Asia Pacific Solvency Regulation - Aon...

Asia Pacific Solvency RegulationNon-Life Solvency Calculations for Selected Asia Pacific Countries/Regions

Asia Pacific Solvency Regulation

ContentsDue to the dynamic nature of solvency regulation in Asia Pacific, we expect there will be a need to update the information in this publication regularly. Future updates are scheduled to be issued in electronic format.To facilitate future changes, we have adopted a convention of only numbering pages within each section, plus placing edition identifiers and effective dates in the footer of each page. Pages will be identified using this convention:

� Section Name | Edition Identifier | Date

We will replace pages and reissue the electronic version periodically. Readers will be able to determine when the information changes and what date it is valid as of.

A summary of updates will be included to assist readers in knowing which sections have been updated.

The following are the sections covered in this publication:

� Overview

� Summary of Current Solvency Margins

� Solvency II

� IFRS Adoption

� Catastrophe Protection Requirements

� Internal Models

� Country/Region Summaries

� Edition and Date of Issue of Country/Region Summaries

� Executive Summary

- Australia - Brunei - China - Hong Kong - India - Indonesia - Japan - Korea (Republic of) - Macau - Malaysia - New Zealand - Pakistan - Papua New Guinea - Philippines - Singapore - Taiwan - Thailand - Vietnam

� Contact Information

� About Aon Benfield

Aon Benfield Analytics

Overview

This paper outlines the non-life solvency requirements for selected countries / regions in Asia Pacific allowing an understanding and benchmarking of the existing methodologies adopted by regulators. Considering the many changes that are foreseen to these regulations over the coming years, this document will be periodically updated to reflect new conditions.

The regulatory changes occurring in Europe with the implementation of Solvency II are serving as a catalyst for change in Asia Pacific. Based on guidelines from Solvency II, some regulators in the region are beginning or have begun to review their minimum capital requirements.

Asia Pacific has been identified as an area of growth, and as new capital flows in, companies will continue to take advantage of opportunities; hence, a clear understanding of the status quo and future regulatory changes is very important. This document provides the current regulatory solvency framework for the following countries / regions:

Australia Hong Kong Japan Malaysia Papua New Guinea Taiwan

Brunei India Korea (Republic of) New Zealand Philippines Thailand

China Indonesia Macau Pakistan Singapore Vietnam

For each country / region, a summary of the specific regulatory frameworks and calculation methodology of the minimum capital or solvency requirements is provided. Recent developments and expected changes are also discussed along with the status of implementation of International Financial Reporting Standards (IFRS), IFRS is an important and often overlooked component of regulatory change, and its impact on the accounting for insurance contracts will be significant.

Summary of Current Solvency MarginSolvency regulation has been evolving rapidly across Asia Pacific. Many regulators have adopted a Risk Based Capital (RBC) framework.

RBC is often used to describe a regulatory regime where statutory capital is determined by applying prescribed factors to various items in a company’s financial statements. These factors will typically depend on the class of business written and types of assets held.

For Australia, an insurer’s Minimum Capital Requirement (MCR) must be adequate for the scale, complexity and mix of its business and must broadly commensurate with the full range of financial risks to which it is exposed. Insurers are allowed to use either or a combination of the two methods (internal model based method and prescribed method) approved by Australian Prudential Regulation Authority (APRA). The MCR is also more detailed and insurers have to meet the definition of the two tiers of capital.

For Japan, there are other considerations such as on the different risk coefficients for computing the risk charges. The company’s portfolio is also a consideration in calculating the solvency margins.

For the other countries / regions, solvency margin requirements are based on the following two components:

� Minimum solvency requirements, which are generally based on premiums and reserves.

� Resources available to cover those requirements, which are defined as capital plus certain admitted assets.

Some countries / regions have amended the minimum solvency requirements to include additional components beyond premiums and reserves to better reflect the increasingly complex insurance and financial environment such as asset risk, credit risk, market risk, and inflation.

Overview Page 1 | Original Edition | 1 September 2011


Solvency IISolvency II represents one of the most wide-ranging reforms to any existing regulatory regime. The aim of Solvency II is to harmonize insurance regulation across Europe, replacing Solvency I (established in 1973) as well as local regimes (e.g. UK ICAS). The planned implementation date is January 2013 plus a transitional period of up to 5-10 years for certain components of the regulation. There is some suggestion that implementation will be delayed until 1 January 2014 with the intervening year in 2013 to be used for insurance supervisors to monitor firms’ preparation for Solvency II.

The Solvency II proposals are based on a three pillar approach. These cover:

Pillar 1 – covers all the financial requirements. This pillar aims to ensure firms are adequately capitalized with risk-based capital. All valuations in this pillar are to be done in a prudent and market consistent manner. This pillar also includes the use of internal models which, subject to stringent standards and prior supervisory approval, enable a firm to calculate its regulatory capital requirements using its own custom methodologies.

Pillar 2 – imposes higher standards of risk management and governance within a firm’s organization. This pillar also gives supervisors greater powers to challenge their firms on risk management issues. It requires a firm to undertake its own forward-looking self-assessment of its risks, corresponding capital requirements and adequacy of capital resources.

Pillar 3 – aims for greater levels of transparency for supervisors and the public. There is a private annual report to supervisors, and a public solvency and financial condition report that increases the level of disclosure required by firms. The current returns will be completely replaced by reports containing core information that firms will have to make on a quarterly and annual basis. This will ensure that there is better and more up-to-date information on a firm’s financial position.

Impact of Solvency II for Asia Insurance CompaniesMany Asia Pacific countries / regions have been implementing RBC type regimes in recent years. With the impending implementation of Solvency II in Europe, it is expected that more Asia Pacific countries / regions would also be adopting RBC regimes.

However, the implementation is expected to take some time as there would be lengthy consultations in the respective markets so as to clearly assess the impact of the implementation. One particular issue in Asia Pacific arising from this

Pillar 1Quantitative requirements

Pillar 2Supervisory review

Pillar 3Disclosure requirements

� Fair value balance sheet

� Capital Requirements

– Solvency Capital Requirement (SCR)

– Minimum Capital Requirement (MCR)

� Solvency and Financial Condition Report (SFCR)

– Greater transparency to investors

� Quarterly to Supervisors (RSR)

– Quarterly and annual reporting requirements

� Systems of governance

� Own Risk Solvency Assessment (ORSA)

� Supervisor review process

– Assessment of quantitative and qualitative requirements

Solvency II



could come from the difficulty in establishing Enterprise Risk Management (ERM) frameworks as will be mandated by Solvency II. Besides this, the market-consistent valuation requirements of Solvency II are set to heighten the volatility of insurers’ statutory results.

Depending on the type of reinsurance and the loss-capacity that is transferred, reinsurance may be an efficient way to reduce both earnings volatility and capital requirements, and it will play a more important role under Solvency II than Solvency I. Solvency II would be good news for highly rated and well diversified reinsurers. However, some smaller players would have to resort to reinsurance to meet higher Solvency requirements. According to rating agencies at the Monte Carlo Rendez-Vous 2011, Solvency II is also expected to benefit some reinsurers, boosting demand and offering opportunities for diversification. With reinsurers investing large sums in economic capital models, it is expected to give them capital savings over the standard model.

Local insurance companies with EU parentage will have to consider their approach in the insurance market due to the implementation of Solvency II, as they would be compelled to adopt consistent capital requirements and tighter risk governance imposed by parent companies. Although this could be a short term advantage for those competitors seeking to benefit from insurance companies having to comply with the new Solvency II requirements in the long run, the new Solvency II requirements could be seen to be more robust to help companies to become more competitive and sustainable in the market as it promotes Enterprise Risk Management, alignment of available capital with the risk profile of the company, focusing on underwriting profit, and using internal economic capital models.

IFRS AdoptionThe move to adopt the International Financial Reporting Standards (IFRS) as a statutory requirement in certain countries / regions in Asia Pacific is changing the way insurers present their businesses and how they are judged by analysts, investors, and other key users of their accounts. Asia Pacific countries / regions are at different stages of adoption of IFRS. Many of the Asia Pacific countries / regions have been adopting IFRS, either directly or adopting it as their countries / regions’ equivalent of the IFRS with some modifications. The rest are planning or have plans for convergence with IFRS at a later date. The key impact of adoption for insurers comes mainly from IFRS 4 Insurance Contracts and IFRS 9 Financial Instruments.

IFRS 4 Insurance ContractsThere has been no accounting standard for recognition and measurement of insurance contracts prior to IFRS. With the expected complexity arising to develop such a standard, the Insurance Contracts project was split into two phases. IFRS 4 Insurance Contracts was implemented in 2005, a result of Phase I of the Insurance Contracts project. It is an interim standard that permits a wide variety of previous accounting practices for insurance contracts to continue until Phase II is complete. The objective of this standard was to achieve limited improvements to accounting by insurers for insurance contracts. Secondly, with new disclosures arising from this new standard, the aim was to help users understand the amounts in the insurer’s financial statements and the amount, timing, and uncertainty of future cash flows from insurance contracts.

Phase IIThe International Accounting Standards Board (IASB), jointly with the Financial Accounting Standards Board (FASB), is undertaking Phase II of this project to develop a standard that will replace IFRS 4. Phase II is a new standard that is expected to be issued in late 2011. However the timing may change until all issues have been discussed and deliberated by the IASB and FASB.

Phase II is likely to lead to significant changes for insurance companies worldwide. An Exposure Draft (ED) was issued in July 2010 to obtain comments on the draft. With that, the Accounting Boards have since begun deliberating on the proposals on the ED. The goal of this new Phase II project would be to achieve unified accounting for all insurance contracts, improvements to financial reporting, and a principle-based standard that reflects the economics of insurance contracts.



IFRS 9 Financial InstrumentsIFRS 9 Financial Instruments was issued in few phases with a view to replace IAS 39 Financial Instruments: Recognition and Measurement entirely. The few phases cover classification and measurement of the financial assets and liabilities, impairment methodology, and hedge accounting. An Exposure Draft was issued on the 4th of August 2011 to propose effective date from 1 January 2013 to 1 January 2015 with early adoption permitted.

In the various country / region discussions, we will be reporting on the status of implementation of IFRS.

Catastrophe Protection Requirements

Capital Model Return Period / Peril Basis

Australia 1:250 - Single Peril Occurrence

Bermuda 1:100 TVaR - All Perils Aggregate

Canada 1:370 - Earthquake Occurrence

Japan Greater of:Return of Kanto equivalent earthquake

Return of equivalent typhoon as Isewan Typhoon N/A

Lloyd’s RDS an 1-in-200 year all risk estimate within the ICA Aggregate

Solvency I None N/A

Solvency II 1:200 - All Perils Aggregate

U.K. None for ECR; However ICA includes a 1-in-200 year all risk estimate

Aggregate

U.S. None N/A

A.M. Best BCAR Greater of:1:100 - Wind

1:250 - EarthquakeOccurrence

S&P Enhanced 1:250 - All Perils Aggregate

The table above provides a summary on the current catastrophe protection requirements for some cap models which is currently being used. As discussed in the sections below, some of the countries / regions are moving to changes in the near future (e.g. see Australia).

Internal ModelsFor the computation of solvency margins, countries / regions like Australia and Japan are already using internal models, which closely reflects the insurer’s risks rather than adopting industry factors in the regulatory regime. Going forward it is expected more countries / regions would be moving in this direction. Companies wishing to implement internal models will usually adopt vendor platforms, such as Aon Benfield’s ReMetrica.

Country / Region SummariesIn the following pages, we discuss the following areas for each Asia Pacific country / region that we are covering:

� REGULATOR: Insurance authority governing the insurance industry.

� MINIMUM CAPITAL REQUIREMENTS: Minimum capital required in setting up and maintaining an insurance company.



� SOLVENCY MARGIN: The method which the regulator sets for all insurers in order to meet the solvency margin / capital adequacy ratio set down.

� REGULATION OF FOREIGN OWNERSHIP: Rules affecting foreign entities in setting up a company or branch.

� IFRS STATUS: The status of implementation of IFRS.

� SOLVENCY II PLANS: The status of implementing Solvency II.

� RECENT DEVELOPMENTS: Recent regulatory developments in each country / region affecting the operations of the insurance company.

Edition and Date of Issue of Country / Region Summaries

Countries / Regions Edition Date of Issue

Australia Original Edition September 2011

Brunei Original Edition September 2011

China Original Edition September 2011

Hong Kong Original Edition September 2011

India Original Edition September 2011

Indonesia Original Edition September 2011

Japan Original Edition September 2011

Korea (Republic of) Original Edition September 2011

Macau Original Edition September 2011

Malaysia Original Edition September 2011

New Zealand Original Edition September 2011

Pakistan Original Edition September 2011

Papua New Guinea Original Edition September 2011

Philippines Original Edition September 2011

Singapore Original Edition September 2011

Taiwan Original Edition September 2011

Thailand Original Edition September 2011

Vietnam Original Edition September 2011

Executive Summary

Solvency Margin

Countries / Regions Type Effective Date

Australia Risk Based Capital 1 July 2010

Brunei Solvency Margin 1 January 1995

China Solvency Margin 10 July 2008

Hong Kong Solvency Margin 30 June 1997

India Solvency Margin 14 July 2000



Solvency Margin

Countries / Regions Type Effective Date

Indonesia Risk Based Capital 21 January 2009

Japan Risk Based Capital 20 April 2010

Korea (Republic of) Risk Based Capital 1 April 2011

Macau Solvency Margin 30 June 1997

MalaysiaRisk Based Capital

1 January 200931 January 2010 (Labuan)

New Zealand Solvency Margin 12 June 2008

Pakistan Solvency Margin 12 December 2002

Papua New Guinea Risk Based Capital 31 March 2008

Philippines Risk Based Capital 5 October 2006

Singapore Risk Based Capital 23 August 2004

Taiwan Risk Based Capital 1 January 2008

Thailand Risk Based Capital 1 September 2011

Vietnam Solvency Margin 20 December 2007

Minimum Capital Requirements and Specific Cat Requirement

Countries / Regions Minimum Capital Requirement Specific Cat Requirement

Australia 5m AUD (5.35m USD) 1:250 - Single Peril

Brunei 8m BND (6.64m USD) Nil

China 200m CNY (32m USD)

Nationwide License

20m CNY (3.2m USD)

Capital per branch

500m CNY (80m USD)

Maximum Capital (Nationwide license

plus more than 15 branch licenses)

Nil

Hong Kong 10m HKD (1.30m USD)

Non-life company

20m HKD (2.60m USD)

Non-life company writing the statutory

classes of insurance business

20m HKD (2.60m USD)

Composite (i.e. carrying on both general

and long term business)

2m HKD (0.26m USD)

Captive

Nil





India 1b INR (21.70m USD)Insurance companies

2b INR (43.40m USD)Reinsurance companies

Nil

Indonesia Insurance companies40b IDR (4.8m USD)By 31 Dec 2010

70b IDR (8.4m USD)By 31 Dec 2012

100b IDR (12m USD)By 31 Dec 2014

Reinsurance companies100b IDR (12m USD)By 31 Dec 2010



Sharia insurance companies50b IDR (6m USD)

Sharia reinsurance companies100b IDR (12m USD)

Nil

Japan1b JPY (13m USD)

Greater of:Return of Kanto equivalent earthquake

Return of equivalent typhoon as Isewan Typhoon

Korea (Republic of) 5b KRW to 30b KRW (5.35m USD to 32.10m USD) depending on class of business

Nil

Macau 15m Patacas (1.8m USD) Nil





Malaysia Under Bank Negara Malaysia

100m MYR (34m USD) Insurers and Takaful operators

Under Labuan Financial Services Authority

7.5m MYR (2.55m USD) General insurance and Takaful business license

10m MYR (3.4m USD) Reinsurance and Retakaful business license

0.3m or 0.5m MYR (0.1m USD or 0.2m USD) Depending on type of captives

Nil

New Zealand 3m NZD (2.55m USD) Nil

Pakistan 300m PKR (3.45m USD) Nil

Papua New Guinea 2m PGK (0.9m USD)Insurance companies

20m PGK (9m USD)Reinsurance companies

Nil

Philippines 125m PHP (2.5m USD)

To increase to 175m PHP (3.5m USD) and 250m PHP (5m USD) by end of 2011 and 2012 respectively

Nil

Singapore 5m SGD (4.15m USD) Investment linked policies only or short term accident and health policies only

10m SGD (8.30m USD) All other types of direct policies

25m SGD (20.75m USD) Reinsurance companies

Nil

Taiwan 2b TWD (69m USD)Insurance companies

50m TWD (1.725m USD)Branches set up by foreign companies

Nil

Thailand 300m THB (9m USD) Nil





Vietnam 300b VND (15m USD)All lines of business except aviation, petroleum and satellite insurance (to add 100b VND (5m USD) if write these lines)

4b VND (0.2m USD)Brokers if transact direct and reinsurance to add 4b VND (0.2m USD)



Australia

(Exchange rate: 1 AUD = 1.07 USD ; 1 USD = 0.93 AUD)

RegulatorAustralian Prudential Regulation Authority (APRA) (www.apra.gov.au) and the Australian Securities and Investments Commission (ASIC) (www.asic.gov.au)

Minimum Capital RequirementsThe General Insurance Reform Act 2001 (the Act) imposed a new Minimum Capital Requirement of 5m AUD (5.35m USD) effective from 1 July 2002.

