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Evolving Criteria Asia PacificOctober 2019

Table of Contents

Executive Summary.............................................................................................................

Regulatory Developments .................................................................................................

Rating Criteria Updates .....................................................................................................

Industry Hot Topics ..........................................................................................................

Minimum Capital Requirement and Specific Catastrophe Considerations ..........................

Appendix ...........................................................................................................................

Contacts ............................................................................................................................

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Evolving Criteria, Asia Pacific 3

Executive Summary

In the recently released Aon’s 14th Insurance Risk Study,

Aon Reinsurance Solutions updated its annual Country

Opportunity Index which identifies markets with a

desirable mix of profitability, growth potential, and a

relatively stable political environment. The table below

displays top 12 of the 50 property casualty markets

ranked by this Index and divided into quartiles.

Asia Pacific markets dominate the top positions. For the

fourth year in a row, Malaysia, Indonesia, and Singapore

are ranked within the top five positions in this index. All

three have shown low combined ratios, healthy premium

and GDP growth, and a stable political environment.

High premium growth is expected in Asia Pacific region

due to current low insurance penetration, government

policy push on investment in infrastructure, and market

liberalisation. All of these will help support the Asia

Pacific insurance markets maintain a stable position.

Offsetting these strengths, protectionist rhetoric has

turned into action. Trade tensions between China

and US have continued and despite recent positive

sign, substantial uncertainty still remains. Natural

catastrophes have been active in 2019 to date. These

factors create uncertainty for the markets and increase

the difficulty of current operating conditions.

On top of these, the evolving regulations and rating criteria

pose additional challenges. Regulators across the region are

upgrading their solvency regimes. New reporting standards

are to be implemented in certain markets and rating agencies

also are refining criteria. All these may affect insurers’ capital

consideration and reinsurance arrangement. Aon Reinsurance

Solutions have prepared this Asia Pacific edition of Evolving

Criteria to capture the key changes in the past twelve months

and to help insurers understand and manage them.

Rank Market 5yr Cumulative Net Combined

Ratio

5yr Annualized Premium

Growth

Real GDP 5yr Growth

Population 5yr Annualized

Growth

Political Risk Assessment

Quartile 1

1 Indonesia 88.8% 12.3% 6.8% 1.2% Medium

1 New Zealand 96.2% 6.1% 5.1% 1.9% Low

3 Malaysia 87.7% 3.3% 6.9% 1.4% Medium Low

4 Mexico 91.2% 10.0% 4.3% 1.0% Medium

4 Singapore 80.6% 1.4% 5.0% 0.9% Low

6 Sweden 92.2% 4.1% 4.5% 1.2% Low

6 Australia 93.6% 3.1% 4.3% 1.6% Low

8 Luxembourg 93.4% 2.9% 4.7% 2.3% Low

8 Saudi Arabia 96.1% 12.7% 3.8% 2.1% Medium

8 Hong Kong 91.1% 5.3% 4.5% 0.7% Medium

8 Finland 90.9% 3.8% 3.1% 0.4% Low

8 Denmark 91.2% 2.3% 3.6% 0.6% Low

Data source: Aon Reinsurance Solutions

For full ranking and methodology of the Country Opportunity Index, please refer to the fourteenth edition of the Insurance Risk Study which is available at www.aon.com/thought-leadership

4 Evolving Criteria, Asia Pacific

Regulatory Developments

Australia

Australian Prudential Regulation Authority (APRA)

made minor changes to the prudential framework

to implement the cross industry appointed actuary

standard. Amendments were made to thirteen prudential

standards to reflect consequential changes arising from

the introduction of the new Prudential Standard CPS 320

- Actuarial and Related Matters and Prudential Standard

GPS 340 - Insurance Liability Valuation.

For general insurers, three minor changes to Prudential

Standard GPS 116 - Capital Adequacy Insurance

Concentration Risk Charge are also made to reflect

current definitions and APRA’s expectations. The revised

GPS 116:

• Removes reinsurance premium protection and

capital market structures from the definition of

alternative capital and risk mitigants in paragraphs

54 and Attachment B, paragraph 13, as these types

of arrangements are more aligned with traditional

reinsurance;

• Clarifies APRA’s expectation that the Appointed

Actuary include both details of the determination of

the net premium liability provision which relates to

catastrophic losses (the PL offset) for the reporting

year and the estimated PL offset to be utilized in the

upcoming year in the AVR; and

• Continues the existing requirement that the Group

Actuary provide the board of a Level 2 insurance

group with an opinion on the Insurance Concentration

Risk Charge whenever substantial changes are made or

at least annually (at attachment B, paragraph 18).

The amended prudential standards are in effect from

1 July 2019.

Solvency and Risk Management

Bhutan

Royal Monetary Authority of Bhutan (RMA) issued Risk

Management Guidelines (RMG) 2019 to all the financial

institutions to meet the minimum required standards for

managing risk. Financial institutions are encouraged to self-

assess their risk profile, operational context and customize

their risk management architecture and approach to attain

the organisational goals.

Brunei

In December 2018, Monetary Authority of Brunei Darussalam

(AMBD) issued guidelines for risk management and internal

controls for insurance companies which will take effect from

1 January 2020. Risk Management Framework must align

with the insurer’s risk culture and include strategies and tools

to mitigate both qualitative and quantitative risks. Control

functions such as compliance, actuarial matters and internal

audit must be included in risk management framework.

Insurers must also consider the probability, potential impact

and time horizon of risks.

China

On 22 July 2019, The China Banking and Insurance

Regulatory Commission (CBIRC) announced an agreement to

continue the preferential treatment to Hong Kong under the

“China Risk Oriented Solvency System (C-ROSS)”, allowing

lower capital requirements for Mainland insurers who cede

businesses to qualified Hong Kong professional reinsurers.

The former China Insurance Regulatory Commission and

the former Office of the Commissioner of Insurance signed

the Equivalence Assessment Framework Agreement on

Solvency Regulatory Regime (Agreement) on 16 May 2017.

