Credit Crisis And Insurance Regulation In Asia


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Tracking the policy response of Asian insurance regulators to the credit crisis

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Credit Crisis And Insurance Regulation In Asia

  1. 1. Current crisis – Regulatory measures in Asia and their impact Authors: Saptarishi Mandal, Ashok Antony Asia-Pacific Risk and Insurance Association (APRIA) 13th Annual Conference Beijing, China. July, 2009
  2. 2. 1. General overview methodology The current financial crisis has affected major insurers globally and insurers have witnessed huge investment loses due to exposure to equity markets and to risky assets such as credit default swaps and mortgage backed securities. This had impacted insurer’s solvency, liquidity and capital position with some of the leading insurers requiring capital infusion from the government and private investors. Asian insurers have been relatively safe compared to their global peers due to a more conservative regulatory environment and limited exposure to risky overseas assets. However, Asian stock markets have on an average dropped between 40% and 70% which has impacted the investment yields as well as the sales of investment linked products. Regulators across the globe have been active in trying to limit the impact of the crisis on insurers. Regulatory response has been varied within Asia. Countries such as Taiwan have relaxed the mark to market requirement for insurers while countries such as China have increased their supervision of companies with weaker capital position. Regulators have also tightened the norms for selling investment linked products and riskier complex products to consumers. Regulators across Asia have also been active to prevent any run of the money attempt on AIG thereby limiting the impact. Methodology: The paper makes a comparative study on policy responses across the Asian insurance markets through extensive literature review. Regulatory actions are analyzed in line with the state of regulation in the industry, extent of impact and maturity level of the industry.
  3. 3. 2. Asia - Importance of regulatory role in a growing market Except for Japan, South Korea and Taiwan, insurance in Asia-Pacific was for the most part extremely underdeveloped. In Japan and South Korea, Insurance premiums represent in excess of 8% of the country’s GDP but only 1% in Vietnam, 2% in India and 4% in China. However in the aftermath of the economic crisis, Insurance products have become very attractive to the investors. This is because more and more people are using insurance products to guarantee safer retirements, children’s education, protecting their family from various calamities and also as an investment instrument. Thus the shift from conspicuous consumption and investments in direct market related financial instruments to safer products have been a key driver for insurance products. Also there are various other favourable factors in Asia that are driving the growth of insurance products, for example high savings rate, favourable demographics and favourable regulations. After the recent credit crisis regulation has become the single most important thing to drive sustained growth of the insurance industry. Through regulation, consumer protectionism, confidence and ‘willingness to invest’ in insurance products is restored within investors. If there are too stringent regulations so that the insurance companies are not been able to offer attractive products to its customers, the customers would obviously shift to other financial instruments available in the market. However too little of regulation would lead the consumers to loose confidence with increasing number of cases of financial companies defaulting. The insurance companies also have to be given enough incentive to operate profitably and not overdose them with regulations. This has become more important with majority of the players being from the private sector and attracting foreign investments becoming an integral part of the various countries’ growth strategy. In the era of globalization, even one or few loosely regulated markets has a trickle down effect on the rest of the countries, especially when these countries are big in terms of its global integration like the US and UK. Since regulations are meant to shield the respective countries from any form of crisis, the happening of the recent credit crisis is taken as a stepping stone to make its regulations more stream-lined and efficient. 3. Impact of the credit crisis on insurers The credit crisis in the US, beginning with the fall in housing and sub-prime markets, has spread across the world impacting the financial markets and has brought down the world economy to its knees. The direct impact on financial services companies have been severe resulting in the winding down of some of the leading investment and brokerage houses and nationalization of some of the large banks and mortgage lenders. Insurers in general have emerged largely unscathed from the crisis, with the exception being American International Group (AIG), which despite its strong insurance operations was brought down by its financial products units. While pure insurance groups have been able to ward off the crisis to a large extent, insurers with banking operations such as ING Group have been impacted due to asset write- downs at the banking units.