There is no explicit capital requirement for foreign branches, though these are required to maintain assets in Australia in excess of their liabilities in Australia of an amount at least equal to their capital adequacy standard.

Solvency MarginAccording to the Act, an insurer’s minimum capital requirement (MCR) must be adequate for the scale, complexity, and mix of its business and must be broadly commensurate with the full range of financial risks to which it is exposed (claims, investments, counterparty default, asset-liability mismatches, catastrophes, and operational errors).

The MCR may be calculated either by means of:

a) An internal model-based method approved by APRA

The purpose of this method is to allow an insurer to have a MCR that better reflects the nature and extent of risks in the insurer’s own business structure and business matrix. There is no prescribed form or structure for this method as the respective insurer has the flexibility to develop a model that suits its business. However, various conditions exist, where approval is required by APRA, including maintaining an advanced and stable approach to risk management (including operational risk management) and also maintaining a prudent approach to capital management. One of the important criteria for the approval of this method is the need to satisfy APRA that the Economic Capital Model (ECM) will play an integral role in the insurer’s management and decision-making process and that the use of the ECM is embedded in the insurer’s operations.

On the quantitative concerns, the model should be designed to compute the MCR to be an amount of capital sufficient for the insurer’s probability of default of 0.5% or less over a one-year time horizon, taking into consideration the business written and losses occurring during the period plus the run-off of risks to extinction.

b) APRA’s prescribed method or a combination of both methods (internal model-based method and prescribed method).

Prescribed MethodThe insurer’s MCR is the sum of the capital charges appropriate for its insurance risk, investment risk, and concentration risk.

a) Insurance risk capital charge

Australia Page 1 | Original Edition | 1 September 2011

http://www.apra.gov.au

http://www.asic.gov.au


The insurance risk capital charge covers the risk of underestimating the outstanding claims reserve and the premiums liability reserve.

Minimum capital charges for direct insurance risk (expressed as a percentage of reserves) are as follows:

Class Outstanding Claims (%) Premiums liability (%)

Household, motor and travel 9 13.5

CTP, public and product liability, PI and EL 15 22.5

All other commercial classes 11 16.5

Minimum capital charges for inwards reinsurance business (expressed as a percentage of reserves) are as follows:

Class Outstanding Claims (%) Premiums liability (%)

Property• Facultative Proportional• Treaty Proportional• Facultative Excess of Loss• Treaty Excess of Loss

9101112

13.515

16.518

Marine & Aviation• Facultative Proportional• Treaty Proportional• Facultative Excess of Loss• Treaty Excess of Loss

11121314

16.518

19.521

Casualty• Facultative Proportional• Treaty Proportional• Facultative Excess of Loss• Treaty Excess of Loss

15161718

22.524

25.527

The reserves mentioned above to be used for the computation of the insurance risk capital charge are to include a risk margin to provide 75% probability of sufficiency.

b) Investment risk capital charge

The investment risk capital charge covers the risk of an adverse movement in the value of an insurer’s assets and/or off-balance sheet exposures, as well as the risk of counterparty default, particularly in relation to reinsurance recoverables.

It also covers market or mismatch risk which is the risk of an adverse movement in value of the assets not offset by corresponding movement in value of liabilities. It also covers liquidity risks where it is the risks of the assets not readily realized in certain circumstances.

Investment risk capital charges for investments range from 0.5% for cash and Australian government bonds to 16% for listed equities and 20% for unlisted equities and direct property investments.

Investment risk capital charges in respect of reinsurance recoverables vary with the counterparty rating (from a recognized rating agency) of the reinsurer.



For reinsurance recoverables, the capital charges for various counterparty grades of domestic and foreign reinsurer are as follows:

S&P Rating Moody’s AM Best Fitch Rating

Capital charge for APRA-

Authorised reinsurer (%)

Capital charge for foreign

reinsurer (%)

AAA Aaa A++ AAA 2 3

AA+, AA, AA- Aa1, Aa2, Aa3 A+ AA+, AA, AA- 2 3

A+, A, A- A1, A2, A3 A, A- A+, A, A- 4 6

BBB+, BBB, BBB- Baa1, Baa2, Baa3 B++, B+ BBB+, BBB, BBB- 6 9

BB+ or below Ba1 or below B or below BB+ or below 8 12

For unsecured reinsurance recoverables due on or after 31 December 2008, the increased capital charge for various counterparty grades of foreign reinsurer is as follows:

S&P Rating Moody’s AM Best Fitch Rating Capital charge for foreign reinsurer

AAA Aaa A++ AAA 20%

AA+, AA, AA- Aa1, Aa2, Aa3 A+ AA+, AA, AA- 40%

A+, A, A- A1, A2, A3 A, A- A+, A, A- 60%

BBB+, BBB, BBB- Baa1, Baa2, Baa3 B++, B+ BBB+, BBB, BBB- 100%

BB+ or below Ba1 or below B or below BB+ or below 100%

The increased capital charge in respect of long-term unsecured recoverables does not apply to reinsurance contracts entered into before 31 December 2008.From 1 January 2009, where a recoverable has become a receivable and has been overdue for more than six months since payment was requested from the reinsurer and there is no formal dispute between the insurer and reinsurers in relation to the recoverable, a 100% capital charge applies regardless of the reinsurer’s counterparty rating.

c) Concentration risk capital charge

The concentration risk charge covers the accumulation of exposures to a single catastrophic event and is equal to the Maximum Event Retention (MER) after taking into account acceptable reinsurance arrangements, including the cost of one reinstatement premium for the insurer’s catastrophe reinsurance cover in cases where the reinstatement reinsurance cover has not been pre-paid by the insurer.

The Board and senior management of the insurer is responsible to ensure that MER is set at a level that is consistent with its risk profile and its reinsurance program. The return period of the relevant catastrophe used in determining the MER is the expected average period within which a particular catastrophic event will re-occur. Insurers are required to assume a return period of 1 in 250 years, or greater.

Eligible capitalAn insurer’s eligible capital base for the purposes of its MCR comprises tier 1 and tier 2 capital.

Tier 1 capital must constitute at least 50% of the capital base and mainly comprises paid-up ordinary shares, general reserves, retained earnings, current year’s earnings net of dividends, and tax and technical provisions in excess of those required by APRA’s liability valuation standard.

Tier 2 capital mainly comprises preference shares, convertible notes, subordinated debt, and other hybrid or limited life capital instruments. In order to improve transparency, each insurer is required to disclose its MCR and its capital adequacy multiple in its published annual accounts. APRA expects an insurer to hold a buffer above its MCR of at least 20%.



Regulation on Foreign OwnershipThere are no material restrictions on foreign ownership. Subject to regulatory approval, foreign companies may acquire any percentage of a domestic company’s equity or may establish wholly owned subsidiaries or branches.

Foreign investments in Australia above a certain size must be approved by the Foreign Investment Review Board (FIRB). For non-US investors, approval is required for the acquisition of a domestic company with assets in excess of 231m AUD (247.17m USD).

IFRS Status Australia has adopted IFRS equivalent accounting standards. The relevant accounting standard on insurance contracts is AASB 1023 General Insurance Contracts.

Solvency II plansThe Australian Prudential Regulation Authority (APRA) has initiated the Life and General Insurance Capital Review project (LAGIC) since early 2009. This has strong parallels to Solvency II.

Recent DevelopmentsAustralia is proposing to introduce a common framework for required capital and eligible capital across general and life insurers. The plans for the new framework are also contemplated to ensure greater risk sensitivity in the calculations of the required capital. The new standards are targeted to be effective from 1 Jan 2013.

An important aim of the insurance capital review is to move from a minimum capital requirement (MCR) to a prudential capital requirement (PCR). Under the new PCR regime, insurers will be required to hold a minimum amount of risk-based capital calculated by the new formula, plus any supervisory adjustment required by APRA. The supervisory adjustment may be greater or less than the current buffer of 20% of the MCR depending on the dynamics of the insurer’s business.

Another aspect of the LAGIC process is to review the insurance concentration risk capital charge (ICRC). In September 2010 APRA released a technical paper on its proposed revisions. These include a vertical standard to be a 1 in 200 year whole of portfolio loss with growth and demand surge instead of 1 in 250 single peril single site and a “horizontal” component to measure an insurer’s exposure to an accumulation of smaller catastrophes. In its present form, the new rule could have the effect of increasing some insurers’ ICRC by a significant amount. Alternatively, aggregate protection would become an effective regulatory capital management tool.It is also reported that going forward, APRA is proposing to adopt the three pillar approach for general and life insurers under Basel II and the proposed Solvency II with a view to strengthen capital management practices as part of the Pillar 2 supervisory review process.



Brunei

(Exchange rate: 1 BND = 0.83 USD ; 1 USD = 1.20 BND)

RegulatorMonetary Authority of Brunei Darussalam (Autoriti Monetari Brunei Darussalam - AMBD) (www.ambd.gov.bn)

Minimum Capital RequirementsUnder the Insurance Order 2006 and Insurance Regulations 2006 the minimum paid-up capital requirement for life and non-life companies is 8m BND (6.64m USD) with a minimum deposit set at 1m FD (830,000 USD) to be maintained with the Financial Institutions Division (FID) of the Ministry of Finance (MOF), now the Monetary Authority of Brunei Darussalam (Autoriti Monetari Brunei Darussalam - AMBD.

Insurers established or incorporated outside Brunei who do not have local share capital are required to maintain in Brunei a surplus of assets over liabilities of an amount not less than the requirement for the minimum paid-up share capital of an insurer incorporated in Brunei.

The Takaful Order 2008 and Takaful Regulations 2008 establish identical capital requirements for takaful operators.

Solvency MarginUnder the Insurance Order 2006, the Insurance Regulations 2006, the Takaful Order 2008, and the Takaful Regulations 2008 the solvency margin applicable to non-life insurers is the equivalent of 20% of net premium income for all classes written in the previous financial year.

A July 2010 report by the Asia/Pacific Group on Money Laundering advised that “Brunei is currently moving towards risk-based supervision of the insurance sector as part of large-scale reforms of the insurance sector,” but there do not appear to have been any significant developments in this respect.

Regulation on Foreign OwnershipThe Insurance Order 2006 and Insurance Regulations 2006 do not restrict or discriminate against foreign participation, and have eliminated the practice of operating through underwriting agencies.

Incorporated foreign companies wishing to establish a place of business in Brunei are required to register under Section 299 of the Companies Act. The act also stipulates the requirements for the registration of a branch of a foreign company in Brunei. The documents required to be filed with the registrar of companies are as follows:

� A certified copy of the charter, statutes or memorandum, and articles of association or other instruments defining the constitution of the foreign company duly authenticated and, when necessary, with English translation

� A list of directors together with their particulars and the names and addresses of one or more persons residing in Brunei authorized to accept notices on the company’s behalf.

Under the Insurance Order 2006 and Takaful Regulations 2008, any company incorporated outside Brunei must produce confirmation from its home country / region regulator that it is authorized to transact the classes of business for which authorization is sought in Brunei and that it complies with all regulatory requirements in its home jurisdiction.

Brunei Page 1 | Original Edition | 1 September 2011

http://www.ambd.gov.bn


Brunei Page 2 | Original Edition | 1 September 2011

Reliable local sources suggest that the likelihood of increased foreign participation in the market is extremely remote, given the market size and limited potential for growth.

IFRS Status IFRS are permitted but not often used by companies in Brunei.

Solvency II plansNil

Recent DevelopmentsReserved for future use.


China Page 1 | Original Edition | 1 September 2011

China

(Exchange rate: 1 CNY = 0.16 USD ; 1 USD = 6.25 RMB)

Regulator

China Insurance Regulatory Commission (CIRC) (http://www.circ.gov.cn/web/site45/)

Minimum Capital RequirementsChinese capital requirements are unusual in the sense that each insurance company / branch must be separately capitalized. Minimum capital must be fully paid-up in cash. Capital requirements are the same for life and non-life and vary only with the geographical spread of a company’s operations. The capital requirements are as follows:

� Nationwide license (200m CNY, 32m USD)

� Capital per branch (20m CNY, 3.2m USD)

� Maximum capital (that is, the capital requirement for a nationwide license plus more than 15 branch licenses) (500m CNY, 80m USD)

Solvency MarginAccording to Article 89 of the Insurance Company Solvency Requirements, minimum capital is based on the greater amount computed using the two methods below:

� 18% of the last year’s premium up to 100m CNY (16m USD) plus 16% of the last year’s premium in excess of 100m CNY (16m USD), in both cases net of ceded reinsurance and business tax, or

� 26% of the average of the last three years’ incurred claims up to 70m CNY (11.2m USD) plus 23% of the average of the last three years’ incurred claims in excess of 70m CNY (11.2m USD), in both cases net of reinsurance recoveries.

If the insurance companies have been in business for fewer than three years, they would have to use method a) for computing the minimum capital.

Regulation on Foreign OwnershipThe State Council has issued new and more stringent regulations for representative offices of foreign companies (including foreign insurance companies) in China. According to the new regulations, representative offices should not employ more than four foreign staff including the chief representative. Not only may representative offices no longer apply for tax-free status, but the rate of deemed profit tax which they have to pay is increased from 10% to between 15% and 30%.

