MAS consults on Proposed Revisions to Risk-Based Capital Framework for Insurers and launches Quantitative Impact Study
Singapore, 26 March 2014 … The Monetary Authority of Singapore (MAS) today published a second consultation paper on the details of the proposed revisions to the Risk-Based Capital (RBC) framework for insurers.
2 The RBC framework for insurers was first introduced in 2004. It adopts a risk-focused approach to assessing capital adequacy and seeks to reflect the relevant risks that insurers face. MAS has reviewed the framework (RBC 2 review) in light of evolving market practices and global regulatory developments and made specific proposals following the first consultation1 on the broad direction of the RBC 2 review.
3 The proposals aim to improve the comprehensiveness of the risk coverage and the risk sensitivity of the framework. The review has taken into account the practices of major jurisdictions as well as the risk profile of the Singapore insurance sector.
4 The consultation paper also contains technical specifications which will guide insurers to conduct a comprehensive quantitative impact study to fully understand the impact of the proposals of the RBC 2 review.
5 The key proposals can be found in the Annex. The consultation paper is available on the MAS website and comments should reach MAS by 30 June 2014.
Key Proposals under RBC 2 Consultation
Introduction of a matching adjustment. For life insurers with predictable liability cash flows, the fixed-income assets that are held to back the policy liabilities are more likely to be held to maturity and therefore do not face the risk posed by short-term interest rate movements. MAS proposes to introduce a matching adjustment to the discount rate to take this into account.
Recalibration of the risk requirements. Currently, risk requirements are calibrated based on different risk measures and confidence levels. MAS proposes to recalibrate the risk requirements to a consistent target criterion i.e. Value at Risk (VaR) measure of 99.5% confidence level over a one year period. This aims to ensure to a high level of certainty that an insurer holds sufficient capital to buffer against losses.
Recognition of diversification benefits in the aggregation of the risk requirements. In response to industry feedback from the first consultation, MAS proposes to recognise diversification between the insurance and asset risk requirements, as well as between some of the underlying risk requirements within these two categories of risk requirements.
Alignment of insurers’ available capital components with those in MAS’ capital adequacy framework for banks, wherever appropriate. As an integrated supervisor overseeing all financial institutions including banks and insurers in Singapore, MAS aims for a level playing field and a consistent regulatory and supervisory framework for financial institutions.