In 2018, the CBIRC, based on the Agreement, granted the

preferential treatment to Hong Kong professional reinsurers

for one year.

C-ROSS Phase II project proceeds, with completion by June

2020 targeted.


Hong Kong

On 9 August 2019, the Insurance Authority (IA) issued

templates and technical specifications for the third

quantitative impact study (QIS 3) on the development

of Risk Based Capital (RBC) regime. The QIS 3 package

represents the collaborative effort of the IA and the

industry. In developing the QIS 3 package, the IA

has worked on the industry data collected from the

Second Quantitative Impact Study (QIS 2) and engaged

representatives of the Hong Kong Federation of Insurers

and the Actuarial Society of Hong Kong for technical

discussion, including the approach for moderation and

recalibration. In addition, the QIS 3 package has taken into

account international standards and practices, particularly

the global Insurance Capital Standard (ICS) being

developed by the International Association of Insurance

Supervisors (IAIS). QIS 3 is contributory to forming the

data set for the insurance industry in Hong Kong.

The result would form the basis for the IA to finalize the

set of rules on Pillar 1 capital requirement after which a

consultation process is expected to be carried out in 2020.

On 5 July 2019, the IA published GL21 – Guideline on

Enterprise Risk Management (ERM). GL21 sets out the

objectives and requirements on ERM and the Own Risk and

Solvency Assessment (ORSA); and provides the impetus

for insurers to establish effective tools to identify, monitor,

manage and mitigate risks. The guideline takes effect from

1 January 2020.

India

In November 2018, an Apex Committee was formed to

implement Indian Accounting Standards (Ind AS), Risk

Based Capital (RBC) and Risk Based Supervisory Framework

(RBSF). In December 2018, Insurance Regulatory and

Development Authority of India (IRDAI) revised the

terms of reference of the steering committee which

was formed in 2017 to ensure the smooth and timely

implementation of RBC Regime in India by 2021. IRDAI also

formed Consultant Evaluation Committee to evaluate the

shortlisted consultants for Implementation of RBC Regime

for Indian Insurance Industry.

As per current regulations, insurers are expected to

maintain 150% margin over insured liabilities. RBC

approach links the level of required capital with the risk

inherent in the underlying business and it represents

the amount of capital a company must hold based on

assessment of risk to protect stakeholders from adverse

development. The shift to RBC from solvency margin

needs technical expertise and related cost.

Japan

Financial Services Agency (FSA) is considering regulatory

changes to align the proposed economic value-based

solvency regime with the insurance capital standards

(ICS). The monitoring period will start from 2020 and

implementation is scheduled for 2025. FSA has conducted

multiple field tests for all insurers in order to establish

methodology for the calculation of economic value-based

insurance liabilities. The tests examined aspects such as

operational problems, methodology improvement and

internal model governance; and various factors such as

interest rates stock values, real estate prices and foreign

exchange rates. Technical specifications of the ICS 2019

field tests will be used for the 2019 field test of economic

value-based solvency regime. Integrated risk management

can be ensured with the help of economic value-based

evaluation as it balances risk, capital and profit. Japan’s

major insurance groups have already incorporated

economic solvency ratio (ESR).

Philippines

With the progressive enhancement mechanism designed

in the Amended Risk-based Capital (RBC2) framework in

2019, non-life insurers’ catastrophe risk capital charge is

calibrated at the 200-year return period, up from the 40-

year return period standard used in 2018 computation.

Republic Act No. 10607 provides that domestic non-

life companies shall maintain a minimum net worth in

accordance with a timetable for implementation: by 31

December 2019 - PHP 900 million and by 31 December

2022 - PHP 1.3 billion.


Singapore

On 6 May 2019, Monetary Authority of Singapore (MAS) issued

technical specifications for RBC 2 parallel run for year ended

31 December 2018. This included updated policy position on

the RBC 2 framework on matching adjustment (MA), illiquidity

premium (IP) and recognition of internal credit rating model

or process for unrated corporate bonds. All the insurers except

captives, Lloyd’s insurers and marine mutual were required

to conduct the parallel run for the year ended 31 December

2018. The parallel run allows MAS to access the impact of RBC

2 proposal on insurers’ capital positions and prepare for its

implementation from 1 January 2020.

MAS expects to conduct a final parallel run for the year ended

31 December 2019.

MAS issued Insurance (General Provisions and Exemptions or

Captive Insurers) Regulations 2018, effective 1 January 2019,

which specifies financial requirement before licensing, fund

solvency requirement and capital adequacy requirement

for captive insurers. This new regulation supersedes The

Insurance (General Provisions and Exemptions for Captive

Insurers) Regulations 2004.

South Korea

Financial Supervisory Services (FSS) has announced full

adoption of IFRS 17 in 2022 and the new solvency regime,

Korean Insurance Capital Standard (K-ICS) simultaneously.

This move will not only force the insurance companies to

raise capital requirement but also to change their business

strategies. Implementation of IFRS 17 will change the

accounting view on the valuation of insurance contracts

and profit recognition. Implementation of K-ICS and IFRS 17

together will regulate the financial soundness of the insurance

industry and will impact the size and volatility of available

capital, change risk categories and calculation methods for

required capital.

FSS is engaging with Industry to develop the final draft of

K-ICS. Quantitative impact study was held in 2018 after the

release of first draft of K-ICS and the second draft of K-ICS

was released in July 2019 which will be followed by an

impact study. With the standard planned to be implemented

in stages, a grace period of 10 to 20 years will be given.

The grace period for K-ICS is linked to the completion of

implementation of Solvency II in the European Union which is

scheduled for 2032.

Taiwan

On 2 August 2019, Taiwan regulator announced it would

amend the insurance capital adequacy management

methodology to include “net assets ratio” as supplemental

measure to monitor insurers’ capital adequacy. The “net

assets ratio” is defined as an insurer’s shareholders’ equity

divided by its total assets (excluding segregated account

linked to investment-type insurance).

