use an estimate that is T discount rate should be recognised as an consistent with the IASB’s guidance on fair adjustment to the residual margin or in profit value measurement, such as Level 3 fair values, or loss in the period of change to the extent that if there are no observable market prices for the changes create an accounting mismatch – points on the yield curve no decision was made. • ash flows of the instruments should be C adjusted in two ways so that they mirror the characteristics of the cash flows of the insurance contract liabilityResidual vs. Proposals in ED In the FASB model, risk and uncertainty would be The FASB chair has indicated that the FASBcomposite have been tentatively reflected implicitly through a single margin rather would like to re-assess its decision on includingmargin confirmed. than in a risk adjustment. This alternative generally a single margin in the context of a close-to-final would not give rise to differences at inception accounting model. In the mean time the two but differences would arise in subsequent Boards will continue to explore whether the two measurement of the insurance contract. approaches can be made more comparable through disclosure.Remeasurement The IASB tentatively The IASB tentatively decided that an insurer • ecognise changes in the risk adjustment Rof the residual decided that the residual should remeasure the residual margin by: in profit or loss in the period of changemargin margin should not be • djust the residual margin for favourable A • ake any adjustments in the residual margin M locked in at inception. and unfavourable changes in the estimates prospectively of future cash flows used to measure the Part of the rationale for not unlocking changes insurance liability, with experience adjustments in financial variables is to avoid creating an recognised in profit or loss accounting mismatch with financial assets • ot limit increases in the residual margin N classified and measured at fair value.Unbundling If an investment or IASB members expressed their preference decided to separate explicit account balances service component is to measure explicit account balances as part of from the insurance contract liability. not closely related to the insurance contract and to disaggregate them the insurance coverage for presentation or disclosure. IASB members specified in the contract also indicated that they would like to explore then an insurer would an approach in which some other deposit unbundle and account components of insurance contracts could be separately for that disaggregated in the same way. However, no component. decisions were made. The FASB tentativelyPresentation Under the ED, all income The Boards tentatively decided that an insurer items should be presented in the statement of and expenditure from should present premiums, claims, benefits and comprehensive income separately from contacts insurance contracts the gross underwriting margin in the statement measured using the building-block approach and would be presented in of comprehensive income. The Boards will those measured using the premium allocation profit or loss. consider at a future meeting whether these approach.Short-duration The proposals contained The premium allocation approach was intended claims that are expected to be paid withincontracts a premium allocation to be a proxy for the building-block measurement 12 months of the insured event, unless facts approach for pre-claim model in the pre-claims period. and circumstances indicate that payment will liabilities of short duration no longer occur in 12 months. Liabilities for claims incurred would be measured contracts. at the present value of the fulfilment cash flows in No decisions have been made to date on eligibility accordance with the general measurement for the premium allocation approach. model. The Boards tentatively decided to provide a practical expedient for discounting-incurred © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 62. ...given the current uncertainty What remains to be done – and when need in critical areas, such as accounting, might we expect a final standard? actuarial, IT, HR, product development over the details and timing of the The current IASB work plan, updated in and investor relations. They are also final proposals, many large December 2011, is targeting a revised considering the implications for other insurers are ‘watching and Review Draft or Exposure Draft in Q2 project activity such as enhancements waiting’... 