Establishing a branch or subsidiary

Until China joined the World Trade Organization (WTO) foreign non-life insurers were only allowed to operate as branches. Foreign insurers were allowed to establish joint venture subsidiaries with a maximum 51% participation from 11 December 2001 and wholly-owned subsidiaries from 11 December 2003. Although new foreign companies may apply to enter the market as either branches or wholly-owned subsidiaries, most applicants now apply for subsidiary status.

http://www.circ.gov.cn/web/site45/



For licensing purposes each branch is treated as a separate entity and is only allowed to write business and establish sub-branches in a designated geographical area. When China first joined the WTO foreign branches were only allowed to operate in Shanghai, Guangzhou, Dalian, Shenzhen and Foshan. With effect from 11 December 2003, foreign branches were allowed to apply for licenses in Beijing, Chengdu, Chongqing, Fuzhou, Suzhou, Xiamen, Ningbo, Shenyang, Wuhan and Tianjin.

With effect from 1 October 2003, foreign branches which had been limited to an individual city were allowed to write business anywhere in the surrounding province. Since 11 December 2004 foreign companies have been allowed to apply for licenses in any province, municipality or autonomous region in China.

Despite China’s greater openness to foreign insurers, the foreign penetration rate has been extremely low. Once foreign insurers were allowed to establish-wholly owned subsidiaries in December 2003, all existing branches withdrew their applications to “out-branch” and applied to convert to subsidiary status. Because of bureaucratic delays and a lack of clarity in the regulations, however, applications to convert have been taking between two and three years to process. Although there is nothing to say so in the regulations, it would seem that foreign subsidiaries are only allowed to out-branch at the rate of one or two branch licenses a year. In particular, it is difficult to obtain approval for multiple concurrent branch or sub-branch license applications.

In order to be considered for a branch, joint venture, or subsidiary license foreign insurers must satisfy the following conditions:

� in business for over 30 years

� representative office in mainland China for at least two years

� total assets of at least 5b USD

and any other conditions which the CIRC deems prudently necessary. Foreign non-life insurers were originally limited to writing business for foreign-invested enterprises, but were allowed to write business for domestic clients from 11 December 2003. Foreign insurers have only been allowed to write group business and health insurance since 11 December 2004. Foreign insurers are still not allowed to write compulsory classes such as motor third party liability.

Investing in a Chinese insurerForeign investors are allowed to buy shares in domestic Chinese insurance companies subject to the following conditions:

� foreign equity investments are limited to 20% any one investor and 25% in all

� eligible foreign investors must have had total assets in excess of 2b USD in the year before making the investment and have been rated “A” or above in the three years before making the investment

� investments may not be made with borrowed funds and must be held for a minimum of three years.

All foreign investments must be approved by the CIRC in advance. Although it is not explicitly stated in the regulations, for corporate governance purposes the CIRC is said to prefer strategic investors from the insurance industry to financial investors such as private equity funds.

Article 3 of the CIRC’s Notice Regulating Relevant Matters Concerning Chinese-Funded Insurance Companies’ Invitation of Foreign Equity Investment states that foreign insurance companies or groups which hold a license to conduct insurance business in China may not, in principle, invest in other Chinese insurance companies. As an exception, the CIRC will allow investment in two Chinese insurers, provided one is life and the other non-life.



Distinction between foreign and domestic ownershipIf 25% or more of a Chinese insurance company’s shares are held by foreign entities, the company is deemed to be foreign funded and is regulated by the Regulations on the Administration of Foreign-Invested Insurance Companies. Companies below the 25% threshold are deemed to be domestic and are regulated by the Regulations for the Administration of Insurance Companies.

Although it is nowhere explicitly stated in either regulation, domestic insurance companies are allowed to out-branch at a much faster rate than foreign-invested companies. Domestic insurers are also the only companies which are allowed to write the compulsory classes.

There is therefore an active debate among foreign insurers as to whether it is more advantageous to have a 20% shareholding in a fast-expanding domestic insurer or a 100% shareholding in a foreign subsidiary which is struggling to break out of its initial city of authorization.

IFRS StatusThe Chinese Accounting Standards published by the Ministry of Finance (MoF) have been substantially converged with IFRS.

In April 2010, the MoF released the roadmap for continuing convergence of CAS with IFRS and has indicated its intention to have all large and medium-sized enterprises (regardless whether they are listed companies or private companies) adopt the new CAS by 2012.

The EU Commission permits Chinese issuers to use CAS when they enter the EU market without adjusting financial statement in accordance with IFRS endorsed by EU.

The relevant accounting standard on insurance contracts is Accounting Standard No. 25 (Direct Insurance Contracts).


Recent DevelopmentsThe CIRC is issuing new regulations to audit insurer performance and the effectiveness of internal controls. The initiative requires larger companies to strengthen actuarial functions and make them independent of other departments within the company.


Hong Kong Page 1 | Original Edition | 1 September 2011

Hong Kong

(Exchange rate: 1 HKD = 0.13 USD ; 1 USD - 7.69 HKD)

RegulatorOffice of the Commissioner of Insurance (OCI) and is appointed as the Insurance Authority (IA). The OCI is part of the Financial Services and Treasury Bureau of the Hong Kong government (http://www.oci.gov.hk)

Minimum Capital RequirementsMinimum paid-up capital requirements are as follows:

– 10m HKD (1.30m USD) for a non-life company

– 20m HKD (2.60m USD) for a non-life company writing the statutory classes of insurance business

– 20m HKD (2.60m USD) for a composite (i.e. carrying on both general and long term business)

– 2m HKD (0.26m USD) for a captive

Statutory classes of business refer to Employee Compensation and Motor Insurance.

Insurance companies must submit a three or five-year business plan when they apply for authorisation. The applicant and the IA agree how much capital they will need based on the business plan. This is normally much higher than the statutory minimum.

Foreign branches do not have to make a capital deposit, though they are required to maintain assets in Hong Kong equivalent to the aggregate of 80% of their net liabilities and solvency margin applicable to their Hong Kong domestic business.

Solvency MarginAn insurer shall maintain an excess of assets over liabilities of not less than a required solvency margin. The objective is to provide a reasonable safeguard against the risk that the insurer’s assets may be inadequate to meet its liabilities arising from unpredictable events, such as adverse fluctuations in its operating result or the value of its assets and liabilities.

There are separate provisions for a general business insurer, a long term business insurer and a captive insurer:

� General Business Insurer

The solvency margin is the greater of:

a) one-fifth of the relevant premium income up to 200m HKD (26m USD), plus one-tenth of the amount by which the relevant premium income exceeds 200m HKD (26m USD); or

b) one-fifth of the relevant claims outstanding up to 200m HKD (26m USD), plus one-tenth of the amount by which the relevant claims outstanding exceeds 200m HKD (26m USD)

subject to a minimum of 10m HKD (1.3m USD), or 20m HKD (2.6m USD) in the case of insurers carrying on statutory classes of insurance business.

http://www.oci.gov.hk


Hong Kong Page 2 | Original Edition | 1 September 2011

� Long Term Business Insurer

The solvency margin is determined by the greater of:

a) 2m HKD (0.26m USD); or

b) an amount specified under the Insurance Companies (Margin of Solvency) Regulation 1995 which is generally 4% of the mathematical reserves and 0.3% of the capital at risk)

� Captive Insurer

The solvency margin is determined by the greatest of:

a) 5% of the net premium income; or b) 5% of the net claims outstanding; or c) 2m HKD (0.26m USD)

Premiums in this context are defined as the greater of 50% of gross written premiums or 100% of gross written premiums less ceded reinsurance. Outstanding claims are defined as the greater of 50% of gross claims outstanding or 100% of gross claims outstanding less reinsurance recoverable plus the unexpired risk reserve.

Regulation on foreign ownershipThere are no restrictions on foreign ownership. Foreign companies may acquire any percentage of the shares in an existing insurance company or establish branches or locally incorporated subsidiaries. Any person who intends to acquire control of 15% or more of the voting power of a locally incorporated insurer must seek the IA’s approval before making the acquisition.

IFRS Status

Hong Kong has adopted accounting standards that are identical to IFRS, including all recognition and measurement options, but in some cases effective dates and transition are different. Companies that are based in Hong Kong but incorporated in another country / region are permitted to issue IFRS financial statements rather than Hong Kong GAAP statements.

In December 2007, the HKICPA recognized Chinese Accounting Standards equivalence to HKFRS, which are identical to IFRS, including all recognition and measurement options, but have in some cases different effective dates and transition requirements.

The relevant accounting standard on insurance contracts is HKFRS4 Insurance Contracts.


Recent DevelopmentsHong Kong is currently looking into setting up of an independent Insurance Authority (IA) to replace the current government department, Office of the Commissioner of Insurance (OCI).

Introduction of risk-based capital

It is widely recognized that Hong Kong’s current solvency standard falls short of global best practice. The IA is considering the introduction of a risk-based capital system, though it is unlikely to put forward any proposals until after the International Association of Insurance Supervisors (IAIS) has finished revising its financial adequacy “core principles”, hopefully by October 2011. The adoption of a new RBC system for Hong Kong is unlikely to take place before the establishment of an independent IA in 2013 or 2014.

http://www.oci.gov.hk/framework/index08_01.html


India Page 1 | Original Edition | 1 September 2011

India

(Exchange rate: 100 INR = 2.17 USD ; 1 USD = 46.08 INR)

RegulatorInsurance Regulatory and Development Authority (IRDA) (www.irda.gov.in)

Minimum Capital RequirementsThe Insurance Regulatory and Development Authority Act, 1999 has set a minimum capital for direct insurance companies (life and non-life) of 1b INR (21.70m USD) and 2b INR (43.40m USD) for professional reinsurers.

Solvency Margin In accordance with the provisions of the 1999 Act, which amended the Insurance Act 1938, the “required solvency margin” (RSM) shall be the maximum of the following amounts:

a) 500m INR (10.85m USD) (1b INR (21.70m USD) for reinsurers) orb) a sum equivalent to 20% of net premium income orc) a sum equivalent to 30% of net incurred claims,

For item b) the computation of the net premium income is based on the higher of the Gross Premiums multiplied by a Factor and Net Premiums. The Factor is the credit for reinsurance determined by regulations, not exceeding 50%.

For item c) the computation of the net incurred claims is based on the higher of the Gross Net Incurred Claims multiplied by a Factor and Net Incurred Claims. The Factor is the credit for reinsurance determined by regulations, not exceeding 50%.

Insurers are also required to compute the Available Solvency Margin (ASM), which is made up of the excess in policyholders’ funds and excess in shareholders’ funds.

The solvency margin ratio is then computed (ASM/RSM).The IRDA has set a working solvency margin ratio of 1.5 for all insurers.

In a circular dated 31 March 2006, the IRDA clarified insurers’ doubts about the computation of solvency margins and confirmed that as far as non-life insurance is concerned that: � gross premium - for the purposes of the solvency margin shall be the aggregate of gross direct premium and

reinsurance accepted premium and

� incurred claims - explanation (ii) to Section 64VA of the Insurance Act 1938 stipulates that the net incurred claims means the average of the net incurred claims during the specified period not exceeding three preceding financial years.

The IRDA has now clarified that: � the gross incurred claims and net incurred claims (inclusive of IBNR and IBNER) shall be taken as the average of

the previous three years (excluding the financial year with reference to which the solvency of the insurer is being computed) and shall in no case be less than the amounts of gross and net incurred claims for the financial year ending on the reporting date and the incurred claims should also include claims pertaining to reinsurance accepted.

http://www.irda.gov.in


India Page 2 | Original Edition | 1 September 2011

The IRDA’s Tariff Advisory Committee announced in a circular dated 4 December 2006 that it had decided that the rates, terms, conditions and regulations applicable to fire, engineering, motor (except third party only cover), workers’ compensation and other classes of business currently under tariffs would be withdrawn from 1 January 2007.

Whilst it had been acknowledged beforehand that this change would be very beneficial to insurance consumers, major reinsurers had expressed concern about the possibility that a “detariffed” market would lead to price wars and could be detrimental to the long-term stability of the industry. At the same time the IRDA had announced that it would conduct a monthly check on the solvency margins of non-life companies. It shared the reinsurer’s fears and hence it felt that a monthly check on the companies’ financial positions would ensure that they would not weaken.

Regulation on foreign ownership Foreign ownership is limited to 26% holdings in private insurance companies incorporated in India.

The Insurance Law Amendment Bill 2008 which proposes a number of major changes, including an increase in permissible foreign investment in local insurance companies from 26% to 49%, is still before parliament awaiting time for its passage into law. When this report was in preparation there was no clear indication as to when this would be.

IFRS Status The IFRS converged Indian Accounting Standards have been issued but the effective application date of these standards has been deferred without any new date being notified.


Recent DevelopmentsThe Insurance Regulatory and Development Authority (IRDA) plans to shift from the current Solvency I type capital requirements to a risk based reporting regime and is planning for such reporting to commence in the next 3 to 4 years.

The IRDA is also placing major emphasis on various Enterprise Risk Management components, including governance (risk management committee, risk management strategy, and a Chief Risk Officer with clearly defined functions), and data control.


Indonesia Page 1 | Original Edition | 1 September 2011

Indonesia

(Exchange rate: 1000 IDR = 0.12 USD ; 1 USD = IDR 8333)

RegulatorInsurance Bureau of the Capital Markets & financial Institutions Supervisory Agency – Badan Pengawas Pasar Modal (BAPEPAM) (http://www.bapepam.go.id/)

Minimum Capital RequirementsThe summary table below lists the minimum capital requirements for companies and their respective deadlines:

Type of CompanyMininum Paid-Up Capital

or Equity (IDR b)Mininum Paid-Up Capital

or Equity (USD b)Deadline

Insurance Company 40 4.8 By 31 Dec 2010

70 8.4 By 31 Dec 2012

100 12.0 By 31 Dec 2014

Reinsurance Company 100 12.0 By 31 Dec 2010

150 18.0 By 31 Dec 2012

200 24.0 By 31 Dec 2014

Sharia Insurance Company 50 6.0 By 31 Dec 2010

Sharia Reinsurance Company 100 12.0 By 31 Dec 2010

Solvency Margin � BAPEPAM has adopted the risk-based capital (RBC) solvency margin ratio where RBC Solvency Margin Ratio =

– Net asset value calculated by standard accounting rules (book value) divided by

– Net asset value recalculated with possible adverse risks taken into accounts (risk based capital)

� Non-life companies are required to maintain a minimum solvency margin ratio of ≥120%.

� Minimum Level of Solvency Margin (MLSM)

– Minimum amount of solvency level that an insurance or reinsurance company shall keep

– Computed separately for each branch of insurance and reinsurance

– MLSM for insurance or reinsurance companies with conventional principles is computed separately from that of insurance or reinsurance company with the Syariah Principle (e.g. Total MLSM for company = MLSM of insurance with Conventional principles + MLSM of insurance with Syariah principles)

Detailed Computations of Minimum Level of Solvency Margin (MLSM) � MLSM components (risk-based capital) consist of:

a) Asset default

b) Currency mismatch of assets and liabilities

http://www.bapepam.go.id/



c) Claim experience worse than expected

d) Inability of the reinsurer to meet its claim obligation (Reinsurance risk)

1. Asset default risk

– Amount of funds required to provide for the asset default risk is determined by multiplying certain risk factors to the asset value.