Thailand

The insurance companies in Thailand are required to

implement Enterprise Risk Management (ERM) and Own

Risk and Solvency Assessment (ORSA) and the new risk-

based capital framework (RBC2) will replace the current

one (RBC1). ORSA must be conducted at least once a year

or whenever there are significant changes to assess the

company’s risk management. Insurance companies need

to establish a risk governance framework that ensures

ERM. Impact studies for IFRS 9 and IFRS 17 are expected

to take place prior to the complete transition to 99.5%

confidence level. The Office of Insurance Commission (OIC)

has recommended dividing insurers into two tiers based on

company size, interconnectedness, complexity and business

type. Tier two will be further divided into two groups, i.e.

Tier 2A and Tier 2B. While ERM and ORSA requirements

are optional for some of the Tier 2A and Tier 2B, all are

compulsory for Tier 1 companies.

A feedback loop will be embedded within the ERM

framework to assess the effects of changes in risk. OIC

reserves the right to review and audit the results at any time

while the Board of directors must review and approve the

risk management policies.


China

On 7 August 2019, the China Banking and Insurance

Regulatory Commission (CBIRC) issued “Temporary Method

of Supervising Insurance Asset-Liability Management” which

aims to prevent asset-liability mismatch risk, to improve

insurers’ asset-liability management capability, and to

strengthen asset-liability management regulations. The

method applies to both life insurers and non-life insurers.

India

IRDAI cancelled the license of ITI Re as it failed to commence

business before 29 December 2018, leaving GIC Re as the

only domestic reinsurer in India.

Malaysia

In June 2019, Bank Negara Malaysia (BNM) published

exposure draft for registration procedures and requirements

for Insurance and Takaful Aggregation Business. BNM will

regulate the Insurance Aggregators as a new category

of business under Financial Services Act 2013. Insurance

aggregators will be required to get approvals from BNM

under the Financial Technology Regulatory Sandbox.

Nepal

A new tariff for property insurance came into effect on 15

January 2019. This includes a requirement that a property

policy must include a wide range of fire and special perils

as standard cover, from which deviation is not allowed.

The risks of riot, strikes, malicious damage, sabotage

and terrorism (RSMDST) are optional (i.e. not part of the

standard cover) and available at extra premium.

Philippines

World Bank has renewed an insurance program to help

Philippines against climate and disaster risk (parametric

insurance policy) which provides USD 390 million in

insurance, effective from 19 December 2018. The renewed

contract provides almost double coverage compared to

2017 against major typhoon and earthquake events.

Other Updates

Singapore

The Monetary Authority of Singapore (MAS) has officially

launched a grant scheme, which offers to fund 100% of an

issuer’s upfront set-up cost of up to SGD 2 million – a major

barrier to entry especially for new sponsors – involved in

issuing bonds in Singapore. The grant will apply in respect

of ILS bonds covering a wide range of risks, not just those

relating to natural catastrophes. Qualifying transactions

comprise bonds valued at more than SGD 50million in which

the notes will be listed on the Singapore stock exchange.

Insurance Australia Group Ltd. sponsored the very first

catastrophe bond issued in Singapore, from Orchard ILS (a

Special Purpose Reinsurance Vehicle) which offered AUD 75

million of annual aggregate catastrophe protection for three

years. The ILS Grant Scheme is valid till 31 December 2020.

Singapore is setting up the world’s first commercial cyber

risk pool as part of efforts to develop the region’s capacity

to deal with threats from cyberattacks. The pool will commit

up to USD 1 billion in capacity and bring together both

traditional insurance and insurance-linked securities markets

to provide bespoke cyber coverage. To date, 20 insurance

firms have indicated their interest to participate in this pool,

which would allow corporates in ASEAN and Asia to be

protected against cyber-related losses.

Sri Lanka

In December 2018, the Insurance Regulatory Commission

of Sri Lanka (IRCSL) issued Direction No 17, recommending

insurers adhere to the Code of Best Practice on Corporate

Governance 2017. The direction also sets out a number of

mandatory points including the maximum age for a director

of an insurance company and the length of time for which

a non-executive director may serve. In March 2019 the

effective date of the direction was amended from 1 January

2019 to 1 July 2019 following industry feedback.

Vietnam

Prime minister of Vietnam issued Decision 242, namely

“Restructuring the securities market and insurance market

to 2020 and orientation to 2025”, aiming to develop safe,

sustainable and efficient insurance market. This plan has

certain objectives such as increasing the total revenue and

growth rate of insurance market, increasing the coverage

meeting diversified insurance needs and use of modern

technology in insurance sector.


China

On 15 October 2019, the State Council announced the revision

of regulations on foreign banks and insurers. China relaxed

market access rules for foreign insurance companies, such as

removing requirements that companies applying to establish

foreign-invested insurers in China have a track record in the

business of over 30 years and have a representative office in

the country longer than two years. The updated regulations

allow foreign insurance groups to set up foreign-invested

insurers in China, and allow overseas financial institutions to

hold stakes in foreign-invested insurers.

India

In November 2018, the Insurance Regulatory and

Development Authority of India (IRDAI) issued updated

reinsurance regulations. While the preceding system

of offering reinsurance initially to an Indian reinsurer is

maintained, the new regulations provide greater scope to

cede to foreign reinsurance branches. Effective 1 January

2019, foreign reinsurers with branches in India are allowed to

bid for reinsurance contracts along with domestic reinsurer

GIC Re. Cedants should seek terms at least from all Indian

reinsurers which have been transacting reinsurance business

during the immediate past three continuous years and at least

from four foreign reinsurers.

In the Union Budget of 2019, Finance Minister of India

proposed a 100% foreign direct investment (FDI) for

insurance intermediaries which was previously 49%. The

government is also looking for an increase in the foreign

direct investment limit for Insurance companies as well. The

FDI is expected to boost the use of advanced technology in

insurance space. The net owned fund required for foreign

reinsurers for opening the branch has been reduced.