  4. 4. The International Association for the Study of Insurance Economics, or “The Geneva Association”, classifies three major impacts of the credit crisis on the insurance industry. • The direct impact due to exposure to sub-prime mortgages • Impact on companies with specific exposure such as credit default swaps (CDS), banking operations and financial guarantee business • Impact of asset meltdown across stocks, corporate bonds, real estate investments and other investments resulting in huge investment loses and asset write-downs1. The Asian Scenario Asian insurance industry has largely remained unscathed because of limited foreign investment exposure and conservative investment regulations by the Insurance Regulatory authorities in most developing markets. Since insurers are required to invest a high proportion of assets under participatory insurance products (where investment risks are borne by the insurer) in government securities and bonds, they have not been largely impacted by asset meltdown. Hence unlike insurers in U.S. and Europe, insurers in fast growing Asian markets such as India are more focused on business and management issues such as managing sales and distribution rather than investment performance2. Much of the impact of the fall in stock markets has been borne by the consumers since a large proportion of policies sold in Asia are Investment Linked Products (ILPs), where investment risk is borne by the policy holder. With stock markets dropping by more than 50%, ILPs have lost out of favor among consumers resulting in a slowdown in premium growth in the industry in the second half of 2008. Slow premium collection and consumer sentiments are also affecting the industry in near term as most of the prospective customers had put their investment plans on hold. 4. Regulatory scenario across Asia Regulatory scenario in Asia varies widely across countries which can be broadly classified in line with the stage of insurance development. Developed economies such as Hong Kong and Singapore are mostly self-regulated, while regulators in emerging markets such as India and China continue to have a tighter grip on the insurance sector In Singapore and Hong Kong, both local and foreign insurance companies are treated equally and are subject to the same regulatory and supervisory regimes. The approach of the Monetary Authority of Singapore (MAS) in Singapore to the supervision of insurance companies is described as "minimal control supplemented by self-regulation and the regulatory measures in Hong Kong are supported by a system of self-regulation by the insurance industry signifying considerable freedom for operations with minimal regulatory supervision. Self-regulatory measures in the insurance market are formulated by the insurance industry in consultation with the Government. In countries such as India China, Malaysia and Thailand ownership restrictions exist and in China foreign insurers are subject to geographical limitations in China where 1 The Credit Crisis and the Insurance Industry,, 19 November 2008 2 Insurance Banana Skins 2009, PWC
  5. 5. insurers need to obtain permission to open branches as only phased expansion of 2- 3 branches are being allowed in a year. Foreign ownership Foreign ownership limits vary across countries. The developed block of Singapore, Hong Kong, South Korea and Taiwan have no limits on foreign ownership stake. Among the developing countries, India restricts foreign ownership to 26% while China allows 50% ownership for foreign insurers. In Malaysia, new investment by foreign companies in insurance companies is limited to 49%, while Indonesia allows a maximum of 80% foreign stake in insurance joint ventures Solvency Solvency criteria vary across countries. Singapore and Taiwan have introduced a risk based capital (RBC) framework In India insurers are required to maintain a solvency of 150% while Korea requires 100% solvency margin and encourages insurers to maintain 150% solvency. Investment Investment restrictions on policyholder’s funds are stringent in most developing Asian countries. India requires insurers to invest at least 50% in government securities and other approves securities, while China allows for a 10% exposure in stocks and 15% in mutual funds China has also recently taken steps to allow 15% of assets to be invested in overseas assets. Distribution Regulatory restrictions on bancassurance are minimal in Hong Kong, Malaysia, Philippines, Singapore and Taiwan. India allows only single-tied distribution while In Indonesia banks can sell products of two insurers. In Korea, which allowed bancassurance sales in 2003, restrictions on type of product sales continue to exist as the fourth stage of bancassurance liberalization is stalled. 