INSIGHTS: Important development for Australian insurers and reinsurers domiciled in Singapore

July 20, 2016

On 15 July 2016, the Monetary Authority of Singapore (MAS) published its third consultation paper on proposed revisions to the Risk-Based Capital (RBC) framework for insurers.

The third consultation paper sets out the revised proposals, which take into account the feedback received from the second consultation paper on MAS’s review of the RBC framework (“RBC 2”) in 2014, as well as the subsequent engagements MAS had with the insurance and reinsurance industry.

Its key revisions include that the capital requirements for equity investment, credit spread, counterparty default and operational risk have been re-calibrated downwards to more accurately reflect the risks they pose to insurers.

Onshore capital requirements

MAS has described the objective of RBC 2 and its approach as reflecting its “ongoing efforts to maintain prudent capital requirements that are commensurate with insurers’ risk profiles and business activities and in line with international standards and best practices” and “not to raise the industry’s overall regulatory capital requirements” and “to explore the feasibility of having more latitude in imposing capital requirements at the insurance fund level”.

The intention is for the revised RBC framework to create a more conducive regulatory environment:

  1. for insurers to invest in equities and long-dated bonds and offer long-term insurance products for policyholders;
  2. for policyholders to benefit from better product pricing and asset allocation decisions made by insurers.

Offshore insurance funds

Currently under the Singapore regulatory regime:

  1. an Overseas Insurance Fund of a foreign-incorporated licensed reinsurer (reinsurance branch) is exempt from the solvency requirements; and
  2. an Overseas Insurance Fund of a foreign-owned locally incorporated reinsurer is subject to a simplified solvency requirement.

The revised RBC framework will seek to clarify that the capital and solvency rules for the Offshore Insurance Fund of a locally incorporated reinsurer, as long as the locally incorporated reinsurer is headquartered in Singapore (that is, the ultimate parent is incorporated in Singapore) will be subject to RBC 2 and that MAS has the oversight responsibility as the home regulator.

Therefore, locally incorporated reinsurers that are headquartered in Singapore will be subject to full RBC 2 requirements and global reinsurance counterparts will similarly be subject to group-wide supervision, including group capital requirements.

Click here to link to a copy of the “Consultation Paper on Review of Risk-Based Capital Framework for Insurers in Singapore (“RBC 2 Review”) – Third Consultation”.

For more information and advice on the potential impact of the MAS proposals on Australian insurers please contact our Financial Services – Regulatory and Transactional Principal, Michael Bracken on T: 02 9018 9977.