2012. The ultimate timeline for a final to management information and IFRS will depend on whether the IASB investment in more sophisticated asset- issues a new ED before issuing a liability management. standard (which usually would require a 120-day or longer exposure period). What does this mean for insurance Whether the IASB re-exposes partially regulation? or fully depends on the eventual extent Does this matter for insurance of change from the original ED. We regulation? Arguably not, because one currently expect deliberations to run into of the reasons that there is so much Q2 2012, with a final IFRS before 2013 diversity in current insurance accounting unlikely in the case of re-exposure. is because this has been influenced by The FASB is aiming for an ED in 2012. insurance regulatory reporting that has Another date we do not yet know with developed on a country-by-country, any certainty is when a standard might jurisdiction-specific basis. But this is come into effect. Taking account of the starting to change. above, and the minimum period of 3 The Solvency II framework is years that many respondents have said implementing uniform economic risk- that they will require to implement a based solvency requirements requiring new standard, we imply an effective date maximum harmonisation across all EU of 2016. Member States for the first time. Globally, the publication of the revised What should insurers be doing now? IAIS Insurance Core Principles in October As identified in KPMG’s recent survey9, 2011 marks an important milestone in the given the current uncertainty over the harmonisation of insurance supervision. details and timing of the final proposals, ICP 14 on Valuation sets out common many large insurers are ‘watching and principles for the valuation of assets waiting’ – focusing on assessing the and liabilities for solvency purposes. high-level impact of the evolving The table below compares its key developments, educating core requirements with those of the IASB stakeholders and lobbying the standard Exposure Draft, as amended, and IFRS setters. more generally. While detailed implementation planning requires a final standard, insurers are beginning work on assessing 9. The New World for Insurance Preparation and readiness for what resources and support they will accounting change – an industry survey, KPMG, January 2012© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 63. Evolving Insurance Regulation | February 2012 | 61IAIS ICP 14 IFRSMethodologies for calculating items in general purpose financial reports Accounting methods designed to meet the needs of investors andare substantially consistent with the methodologies used for regulatory capital providers, focused on capacity to generate future distributablereporting purposes cash flows, may not meet the needs of insurance supervisors, focused on policyholder protection and an economic view of the balance sheetA total balance sheet approach to be used in the assessment of solvency Assets and liabilities are measured independently of each other,to recognise the interdependence between assets, liabilities regulatory except as regards participating businesscapital requirements and capital resourcesTechnical provisions include a margin for risk ✔ In principle agree, but determination of risk margin may differ depending on supervisory requirementsRecognition and derecognition principles may differ from those usedfor general purpose financial reportingInsurance contracts may be recognised on either the bound date or Insurance contract assets and liabilities recognised when theon the inception date of the contract coverage period begins, with an onerous contact liability recognised in the pre-coverage periodContracts for ceded reinsurance should be recognised and valued so ✔ In principle agree as IFRS generally requires calibration of the insuranceas to correspond to the recognition of risks which they are mitigating contract liability to the reinsurance premiumThe purchase of