The risk factors for each type of asset are as follows:

Asset Type Category Risk Factor Remarks

Investment:

Time Deposit and Certificate of Deposit

Special categoryCAR ≥ 8%5% ≤ CAR< 8%CAR ≤ 5%

0.00%2.00%4.00%

16.00%

CAR is based on latest audited financial statements submitted

to the Bank of Indonesia

Stock listed at Stock Exchange

LQ 45 at the Jakarta Stock Exchange or equivalent elsewhereOther than LQ 45 or equivalent

10.00%

15.00%

Bonds and Medium Term Notes (MTN)

AAA or equivalentAA or equivalentA or equivalentBBB or equivalentBB or equivalentB or equivalentLower than B or equivalent, or unrated

0.25%0.50%1.00%2.00%4.00%8.00%

16.00%

Included in respective rating categories are + and -, (e.g. A-rated includes

both A+ and A-)

Securities issued or guaranteed by the Govt. or Bank of Indonesia

- 0.00%

Trust Fund Wholly government bondWholly private bond and/or marketable securitiesWholly in equity securities

0.00%2.00%

10.00%

Mixed (Weighted average based on portfolio composition)

Direct Placement 16.00%

Buildings with strata title or real estate for investment

Net investment returns per annum of 4% or higherNet investment returns per annum of less than 4%

7.00%

15.00%

Investment returns include net income from rental

Mortgage loan - 5.00%

Policy loan - 0.00%

Non-investment:

Cash and bank - 0.00%



Asset Type Category Risk Factor Remarks

Direct premium written receivable

- 8.00%

Reinsurance receivable Domestic companyForeign company with rating BBB or higherForeign company with rating lower than BBBForeign company - unrated

4.00%4.00%

8.00%

24.00%

Investment income receivable

- 2.00%

Buildings with strata title or real estate for own use

- 4.00%

Computer hardware - 8.00%

Investment on one party:(Party is a company or group of companies which is related to each other by affiliation)

10% x (weighted average or risk factor)

Restructured Investment:(Investment where one undergoes rescheduled payments on its principal and/or investment returns)

25.00% of the value of restructured investment

Impaired Investment:(Investment in which the collection of its principal and interest is doubled)

Classified as such when:

- There is doubt concerning payment of the principal and/or investment returns; or

- Payment of the principal and/or investment returns is deferred for more than 30 days

This factor is applied in addition to the base factor applied according to the investment type.

12.50% of the value of impaired investment

2. Currency mismatch of assets and liabilities

� Arises from the possible discrepancy of value of the assets and liabilities in foreign currency, as well as exchange rate fluctuations against the Rupiah

� Fund required to cover the said risk is determined as follows:

Total Admitted Assets Deducted by Total Liabilities Risk Factor Funds Required

Less than or equal to nil 30.00% 30% x (Liabilities - Admitted Assets)

Higher than nil but not exceeding 20% of Total Liabilities 0.00% Nil

Higher than 20% of Total Liabilities10.00%

10% x (Admitted Assets - 120% x Liabilities)

� Result of the computation above is then converted to Rupiah using middle rate of Bank of Indonesia as at balance sheet date



3. Claim experience worse than expected

� Arises from the risk of difference between experienced and expected claims and the possibility of claim experience to be worse than expected

� Fund required to cover this risk is determined by risk factors applied against each component as follows:

- Mortality component (Life)

- Morbidity component (Life)

- General insurance claim component (General)

General Insurance Claim Component

� Made up of future claim component and past claim component

4. Inability of the reinsurer to meet its claim obligation (Reinsurance Risk)

� Linked to the risk that the reinsurer will not be able to fulfill its obligations.

� Fund considered in computing the MLSM to cover the reinsurance risk is determined by applying the following risk factors to the technical reserves ceded by the reinsurer.

� Risk factors applied are as follows:

General Insurance Claim Component =

Future Claim Component + Past Claim Component

A = Pfp + PKf

k

where:A = fund required for future claim componentP = net premium revenuefp = risk factor for net premium revenuePK = projected net claim incurredfK = risk factor for net claim incurred

B = (CKDPP x fckdpp) + (IBNR x f

IBNR)

where:B = fund required for past claim componentCKDPP = reserve for claim in process of settlement, own riskfckdpp = risk factor for claim reserve in process of settlement,own riskIBNR = reserve for claim incurred but not reported, own riskfIBNR = risk factor for claim reserve included but not reported, own risk



Description of Reinsurer Type Risk Factor Remarks

Domestic Maintaining Deposit

Maintaining no Deposit

4% x [1 – (deposit/technical reserve of the reinsurer)]4%

Deposits are all kinds of savings ceded by the

reinsurer to the ceding company, including premium retained by the ceding company that has full control

over the deposit.

Overseas with a rating of at least BBB

Maintaining Deposit



Overseas with a rating of lower than BBB

Maintaining Deposit



Unrated Maintaining Deposit



Regulation on foreign ownership Changes in ownership of an insurance or reinsurance company have to be approved by the minister of finance. If ownership change involves a foreign company, the foreign partner must be an insurer or holding company affiliate already conducting the same kind of business. Changes resulting from transactions in the Indonesia Stock Exchange are exempted from these regulations.

IFRS Status Indonesia has plans to converge with IFRS by 2012.


Recent DevelopmentsThe role of the regulator is expected to be replaced by a new independent financial regulator, the Institutions Financial Services Authority (Otoritas Jasa Keuangan; OJK) in the near future.


Japan Page 1 | Original Edition | 1 September 2011

Japan

(Exchange rate: 1000 JPY = 13 USD ; 1 USD = JPY 76.92)

RegulatorFinancial Services Agency (FSA) (http://www.fsa.go.jp/en/index.html)

Minimum Capital RequirementsThe minimum capital requirement for an insurance company and mutual insurance association are both 1b JPY (13m USD).

In place of a minimum capital requirement, foreign branches are required to deposit cash or securities for the protection of their Japanese policyholders. The normal minimum deposit is 200m JPY (2.6m USD). Foreign branches must also hold assets in Japan equivalent to the total of their underwriting reserves and outstanding loss reserves.

Solvency Margin A Cabinet Office Ordinance for Partial Amendment of the Order for Enforcement of the Insurance Business Act was promulgated on 20 April 2010. The purpose of the new ordinance, which was under development from 7 February 2008, is to introduce stricter standards for the calculation of insurance companies’ solvency margin ratios. Insurers may disclose their solvency margin ratios calculated by the new standards on a voluntary basis from 31 March 2011. The Financial Services Agency (FSA) will start using the new standards as the benchmark for supervisory intervention with effect from 31 March 2012.

The main effects of the new standards are summarised as follows:

� restrictions are introduced on the inclusion of surplus portion of the insurance premium reserves and deferred tax assets in the solvency margin amount

� the confidence level (that is, the probability of sufficiency) of each risk co-efficient is raised from 90% to 95%

� the statistical data underlying each risk co-efficient has been revised

� the basis for calculating the earthquake risk is changed from a universal risk model to the actual risk model used by each insurance company

� the effect of investment diversification on the risk of asset price fluctuation is tailored to each company’s portfolio

� more rigorous risk co-efficients are adopted in respect of securitized products and financial guarantee insurance

� a credit-spread risk is created in respect of credit default swap transactions.

The formula for the computation of the solvency margin ratio is:

Total amount of solvency margin / total amount of risks (X 1/2) X100%

(The basis of the computation as described below is effective from 31 March 2012)

1. Total of Solvency Margin

http://www.fsa.go.jp/en/index.html



This is made up of the sum of the following items:

� Total net assets

� Price fluctuation reserve

� Contingency reserve

� Catastrophe loss reserve including earthquake insurance

� General valuation allowances for bad debts

� Net unrealized gains/losses on securities (prior to tax effect deductions)

- 90% of latent profit on securities (100% of latent loss on securities)

� Net unrealized gains/losses on land

- 85% of latent profit on real estate (100% of latent loss on land)

� Others which the Commissioner of the Financial Services Agency prescribes

2. Total amount of risks

The formula for computation of the of the total amount of risks is:

√ R1 + R2)2 + (R3 + R4)

2 + R5 + R6

R1 : General insurance risk

R2 : Third sector risk

The above two risks relates to risks of occurrence of insurance claims in excess of normal expectations (excluding risks relating to major disasters).

Ordinary insurance risk is calculated by:

– Multiplying the amount at risk for each type of insurance appearing in Table 1 below by the corresponding risk co-efficient.

Table 1: Risk Co-efficients for Ordinary Insurance Risk

Type of InsuranceInsurance Premium Insurance Coverage

Amount at Risk Risk Co-efficient Amount at Risk Risk Co-efficient

Fire Insurance (excl. homeowner’s earthquake insurance)

Net earned premium

15%

Net incurred insurance claims

33%

Personal Accident Insurance 14% 33%

Auto Insurance 13% 22%

Hull Insurance 66% 81%

Cargo Insurance 20% 44%

Other Insurance (excl. auto liability insurance)

27% 41%



– And then applying them into the formula as shown below:

Ordinary Insurance Risk Amount

√ (1- ) x (a2 + b2 + c2 + d2 + e2 + f2) + x (a + b + c + d + e + f)2

Where:

� = correlation coefficient of 0.05

� a, b, c, d, e, f are:

- Fire insurance (excl. homeowner’s earthquake insurance)

- Personal accident insurance

- Auto insurance

- Hull insurance

- Cargo insurance

- Other insurance (excl. auto liability insurance) respectively.

� Here, the value used is the larger of either the insurance premium amount at risk or insurance claims amount at risk as calculated with the risk coefficient appearing in Table 1 above.

R3 : Assumed interest risk

Risks of invested assets failing to yield assumed interest rates due to the worsening of investment calculated by:

– Multiplying each scheduled interest rate for the reserve in the Table 2 below by the corresponding risk co-efficient

– Summing the total of these amounts

– Multiplying this total by the balance of the underwriting reserves for said schedules interest rates,

– and finally summing up these results

Table 2: Scheduled Interest Rates for Property & Casualty Insurance Companies

Scheduled Interest Rate Risk Co-efficient

0.0% - 1.0% 0.09

1.0% - 2.0% 0.3

2.0% - 3.0% 0.6

3.0% - 4.0% 0.8

4.0% - 5.0% 0.8

5.0% - 6.0% 0.8

> 6.0% 0.9

R4 : Asset management risk


Risks of retained securities and other assets fluctuating in prices beyond expectations.

� Asset management risk = (Price fluctuation risks) + (Credit risks) + (Subsidiaries risks) + (Derivative transactions risks) + (Credit spread risks) + (Reinsurance counterparty risks)

� Price fluctuation risk is calculated by:

– Multiplying the respective amounts for the assets at risk appearing in Table 3 below by the corresponding risk co-efficients

– Summing the total of these amounts

– Subtracting from this total an amount that reflects investment diversification effectiveness calculated on each company’s portfolio

Table 3: Assets at Risk

Assets at Risk Risk Coefficient

Domestic stock 20%

Foreign stock 10%

Yen-denominated bonds 2%

Foreign currency bonds, foreign currency loans 1%

Real estate (domestic land) 10%

Gold bullion 25%

Trading securities 1%

Asset including currency exchange risk 10%

� Credit risk is calculated by:

– Determining the rank of credit claim in Table 4 below if required

– Multiplying the respective amounts (appearing on the balance sheet) for the assets at risk in Table 5 below by the corresponding risk co-efficients and

– Summing up the total of these amounts




Table 4: Determining Rank of Credit Claim

Rank Loans, Bonds, Deposits and Money Market TradeSecuritized Products and Re-securitized

(Re-package) products

Rank 1 a) Central government agencies, central banks & international bodies holding the highest credit rating

b) Central government agencies and central banks of OECD member nations

c) Japanese government agencies, regional public bodies and public corporations

d) Parties with guarantees issued by the parties of (a) to (c)

e) Policyholder loans

Same as Loans, Bonds, Deposits and Money Market Trade

Rank 2 a) Central government agencies and central bank not coming under the criteria of Rank 1 (a) and (b) above and international bodies not coming under the criteria of Rank 1 (a) above

b) Government agencies, regional public bodies and public corporations of foreign nations

c) Financial institutions of Japan and foreign nations

d) Parties holding a credit rating of BBB

e) Parties with guarantees issued by the parties of (a) to (d)

f) Housing mortgage loans

g) Loans secured by securities and real estate

h) Loans guaranteed by the Loan Guarantee Association

All items not under Rank 1, and having credit rating equivalent to BBB and better.

Rank 3a) Loans and other credits extended to parties not

corresponding to Rank 1 or 2 that do not fall into rank 4

Items not under Rank 1 and 2, and having credit rating equivalent to BB and

better

Rank 4 a) Credit claims against insolvent parties

b) Credit claims that are in arrears

c) Credit claims that are more than 3 months in arrears

d) Credit claims for which there is a compromise on the loan conditions

Nil


Table 5: Risk Co-efficients for Assets at Risk

Assets at Risk Risk Co-efficient

Loans, Bonds & Deposits Rank 1Rank 2Rank 3Rank 4

0%1%4%

30%

Securitized products Rank 1Rank 2Rank 3Rank 4

0%1%

14%30%

Re-package products Rank 1Rank 2Rank 3Rank 4

0%2%

28%30%

Money Market Trade 0.1% (Rank 1 to 3)30% (Rank 4)

There is also a new credit spread risk where risk factors are computed based on location of risk domicile. They are:

� Japan (5.6%)

� USA (2.9%)

� Europe (2.5%)

� Others (5.6%)

Subsidiaries risk is calculated by:

- Multiplying the respective amounts for the assets at risk appearing in Table 6 below by the corresponding risk co-efficients and

- Summing the total of these amounts

Table 6: Risk Co-efficients for Subsidiary Companies

Type of Business Assets at Risk Risk Co-efficient

Domestic Companies

Financial BusinessStocks 30%

Loans 1.5%

Non-financial BusinessStocks 20%

Loans 1.0%

Foreign Corporations

Financial BusinessStocks 25%

Loans 9.5%

Non-financial BusinessStocks 15%

Loans 9.0%

Notwithstanding the above, subsidiary companies that correspond to Rank 4 appearing in Table 3.

Stocks 100%

Loans 30%




Derivative transaction risk is calculated by:

- (Risk amount on futures transaction) + (Risk amount on option transactions) + (Risk amount on swap transactions)

Various risk factors are applied to the respective balances to derive at the risk amount.

R5 : Business administration risk

� Risks beyond normal expectations arising from business management that does not fall under any of the above categories.

Calculated by:

- Multiplying the total of the risk amounts set out in the Regulations for respective companies by the corresponding risk co-efficients (as seen in Table 7 below)

Table 7: Risk Co-efficients for Calculating Business Management Risks

Type of Company Risk Co-efficient

Companies reporting cumulative profit which is less than zero 3%

Companies other than the above 2%

R6 : Catastrophe risk

� Risks of the occurrence of major catastrophic losses in excess of normal expectations (risks such as the Great Kanto Earthquake or Isewan typhoon).

Calculated by:

- The larger of either the total amount of the earthquake disaster amount at risk for each type of insurance or the total of the flood disaster amount at risk for each type of insurance appearing in Table 8 below.

Table 8: Major Catastrophe Risk

Type of InsuranceEarthquake Disaster Amount at

RiskFlood Disaster Amount at Risk

Fire Insurance (excl. homeowner’s earthquake insurance)Personal Accident InsuranceAuto InsuranceHull InsuranceCargo InsuranceOther Insurance (excl. auto liability insurance)

Assumed net claims paid are based on occurrence of earthquake

equivalent to the level of the Great Kanto Earthquake

Assumed net claims paid are based on occurrence of typhoon equivalent

to Typhoon no. 15 of 1959 (Isewan Typhoon)

Homeowner’s Earthquake Insurance Limit of reserve -


Regulation on foreign ownership Foreign companies are allowed to establish wholly owned subsidiaries or branches in Japan or to acquire any percentage of a Japanese company’s equity. Foreign companies are also allowed to establish representative offices for market research and liaison.