5. Past Experience and Role of Regulation: The 1997 Asian Crisis Financial sector weaknesses played a major role in the Asian crisis in 1997. This led to the increased exposure of financial institutions to a variety of external threats, including declines in asset values, market contagion, speculative attacks, exchange rate devaluations and a reversal of capital flows. In 1998, the South East Asian countries saw their economies shrink by an average of 7.7 percent and many millions of their people lost their jobs. The initial priorities in the hands of the regulators were to stabilize the financial system and to restore confidence in economic management. Forceful measures were implemented to stop bank runs, protect the payment system, limit central bank liquidity support, and minimize disruptions to credit flows, maintain monetary control, and stem capital outflows. Also emergency measures such as the introduction of blanket guarantees and bank closings were accompanied by comprehensive bank restructuring programmes, supported by macroeconomic stabilization policies. During this crisis each of the affected countries turned to the International Monetary Fund (IMF) for rescue, which came with various stiff conditions. The conditions imposed by the IMF were to dismantle protected monopolies and slash deficits run by national entities. The South East Asian nations had a full and fast recovery post the criris. Between 1999 and 2005, their average per capita income grew 8.2%, investment grew by 9 %,
  6. 6. with foreign direct investment booming at an average annual rate of 17.5%. Korea, Malaysia, Thailand, and Indonesia moved to improve banking supervision and regulation and introduced more market discipline since the crisis. Supervision and accounting transparency improved, and banks in Thailand, Malaysia, and the Philippines have succeeded in ridding their balance sheets of nonperforming loans. Thailand moved towards liberalization of the life sector under commitments to the World Trade Organization on financial services. However limits on investment by insurance companies were spelled out as part of Thailand's wider drive to reduce risks in the financial sector. Indonesia raised the minimum capitalization which was set at $ 214,000 for Life Insurance companies. Philippines: Income tax was reduced from 35% to 34% for 1998, 33% for 1999 and 32% for 2000 and thereafter. China: People's Bank of China increased the range of annual compound interest on life insurance premiums at 4 to 6.5%. Also China’s domestic insurance companies signed a cooperation pact with the People’s Bank of China to bring to order the (insurance) sector and strengthen the management and implementation of existing regulations. South Korea: South Korea allowed the nation's top five conglomerates to participate in the life insurance industry. Taiwan: Taiwan agreed with the US of not to implement regulations that would severely restricted the operations of American insurance companies in Taiwan. Singapore: Singapore liberalized the investment limits by insurance companies • Aggregate limits in equities investments, including unit trust instruments, were raised to 45% from 35% • Limit of 10% was imposed on investment in any one unit trust • Aggregate limits on property and property shares investments rose to 25% from 20% • Admitted investment values of foreign currency denominated and overseas assets rose to 30% from 20%, except for non-investment grade foreign assets which remained unchanged at 20% 6. Regulatory Measures after the Crisis Boosting investor confidence: One of the major challenges for regulators in Asia post the credit crisis was to limit the impact of the fall of AIG. Regulators across the region assured policyholders to prevent a run on the insurer thereby limiting policy withdrawals. Such measures including regulatory statements reassuring policyholders on adequate reserves and stability of the local AIG units helped in reassuring investor confidence among insurers in general. One of the major measures post the crisis was the establishment of policyholder fund or initiatives towards setting up a fund. CIRC set up a company to run insurance security fund and in Thailand regulator was pushing for a contingency fund for protecting policyholders.
  7. 7. Relaxing capital/investment norms: Another major challenge in countries where insurers to market to market their loses, was the huge write downs which required additional capital investment. Since the markets had fallen by more than 50% during the period, countries such as Taiwan relaxed the RBC norms by letting Insurers to recognize only 20% of paper losses on equity investments. Saving smaller insurers in such scenarios was also a concern with Malaysia and Indonesia providing liquidity assistance to the insurance companies with liquidity constraints and solvability problem The period also saw a relaxation of investment norms allowing insurers a wider range of investment options and increasing the investment limits beyond government investments. China raised the limits on infrastructure investments and allowed insurers to buy equity in private firms. However falling equity markets was a concern for regulators with China ruling out any proposal to raise the proportion for stock investment of insurance capital at that point in time. Scrutiny on Sales Practices: The uproar over investment loses due to Lehman bonds led to closer scrutiny of sales practices. In Hong Kong, the regulator required audio-recording of the sales process and ancillary arrangements in the banking sector while selling ILPs. China’s regulator conducted a nationwide check of agency services done by banks and postal savings organizations while Korea regulator was trying out mystery shopping to