reinsurance should not result in the de-recognition of ✔technical provisions unless the purchase of that reinsurance resultseffectively in the extinguishment or novation of the insurance contractsThe valuation of assets and liabilities is undertaken on consistent basesThe valuation of assets and liabilities is undertaken in a reliable, decision ✔useful and transparent mannerAn economic valuation of assets and liabilities reflects the risk-adjusted ✔ But amortised cost not permitted for insurance contract liabilitiespresent value of their cash flows. It may be appropriate to use anamortised cost method for economic valuation of assets and liabilitiesThe value of technical provisions and other liabilities does not reflect ✔ For insurance contract liabilitiesthe insurer’s own credit standing For other liabilitiesThe valuation of technical provisions exceeds the Current estimate ✔ In principle analogous to the risk marginby a margin (MOCE)The Current estimate reflects the expected present value of all relevant ✔future cash flows that arise in fulfilling insurance obligations, usingunbiased, current assumptionsInsurance contracts are subject to the following boundary constraints, Definition of contract boundary differsif they exist:• Contractual termination as extended by any unilateral option available to the policyholder• The insurer having a unilateral right to cancel or freely re-underwrite the policy• Both the insurer and the policyholder making a bilateral decision regarding continuation of the policyThe MOCE reflects the inherent uncertainty related to all relevant future ✔cash flows that arise in fulfilling insurance obligations over the full timehorizon thereof.The valuation of technical provisions allows for the time value of money ✔ In principle – although detailed determination may differ, for example, Solvency II uses the concept of the matching premium rather than an illiquidity premiumThe valuation of technical provisions makes appropriate allowance for ✔embedded options and guarantees © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 64. 62 | Evolving Insurance Regulation | February 2012 1997 2004 2008 January 2011 2013? The IASB’s By issuing IFRS 4 The FASB joins the The IASB and FASB Earliest date likely predecessor, the Insurance project begin their review of for issue of a final IASC, sets up a Contracts, the IASB responses to standard by the steering Committee completes Phase 1 proposals in the IASB? launching the of the project Exposure Draft and insurance project Discussion Paper Preliminary View on Insurance Contracts 2001 2007 July 2010 Q2 2012 2016? The IASB takes over The IASB issues the The IASB issues the Target date for Potential effective the project from its discussion paper, Exposure Draft, re-exposure date? predecessor body Preliminary View on Insurance Contracts by the IASB Insurance contracts, proposing and exit value model In some cases, these differences reflect Insurance reporting is in need of a Where regulatory requirements a fundamental difference in philosophy, radical overhaul because it has grown can be aligned with general namely the purpose of financial up to be unduly dependent on insurance purpose financial statements, statements but in some cases they regulatory reporting. It would be a matter reflect subtle differences in the solutions of great regret if the current reforms they should be. to complex issues – like the definition of were inadvertently to lead to avoidable the contract boundary. As the IAIS said inconsistency because insurance in their comment letter on the Exposure regulators and accounting standard Draft, “if the issues had been easy to setters had each headed down the resolve they would have been resolved same path, trying to resolve the same many years ago.” Large or small, these problems, but had done so independently differences have important practical of each other. implications – if methodologies used The journey to a single high quality for calculating items in general purpose global accounting standard for insurance financial reports can be used for, or contracts is a long one – but it should are substantially consistent with, the not be never-ending. As the insurance methodologies used for supervisory accounting journey