IFRS Status On 11 Dec 2009, the Financial Services Authority of Japan (FSA) published final Cabinet Office Ordinances that allow some Japanese public companies voluntarily to start using IFRS designated by the Commissioner of the FSA in their consolidated financial statements starting from the fiscal year ending 31 March 2010.

Representatives of the Accounting Standards Board of Japan (ASBJ) and the Financial Accounting Standards Board (FASB) met on 18-19 August 2011, in Tokyo, Japan. At this meeting, the ASBJ and the FASB updated each other with the recent developments in their respective convergence projects with the IASB. One of the areas covered was on the insurance contracts projects being undertaken by the FASB and the IASB.

Solvency II plansThe Japan Financial Service Agency (JFSA) is currently carrying out a Quantitative Impact Study (QIS) to determine the impact if it was to move from the current RBC approach to a Solvency II style approach.




Korea Page 1 | Original Edition | 1 September 2011

Korea (Republic of)

(Exchange rate: 1000 KRW = 1.07 USD ; 1 USD = 934.58 KRW)

RegulatorTwo-tier financial supervisory system comprising the Financial Services Commission (FSC) (http://www.fsc.go.kr/eng/) and a subordinate institution called the Financial Supervisory Service (FSS) (http://english.fss.or.kr/fss/en/main.jsp)

Minimum Capital RequirementsThe minimum capital for a monoline insurer writing only engineering or title insurance is 5b KRW (5.35m USD). The minimum capital for a multiline insurer is the sum total of the capital requirements applicable to each of its authorized business lines, subject to a maximum of 30b KRW (32.10m USD). The minimum capital for a direct writer is two-thirds of the amount applicable to an equivalent multichannel distributor (for this purpose a direct writer is defined as an insurer which obtains at least 90% of its policies or premiums by telephone, mail or the internet).

The minimum capital for a reinsurance licence is 30b KRW (32.10m USD).

The following minimum capital requirements have been in effect since 30 August 2003.

ClassCapital

KRW b USD m

Fire 10 10.70

MAT 15 16.05

Motor 20 21.40

Guarantee 30 32.10

Liability 10 10.70

Engineering 5 5.35

Title 5 5.35

Personal accident 10 10.70

Health 10 10.70

Nursing care expenses 10 10.70

Other business 5 5.35

Solvency MarginThe Insurance Business Law was amended on 18 March 2009 to allow the phasing in of a risk-based capital (RBC) system over the period from 1 April 2009 to 1 April 2011. During the two-year transition period the old and new solvency measures will run in parallel.

From 1 April 2011 all insurers must measure their solvency by the new RBC system.

The RBC ratio is based on available capital divided by the required capital. The ratio which has to be maintained by all insurers is to be more than 100%.

http://www.fsc.go.kr/eng/

http://english.fss.or.kr/fss/en/main.jsp


The basis of computing the available capital is still based on the old solvency I methodology.

The formula is as follows:

Available Capital =

Adding Items(1) - Deducting Items(2) + Subsidiary Company (if group)’s surplus (or shortfall) in capital based on formula from FSC and percentage shareholdings of the holding company in the subsidiary company.

Note:

Adding Items (1) = Contributed capital + retained earnings + capital adjustment accounts + various reserves in the capital account

Deducting Items (2) = Un-amortized acquisition cost + Intangible assets + Prepaid expenses + Deferred income tax credits + Estimated cash dividends for shareholders.

Required CapitalThe new RBC system relates insurers’ capital requirements to their individual risk exposures in the five areas of insurance risk, credit risk, interest rate risk, market risk and operational risk.

The required capital for computing the RBC ratio is calculated by:

Operational Risk +

√[(Insurance risk)2 + (Total of the interest rate risk and the credit risk)2 + (Market risk)2]

The insurance risk is the risk of economic loss due to mismatch between the predicted risk rate and the actual risk rate. It is broken down into Pricing Risk and Reserving Risk.

The risk factor or loading is to cover the risk of companies under-pricing their insurance products or under-estimating their claims reserves. There are different loadings for different classes of business which are applied to a direct insurer’s net retained premium income. However, in the case of long term classes, loadings are applied to net retained premium income and net claims paid where the higher of the two amounts would be used to arrive at the pricing risk.

In the case of professional reinsurers, there are also different premium and claim reserve loadings depending on whether the assumed business is proportional with variable ceding commission, proportional with fixed ceding commission or non-proportional.

Insurance price risk factor for long -term non-life insurance

Renewal adjustment (for renewable policies)

(Units: %) Product Type Pricing Risk FactorInterval

≤ 3 years

3 < interval

≤ 5 years

Long Term

Illness 38.2 47.0 66.0

Motor 22.6 43.0 65.0

Property 28.1 61.0 73.0

Other long term 27.5 54.0 68.0




Insurance price risk factor for general insurance

Insurance Pricing Risk

(Units: %) Product Type Risk FactorStandard

Combined RatioRisk Factor

(max)Risk Factor (min)

Long Term

Fire, theft 36.8 107.0 47.8 25.8

Eng. Package 2.0 65.5 2.6 1.4

Marine 5.1 85.8 6.6 3.6

Other General 1.2 77.7 1.6 1.2

Motor

Personal 17.9 112.5 23.3 12.5

Non-personal 13.1 107.0 17.0 9.2

Other motor 16.3 108.2 21.2 11.4

Guarantee Guarantee 38.9 - - -

Insurance price risk factor for reinsurance

Insurance Price Risk Factor

(Units: %) Product TypeProp with

application of linked commission

Prop without application of

linked commission

Non-proportional reinsurance

Long Term non life

Illness 18.0 18.0 27.0

Motor 9.7 9.7 14.6

Property 17.1 17.1 25.7

Other long term 14.9 14.9 22.4

General

Fire, theft 31.3 36.8 55.2

Eng, package 1.7 2.0 3.0

Marine 4.3 5.1 7.7

Other general 1.2 1.2 1.8

Motor

Personal 15.2 17.9 26.9

Non-personal 11.1 13.1 19.7

Other motor 13.9 16.3 24.5

Guarantee Guarantee 33.1 38.9 58.4

Reserve Risk Factor for general insurance

(Units: %) Product Type Reserve Risk Factor

General

Fire, theft 1.2

Eng, package 34.3

Marine 43.7

Other general 77.9

Motor

Personal 29.6

Non-personal 35.4

Other motor 14.5

Guarantee Guarantee 1.2


Insurance price risk factor for reinsurance

Reserve Risk Factor

(Units: %) Product TypeProp with

application of linked commission

Prop without application of

linked commission

Non-proportional reinsurance

General

Fire, theft 1.2 1.2 1.2

Eng, package 29.2 34.3 34.3

Marine 37.1 43.7 43.7

Other general 66.2 77.9 77.9

Motor

Personal 25.2 29.6 29.6

Non-personal 30.1 35.4 35.4

Other motor 12.3 14.5 14.5

Guarantee Guarantee 1.2 1.2 1.2

The interest rate risk loading covers the risk of economic loss due to volatility of future market interest rates and due to mismatch of assets and liabilities duration structure. Situations can arise where the duration of insurance liability is longer than the duration of the interest bearing assets. Hence if interest rates fall, this will result in a diminishing net assets situation.

It is calculated as: (Exposure of assets X Effective duration of assets X Interest Rate Factor ) - (Exposure of assets X Effective duration of assets X Interest Rate Factor )

Risk Exposures:Asset B/S Balance for Interest sensitive assets(AFS/HTM bond, Loans, Cash & Deposits)

Liability Net Level Premium reserve

Applicable Interest Rate Factor

If Duration (assets) < Duration (liabilities): 1.5%If Duration (assets) > Duration (liabilities): 2.0%

Insurance Liability Effective Duration

Effective Duration

Product Type Fixed Rate Products Float Rate Products

Non-life long term insurance

Illness 7.4 6.9

Motor, Property 3.8 0.5

Savings 8.7 0.5

Pension 9.5 1.8




Asset Effective Duration Liability Effective Duration

Loans

Bonds

Deposits Time Deposits

Installment deposits

OthersFixed Rate

ProductsFloat Rate Products

Deposits, securities, loans denominated in foreign currency

Modified duration or effective duration

Duration according to

remaining maturity*

0Liability effective

duration

Duration according to

remaining maturity*

For such assets held as hedging purposes

(forex hedging as defined by related

regulation), company may use duration

based on cash flow of such assets

translated into KRW

*Duration according to remaining maturity

Remaining Maturity Duration

Less than 3 months 0.12

3 months ~ < 6 months 0.36

6 months ~ < 12 months 0.71

1 ~ < 2 years 1.38

2 ~ < 3 years 2.25

3 ~ < 4 years 3.07

4 ~ < 5 years 3.85

5 ~ < 7 years 5.08

7 ~ < 10 years 6.63

10 ~ < 15 years 8.92

15 ~ < 20 years 11.21

20 ~ < 25 years 13.01

25 ~ < 30 years 14.42

30 years or more 15.53

The credit risk loading covers insolvency and default risks in respect of loans, investments and reinsurance recoverables.

Capital provisions for reinsurance recoverables are based on the credit rating of the reinsurance counter-party. The capital provisions (expressed as a percentage of ceded premiums and loss reserves) for different counter-party credit ratings (based on local credit rating agency ratings) are shown below. The current RBC system does not differentiate between recoverables due from resident and non-resident reinsurers.

Credit Rating AAA AA+ to AA- A+ to BBB Below BBB- Not rated

Provision 0.8 2 4 6 4


If many ratings are available, the lowest rating is used.

Risk Charge (%)

Domestic Credit Rating Agency

S&P Moody’s Fitch AM Best

0.8 AAA AAA Aaa AAA A++

0.8 AAA AA+~AA- Aa1~Aa3 AA+~AA- A+

2.0 AA+~AA- A+~A- A1~A3 A+~A- A,A-

4.0 A+~A- BBB+~BBB- Baa1~Baa3 BBB+~BBB- B++

4.0 BBB+~BBB- BB+~BB- Ba1~Ba3 BB+~BB- B+

6.0 BB+, BB, BB- B+, B, B- B1, B2, B3 B+, B, B- B, B-

6.0 Less than B+ Less than CCC Less than CCC Less than CCC Less than CCC

4.0 No rating No rating No rating No rating No rating

The risk factor for AFS stocks are: - Listed stocks : 8%

- Unlisted stocks : 12%

As for AFS/HTM(Bonds) - Govt : 0%

- Special, Corporate, Foreign ranges from 0.8% to 6% depending on ratings

Others - Cash : 0%

- Real Estate : 6%

The market risk loading covers the risk of volatility in equity positions, interest rate positions, foreign exchange positions and commodity investment positions. The risk factor ranges from 2 to 16% depending on the items concern.

Categories Risk Factor

Trading securities Stock - Listed 12%

Stock - Unlisted 16%

Bonds Effective Duration x 0.9%

FX Net Position 8%

Derivatives Stocks 12%

Interest rate Effective duration x 0.9%

FX 8%

Guaranteed Minimum Accumulation Benefit Exposure = VA Policyholder’s Reserve 2%

The operational risk factor is set at 1% of gross premium income in the year before the solvency margin calculation date.




Regulation on foreign ownershipForeign insurers are allowed to establish branches or wholly owned subsidiaries in Korea or to buy any percentage of a domestic company’s equity.

The authorisation requirements for foreign insurers are similar to those for domestic concerns, except that foreign insurers may only be licensed for classes of business which they already write in other territories. Foreign insurers must also hold a recent investment grade credit rating from an international rating agency. Applications will not be accepted from foreign insurers which have received criminal penalties greater than fines or supervisory sanctions stronger than warnings in the preceding three years.

In place of a minimum capital requirement, foreign branches are required to have an operating fund of KRW 3b (USD 3.21mn) which must be subscribed in cash. Foreign operations are obliged to retain assets in Korea up to the value of their technical reserves and solvency margin.

IFRS Status IFRS is required for financial institutions and state-owned companies and is also permitted for other unlisted companies. It is mandatory for all insurers from 31 March 2012.




Macau

(Exchange rate: 1 Patacas = 0.12 USD ; 1 USD = 8.33 Patacas)

RegulatorAutoridade Monetaria e Cambial de Macau (AMCM) (http://www.amcm.gov.mo)

Minimum Capital RequirementsThe minimum share capital of an insurer shall not be less than 15m Patacas (1.8m USD) for the carrying on of non-life business.

At the time of formation, 50% of the share capital shall have to be realized in cash and deposited in favor of AMCM with a credit institution authorized to operate in the Territory, with an express declaration of the amount subscribed by each shareholder, and such deposit may only be withdrawn after commencement of insurance activity and authorization of AMCM.

The remaining 50% of the share capital shall have to be realized within a maximum period of 180 days from the date of the deed of constitution.

Solvency MarginThe required margin of solvency for non-life business shall be determined in terms of annual gross premium income recorded during the preceding year, net of returns and cancellations, in accordance with the following table.

Gross Premium Income Amount of Margin of Solvency

Less than 10m Patacas (1.2m USD) 5m Patacas (600,000 USD)

Equal to or more than 10m Patacas (1.2m USD) but less than 20m Patacas (2.4m USD)

50% of the said income in that year

Equal to or more than 20m Patacas (2.4m USD) The aggregate of 10m Patacas (1.2m USD) and 25% of the amount by which the said income in that year exeeds

20m Patacas

Where an insurer registers an abnormal loss ratio during the preceding three consecutive years or during any three years of the preceding five years, the margin of solvency shall be double the amounts calculated in accordance with the table in the preceding paragraph.

Regulation on foreign ownershipThe insurance law allows foreign participation through branch offices and representative offices. For setting up branch offices, insurers with head office overseas shall only be permitted to carry on the class(es) of insurance for which they hold a valid license and effectively transact in the country / region or territory of origin.

Authorization for the establishment shall depend whether they have been constituted and in operation for at least five years, and whether their respective capital is not less than the minimum amounts fixed as a local insurer.

Macau Page 1 | Original Edition | 1 September 2011

http://www.amcm.gov.mo


Macau Page 2 | Original Edition | 1 September 2011

It shall also be required to set up, for its operations in Macau, an establishment fund of an amount not less than 5 million patacas in the case of non-life business and such amount shall be, at any point of time, held in the Territory of Macau in the form of certain types of assets as defined by Notice of AMCM.

Within a period of 30 days from the date of authorization for the establishment of the branch, the insurer shall deposit in favor of AMCM with a credit institution authorized to operate in the Territory, half of the amount referred to in the preceding paragraph and such deposit may only be withdrawn after commencement of activity of the branch and authorization of AMCM.The insurer can only establish one representative office.

IFRS StatusMacau Accounting Standards (MAS) comprises of Macau Financial Reporting Standards (MFRS) and General Financial Reporting Standards (GFRS).

The new MFRS are basically comprised of 15 IAS and 1 IFRS. The application of the MFRS is mandatory for all establishments who have been granted concessionary status by the Macau Government as well as financial institutions and companies limited by shares in Macau. Other types of Macau companies could elect to adopt either MFRS or GFRS.




Malaysia

(Exchange rate: 1 MYR = 0.34 USD ; 1 USD = 2.94 MYR)

RegulatorBank Negara Malaysia ( www.bnm.gov.my/ )

Other insurance and reinsurance related entities set up in Labuan Internal Business Financial Centers (http://www.labuanibfc.my/site/) are regulated separately under the Labuan Financial Services Authority. (http://www.lfsa.gov.my)

Minimum Capital RequirementsUnder Bank Negara Malaysia

Both licensed insurers and takaful operators are required to have a minimum paid-up capital of MYR 100m (USD 34m).