Insurance Market Liberalisation

Myanmar

In January 2019, Ministry of Planning and Finance of Myanmar

(MoPF) granted permission for foreign insurers to operate in

the country. In order to form JV with local Myanmar insurers,

the foreign partners must have a local representative office

registered for the life/non-life insurance business in Myanmar

as of 31 December 2018. Three options given by MoPF for

foreign insurers are mentioned below:

• Maximum three licenses will be issued to foreign life

insurers to have 100% wholly owned subsidiaries.

• Foreign life insurers can have a representative office in

Myanmar to form Joint Venture with local life insurers.

• Foreign non-life insurers can have a representative office in

Myanmar to form Joint Venture with local non-life insurers.

MoPF invited local and foreign insurers for expression of

interest (EOI) and request for proposal (RFP) to conduct

business in Myanmar. In July 2019, MoPF announced the list of

six successful applicants.

The Myanmar government is seeking through legislation

to exclude the insurance sector from the competition

law, in a move seen as protecting the state-owned insurer

Myanma Insurance. The Competition Law shall not apply to

insurance products and rates approved by Insurance Business

Regulatory Board (IBRB). The move is expected to protect

the state-run enterprise’s privileged position in the market.

It provides about 50 different types of products in market

where private entities are only allowed to issue a few types of

insurance cover. Reinsurance business can only be conducted

by Myanma Insurance through contracting with foreign

reinsurers, and not with any private service providers.


China

On 18 February 2019, China State Council announced the

initiatives for the insurance industry under the Outline

Development Plan for the Guangdong-Hong Kong-Macao

Greater Bay Area (Outline Development Plan). These

initiatives include promoting cross-boundary Renminbi

reinsurance business; supporting joint development by

insurance institutions in Guangdong, Hong Kong and

Macao of innovative and cross-boundary motor vehicle and

medical insurance products; exploring the development of

a trading platform for innovative insurance elements such

as international marine insurance; and providing facilitation

services such as underwriting, investigation and claims for

cross-boundary policy holders.

The Outline Development Plan also suggests progressive

promotion of cross-boundary transactions of financial

products including insurance products within the Greater

Bay Area in accordance with relevant laws and regulations,

and provision of support to eligible Hong Kong insurance

institutions in setting up operations in designated areas in the

Greater Bay Area.

Hong Kong

In order to effectively capture the unprecedented

opportunities brought by China’s “Belt & Road Initiative”

(BRI), the Insurance Authority (IA) set up the Belt and Road

Insurance Exchange Facilitation (BRIEF) in December 2018

to pool together key stakeholders to unleash synergies in

exploiting prospects arising from BRI. The objectives of

BRIEF are to provide a platform to promote the exchange of

intelligence, forge alliances and facilitate networking; and to

establish Hong Kong as a global risk management centre and

a regional insurance hub. The membership of BRIEF spans

across mainland China, Hong Kong and foreign enterprises

engaging in projects and commercial activities connected

with BRI. As of 30 August 2019, BRIEF has 39 members

including insurers, reinsurers, and brokers.

Cross-Jurisdiction Collaboration

Singapore

Memorandum of Understanding (MoU) was signed between

Monetary Authority of Singapore (MAS) and National

Bank of Cambodia (NBC) to enhance the partnership and

financial services innovation in April 2019. Similar MoU was

signed with Otoritas Jasa Keuangan (OJK) of Indonesia in

October 2018. On 26 September 2019, MAS and Insurance

Commission, Thailand (IC) signed MoU to strengthen co-

operation in insurance supervision.

Vietnam

In October 2018, the national agency implementing

Vietnam’s Protocol No. 5 had a bilateral meeting with the

Lao Insurance Association in Da Nang to discuss the signing

of Memorandum of Understanding (MoU) on implementing

the compulsory liability insurance for motorized vehicle

owners crossing the border.

ASEAN

In December 2018, the representatives of the Finance

Ministries of Cambodia, Indonesia, Japan, Lao PDR,

Myanmar, and Singapore signed a Memorandum of

Understanding (MoU) for the establishment of the Southeast

Asia Disaster Risk Insurance Facility (SEADRIF) in Busan for

strengthening the financial resilience of ASEAN countries.

World Bank will finance the project through Multi-Donor

Trust Fund and other trust funds.


Rating Criteria UpdatesThe importance of international rating is becoming widely accepted and acknowledged across Asia Pacific. Many regulators refer to international rating in the solvency capital regime and/or the reinsurance arrangement requirement. Ratings are also frequently required in tenders for commercial lines. The rating agencies will likely play a greater role in the evolution of Asia Pacific insurance markets.

The focus of rating agency criteria updates in 2018/2019 has been around AM Best’s proposed innovation criteria and S&P’s updates to several methodologies, including insurer, group, hybrid, and ERM criteria.

AM Best

Scoring and Assessing Innovation

On 13 September 2019, AM Best released updated draft of

its new rating criteria, “Scoring and Assessing Innovation”,

proposing a revision to Best’s Credit Rating Methodology

(BCRM). AM Best has requested comments from the market

participants by 31 October 2019. In the proposed criteria, AM

Best discusses the importance of insurers being innovative

and the relationship between the company’s ability to

innovate and their long-term performance and financial

strength. The criteria proposal highlights that innovation

can come in many forms and that new or improved

products, processes, services, or business models should

have measurable impact. Historically, AM Best has captured

innovation indirectly through the various building blocks

of its rating process. The revision of the BCRM incorporates

innovation as the ninth subcomponent of the business

profile building block. Within its business profile building

block, AM Best explicitly will consider whether a company’s

innovation efforts, or lack thereof, have had a demonstrable

positive or negative impact. AM Best will calculate innovation

score based on innovation inputs and innovation outputs.

Components of innovation inputs include leadership, culture,

resources and processes and structure. Innovation outputs

include results and levels of transformation. A balanced mix of

innovation will help the company to respond to internal and

external pressures.

The impact of innovation on a company’s financial strength

rating will be relative depending on the individual

characteristics of each company. AM Best highlights that the

innovation score is not directly correlated to the issuer credit

rating of an insurer and does not automatically have a positive

or negative impact on a company’s rating. But AM Best

anticipates that the importance of innovation will increase

over time.