finally appears to reporting purposes, with as few changes be getting nearer to a conclusion, as possible, this is likely to reduce costs we believe that where regulatory for regulated insurance entities and requirements can be aligned with general thereby policyholders. purpose financial statements they should Accounting results drive management be. This is, after all, the premise that behaviour and insurance supervisors underpinned the original Framework should be concerned about accounting for Consultation on Solvency II, which implications that may drive management envisaged a solvency regime compatible towards conduct that is not in the with the accounting principles elaborated interests of policyholders or which could by the IASB. Remaining differences pose a threat to their financial stability. should be limited to areas that are clearly Explaining two divergent outcomes explainable, and are required to meet the especially when both claim to be differing needs of different ‘market consistent’ is likely to prove constituencies. challenging – and is unlikely to enhance the transparency of the sector.© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 65. Evolving Insurance Regulation | February 2012 | 63AbbreviationsAC Additional Capital IMF International Monetary FundALM Asset-Liability Management Ind-AS Indian IFRS standardsAPRA Australian Prudential Regulation Authority IOSCO International Organization of Securities CommissionsASC Accounting Standards Council of Singapore IRDA Insurance Regulatory and Development AuthorityASEAN Association of Southeast Asian Nations ISBL Insurance and Surety Bonds LawBCBS Basel Committee on Banking Supervision JFSA Japan Financial Services AgencyBC Base Capital LAGIC Life and General Insurance CapitalBNM Bank Negara Malaysia OCC Office of the Comptroller of the CurrencyBMA Bermuda Monetary Authority OCI Other Comprehensive IncomeCBRC China Banking Regulatory Commission OECD Organisation for Economic Co-operationCFPB Consumer Financial Protection Bureau and DevelopmentCIMA Cayman Islands Monetary Authority OFT Office of Fair TradingCIRC China Regulatory Insurance Commission OIC Office of Insurance CommissionComFrame A comprehensive supervisory framework ORSA Own Risk and Solvency Assessment for the supervision of internationally active OSFI Office of the Superintendent of Financial Institutions insurance groups OTC Over the CounterDdA Defensor Del Aseguardo OTS Office of Thrift SupervisionDFA Dodd-Frank Act MI Management InformationED Exposure Draft MCR Minimum Capital RequirementEIOPA European Insurance and Occupational MiFID Markets in Financial Instruments Directive Pensions Authority MAS Monetary Authority of SingaporeERM Enterprise Risk Management MOF Ministry of FinanceFASB Financial Accounting Standards Board NAIC National Association of Insurance CommissionersFATCA Foreign Accounts Tax Compliance Act PFRS Philippines Financial Reporting StandardsFCA Financial Conduct Authority PIDM Perbadanan Insurans Deposit MalaysiaFIO Federal Insurance Office PRA Prudential Regulation AuthorityFOFA Future of Financial Advice PRIPs Packaged Retail Investment ProductsFSAP Financial Services Authority QRTs Quantitative Reporting TemplatesFSAP Financial Sector Assessment Programme RAAS Risk Assessment and Application SystemFSB Financial Stability Board RBC Risk-Based CapitalFSOC Financial Stability Oversight Council RDR Retail Distribution ReviewFSMA Financial Services and Markets Act RMB RenminbiFSS Financial Supervisory Service RMS Risk Management SystemFVTPL Fair Value Through Profit or Loss RRPs Recovery and Resolution PlansGAAP Generally Accepted Accounting Principles SAM Solvency Assessment and ManagementGFC Global Financial Crisis SFRS Singapore Financial Reporting StandardsG-SIFI Global Systemically Important Financial Institution SFCR Solvency and Financial Condition ReportIAIG Internationally Active Insurance Groups SM Solvency MarginIAIS International Association of Insurance Supervisors SMI Solvency Modernization InitiativeIB Insurance Bureau SSN Argentine Insurance RegulatorICAAP Internal Capital Adequacy Assessment Process SVS Superintendencia de Valores y SegurosICPs Insurance Core Principles TCF Treating Customers FairlyIFRS International Financial Reporting Standards ULIPS Unit Linked Insurance PlansIMD 2 Insurance Mediation Directive 2 © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 66. 