Update on RBC development in Hong Kong

Raymond Tam

Executive Director, Policy & Development

Insurance Authority

26 October 2018

RBC Development UpdatesImplementation Roadmap

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QIS 1 (Tentative) Consultation on detailed rules

(Under Consultation) Implementation of

Pillar 2 requirements

Draft ERM Guideline for consultation

in May-18

Legislative preparation Long run-in period

2017 2022+2018 2019 2020 2021

IA to analyze QIS results

Finalized Guideline

Pillar I

Pillar II

Pillar III

QIS 3QIS 2 (Open till Nov-18)

Insurers to make preparations for RBC Pillar 1 implementation

Conduct Studies

Industry consultation

FTF Meeting

Aug-17

FTF Meeting

Oct-18

RBC Development UpdatesPillar I – Key Milestones

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Jul Dec Aug Nov Dec

2017 2018 2019

QIS3 Preparation :• Impact analysis of RBC to

individual insurers and HKindustry as a whole

• Moderation exercise with revised parameters for QIS3 after forming holistic view on industry

Jul-17:QIS1 Release

QIS2 Preparation:• Calibration of QIS2 parameters• 3 IFG meetings held during Jan to

Jun-18 to share calibrationapproach and collect commentsfrom HKFI, ASHK and IFG members

Aug-18:QIS2 Release

mid-19 (tentative):QIS3 Release

30-Nov-18:QIS2 Submission

RBC Development UpdatesPillar I – Key Developments under QIS2

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Economic Balance Sheet

• Separate reporting in respect of HK operation and other overseas branches forHong Kong incorporated insurance companies, or de facto Hong Kong insurers

Treatment of different operations in HK

Valuation

• Specified requirements on Margin on Current Estimate (MOCE) for long-termbusiness

• More guidance on TVOG and introduction of factor-based approach for thoseinsurers not having stochastic model

• Testing of different methodologies in deriving the discount rates for long-termbusiness

RBC Development UpdatesPillar I – Key Developments under QIS2

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Prescribed Capital Requirement (PCR)

• Updated risk charges on insurance risk and market risk, based on QIS1 data and HKmarket data

• New items – correlation matrix (diversification benefit) and operational risk

• Additional data collection for GI catastrophe risk in QIS2

Capital Resources

• New item – data collection for further study

GI catastrophe risk – onshore and offshore

RBC Development UpdatesPillar I – Key Considerations under QIS3

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Discount rate for long-term business

• Methodologies and techniques for yield curve calibration – fit for HKcircumstances

Prescribed Capital Requirements (PCR)

• Calibration approach for interest rate risk and credit spread risk

• Scope and methodology for GI catastrophe risk based on QIS2 data

Capital Resources

• Determination criteria based on quality and loss absorbing capacity

Others

• Minimum capital requirement

• Transition arrangement

RBC Development UpdatesPillar I – Key Considerations under QIS3

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Overall• Holistic view on industry landscape under RBC for moderation exercise

• Continuous monitoring of international developments over capitalframeworks

RBC Development UpdatesPillar I – International Developments

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• Insurance Capital Standard (ICS) developed by InternationalAssociation of Insurance Supervisors (IAIS)– Roll-out of ICS version 2.0 in mid-2018 for consultation

– Reporting required based on market-adjusted valuation (MAV), beingthe standard method for capital requirements

– Additional reporting, at the option of the group-wide supervisor, of ICSbased on GAAP Plus valuation

– Target timeframe: adoption of ICS 2.0 at IAIS 2019 General Meeting

• Review over existing capital regimes around the world, e.g.Singapore RBC, EIOPA Solvency II, C-ROSS, etc.

RBC Development UpdatesPillar II – ERM Guideline

• Industry consultation on draft ERM Guideline started in May-18– Received 45 comments and valuable input

• ERM Guidelines sets forth risk appetite framework and, moreimportantly, culture of risk assessment and management– Takes time to build up risk culture among the industry apart from

hardware or resources allocation

– Principles-based approach; comply-or-explain approach

– Implementation ahead of Pillar I

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RBC Development UpdatesPillar II – Major Feedback Received

1010

Delegation of the Board

responsibilities

to consider outlining theextent of delegation ofrisk managementresponsibilitiesparticularly for overseasinsurers operating in HKas branches

Assessments on capital

requirements

concerns on the level of sophistication required for the majority of the industry

Effective date of ERM Guideline

● to consider a longer transition period or a phased implementation● Effective date: 1 January 2020

Submission of annual ORSA

Report

● comments on the ORSAvaluation date andextending the reportsubmission deadline● Submission of annualORSA Report within fourmonths after each financialyear end (1st Report: by 30Apr 2021)

RBC Development UpdatesPillar II – Way Forward

• Industry consultation on ERM Guideline by end of 2018

• Issuance of the ERM Guideline tentatively by early 2019,depending on the comments received

• However, insurers should start reviewing their ERM and ORSAframework now

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Implementation capability among the industry

RBC Development UpdatesPillar II – Way Forward

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RBC Development UpdatesPillar III – Key Objectives

• Aims at addressing transparency thereby enhancing marketdiscipline and increasing comparability among insurers

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Statutory Reporting

• Facilitate regulator to payattention to the financialpositions of insurers regularlyand carry out appropriateactions when necessary

Public Disclosure

• Allow policy holders andinvestors to make moreinformed decisions whentaking out insurance orinvesting in insurance.

Thank You!

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