S&P

S&P Insurer Rating Methodology

On 1 July 2019, S&P published updated “Insurers Rating

Methodology” for measuring the stand-alone credit

worthiness which applies to all insurers ratings in the

life, health, property/casualty, mortgage, title, and bond

insurance and reinsurance sectors. The criteria do not apply

to insurance brokers and ‘CCC’ rated insurance companies.

The objective is to increase analytical judgment within the

rating process. S&P anticipates that less than 3% of ratings

will be impacted, with most of the changes within one notch.

The assessment of the stand-alone credit profile (SACP)

is based on competitive position, Insurance Industry and

Country Risk Assessment (IICRA), Capital and earnings, Risk

exposure, Funding structure, Governance and Liquidity.

Revisions to the Business Risk Profile (BRP), Financial Risk

Profile (FRP), and modifiers are:

• Removal of subfactor tables: Specific scoring of

subfactors have been removed in competitive position and

IICRA to have a greater scope in analytical judgement.

• Risk position replaced by risk exposure: The updated

assessment encompasses a broader assessment of a

company’s risks, including risk controls, risks not captured

in the capital and earnings analysis, concentration and

diversification, and complexity of products and risks.

• Financial flexibility replaced by funding structure: The new assessment focuses on the risks posed by use of

leverage and significant number of intangibles. Funding

structure is dependent on S&P’s assessment of company’s

capital structure and individual characteristics.

• Governance modifier: Governance covers risks

related enterprise risk culture and its relationship with

stakeholders.

• ERM modifier removed: Key principles ERM are integrated

with relevant key rating factors and there would be no

explicit scoring of ERM.


• Holistic analysis replaced by comparable ratings analysis: This new modifier incorporates additional credit

factors and may be impacted by peer analysis.

• Other changes include consolidation of certain capital

and earnings factor, removing explicit cap to provide

more scope for analytical judgement and incorporate

bond insurer to the scope of the criteria to ensure

consistency of ratings.

S&P ERM Update

On 22 July 2019, S&P published “Enterprise Risk

Management Evaluation Framework” for analyzing

company Enterprise Risk Management (ERM). The

analysis intended is stand-alone, on-request service and

separate from the ratings process. Overall ERM evaluation

includes risk culture, risk exposure management and

risk optimisation. While the overall evaluation will not

be considered in the context of the ratings criteria,

the score should be reflective of the impact ERM has

on the rating within the other rating components.

Group Methodology

On 1 July 2019, S&P announced that ‘Group Rating

Methodology’ has come into effect, except in those markets

where prior permission from regulator is required. The

change in methodology brings more analyst discretion in

assessing the group status of subsidiaries from ‘Core’ to

‘Nonstrategic’. For insurance groups, S&P is proposing to

eliminate the sovereign caps and allow a subsidiary rating

to be higher than the sovereign rating if appropriate,

due to factors such as group uplift and support. S&P

has added more detail around determining insulated

subsidiary criteria including adding more differentiation

between the different levels of insulation. S&P expects

up to 2% of ratings in insurance sector would be affected

by this change, with more upgrades than downgrades

due to removal of the sovereign ratings caps.

Fitch

In November 2018, Fitch Ratings published updates to its

global methodology for rating insurance companies, which

are primarily clarifications to pre-existing methodology. The

updates include the following:

• Sector Credit Factor ratio guidelines restated as ranges

instead of medians, along with the addition of guidelines

for the ‘BB’ and ‘B’ rating categories.

• Clarifications and details added to the ‘Group Rating

Methodology’ section that describe the factors that would

cause Fitch to classify an insurance subsidiary as: Core, Very

Important, Important or Limited Importance.

• Details added to the ‘Recovery Analysis’ section on how

and when to conduct a liquidation value or going concern

analysis in insurance-specific context. The update also adds

guidelines with respect to how far a bespoke recovery

rating may vary from the baseline recovery assumptions

discussed in the ‘Notching’ section of the criteria.

• Updated commentary in the ‘Ownership’ section for

ownership by banks, financial conglomerates or other

corporate organisations. Clarifications were also added for

how the agency would rate an insurer when Fitch does not

rate the parent, and when there is a change in ownership.

• Clarifications added on how Fitch treats certain hybrid

structures as perpetual in jurisdictions that do not allow for

the issuance of true perpetual securities.

• Clarifications and details added on notching distinctions for

Group Solvency and Ring-Fenced regulatory environments

for holding companies.

• Clarifications were added to the ‘Captive Insurance

Companies’ section that core captives are typically rated

at the level of the parent Issuer Default Rating, and on the

ways the proportion of nonparent/sponsor business can be

measured.


IFRS 17

On 14 November 2018, the International Accounting

Standard Board (IASB) voted to defer IFRS 17 by one year

until 1 January 2022. The vote was in response to insurers’

feedback about the challenges encountered during

implementation processes around the world. However,

given the complexity of the standard’s implementation,

re/insurers should not delay any implementation

work, but allocate the extra time as a safety buffer.

Key implementation challenges reported by insurers are:

• Underestimating the complexity of the standard and,

despite timely commencement of implementation effort,

stumbling upon unforeseen issues that needed extra time

• Depending on jurisdiction, managing other competing

regulatory projects where resources and budget have

already been committed

• The shortage of internal and external IFRS 17 experts

with technical understanding of the standard sufficient to

successfully implement it.

The IASB is proposing targeted amendments to IFRS 17 to

respond to concerns and challenges raised by stakeholders

as IFRS 17 is being implemented. The Exposure Draft

Amendments to IFRS 17 was open for comments until 25

September 2019. The Board will consider feedback on the

proposed amendments and aims to issue final amendments

in mid-2020. The IASB wants to bring as much certainty

and clarity to implementation timelines as possible and

prevent continuous postponement of a standard that aims

to improve existing discrepant accounting practices.