64 | Evolving Insurance Regulation | February 2012 Acknowledgements We would like to acknowledge the contribution of our colleagues from across our global network who helped develop this report: Lead Editors ASPAC Rob Curtis Noel Ashpole Shirley Hu Akeel Master Director, Insurance Partner Manager Partner Financial Services KPMG in Thailand KPMG in Singapore KPMG in India Regulatory Centre of T: +66 2677 2794 T: +65 6213 2026 T: +91 22 3090 2486 Excellence, EMA region E: nashpole@kpmg.co.th E: shirleyhu@kpmg.com.sg E: amaster@kpmg.com KPMG in the UK T: +44 20 7694 8818 Nicholas Bellamy Elaine Hultzer Takanobu Miwa E: rob.curtis@kpmg.co.uk Partner Partner Partner KPMG in Thailand KPMG in New Zealand KPMG in Japan David Sherwood T: +66 2677 2125 T: +64 9363 3228 T: +81 3 3548 5101 US Head of Insurance E: nbellamy@kpmg.co.th E: ehultzer@kpmg.co.nz E: takanobu.miwa@jp.kpmg.com Regulatory Financial Services Bruce Le Bransky Dennis Ilan Ian Moyser Regulatory Centre of Principal Adviser Partner Partner Excellence, Americas region KPMG in Australia KPMG in the Philippines KPMG in Australia KPMG in the US T: +61 3 9838 4188 T: +63 2885 7000 T: +61 2 9335 7547 T: +1 212 954 5861 E: blebransky@kpmg.com.au E: dilan@kpmg.com E: ianmoyser@kpmg.com.au E: davidsherwood@kpmg.com Sung Min Cho Elisabeth Imelda Truong Vinh Phuc Martin Noble Partner Partner Director Senior Manager, Insurance KPMG in Korea KPMG in Indonesia KPMG in Vietnam Financial Services T: +822 2112 0499 T: +62 21 574 2333 T: +84 8 3821 9266 Regulatory Centre of E: sungmincho@kr.kpmg.com E: elisabeth.imelda@kpmg.co.id E: pvtruong@kpmg.com Excellence, ASPAC region KPMG in China Phoebe Chung Ramchandran Iyer Paul Ruiz T: + 852 2685 7817 Partner Director Partner E: martin.noble@kpmg.com KPMG in Taiwan KPMG in India KPMG in Australia T: +886 2 8101 6666 T: +91 22 3090 1946 T: +61 2 9335 7519 E: phoebechung@kpmg.com.tw E: rgiyer@kpmg.com E: pruiz@kpmg.com.au Simon Donowho Mok Wan Kong Prachi Singhi Partner Partner Manager KPMG in China KPMG in Malaysia KPMG in India T: +852 2826 7105 T: +60 3 7721 3388 T: +91 22 3989 6000 E: simon.donowho@kpmg.com E: wmok@kpmg.com.my E: prachisinghi@kpmg.com Sam Evans Kam Yuen Lau Ryuji Takahashi Partner Partner Associate Partner KPMG in China KPMG in Singapore KPMG in Japan T: +852 2140 2879 T: +65 6213 2550 T: +81 3 3548 5101 E: sam.evans@kpmg.com E: kamyuenlau@kpmg.com.sg E: ryuji.takahashi@jp.kpmg.com Nicola Finn Douglas Lecocq Tran Dinh Vinh Manager Principal Partner KPMG in Australia KPMG in China KPMG in Vietnam T: +61 2 9335 8001 T: +852 2978 8282 T: +84 8 3821 9266 E: nicolafinn@kpmg.com.au E: douglas.lecocq@kpmg.com E: vdtran@kpmg.com Albert Gau Banny Leung Partner Partner KPMG in Taiwan KPMG in China T: +886 2 8101 6666 T: +86 10 8508 7108 E: agau@kpmg.com.tw E: banny.leung@kpmg.com Ikuo Hirakuri Novi Liong Partner Director KPMG in Japan KPMG in Indonesia T: +81 3 3548 5101 T: +62 21 574 2333 E: ikuo.hirakuri@jp.kpmg.com E: novi.liong@kpmg.co.id© 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. Nomember firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 67. Evolving Insurance Regulation | February 2012 | 65EMA AmericasHuub Arendse Jane Portas Ricardo S. Anhesini Laura HayPartner Partner Partner Global Leader, InsuranceKPMG in The Netherlands KPMG in the UK KPMG in Brazil KPMG in the UST: +31 206 567462 T: +44 20 7311 5437 T: +55 11 2183 3141 T: +1 212 872 3383E: arendse.huub@kpmg.nl E: jane.portas@kpmg.co.uk E: rsouza@kpmg.com.br E: ljhay@kpmg.comPaul Bishop Nathan Patten Javier Candiotti Richard LightowlerPartner Director Partner PartnerKPMG in the UK KPMG in the UK KPMG in Peru KPMG in BermudaT: +44 20 7311 5151 T: +44 20 7694 2394 T: +51 1611 3000 T: +1 441 295 5063 ex. 517E: paul.bishop@kpmg.co.uk E: nathan.patten@kpmg.co.uk E: jcandiotti@kpmg.com E: richardlightowler@kpmg.comMichael Crawford Thomas Rauschen Rodrigo Corominas Joaquin LiraPartner Senior Manager Partner PartnerKPMG in the UK KPMG in Germany KPMG in Mexico KPMG in ChileT: +44 20 7311 1446 T: +49 511 8509 5058 T: +52 55 5246 8300 T: +56 2798 1203E: michael.crawford@kpmg.co.uk