check on mis-selling practices. China eventually banned sale of ILPs in some of the major markets including Shanghai and major insurers such as China Life stopped selling ILPs. Closer scrutiny and additional disclosures in India and China Regulators in Asia especially in India and China increased their scrutiny and disclosure requirements for insurers. China required insurers to submit daily reports on their overseas investments in a move to check on the investment exposure to troubled firms abroad. China also issued 22 new regulatory categories (include the value at risk (VAR) of funds and stocks, AAA bonds, profit forecast for the next three years, cash flow test for the next three years, and reserve adequacy test), under which insurance institutions should submit relevant information starting January 1, 2009. Indian regulator asked for disclosure of more financial data, including solvency margins, claims settlement records and loss ratios, on a quarterly basis and directed insurers to furnish data on the performance of ILP funds China’s regulator intended to check the facticity of financial data of insurers while India asked all insurance companies to furnish the details of investments made in Sep-Dec period and disclose ILP exposures to troubled company Satyam. Conclusion Unlike the Asian financial crisis, which resulted in a systemic failure of financial institutions requiring broader intervention, the regulatory intervention in the current crisis was limited. Except for some soured investments such as some insurers exposure to Madoff and risky investments abroad such as Ping An’s exposure to Fortis, which resulted in some write-downs, there were no broader systemic failure of insurance companies. Hence regulatory role was restricted to measures to ensure the safety of insurer’s investments and capital position and to improve consumer confidence in insurers.
  8. 8. The crisis also presented an opportunity for regulators to plug some loopholes in the system and place closer scrutiny on the insurers who were in need for capital and liquidity. China’s layered method of categorizing insurers based on their solvency margin is a good example which enables the regulator to focus on troubled insurers. Such a measure should exclude the other insurers from more stringent regulatory and disclosure norms which place a burden on insurers in compliance costs and executive time. The crisis also brought to fore the important role of the regulator and also the effectiveness of self regulation in countries such as Hong Kong. Hence a move towards a stringent direct supervision should not be considered to be a solution to the crisis. This should bring into focus a much more self-regulated practices in other developing countries such as China and India which will ease the current regulator led norms and guidelines. This study finds that the impact of the current crisis on regulations in Asia will be more of a short term nature which is unlikely to hamper any of the long term regulatory environments in these countries. This has been signified by the move to a RBC norm by Malaysia and India’s efforts to further open up the markets to foreign insurers. Developing Asia still continues to have a restricted insurance environment in terms of foreign ownership and distribution restrictions. The credit crisis has brought to the fore some of the major concerns such as the exposure to ILPs and the capital position of insurers. The period till 2012 is set to see a wider move to RBC norms across some of the major countries with enhanced measures to improve consumer protection
  9. 9. Table 1 - Summary of key regulatory initiatives post the credit crisis Commissions/ Related party Capital/Solvency Liquidity Investment Norms: transactions Approval for insurers to buy equity in private firms; Insurers now allowed to China buy local government Layered regulation: bonds and some To make detailed and Categorizing insurers debenture bonds; set a 5 operable internal control into four classes for per cent limit for systems to guard against risks separated regulation infrastructure investments in related party transactions India IRDA relaxed solvency Insurers to disclose the details norms for ILPs, Insurers’ exposure limit to of payments by the company annuities, pension plans infrastructure sector hiked to all intermediaries, except , term and health plans to 20% from 15% individual agents Liquidity assistance to Indonesia Extending the enactment the insurance of minimum capital companies with regulation as from end of liquidity constraints and 2008 to 2010. solvability problem Malaysia's central bank Malaysia Risk-based capital provided a liquidity framework to be effective facility to insurance Jan 1, 2009 and takaful firms Adjustment in RBC Taiwan norms: Insurers to recognize only 20% of paper losses on equity Higher offshore asset investments allocation limits Misselling/Consumer Investment linked Products (ILPS) Policyholder Fund protection CIRC to conduct nationwide ILPs will be not allowed to be sold via banks' check of agency services done savings counters; CIRC issued a notice to by banks and postal savings insurers, requiring them to develop risk organizations; Insurers to China prevention and long-term savings