Under Labuan Financial Services Authority,

Offshore insurers in Labuan have a paid-up capital/working funds requirement of:

� For a general insurance and takaful business license: 7.5m MYR (2.55m USD)

� For a reinsurance and retakaful business license: 10m MYR (3.4m USD)

� For a captive license: 300,000 MYR (102,000 USD) or 500,000 MYR (170,000 USD), depending on the type of captive.

Solvency MarginInsurers regulated under Bank Negara Malaysia

Currently, only the conventional (re)insurers are subjected to the Risk Based Framework. Takaful operators’ guidelines were published for feedback in April 2011.

Under the RBC framework, insurers are required to determine their capital adequacy ratio (CAR).

CAR = Total Capital Available (TCA)/ Total Capital Required (TCR) x 100%

TCA = the aggregate of an insurer’s tier 1 capital (such as issued and paid-up ordinary shares) and tier 2 capital (such as cumulative irredeemable preference shares) less deductions from capital (such as goodwill and intangible assets)

TCR = Max [surrender value capital charges, ∑ (credit risk capital charges + market risk capital charges + insurance liability capital charges + operational risk capital charges)]

Credit risk capital charges aim to mitigate risks of losses resulting from asset defaults, related losses of income, or unwillingness of counterparty to fully meet its contractual financial obligations.

Credit Risk = ∑ [( exposure to counterparty X credit risk charge ) ]

Malaysia Page 1 | Original Edition | 1 September 2011

http://www.labuanibfc.my/site/

http://www.labuanibfc.my/site/

http://www.lfsa.gov.my


Risk charges for counterparties and debt obligations

Counterparty or debt obligations Risk Charge

a) the Federal Government of Malaysia, Bank Negara Malaysia, the federal government or the central bank of a G10 country / region and recognised multilateral development banks (MDBs)

0%

b) Cagamas in respect of its obligations or that issued by its subsidiaries prior to 4 September 2004, Cagamas Covered Bonds and Covered Sukuk Wakalah

0.8%

c) State government of Malaysia and the federal government or the central bank of non-G10 countries / regions

1.6%

d) Corporations and other organisations with the following rating categories:1. One 2. Two 3. Three 4. Four 5. Five

1.6%2.8%

4%6%

12%

e) Debt facilities with original maturity of 1 year or less and with the following rating categories:1. One 2. Two 3. Three 4. Four

1.6%4%8%

12%

f) Individual person1. staff of the insurer 2. other individuals (except for policy loans)

4%12%

g) Policy loans 0%

Insurers may recognise a lower credit risk capital charge for debt obligations if the insurer holds certain types of Credit Risk Mitigants (CRM), namely, eligible collateral against the debt obligations, or if the obligations are guaranteed by recognised guarantors.

Risk charges for debt obligations secured by properties

Types of properties Risk Charge

a) residential properties - LTV< 80%

- 80% < LTV < 90%

2.8%

4%

(b) other types of properties - LTV< 80%

- 80% < LTV < 90%

5.6%

8%

(c) Abandoned properties 12%

Risk charges for other assets


a) Cash (including certificate of deposits or comparable instruments) in hand and bank deposits26 with financial institutions licensed under the Banking and Financial Institutions Act 1989, the Islamic Banking Act 1983 or prescribed under the Development Financial Institutions Act 2002

0%




b) Deposits with other banking institutions with the following ratings categories: 1. One 2. Two 3. Three 4. Four 5. Five

1.6%2.8%

4%6%

12%

c) Credit exposures to (re)insurers licensed under the Act and qualifying reinsurers 1.6%

d) Credit exposures to (re)insurers other than those licensed under the Act and qualifying (re)insurers, with the following rating categories:

1. One 2. Two 3. Three 4. Four 5. Five

1.6%2.8%

4%6%

12%

e) Outstanding premiums, agent balances and other receivables due from:1. Other licensees under the Act or agents2. Others

4%6%

F) Other assets 8%

Market risk capital charges aim to mitigate risks of losses resulting from reductions in the market value of assets due to exposures to equity, interest rates, property and currency risks; non parallel movements between the value of liabilities and the value of assets backing the liabilities due to interest rate movements; and concentration of exposures to particular counterparties or asset classes.

Market Risk = ∑ [ (market exposures X market risk charge ) ]

Risk charge for equity exposures

Equity Instruments Risk Charge

a) Listed on the Main Market of Bursa Malaysia or listed on the primary board of recognised stock exchanges in a G10 country / region

20%

b) Listed on recognised stock exchanges other than those mentioned in (a) 30%

c) FTSE Bursa Malaysia (FBM) KLCI, FBM Top-100 Index, FBM Hijrah Shariah Index or the indicative index of the recognized stock exchanges in a G10 country / region

16%

d) FBM Mid-70 Index or other stock market indices 25%

e) Unlisted or private equity (including venture capital) 35%

Risk charge for investment in immovable property

Equity Instruments Risk Charge

a) Self-occupied properties 8%

b) Other property and property-related investments 16%

Insurance liabilities risk capital charges aim to address risks of underestimation of the insurance liabilities and adverse claims experience.

Insurance Liability = ∑ [ value of unexpired risk reserves X risk charge + value of claims liability X risk charge]



Risk charge applicable for

Class Claims Liabilities URR @ 75% Confidence level

1 Aviation 30% 45%

2 Bonds 20% 30%

3 Cargo 25% 37.5%

4 Contractor’s All Risks & Engineering 25% 37.5%

5 Fire 20% 30%

6 Liabilities 30% 45%

7 Marine Hull 30% 45%

8 Medical and Health 25% 37.5%

9 Motor “Act” 25% 37%

10 Motor ‘Others” 20% 30%

11 Offshore Iil & Gas related 20% 30%

12 Personal Accident 20% 30%

13 Workmen’s Compensation Employer’s Liability 25% 37.5%

14 Others 20% 30%

The MRCC for interest rate mismatch risks is applicable only for life insurance funds and general insurance funds with discounted liabilities.

Operational risk capital charges aim to mitigate the risk of losses from inadequate or failed internal processes, people, and systems.

Operational Risk = 1% of total assets

An insurer’s CAR may not go below 130%; otherwise it will face supervisory action.

Insurers regulated under Labuan Financial Services Authority

For the computation of margin of solvency, every Labuan insurer, including captive insurance business, shall ensure that the realizable value of its assets exceeds the amount of its liabilities by a margin stipulated by the Authority.

� For a general insurance and takaful business license: 7.5m MYR (2.55m USD) or 20% of net premium income of the preceding year, whichever greater.

� For a reinsurance and retakaful business license: 10m MYR (3.4m USD) or 20% of net premium income of the preceding year, whichever greater

� For a captive license: it is required to maintain at all times, a surplus of assets over its liabilities, which is equivalent to or more than its amounts of its working fund (depending on the kind of captive license), or 20% of its net premium income for the preceding year in respect of its general business, whichever is greater.

Regulation on foreign ownershipIn April 2009 BNM announced that foreign equity participation in insurance companies and takaful operators may reach 70%. A higher percentage would be considered on a case-by-case basis for companies who can facilitate consolidation and rationalization of the insurance industry.

Foreign insurers’ intending to enter into negotiations for the acquisition or disposal of an aggregate interest of 5% or more of the shares of a Malaysian conventional insurer/control of a takaful operator will require further approval.



IFRS Status Malaysia has announced a plan to bring Malaysian GAAP into full convergence with IFRS effective 1 January 2012.


Recent DevelopmentsWith the growth of Takaful insurance, the regulators are seeking to bring reporting for such operators in line with conventional insurers in the near future. In April 2011, draft risk-based capital (RBC) guidelines for Takaful operators were released. The draft guidelines are released with considerations made to align it to Shariah-specific requirements.



New Zealand

(Exchange rate: 1 NZD = 0.85 USD ; 1 USD = 1.17 NZD)

RegulatorFinancial Markets Authority (FMA) (http://www.fma.govt.nz) & The Reserve Bank (RB) (http://www.rbnz.govt.nz)

Minimum Capital RequirementsUnder the new supervisory system which is being brought in by the Insurance (Prudential Supervision) Act 2010, the minimum capital requirement is 3m NZD (2.55m USD). More important than the minimum capital requirement, however, is the new solvency standard which has taken the place of a formula-based solvency margin and which requires most insurers to maintain capital levels far in excess of the statutory minimum. This is discussed in the Solvency Margin section below.

There is no explicit capital requirement for foreign branches, though these are required to maintain assets in excess of their liabilities of an amount at least equal to their minimum solvency capital. There is no requirement for such assets to be kept in New Zealand.

Solvency MarginPreviously, there were no statutory solvency margins. Members of the Insurance Council of New Zealand are required to maintain a minimum solvency ratio of 20% as a condition of membership.

The Insurance (Prudential Supervision) Act requires all insurers to obtain a financial strength rating from an approved rating agency and disclose that rating in writing to the policyholder before entering into or renewing a contract of insurance. The only exceptions are captives, professional reinsurers, and traditional insurers with gross written premiums below 1.5m NZD (1.275m USD). Such exempted companies must disclose to the policyholder before entering into or renewing a contract of insurance that they are not required to be rated and the reason why. If an insurer fails to disclose its rating as required, the policyholder may cancel the contract within 20 working days of inception or renewal and receive a pro rata return of premium.

Any change in an insurer’s financial strength rating or the issue of a credit watch warning must be notified to the RB within 20 working days. Any downgrade of an insurer’s financial strength rating must be advertised within 10 working days either on the insurer’s website or in at least one daily newspaper circulated in all the major cities of New Zealand.

Regulation on foreign ownership Subject to prudential approval, foreign companies may acquire any percentage of a domestic insurer’s equity or may establish wholly owned subsidiaries or branches.

The new Insurance (Prudential Supervision) Act allows the RB to refuse branch licences to companies whose home country /region supervisory arrangements or legal or accounting practices potentially put New Zealand policyholders at risk. Companies from such countries / regions will only be allowed to operate in New Zealand through a subsidiary.

Foreign companies which are allowed to operate as branches should obtain a financial strength rating from a rating agency approved by the RB that takes account of any home country / region policyholder preference arrangements or

New Zealand Page 1 | Original Edition | 1 September 2011

http://www.fma.govt.nz

http://www.rbnz.govt.nz/


other legal issues which would disadvantage New Zealand policyholders. Foreign branches are required to disclose any home country / region policyholder preference arrangements affecting New Zealand policyholders to the public.

If a foreign insurer operating in New Zealand is fully compliant with its home regulator’s solvency standards and fit and proper person standards, and the RB is satisfied with the adequacy of those standards, then the RB will have the discretion to accept compliance with those standards in place of compliance with its own standards. This will be especially relevant to the large number of Australian insurers operating in New Zealand which are supervised by the highly regarded Australian Prudential Regulation Authority.

IFRS StatusAustralia has adopted IFRS equivalent accounting standards. The relevant accounting standard on insurance contracts is NZ IFRS 4 Insurance Contracts.


Recent Developments There is a new insurance framework that is embodied in the Insurance (Prudential Supervision) Act 2010, which received the Royal Assent on September 7, 2010. Amongst other provisions, the legislation will require all insurance providers with a physical presence in New Zealand to be licensed by the RB. The act will also introduce minimum capital and capital adequacy standards. Non-life insurers will still be required to obtain a rating from an approved rating agency. Existing insurers now have 18 months in which to apply for a provisional license from the RB or to exit the market.

On May 1, 2011, following the successful passage of the Financial Markets Authority Act 2011, the Financial Markets Authority (FMA) commenced operations. The FMA is a super-regulator which, in conjunction with the Reserve Bank, has responsibility for regulating the financial sector.

The Reserve Bank (RB) has published draft solvency standards for non-life insurance to accompany the new Insurance (Prudential Supervision) Act 2010. The solvency standards are risk-based and are intended to ensure that each company’s solvency capital is adequate for the nature of its business. The draft standards are broadly similar to those of Australia, though with different capital loadings to reflect the different investment environment in New Zealand.

The main points of the solvency standards, as currently drafted, are summarized below.

The notion of “premium liabilities” takes the place of unearned premiums. Premium liabilities relate to future claim payments arising from future events under unexpired policies, including future claim settlement costs but excluding government levies and taxes. Premium liabilities may be calculated net of reinsurance recoverables. Premium liabilities must include a risk margin sufficient to provide a 75% probability of sufficiency and must be attested by the appointed actuary.An insurer must at all times maintain actual solvency capital in excess of minimum solvency capital (MSC) to the extent laid down by the solvency standard. Actual solvency capital is the difference between capital (as defined) and deductions from capital (as defined). Solvency capital for a licensed foreign insurer in New Zealand is the excess of the branch’s assets over its liabilities.

An insurer’s MSC is the sum of the capital charges appropriate for its insurance risk, catastrophe risk, asset risk, and reinsurance recovery risk.

The minimum amount of the MSC is 1m NZD (850,000 USD) for a captive and 3m NZD (2.55m USD) for any other type of insurer.



The insurance risk capital charge is intended to reflect the risks of writing business on unprofitable terms and of underestimating the amounts that should be put aside for outstanding claim reserves. Capital charges vary by line of business and are expressed as the following percentages of (1) premium liabilities and (2) outstanding claim reserves.

Class % of premium liabilities % of outstanding claims

Domestic property 14 9

Private motor 14 9

Commercial property 16 11

Commercial motor 14 9

Liability 22 15

Marine 16 11

PA and health 16 11

Travel 14 9

Other 16 11

The Catastrophe Risk Capital Charge is intended to protect the insurer’s solvency position from potential exposure to unexpected large or extreme losses arising from one or more events including (but not limited to) earthquake, flood, or storm that may result in claims on more than one insurance contract. This applies mainly to property insurers, although insurers with no such exposures could also be exposed to such unexpected large losses. The Probable Maximum Loss (“PML”) arising from catastrophes used in the calculation of the charges, is the greater of the following:

� the insurer’s economic loss in respect of earthquake for a one in 1000 year loss occurring anywhere within New Zealand or other location in which the insurer has property and other exposures; or

� the insurer’s economic loss for a one in 250 year loss arising from other catastrophe perils.

The catastrophe risk capital charge is the net cost (after reinsurance recoverable amounts) to the insurer based on the larger of the amounts mentioned above, plus any gap or shortfall in the reinsurance cover, plus the cost of one reinstatement premium for its full catastrophe reinsurance program.

The asset risk capital charge is intended to reflect the exposure of the insurer to losses on its investment assets. Asset risk capital factors (expressed as a percentage of asset values in the relevant asset class) range from 0.5% for cash and sovereign debt to 25% for listed equities and 35% for unlisted equities.

Asset Class Asset Risk Capital Factor

Cash and Sovereign Debt 0.5%

AA rated fixed interest < 1 yr 1%

AA rated fixed interest > 1 yr 2%

A rated fixed interest 4%

Unpaid premiums < 6 months 4%

Deferred Acquisition Cost 5%

BBB rated fixed interest 6%

Unrated Local Authority Debt and Third Party Claims Recoveries 8%

Other fixed interest and short term unpaid premiums 15%

Off Balance Sheet Exposures not covered elsewhere 20%

Listed equity & Trusts and Property, plant and equipment 25%



Asset Class Asset Risk Capital Factor

Unlisted equity, unlisted trusts 35%

Any other assets 40%

Assets incurring full capital charge 100%

An additional concentration risk capital charge may apply if individual asset or counterparty exposures exceed specified percentages of total assets.