E: thomas.rauschen@kpmg.de E: rcorominas@kpmg.com E: jlira@kpmg.comNick Dexter Sally Rigg Anthony Cowell Matthew McCorryPartner Manager Partner Global Leader, Insurance RiskKPMG in the UK KPMG in the UK KPMG in the Cayman Islands KPMG in the UST: +44 20 7311 5443 T: +44 20 7694 5271 T: +1 345 914 4338 T: +1 212 954 3945E: nick.dexter@kpmg.co.uk E: sally.rigg@kpmg.co.uk E: acowell@kpmg.com E: memccorry@kpmg.comDrew Fellowes Martin Rumsey Ricardo De Lellis Louis MannelloPartner Senior Manager Partner Partner, Accounting AdvisoryKPMG in the UK KPMG in the UK KPMG in Argentina KPMG in the UST: +44 20 7311 5668 T: +44 20 7311 6072 T: +54 11 4316 5837 T: +1 312 665 2613E: drew.fellowes@kpmg.co.uk E: martin.rumsey@kpmg.co.uk E: ricardodelellis@kpmg.com E: imannello@kpmg.comFiona Fry Andries Schutte Andrea Gaillard Roberto Muñoz G.Partner Partner Partner PartnerKPMG in the UK KPMG in South Africa KPMG in Peru KPMG in ChileT: +44 20 7694 2364 T: +27 1164 76804 T: +51 1611 3000 T: +56 2798 1233E: fiona.fry@kpmg.co.uk E: andries.schutte@kpmg.co.za E: andreagaillard@kpmg.com E: rmunoz@kpmg.comSandra Grote Francesca Short Jesus Guzman Rudolph PersaudPartner Partner Director Associate PartnerKPMG in Germany KPMG in the UK KPMG in Mexico KPMG in CanadaT: +49 89 9282 1382 T: +44 20 7311 5056 T: +52 55 5246 8506 T: +1 416 777 8957E: sgrote@kpmg.com E: francesca.short@kpmg.co.uk E: jesusguzman@kpmg.com E: rppersaud@kpmg.com.caJanine Hawes Vanessa SwantonDirector Senior ManagerKPMG in the UK KPMG in the UKT: +44 20 7311 5261 T: +44 20 7311 1457E: janine.hawes@kpmg.co.uk E: vanessa.swanton@kpmg.co.ukThomas Kagermeier Mary TrussellPartner PartnerKPMG in Germany KPMG in the UKT: +49 89 9282 4552 T: +44 20 7311 5461E: tkagermeier@kpmg.com E: mary.trusell@kpmg.co.ukJoachim Kölschbach Hugh von BergenPartner PartnerKPMG in Germany KPMG in the UKT: +49 221 2073 6326 T: +44 20 7311 5570E: jkoelschbach@kpmg.com E: hugh.von.bergen@kpmg.co.ukBen Mayhew Michael WinzerManager DirectorKPMG in the UK KPMG in GermanyT: +44 20 7311 5878 T: +49 221 2073 1047E: ben.mayhew@kpmg.co.uk E: mwinzer@kpmg.com © 2012 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
  • 68. kpmg.comContact usJeremy Anderson Frank EllenbürgerGlobal Chairman, KPMG’s Global Head of KPMG’sFinancial Services Practice Insurance PracticeT: +44 20 7311 5800 T: +49 89 9282 1867E: jeremy.anderson@kpmg.co.uk E: fellenbuerger@kpmg.comGiles Williams Jim Low Simon ToppingPartner Partner PrincipalFinancial Services Financial Services Financial ServicesRegulatory Centre of Regulatory Centre of Excellence, Regulatory Centre of Excellence,Excellence, EMA region Americas region ASPAC regionKPMG in the UK KPMG in the US KPMG in ChinaT: +44 20 7311 5354 T: +1 212 872 3205 T: +852 2826 7283E: giles.williams@kpmg.co.uk E: jhlow@kpmg.com E: simon.topping@kpmg.comRob Curtis David Sherwood Martin NobleDirector, Insurance US Head of Insurance Regulatory Senior Manager, InsuranceFinancial Services Financial Services Financial ServicesRegulatory Centre of Regulatory Centre of Excellence, Regulatory Centre of Excellence,Excellence, EMA region Americas region ASPAC regionKPMG in the UK KPMG in the US KPMG in ChinaT: +44 20 7694 8818 T: +1 212 954 5861 T: +852 2685 7817E: rob.curtis@kpmg.co.uk E: davidsherwood@kpmg.com E: martin.noble@kpmg.comfsregulation@kpmg.co.ukwww.kpmg.com/regulatorychallengesThe information contained herein is of a general nature and is not intended to address the circumstances of any particular individual orentity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurateas of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriateprofessional advice after a thorough examination of the particular situation.© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firmsare affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate orbind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligateor bind any member firm. All rights reserved. Printed in the UK.The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.Produced by KPMG’s Global Financial Services Practice in the UK.Designed by Mytton WilliamsPublication name: Evolving Insurance RegulationPublication number: 120283Publication date: February 2012

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