products; demonstrate the settlement rates Sales of endowment products with less than of new personal insurance five years of insurance period and less than products clearly when selling CIRC set up a company to run ten times installment premium banned them insurance security fund Mandatory requirements for the audio-recording of the sales Hong Kong process and ancillary arrangements in the banking Insurers propose to set up sector while selling ILPs protection fund Ombudsman to come under the purview of IRDA is to streamline the consumer grievance India mechanism; Companies can’t deny health cover renewal, says Irda; IRDA to penalize agents if IRDA directed that the premium of ILP life insurance policies are not products second year should not be less renewed in a move aimed at than 75 percent of the premium of first year curtailing misselling
  10. 10. MAS is consulting the public on proposals to further safeguard Singapore consumers’ interests and promote higher industry FIs will be required to undertake an standards for the sale and enhanced product due diligence process marketing of unlisted investment before selling new investment products products Taiwan Requirement for insurers to consider product suitability when selling investment- linked insurance products to customers Thailand Regulator seeks permission from the Finance Ministry to set up a USD 292m contingency fund to protect consumers Disclosures Executive compensation Insurers to submit daily reports on their overseas investments; Issued 22 new regulatory categories (include the value at risk (VAR) of funds and stocks, AAA bonds, profit forecast for the next three years, China cash flow test for the next three years, and reserve adequacy test), under which insurance institutions should submit relevant information starting January State-owned insurers to cap executive salaries; 1, 2009; CIRC to check the facticity of financial data insurers to suspend stock incentive plans until of insurers in a bid to ensure a healthy and stable government issues new rules permitting such insurance market schemes at financial institutions Starting 1 Apr 2009 life insurance companies to show all details of charges deducted from premiums of ILPs. Disclosure of more financial data, including solvency India margins, claims settlement records and loss ratios, on a quarterly basis; To direct life insurers to furnish data on the performance of ILP funds. All insurance companies to furnish the details of investments made in Sep-Dec period; ILP Cap on CEOs pay at Rs 1.5 Crores per Annum exposures to troubled company Satyam to be Modified norms for the issuance of ESOP/sweat disclosed equity to CEOs. Singapore Insurers are required to issue statements on participating funds for 2007, in the form of an 'annual bonus update' Tie-ups Other Licence CIRC issued 407 administrative penalties to New accounting standards: Investment insurance branches, insurance income and savings income charged intermediaries and other unlawful CIRC and China Banking together with the premium will no longer be China corporations; Sino-US MetLife Fined Regulatory Commission calculated into premium income; New CNY100,000 for misleading sales; (CBRC) will join hands in legislation gives the China Insurance Regulator hits PICC Health for violating regulating the mainland's Regulatory Commission (CIRC) greater regulations on universal life products bancassurance market power in regulating insurers' capital level Hong Hong Kong to consider independent Kong insurance authority to further improve the insurance supervisory framework
  11. 11. Insurance industry to have new M&A guidelines by March 2010; IRDA working on guidelines to allow insurance companies to India hedge their portfolios with derivatives; Drawing up plans to strictly monitor insurers' expenses and premium charged for group and guaranteed return policies Indonesia Government to revoke agency license Finance Minister revoked the business temporarily to prevent from insurance license of PT Asuransi Jiwa Jaminan 1962 agency pouching 35 insurance firms yet to comply with the House body has recommended the Philippines government's prescribed capitalization Insurance Commission (IC) as regulator of requirements face cease-and-desist orders the pre-need industry Signed a MOU with Dubai Financial Services Authority for supervisory cooperation Singapore in banking, insurance and capital markets; Singapore, 3 firms told to cease financial advisory Germany to co-operate on Amendments to the Insurance Act enables service due to lack of adequate insurance and banking policyholders to change beneficiaries of management oversight and control policies supervision insurance policy Tied up With Financial Authority in Dubai; Signing Taiwan of MOU for the financial sector with expected tby mid-2009 Thailand Revoked the license of Samphan Tax breaks on A&H riders or additional Insurance as it failed to raise capital to contracts attached to life insurance policies, meet the required level to end
  12. 12. References The Credit Crisis and the Insurance Industry, Swiss Re Sigma reports Insurance Banana Skins 2009, PWC Asia Insurance Review Country Regulatory websites, news releases and policy documents Country Life Insurance associations