How Aon Can Help

Aon has a proprietary impact assessment tool to help you

understand the impact on gross and reinsurance contracts

through a minimal amount of data, model points and

assumptions. Aon can reassess existing covers and propose

alternative reinsurance solutions where the results of the

impact assessment show that current reinsurance structures

are not optimal. A number of Aon tools can also support

inhouse IFRS 17 modelling and reporting including PathWise

and ReMetrica.

InsurTech

Growth of AI has enabled insurance analytics which impacts

underwriting, settlement of claims, marketing and customer

services and innovation. Technology-enabled services has

helped the insurance companies to boost capabilities allowing

them to capture market share and shape the market’s future.

In India, IRDAI has set up a single point of contact for

regulatory sandbox matters and has called up applications

for sandbox from 15 September 2019 till 14 October

2019. In Singapore, MAS has launched Sandbox Express

to test innovative financial products. In Korea, fintech

regulatory sandbox came into effect on 1 April 2019

under the Special Act on Financial Innovation Support.

Singapore Fintech Festival 2018, which was attended by

45,000 people and 130 countries had a new element called

‘The Artificial Intelligence (AI) in Finance Summit’. API

Exchange (APIX), an online global FinTech marketplace and

sandbox platform for financial institutions was launched

during this event. Seven agreements were signed between

Monetary Authority of Singapore and international

financial institutions. Co-operation agreements were

signed to enhance financial regulatory co-operation,

financial market connectivity and foster innovation.

Internet Insurance Summit Asia Pacific 2019 was held in

Shanghai focusing on the use of technology, new business

model and development trends. Insurance Analytics

& AI Innovation Asia Pacific 2019 was held in Hong

Kong focusing on reshaping insurance value chain.

How Aon Can Help

Aon tracks 1,200+ startups to match partnership

opportunities with insurers’ strategic goals. Our emerging

technology partnerships deliver growth opportunities and

enable clients to stay ahead of the game whether improving

customers’ digital experience, boosting claims performance

or enhancing underwriting insights and outcomes. We

leverage our global Aon United network across Risk,

Retirement and Health to help our clients navigate this

complex ecosystem.

Industry Hot Topics


Minimum Capital Requirement and Specific Catastrophe ConsiderationsMinimum Capital Requirement and Specific Catastrophe Considerations embedded in Risk Based Capital (RBC) structure.

Market Minimum Capital Requirement Specific Catastrophe Considerations

Australia # Captive insurer 2m AUD Any other type of insurer 5m AUD

Greater of: Natural Perils Vertical Requirement (NP VR) Natural Perils Horizontal Requirement (NP HR) Other Accumulations Vertical Requirement (OA VR)

Bangladesh Non-Life Insurer For companies incorporated within Bangladesh 400m BDT (60% must be paid by sponsors and 40% must be paid up by public) For companies incorporated outside Bangladesh At least 400m BDT must be deposited in Bangladesh Life Insurer For companies incorporated within Bangladesh 300m BDT (60% must be paid by sponsors and 40% must be paid up by public) For companies incorporated outside Bangladesh At least 300m BDT must be deposited in Bangladesh

Nil

Bhutan Insurance business 300m BTN Life reinsurance business 600m BTN Non-life reinsurance business 1b BTN Composite reinsurance business 1.5b BTN

Nil

Brunei 8m BND for insurance companies Nil

Cambodia Life/Non-Life Insurer 5m SDR Composite Insurer 10m SDR

Nil



China ^ Nation-wide license 200m CNY Capital per branch 20m CNY Maximum capital 500m CNY

Damage ratio decided by regulator at 1:200 applied to province-level exposure by LOBs (motor, property, and agriculture)

Hong Kong Non-life company 10m HKD Non-life company writing statutory classes of insurance business 20m HKD Composite (i.e. carrying on both general and long-term business) 20m HKD Captive insurer 2m HKD

Nil

India Insurance companies 1b INR Reinsurance companies 2b INR For a foreign company to engage in reinsurance business through a branch established in India 50b INR (net owned fund)

Nil

Indonesia ° Insurance companies 150b IDR Reinsurance companies 300b IDR Sharia insurance companies 100b IDR Sharia reinsurance companies 175b IDR

Retention for a 1:250 year cat event

Japan 1b JPY Greater of: 1:200 - Earthquake 1:70 – Wind

Macao Non-life insurance companies 15m MOP Non-life reinsurance companies 100m MOP

Nil



Malaysia Under Bank Negara Malaysia Insurers and Takaful operators 100m MYR Under Labuan Financial Services Authority General insurance and Takaful business license 7.5m MYR Reinsurance and Retakaful business license 10m MYR Depending on the type of captive insurer 0.3m or 0.5m MYR

Nil

Myanmar Life company 6b MMK Non-life company 40b MMK Composite company 46b MMK

Nil

Nepal Non-life company 1b NPR

Nil

New Zealand Captive insurer 1m NZD General insurer 3m NZD General insurer that has life business 5m NZD

Greater of projected insurance loss incurred in respect of:1. A major earthquake affecting

Wellington (1:1000 years),2. A major earthquake affecting any

place other than Wellington (1:1000 years),

3. Non-earthquake extreme event occurring anywhere within New Zealand or elsewhere (1:250 years)

Pakistan Non-Life Insurers 500m PKR Life Insurers 700m PKR

Nil

Papua New Guinea

2m PGK Nil



Philippines For existing insurers Net worth of: 550m PHP by 31 December 2016 900m PHP by 31 December 2019 1.3b PHP by 31 December 2022 For new non-life insurers 1b PHP minimum capital requirements

Greater of the three components below: 1:200 return period retained aggregated losses in any given year arising from an Earthquake; 1:200 return period retained aggregated losses in any given year arising from a Windstorm; 60% of the combined 1:200 return period retained aggregate losses in any given year arising from both the Earthquake and Windstorm.