In order to provide against the risk of a mismatch between assets and liabilities expressed in different currencies, a capital charge of 22% must be applied to the net open foreign exchange position of any currency apart from the NZD.

There is also an interest rate risk where a charge is calculated by reference to fixed interest-bearing assets and fixed interest-bearing liabilities, which is revalued using a 175 basis point change (upshock and downshock). The greater of the adverse net revaluation upshock and downshock impact is the Interest Rate Capital Charge.

The reinsurance recovery risk capital charge is intended to reflect an insurer’s exposure to reinsurer counterparty risk, and is expressed as a percentage of reinsurance recoverables varying with the financial strength rating of each reinsurer:

S&P/Fitch rating AM Best rating Moody’s rating Capital charge

AAA A++ Aaa 2%

AA- to AA+ A+ Aa3 to Aa1 2%

A- to A+ A- A A3 to A1 4%

BBB- to BBB+B+ B++ Baa3 to Baa1

10%, up to a 20% proportion of the total reinsurance recovery asset, and 20% above that limit

Below or unratedBelow or unrated Below or unrated

20%, up to a 10% proportion of the total reinsurance recovery asset, and 40% above that limit

An insurer must submit an annual solvency return attested by two directors to the Reserve Bank within five months of its financial year-end. This must be audited by the insurer’s auditor and accompanied by a financial condition report by the appointed actuary. Insurers must also submit interim financial statements and solvency returns for the first half of each accounting period within five months of the end of such period.

Insurers must disclose their latest solvency ratio (the ratio of their actual solvency capital to their minimum solvency capital) on their websites.



Pakistan

(Exchange rate: 100 PKR = 1.15 USD ; 1 USD = 86.96 PKR)

RegulatorInsurance Division of the Securities and Exchange Commission of Pakistan (SECP) (http://www.secp.gov.pk)

Minimum Capital Requirements The minimum capital requirement is 300m PKR (3.45m USD).

All new registrations for non life companies must pay a minimum of 300m PKR (3.45m USD). New companies are obliged to meet the new requirements in full as from their initial authorisation and not by installments.

In accordance with the provisions of Section 29 of the Insurance Ordinance 2000, each insurer shall make and keep maintained a deposit with the State Bank of Pakistan a specified minimum amount either in cash or approved securities estimated at the market value of the securities on the day of the deposit, or partly in cash and partly in approved securities.

The specified amount in Section 29 is the higher of 10m PKR (115,000 USD) and 10% of the insurer’s paid up capital or, such amount as may be prescribed by the Securities and Exchange Commission of Pakistan (SECP).

Separate companies are required to carry out life and non-life insurance business in Pakistan as composite insurance is not allowed.

Solvency Margin Non-life insurers are required at all times to have admissible assets in excess of their liabilities of an amount greater than or equal to the minimum solvency requirement. The minimum solvency requirement must be the greatest of the following:

� 50m PKR (575,000 USD) in excess of liabilities

� 20% of the net premium, subject to a maximum deduction of 50% reinsurance share

� 20% of the sum of unexpired risks plus outstanding claims

Regulation on foreign ownershipSecurities and Exchange Commission of Pakistan’s (SECP) Circular 5 of 2007 states that in the interests of consistency and uniformity in the foreign investment policy governing various service sectors and to make the environment more conducive to attracting foreign investment, the government has allowed 100% foreign equity in the insurance business in Pakistan subject to the conditions listed below.

� Foreign companies shall be required to bring a minimum amount of 4m USD, but no less than 2m USD shall come from abroad.

� There shall be no restriction on the number of branches.

� There shall be no restriction on foreign insurance companies as to whom they shall employ. They shall be given national treatment in extending all the facilities as enjoyed by local companies.

Pakistan Page 1 | Original Edition | 1 September 2011

http://www.secp.gov.pk/


Since every insurer is required to comply with all the conditions, including without limitations the minimum paid up capital requirement and the revised paid up capital requirements of 4m USD, the foreign investors are required to bring in the equivalent of minimum paid up PKR capital.

IFRS Status

As adoption of IFRS 4 (Insurance Contracts) would require amendment of the Pakistani insurance ordinance, the Institute of Chartered Accountants of Pakistan has deferred consideration of it until the IASB issues a final standard on Phase II of the Insurance Project.



Pakistan Page 2 | Original Edition | 1 September 2011


Papua New Guinea

(Exchange rate: 1 PGK = 0.45 USD ; 1 USD = 2.22 PGK)

RegulatorThe Insurance Commissioner is appointed by and responsible to the Ministry of Treasury.

Minimum Capital RequirementsThe minimum non-life capital requirement is 2m PGK (900,000 USD) for an insurer and 20m PGK (9m USD) for a reinsurer.

Solvency MarginThe Insurance Commission (IC) completed in 2009 a project sponsored by the World Bank and aimed at introducing risk based capital (RBC) tests. The new system went through a transitional phase in 2009 and became universally applied in 2010. It is based on the primary principles of the Australian Prudential Supervisory Authority’s risk based capital model although there are a number of differences.

A minimum capital of 2m PGK (900,000 USD) remains a primary requirement.

The formula for the minimum capital requirement: Liability Risk Charge + Asset Risk Capital Charge + Excessive Exposure Risk Capital Charge.

Liability Risk Capital Charge: Determined by applying fixed factors to an insurer’s estimates of its insurance liabilities which comprise outstanding claims liability (including incurred but not reported claims provision) and premiums liability.

Asset Risk Capital Charge: Determined by applying fixed factors to the market values of an insurer’s assets.

Excessive Risk Capital Charge: Determined based on a company’s exposure to any single risk.

Regulation on foreign ownershipThere are no discriminatory restrictions on the foreign ownership of domestic insurance companies. Registration of business is required with Investment Promotion Authority.

IFRS Status Papua New Guinea is currently in the third stage of the IFRS adoption process. The Companies Act 1997 (The Act) established the Accounting Standards Board (ASB) of Papua New Guinea. The ASB fully complies with the International Accounting Standards. In 2000, IFRS became a requirement for banks and financial institution as an accounting standard.


Papua New Guinea Page 1 | Original Edition | 1 September 2011



Papua New Guinea Page 2 | Original Edition | 1 September 2011


Philippines

(Exchange rate; 1 PHP = 0.02 USD ; 1 USD = 50 PHP)

RegulatorThe insurance supervisory authority is known as the Insurance Commission (IC). (http://www.insurance.gov.ph)

It is a government agency under the aegis of the Department of Finance.

Minimum Capital RequirementsThe current paid up capital requirement is 125m PHP (2.5m USD). This is to be increased to 175m PHP (3.5m USD) and 250m PHP (5m USD) by end of 2011 and 2012, respectively. Statutory net worth includes the company’s paid-up capital, capital in excess of par value, contingency surplus, retained earnings, and revaluation increments as may be approved by the insurance commissioner.

Solvency MarginRisk based capital (RBC) requirements were introduced in 2006 and are complementary to the minimum capital requirements. Insurance Memorandum Circular No 7-2006.

The RBC requirements include fixed income securities (R1), equities (R2), credit risk (R3), loss reserves (R4), and net written premiums (R5).

RBC Requirement = √ (R12+ R22 + (0.5 * R3)2 + (0.5 * R3 + R4)2 + R52)

There is a minimum RBC ratio of 100%, which is calculated by dividing the company’s net worth by the RBC requirement.

If the RBC ratio approaches the minimum and fails to meet the required level then increasing severity of action is required to rectify the situation.

Companies are required at all times to maintain a margin of solvency in excess of the value of their admitted assets exclusive of paid-up capital/statutory deposits, over their liabilities, unearned premium, and reinsurance reserves in the Philippines, of at least 10% of the total amount of their net premium written during the preceding calendar year. This margin must be no less than 500,000 PHP. The shortfall has to be made up in cash within 15 days or the insurance commissioner can revoke the license.

RBC Ratio Event Description of required action

100% to 125% Trend Test Company to take appropriate action to rectify situation

75% to 100%Company action

Company to submit RBC rectification plan and financial projection Company to take appropriate action to implement plan

50% to 75%Regulatory action

IC authorised to examine company and issue regulatory orders as necessary

35% to 50% Authorised control IC authorised to take control of the company, if deemed necessary

Less than 35% Mandatory control IC required to take control of the company

Philippines Page 1 | Original Edition | 1 September 2011

http://www.insurance.gov.ph


Regulation on foreign ownershipForeign ownership is permitted under the Republic Act No 8170, 1996, of up to 100% ownership.

IFRS StatusIn adopting IFRS as Philippines Financial Reporting Standards (PFRSs), various modifications were made to IFRS including some ‘transition relief’. This applies to insurance companies who are allowed to use another comprehensive set of accounting principles (also described as Philippine Financial Reporting Standards) The relevant accounting standard for insurance contracts is PFRS4 (Insurance Contracts).


Recent DevelopmentsThe Insurance Commissioner has recently commented that the Aquino administration is planning to increase the minimum paid-up capital up to PHP 750m (USD 15m) or even PHP 1b (USD 20m). The aim of this is to reduce insolvency risk and help protect customers. Smaller insurance players are likely to consolidate in order to meet this requirement.

Philippines Page 2 | Original Edition | 1 September 2011


Singapore

(Exchange rate: 1 SGD = 0.83 USD ; 1 USD = 1.20 SGD)

RegulatorMonetary Authority of Singapore (MAS) (www.mas.gov.sg)

Minimum Capital RequirementsThe paid up capital requirement for direct insurer concerned with investment-linked policies only or short-term accident and health policies only is 5m SGD (4.15m USD). For any other type of direct insurer the requirement is 10m SGD (8.3m USD). For reinsurers, the requirement is 25m SGD (20.75m USD).

Solvency MarginCalculation of Total Risk Requirement

The TRR of a registered insurer shall be the aggregate of the total risk requirements of every insurance fund established and maintained by the insurer under the Insurance Act (Act) or in the case where the insurer is a registered insurer incorporated in Singapore, the total risk requirement arising from assets and liabilities that do not belong to any insurance fund established and maintained under the Act (including assets and liabilities of any of the insurer’s branches located outside Singapore).

a) Computation of C1 Requirement

� Calculated as the sum of:

� Premium liability risk requirement

� Claim liability risk requirement

� For each volatility category (see Table 1 below), the premium liability risk requirement for that category is:

� The product of:

- The premium liability risk factor for that volatility category (see Table 2 below)

- Unexpired risk reserves, less the premium liability relating to that volatility category; or

� zero, whichever is the higher.

Total Risk Requirement (TRR) = Component 1 (C1) + Component 2 (C2) + Component 3 (C3)

Insurance Risks Concentration RisksMarket RisksCredit RisksRisks arising from mismatch, in terms of interest rate sensitivity & currency exposure of the assets and liabilities of the insurer

Singapore Page 1 | Original Edition | 1 September 2011

http://www.mas.gov.sg


Table 1: Volatility Categories

Volatility CategoryBusiness Lines - Singapore Insurance Fund

Business Lines - Offshore Insurance Fund

Low a) Personal accidentb) Healthc) Fire

-

Medium a) Marine & aviation - cargob) Motorc) Workmen’s compensationd) Bondse) Engineering construction all riskf) Credit or political riskg) Others - non-liability class

a) Marine & aviation - cargob) Propertyc) Credit or political risk

High a) Marine & aviation - hullb) Professional indemnityc) Public liabilityd) Others-Liability class

a) Marine & aviation - hull and liabilityb) Casualty and others but excludes credit or political risk

Table 2: Premium Liability Risk Factors

Volatility Category Premium Liability Risk Factors

Low 124%

Medium 130%

High 136%

Premium liability risk requirement of the insurance fund shall be the aggregate of the premium liability risk requirements for each volatility category

For each volatility category (see Table 1 above), the claim liability risk requirement for that category is:

� The product of:

- The claim liability risk factor for that volatility category (see Table 3 below)

- Claim liabilities relating to that volatility category, excluding such claim liabilities arising from any policy which the maximum loss that may be incurred under the policy is already provided for, less the claim liabilities relating to that volatility category (excluding such claim liabilities arising from any policy which the maximum loss that may be incurred under the policy is already provided for); or

� zero, whichever is the higher.

Table 3: Claim Liability Risk Factors

Volatility Category Claim Liability Risk Factors

Low 120%

Medium 125%

High 130%



Claim liability risk requirement of the insurance fund is the aggregate of the claim liability risk requirements for each volatility category.

b) Computation of C2 Requirement

� Calculated as the sum of:

- Equity investment risk requirement

- Debt investment and duration mismatch risk requirement

- Loan investment risk requirement

- Property investment risk requirement

- Foreign currency mismatch risk requirement

- Derivative counterparty risk requirement

- Miscellaneous risk requirement

c) Computation of C3 Requirement

� Calculated as the difference between:

- Total asset value of the fund; and

- Value of assets that do not exceed any concentration limit as set out in Table 4 below:

Table 4: Concentration Limits

Description of Limit As % of total assets

1 Counterparty exposure limit to a counterparty or a group of related counterparties (except any transaction related to a contract of insurance) � Where the counterparty is the Government, any central government or central bank

of a country / region or territory which has a sovereign rating of investment grade or higher, any company wholly owned by the Government, or any statutory board in Singapore

� Where the counterparty is an approved financial institution

� Where the counterparty is not an entity specified in (a) or any approved financial institutions, and is listed on any securities exchange

� Where the counterparty is not an entity specified in (a) or any approved financial institutions, and is not listed on any securities exchange

100%

20%

10%

5%

2 Equities security limit: � Exposure to any equity security (other than a collective investment scheme) that is

listed on a securities exchange

� Exposure to any unlisted equity (other than any collective investment scheme)

� Exposure to unlisted equities (other than any collective investment scheme) in aggregate

� Where the equity security is a collective investment scheme

5%

2.5%

10%

10%

3 Unsecured loan limits: � To a single counterparty

� In aggregate

1%

2.5%



Description of Limit As % of total assets

4 Property exposure limit 35%

5 Foreign currency risk exposure 40%

6 Limit on the aggregate value of assets to which the miscellaneous risk factor applies 2.5%

7For an insurance fund established and maintained by an insurer under the Act in respect of general business and relating to Singapore policies, limit on aggregate value of assets that are not liquid assets

Total assets of the insurance fund less 30% of claim liabilities of the fund

For each limit stated in the Table 4, where the amount of assets falling within the limit is calculated to be less than 5m SGD (4.15m USD), a limit of 5m SGD (4.15m USD) shall apply.

Regulation on foreign ownershipForeign ownership is permitted in the form of wholly owned subsidiaries or branches. There are no restrictions on the level of foreign ownership. Foreign insurers, including reinsurers, are also allowed to set up representative offices, though these are not authorized to write business.

The Singapore government offers tax incentives for regional insurers to establish operational headquarters (OHQs) in Singapore. The incentive promotes the centralization of headquarters’ services to be carried on out of Singapore.

The US-Singapore Free Trade Agreement of 2003 establishes certain additional rights for US insurance organizations such as the expedited availability of new insurance products, cross-border sales of Marine, Aviation & Transit (MAT) products, and cross-border rights for MAT intermediaries. The MAS has also granted additional rights in the cross-border supply of reinsurance under the authorized reinsurers’ regime.