Singapore Investment-linked policies only, or short-term accident and health policies only 5m SGD All other types of direct policies 10m SGD Reinsurance companies 25m SGD Captive insurer 0.4m SGD

Nil

South Korea 5b KRW to 30b KRW depending on class of business 30b KRW for Reinsurance business

Nil

Sri Lanka 500m LKR for each class of insurance business Nil

Taiwan > 2b TWD for Insurance companies Greater of: 1:250 - Earthquake 1:100 - Wind

Thailand 300m THB for non-life insurer Nil

Vietnam Non-Life insurer 300b VND Branch of a foreign non-life insurance business 200b VND Additional 50b VND for insurers writing aviation or satellite business 400b VND to 1.1t VND for a reinsurer, depending on the type of reinsurance business written

Nil

# NP VR: 1 in 200 year return period loss after allowing for all classes of business, non modelled perils and potential growth in the insurer’s portfolio# NP HR: Three ‘1 in 10 year losses or four ‘1 in 6 year’ losses less an allowance for the net premium liability provision which relates to catastrophic losses

^ Requirement under C-ROSS. Calculation is done using template provided by the regulator, not based on insurers’ cat modeling work

^ For new insurers founded after 2013, minimum capital requirement depends on their business scope. Non-life insurance business is divided into five “basic” categories and four “extended” categories. Minimum capital requirement is CNY 200 million per “basic” category.

° The regulator OJK specified that if the insurance company has established a catastrophic reserve, the minimum own retention must be under the assumption that the disaster risk event repeats every 250 years.> This is a soft requirement on catastrophe risk management, included in the Q&A of “Risk Management Measures for Insurance Industry” published by Taiwan insurance regulator FSC.


Appendix 1Mandatory domestic cession

Market Mandatory Cession Details

Bangladesh It is mandatory for Bangladesh based private non-life insurers to reinsure 50% of their re-insurable risk with Sadharan Bima Corporation (SBC), the state-owned non-life insurer in Bangladesh, and the remaining 50% can be placed with any reinsurers either home or abroad as per the Insurance Corporation Amendment Act 1990 and Insurance Act 2010.

Bhutan The reinsurance regulation mandates that 20% of every business underwritten by two insurance companies in Bhutan must be ceded to GIC-Bhutan Re Ltd.

Cambodia A compulsory cession of 20% on all non-life insurance contracts must be ceded to Cambodia Re, a partially state-owned firm.

China No mandatory domestic cession requirement except for agriculture business.

India Except the terrorism premium and premium ceded to Nuclear pool, 5% of each General Insurance Policy should be reinsured with the Indian Re-insurers, during the financial year 2019 (1 April 2019 to 31 March 2020). The entire mandatory Cession should be placed with General Insurance Corporation of India (GIC Re) only.

Indonesia As per POJK 05/2015, Indonesian insurers are required to place all reinsurance of simple risks (Motor, Personal Accident, Health, Suretyship, Credit, Life, Cargo lines of business) with domestic Indonesian reinsurers.

Compulsory earthquake cession to Asuransi Maipark is 25% of the total sum insured up to 60 billion rupiah per risk.

OJK stipulates that the priority reinsurance in the local market must be higher of either:

• 25% of the automatic reinsurance capacity in case of treaty reinsurance or 25% of the sum insured in case of facultative reinsurance, or

• the placement amount as prescribed by OJK which differs by line of business

Malaysia There are mandatory “voluntary” facultative cessions to Malaysian Re from direct insurers on a quota share basis of 2.5% in respect of all classes.

All companies must offer Malaysian Re up to 15% in their treaty programmes (excluding aviation, energy and D&O) both proportional and non-proportional.

Priority must be given by insurers when placing facultative property or engineering reinsurance to Malaysian Re up to 15% or MYR 5 million on total sum insured basis, the PML monetary limit being MYR 1.5 million.

There is a retrocession from Malaysian Re back to the market of 20% on treaty and facultative business, which individual companies may choose to accept or not.

Nepal The Insurance Board directed insurance companies to reinsure 20% of their business (excluding aviation insurance) to Nepal Re from July 2018.

Pakistan All insurance companies are mandated to offer 35% of their re-insurance treaty business to PRCL.

Philippines All insurance companies authorised in the Philippines are required to offer at least 10% of each and every outward reinsurance treaty and facultative placement to PhilNaRe.

Sri Lanka All the insurance companies transacting general insurance business in Sri Lanka should place 30% of their reinsurance cession with National Insurance Trust Fund.


Market Current Minimum Rating Requirement for Writing Reinsurance Business

Australia No minimum rating requirement but the reinsurer’s rating will impact the cedant’s solvency due to different risk charges being considered under the RBC framework.

Bhutan All licensed Reinsurance companies must be rated investment grade or equivalent by rating agencies such as S&P, AM Best, Moody’s within 5 years of commencement of business operations. RMA also considers capital, financial strength and domestic and international ranking.

China Any reinsurer that writes China treaty business must have A- or above as leader and BBB or above as follower. Certain exemptions may apply.

Hong Kong Explicit rating requirement for reinsurer does not exist, but the cedants should consider Guideline on Reinsurance (GL17) and have sound reinsurance credit risk management.

India The foreign insurer must have a credit rating of at least BBB from S&P or equivalent rating from an international rating agency during the immediate past three continuous years.

Indonesia Foreign reinsurer must have minimum BBB or equivalent rating.

Malaysia For overseas reinsurance placement, Bank Negara Malaysia’s Guidelines on General Reinsurance Arrangements Circular JPI/GPI-22 require the reinsurer to have a minimum rating of “A” by an accredited rating agency or have a combined paid-up capital and surplus of at least USD 150 million.

Nepal Reinsurance cannot be ceded to foreign reinsurer with the rating less than BBB from any international rating agency.

New Zealand No rating requirement but the reinsurer’s rating will impact the cedant’s solvency.

Pakistan In case of foreign reinsurer, at least 80% of total reinsurance must be placed with reinsurer with A or above rating by S&P or equivalent rating by other international rating agencies. Remaining risk can be placed with S&P BBB or above rated reinsurer or equivalent rating by other international rating agencies.

Philippines The foreign reinsurer’s capital requirements should be equal to the rating required for its local counterpart (depends whether the non-resident foreign reinsurer is licensed as an insurer or as a professional reinsurer in its home country) Or the foreign insurer/professional reinsurer/broker/insurance market must have a minimum financial strength rating as below:

AM Best: At least A- rating Moody’s: At least Aa Rating S&P: At least AA Rating Fitch: At least AA rating

Singapore MAS considers various parameters for reinsurers which include domestic and international rankings, past and current credit rating from international credit rating agencies, track record, financial soundness, reputation and risk management. Under RBC2, counter party risk as below: Risk charge varies from 0.5 to 48.5% based on rating levels from AAA to CCC+. Unrated counterparties are to be treated as having a rating of between BB- to BB+ and BBB- to BBB+: a default risk charge of 7.75% will apply.

Appendix 2Minimum rating requirements for reinsurers


Market Current Minimum Rating Requirement for Writing Reinsurance Business

Sri Lanka Minimum financial strength ratings required for reinsurer are BBB with S&P or Fitch, B+ with AM Best or Baa with Moody’s. In case of reinsurance with a related reinsurer, then such reinsurer must have a rating of at least A from any of the four main ratings agencies.

Taiwan “Mega-risk” defined as over TWD 15 billion threshold requires A rating or above. For other risks, minimum rating required is S&P BBB or equivalent rating from AM Best, Fitch, Moody’s or Taiwan Ratings, i.e. the S&P local affiliate.

Thailand Foreign reinsurer must have rating of at least A3 from Moody’s or A- from S&P, AM Best or Fitch if cession exceeds 50%. If cession does not exceed 50%, then BBB- from S&P or Fitch; or Baa3 from Moody’s or B+ from AM Best.

Vietnam Foreign reinsurer must have at least BBB rating from S&P or Fitch, B++ from AM Best or Baa1 from Moody’s.


Appendix 3Current Sovereign Ratings as of 30 September 2019

Market S&P Fitch Moody’s AM Best

Australia AAA AAA Aaa CRT - 1

Bangladesh BB- BB- Ba3 CRT - 5

Bhutan CRT - 5

Brunei CRT - 4

Cambodia B2 CRT - 5

China A+ A+ A1 CRT - 3

Hong Kong AA+ AA Aa2 CRT - 2

India BBB- BBB- Baa2 CRT - 4

Indonesia BBB BBB Baa2 CRT - 4

Japan A+ A A1 CRT - 2

Laos CRT - 5

Macao AA Aa3 CRT - 2

Malaysia A- A- A3 CRT - 3

Myanmar CRT - 5

Nepal CRT - 5

New Zealand AA AA Aaa CRT - 2

Pakistan B- B- B3 CRT - 5

Papua New Guinea B B2 CRT - 5

Philippines BBB+ BBB Baa2 CRT - 4

Singapore AAA AAA Aaa CRT - 1

South Korea AA AA- Aa2 CRT - 2

Sri Lanka B B B2 CRT - 4

Taiwan AA- AA- Aa3 CRT - 2

Thailand BBB+ BBB+ Baa1 CRT - 3

Vietnam BB BB Ba3 CRT - 4

Data from: S&P, Fitch, Moody’s, AM Best; Red representing negative outlook, Green representing positive outlook.


Appendix 4IFRS 17 expected implementation

Market Expected Implementation Date

Australia January, 2022

Hong Kong January, 2022

India# April, 2020

Myanmar * October 2022/2023

New Zealand January, 2022

Pakistan January, 2022

Philippines January, 2023

Singapore January, 2022

South Korea January, 2022

Taiwan January, 2025

Thailand January, 2023

Data Source: The Regulatory Websites# India has adopted Ind AS 117 (Indian Accounting Standards) similar to IFRS 17

*Myanmar Accountancy Council (MAC) issued notification to adopt IFRS latest by the FY 2022/2023. Financial year begins in October and ends in September.


Appendix 5IFRS standard by jurisdiction *

IFRS Standards are required for domestic public companies

IFRS Standards are permitted but not required for domestic public companies

IFRS Standards are required or permitted for listings by foreign companies

The IFRS for SMEs Standard is required or permitted

The IFRS for SMEs Standard is under consideration

Australia Japan Australia Bangladesh Brunei

Bangladesh Bangladesh Bhutan Thailand

Bhutan Bhutan Cambodia

Brunei Cambodia Hong Kong

Cambodia Hong Kong Malaysia

Hong Kong Japan Myanmar

Malaysia Malaysia Pakistan

Myanmar Nepal Papua New Guinea

Nepal New Zealand Philippines

New Zealand Pakistan Singapore

Pakistan Papua New Guinea Sri Lanka

Papua New Guinea Philippines

Philippines Singapore

Singapore South Korea

South Korea Sri Lanka

Sri Lanka Thailand

Data source: The IFRS Foundation

*The list includes jurisdictions with their own version of IFRS such as BFRS, SFRS, SLFRS, NZFRS, HKFRS etc.


Contacts

For additional information on this report or our analytical capabilities, please contact your local Aon reinsurance

broker or a member of the Aon Reinsurance Solutions analytics team, including:

Peter Cheesman Head of Analytics, Asia Pacific Aon Reinsurance Solutions +61 2 9650 0462 [email protected]

Brad Weir Head of Analytics, Asia Aon Reinsurance Solutions +65 6231 6490 [email protected]

Oriol Gaspa Rebull Head of Analytics, Japan Aon Reinsurance Solutions +81 3 4589 4258 [email protected]

Yifan Fu Head of Analytics, Greater China Aon Reinsurance Solutions +852 2861 6375 [email protected]

Patrick Matthews Head of Global Rating Agency Advisory+1 215 751 1591 [email protected]

Sifang Zhang Regulatory & Rating Agency Advisory, Asia Pacific +852 2861 6493 [email protected]

Kate Bible Regulatory & Rating Agency Advisory, Australia +61 2 9650 0421 [email protected]

Mansi Jain Regulatory & Rating Agency Advisory, Singapore +65 6239 7666 [email protected]

About Aon Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance.

© Aon plc 2019. All rights reserved.The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as 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 appropriate professional advice after a thorough examination of the particular situation.

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