IFRS Status Singapore has adopted most IFRS wording as Singapore equivalents of IFRS. However, they have made changes to the recognition and measurement principles in several IFRS when adopting them as Singapore standards, and they have not adopted several other IFRS.

In May 2009 the government announced Singapore Financial Reporting Standards will be fully converged with IFRS by 2012.

The relevant accounting standard for insurance contracts is FRS 104 Insurance Contracts.


Recent DevelopmentsIn view of developments around the world in terms of regulatory capital and solvency framework such as Europe’s Solvency II, the Monetary Authority of Singapore (MAS) has spoken of the importance of reviewing the existing Risk Based Capital regime so as to improve the practicality and robustness of the framework.



On 11 July 2011 MAS issued a consultation paper for a review of areas relating to credit risks arising from insurance contracts and contagion risk arising from intra-group transactions. The proposals touch on changes to the financial resources adjustment, the reinsurance adjustment, and the C2 risk requirements under the RBC framework.

On the area of ERM, under the amended regulations on corporate governance, MAS has mandated the setting up of a Risk Management Committee for significant insurers with more empowerment to monitor risk and with appropriate independent reporting lines.



Taiwan

(Exchange rate: 100 TWD = 3.45 USD ; 1 USD = 28,99 TWD)

RegulatorThe insurance industry is under the supervision of the Insurance Bureau of the Financial Supervisory Commission, which came into being in July 2004. (http://www.fscey.gov.tw/Layout/main_en/index.aspx?frame=16)

Minimum Capital Requirements The minimum capital requirements in establishing an insurance company is 2b TWD (69m USD). The capital requirement is on cash basis only. A bond equal to 15% of the total amount of its paid in capital or paid in fund must be posted with the national treasury.

For branches set up by foreign insurance enterprise, the head office shall set aside minimum working capital for each branch in accordance with its business plan, amounting to not less than 50m TWD (1.725m USD), and post bond with the national treasury in an amount equal to 15% of its working capital.

Solvency MarginThe Insurance Bureau has adopted a financial early warning system, referred to as Dynamic Financial Analysis, which is based on the US Financial Analysis and Solvency Tracking (FAST) and Insurance Regulation Information System (IRIS). The new system uploads financial information and compares it with financial indicators.

Article 143-4 of the insurance law covers solvency calculated as a percentage of risk-based capital. The article states that a company’s ratio of total adjusted net capital to risk-based capital shall not be lower than 200%. The definition of what constitutes total adjusted net capital, what constitutes risk-based capital, and the method of calculating the amounts is prescribed by the Financial Supervisory Commission (FSC) separately and not prescribed in the Insurance Law.

The term “adjusted capital” is defined as the total capital of an insurance company as admitted by the supervisory authority the scope of which includes:

� admitted stockholders’ equity, and

� any other adjusted items required by the supervisory authority.

Risk-based capital is defined as such capital that is calculated based on the risks that an insurance company may incur from the actual operation of insurance business. The scope of such risks includes:

� asset risks

� credit risks

� underwriting risks

� asset-liability matching risks and other risks.

Taiwan Page 1 | Original Edition | 1 September 2011

http://www.fscey.gov.tw/Layout/main_en/index.aspx?frame=16


The formula to arrive at the Risk Based Capital:

Factor (0.48) x (R0 + R5 + (R10 + R4)2 + R1S

2 + R22 + R3a

2 + R3b2)

R0 : Asset Risk - Stakeholder Risk

R10 : Asset Risk - Non Stock Asset RiskR1S : Asset Risk - Non Stakeholder Stock RiskR2 : Credit RiskR3a : Underwriting Risk – Reserve RiskR3b : Underwriting Risk – Premium RiskR4 : Asset Liability Matching RiskR5 : Other Risk

The factor as above for 0.48 is used for Yr 2011. This is subject to changes by the regulators every year.

Regulation on foreign ownershipA foreign insurance enterprise may not commence operations unless it has received permission from the competent authority, completed establishment registration, posted bond, and secured a business license in accordance with the law.

Unless otherwise provided by this Act, the provisions of this Act regarding insurance enterprises shall apply with regards on relevant section to foreign insurance enterprises.

IFRS Status On 14 May 2009, the Financial Supervisory Commission (FSC) of Taiwan announced its roadmap for the full adoption of IFRS in Taiwan. Taiwan has adopted a plan to adopt IFRS in two phases. Insurance companies would fall under Phase 1 and will be required to adopt Taiwan-IFRS starting 2013. Early adoption in 2012 is optional for companies that have already issued securities overseas, or have registered an overseas securities issuance with the FSC, or have a market capitalization of greater than 10b TWD (345m USD).


Recent DevelopmentsThe Insurance Bureau (IB) and Taiwan Insurance Institute (TII) have been studying Solvency II and how it will impact the current RBC system.

On 1st January 2010, practice rules were set up by the Taiwan Life and Non-Life Insurance Associations to establish ERM rules to enhance risk management activities and internal control processes within two years.

Taiwan Page 2 | Original Edition | 1 September 2011


Thailand

(Exchange rate: 1 THB = 0.03 USD ; 1 USD = 33.33 THB)

RegulatorOffice of the Insurance Commission (OIC), (http://www.oic.or.th/en/home/index.php) which reports to the Ministry of Finance.

Minimum Capital Requirements The Non-Life Insurance Act 1992 established a minimum capital requirement of 30m THB (900,000 USD) but companies subsequently licensed in 1997 were required to have a minimum paid-up capital of 300m THB (9m USD). Many non-life insurers registered prior to 1997 therefore have less than the required 300m THB (9m USD) capital.

Insurers must also deposit security with the OIC of 3.5m THB (105,000 USD) for each class of business written.

Solvency MarginThe implementation of a risk-based-capital framework in 2011 should be positive for the industry as it is likely to help strengthen risk management, improve financial transparency and ensure better risk-returns.

RBC has been fully implemented, from 1 September 2011, with an initial minimum Capital Adequacy Ratio (CAR) of 125% which will increase to 140% by 1 January 2013.

The Capital Adequacy Ratio measures the adequacy of the capital available to the insurer to support the total capital required under various circumstances.

The formula is:

� Total Capital Available / Total capital required X 100%

Total Capital AvailableThis is made up of:

� Tier 1 capital : Fully paid up ordinary shares, capital from head office, share premium, irredeemable and non-cumulative preference shares, retained profits/ (accumulated losses), Investment revaluation reserve except property and other reserves within Shareholders Equity.

� Tier 2 capital : Irredeemable and cumulative preference shares and reserve or surplus from revaluation of property. Total tier 2 capital should be less than tier 1 capital.

Less:

Deductions for treasury stocks, Goodwill, Intangibles (excluding software), Net deferred tax assets, Assets pledged by an insurer and Investment in subsidiaries and associates.

Thailand Page 1 | Original Edition | 1 September 2011

http://www.oic.or.th/en/home/index.php


Total capital requiredThis is made up of:

1. Insurance Risk Capital Charge

This is aimed at addressing the risk of under-estimation of the insurance liabilities and adverse claims experience above the amount of reserves shown in the balance sheet.

The risk charge is computed as: Fair value X Standard PAD X 1.5 (Risk factor).

The Fair Value is based on a 75% level of confidence that the value of liability will be sufficient with loading or provisions for adverse deviation (PAD).

2. Market Risk Capital Charge

The market risk capital charge (MRCC) is the sum of the risk charges of the following items. It aims to mitigate risks of financial losses arising from the reduction in the market value of assets due to exposures to:

(i) Equity risks

(ii) Property risks

(iii) Interest rate risks

(iv) Currency risks

(v) Commodity risks

(vi) Collective Investment i.e. unit trust

For the above items except for (ii), the risk charge is calculated based on the Market exposure X Prescribed Parameter for a Market Risk Charge.

For item (iii), the risk charge is calculated as the fall in values of fixed interest investments resulting from a prescribed shift in interest rates.

3. Credit Risk Capital Charge

The credit risk capital charge aims to mitigate risks of losses resulting from exposures by counterparties to meet its contractual financial obligations, debt obligations secured by properties, reinsurance balances, other assets and derivatives.

The general formula is as follows:

- CRCC = ∑ [(exposure to counterparties X credit risk charge)]

where the exposure is the value of the asset according to the RBC valuation rules. The precise form of the formula varies according to the type of security.

4. Concentration Risk Capital Charge

The counterparty concentration risk capital charge aims to mitigate risks of financial losses arising from having excessive exposure related to investments in a particular company, group of related companies or asset classes.

The charge is computed based on the amount of the asset values that exceed the limits set out for the various exposures raging from 5% to 20%. In the case of projected reinsurance recoverables on technical reserves, this would be before adding PAD in calculating the concentration risk charge.



Regulation on foreign ownership Following a recent Council of State opinion, to be deemed a Thai company an insurance company must have Thai shareholders holding at least 75% of the total shares sold and at least 75% of the total voting rights in the company. This also applies to the companies holding shares in an insurance company. A holding company in which non-Thai shareholders have greater voting power than Thai ones will be considered a non-Thai entity. Foreign companies may participate in the market through locally incorporated companies and branches.

Until 2008 the law limited foreign ownership to 25% although some foreign companies have overcome this restriction through the use of nominees and, in some cases, a series of holding companies.

Under the Non-Life Insurance Act 2008 No 2, the OIC may permit, if deemed “appropriate”, up to 49% foreign ownership and up to half of the directors to be foreign. The finance minister, on the recommendation of the OIC, has discretion to permit greater foreign ownership and a majority of foreign directors where the operation of the company may prejudice insured parties or the public. Such approval may be granted subject to certain conditions or for a limited period of time.

IFRS Status IFRS is not permitted for regulatory filings.

Many Thai GAAP (TAS) have been revised or newly issued to align with existing IFRS.

IFRS conversion is now done in various phases and it is anticipated TAS will be fully compliant with IFRS in the near future


Recent DevelopmentsThailand has implemented the RBC framework from September 2011.



Vietnam

(Exchange rate: 1000 VND = 0.05 USD ; 1 USD = 20.000 VND)

RegulatorThe Ministry of Finance carries out the supervision of the insurance market including insurance and reinsurance companies, agents and brokers.(www.mof.gov.vn)

The insurance department became the Insurance Regulatory and Supervisory Administration (IRSA) in 2008.

Minimum Capital RequirementsAccording to Decree 46-2007-ND-CP and Circular 156-2007-TT-BTC the minimum legal capital required is set:

� for a non-life insurer, at 300b VND (15m USD), enabling a company to write all lines of business except aviation insurance, petroleum insurance, and satellite insurance; if it wishes to write one or all of these lines of business, an additional 100b VND (5m USD) must be paid up

� for a broker, at 4b VND (200,000 USD). Broking operations transacting both direct insurance and reinsurance must put up an additional 4b VND (200,000 USD) capital

Companies operating prior to the implementation date of Decree No 46/2007 that had capital less than the amount specified in the legislation have three years in which to raise it to the new level.

Following the introduction of the decree, more than 10 companies have applied for permission to increase their capital. Two per cent of the legal minimum capital must be deposited in a local bank as a security guarantee that may be drawn upon, with the permission of the Ministry of Finance, in situations of inadequate solvency. Charter capital is required to be fully paid up within six months of receiving the authorisation in principle to operate.

Solvency MarginThe solvency margin of an insurer is considered to be the difference between the value of assets and the debts payable at the time of calculation. The assets that may be taken into consideration are specified in Section V of Circular 156-2007-TT-BTC. Reinsurance ceded which fails to meet the minimum requirements laid down by the Insurance Regulatory and Supervisory Administration may not be brought into account.

In accordance with Article 16 of Decree No 46/2007, the minimum solvency margin of a non-life insurer is the greater of the following calculations:

� 25% of the total premiums retained at the time of the calculation, and

� 12.5% of the total primary insurance premiums plus reinsurance premiums at the time of the calculation.

For the purposes of calculating the solvency margin only liquid assets may be used. The minimum solvency margin must be met at all times.

Circular No 86/2009/TT-BTC added a new Paragraph No 4 to Section IV of Circular No 155-2007-TT-BTC, requiring that technical reserves and solvency margin be calculated by an “expert” and setting out the required qualifications for the figure. The person must be registered by the non-life company with the Ministry of Finance and copies of his or her qualifications must be provided.

Vietnam Page 1 | Original Edition | 1 September 2011

http://www.mof.gov.vn


Regulation on foreign ownershipForeign ownership is permitted, but has been carefully controlled, and often restrictions have been placed on operating licences to prevent the writing of selected classes of business. Following Vietnam’s accession to the WTO on 7 November 2006, however, these restrictions are being eliminated and with effect from 1 January 2008 the prohibition of foreign insurers writing obligatory insurances was lifted.

The Vietnamese government had announced that, within five years of its accession to the World Trade Organization, it would allow foreign insurers to open direct branches offering non-life insurance and the legislation permitting it has now been implemented.

IFRS Status The Ministry of Finance has issued a circular on 6 November 2009 on applying IAS32 Financial Instruments: Presentation and IFRS 7 Financial Instruments: Disclosures in financial statements from financial year 2011 onwards. No further guidance on other IFRS has been issued yet. However, some insurers have begun reporting their results according to IFRS (including IFRS 4 Insurance Contracts) on a voluntary basis.


Recent DevelopmentsThe Insurance Regulatory and Supervisory Administration is considering a move to Solvency II requirements but it is unlikely to take place in the near future.

From 1st July 2011, Vietnam’s insurance law has been amended in a bid to create a more open and competitive environment, However detailed regulations are still pending to be implemented.

The legislative changes seeks to codify some of the commitments Vietnam made before it was admitted into the WTO in 2007. Such commitments include allowing insurance companies the right to reinsure with overseas reinsurers without reinsuring a part with domestic entities.

However concerns have arisen with the new law, such as the need to tender for group or captive business instead of appointing from within the group. This has led to increased competition among insurers and lower profit margins.

Vietnam Page 2 | Original Edition | 1 September 2011


Contact Information

APAC Rating Agency Advisory

SingaporeDavid [email protected]

Greater ChinaSifang Zhang, CPA, [email protected]

Asia PacificRade [email protected]

JapanSoichiro [email protected]

About Aon Benfield

Aon Benfield, a division of Aon Corporation (NYSE: AON), is the world’s leading reinsurance intermediary and full-service capital advisor. We empower our clients to better understand, manage and transfer risk through innovative solutions and personalized access to all forms of global reinsurance capital across treaty, facultative and capital markets. As a trusted advocate, we deliver local reach to the world’s markets, an unparalleled investment in innovative analytics, including catastrophe management, actuarial and rating agency advisory. Through our professionals’ expertise and experience, we advise clients in making optimal capital choices that will empower results and improve operational effectiveness for their business. With more than 80 offices in 50 countries, our worldwide client base has access to the broadest portfolio of integrated capital solutions and services. To learn how Aon Benfield helps empower results, please visit aonbenfield.com.

Copyright 2011 Aon Benfield Inc.

This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Benfield’s preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. Aon Benfield disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Benfield reserves all rights to the content of this document.

APAC Analytics

Singapore George [email protected]

Greater ChinaCarole [email protected]

AustraliaBen [email protected]

JapanHideyuki.Yoshida+81.3.3237.6355hideyuki.yoshida@aonbenfield.com


Aon Tower, 201 Kent Street, Sydney NSW 2000 | Australiat: +61 2 9650 0200 | f: +61 2 9650 0210 | www.aonbenfield.com

Copyright 2011 Aon Benfield Inc.

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