Journey towards Hong Kong R”
Transcript of Journey towards Hong Kong R”
“Journey towards Hong Kong RBC”Panel Discussion
Joint Regional Seminar Hong Kong 2018
27 July 2018
Raymond Tam
Executive Director, Policy and Development Division
Insurance Authority
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Recap of the Proposed RBC Regime
Pillar 1Quantitative Aspects
Capital Resources
Capital Adequacy
Valuation Bases
Three Pillars
Pillar 2Qualitative Aspects
Own Risk and Solvency Assessment (ORSA)
Corporate Governance
Pillar 3Disclosures
Disclosure requirements(regulator)
Transparency(public)
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Enterprise Risk Management (ERM)
Guiding Principles on the RBC Development
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❖ Aligned with international standards and fit for purpose
❖ Foster risk culture and prudent risk management practices
❖ Promotion of industry stability, and healthy and sustainable development
❖ Protection of policyholders
❖ Maintain competitiveness of Hong Kong as a regional insurance hub
RBC Development - Pillar 1
Industry–wide consultation
- Industry Focus Groups (IFGs) with representatives from ASHK and HKFI
- Engage with professional bodies (e.g. HKICPA)
Three Quantitative Impact Studies (QIS)
- QIS 2 launching in Aug 2018
- Preparation of QIS 3 for 2019
Purpose of Quantitative Impact Studies (QIS) to gauge readiness of RBC and
collect industry-wide data for:• Valuation of assets and other liabilities
• Methodologies on deriving the best estimate of reserves, risk margin and
discounting for insurance obligations
• Calibration of risk charges for insurance, market, credit, catastrophe and
operational risks to determine the level of prescribed capital requirement and
minimum capital requirement
• Considerations of tiering and loss absorbency ability of capital resources4
RBC Development- Quantitative Impact Studies
• QIS 2 referenced to methodologies in ICS, Singapore, China, Solvency II and Bermuda, with ongoing considerations of local characteristics and competitiveness
• QIS2 to provide a full picture leading to the calculations of the Prescribed Capital Requirement (PCR); QIS3 allows for moderations and refinements based on Hong Kong business profile
• Balancing industry competitiveness and policy holder protection
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QIS 2 -Overall Prescribed Capital Requirement Framework
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Overall Prescribed Capital Requirement (PCR)
Market Risk
Interest Rate Risk
Credit Spread Risk
Equity Risk
Property Risk
Currency Risk
Life Insurance Risk
Mortality Risk
Longevity Risk
Life Catastrophe Risk
Morbidity Risk
Expense Risk
Lapse Risk
General Insurance Risk
Premium Risk
Claims Reserve Risk
GI Catastrophe Risk
Counterparty Default Risk
Operational Risk
Step 2 –
Diversification
among risk
modules
Step 1 –
Diversification
among sub-
risk modules
QIS 2 -Insurance Contract Measurement
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Classification and measurement
• Lines of business classified based on risk-types
• Contract boundary defined for cash flow projections
• Bundling / Unbundling
Valuation
• Best estimate (current estimate)
• Risk Margin (75th percentile confidence level in QIS2)
• Discount rate by major currencies
• Valuation of options and guarantees
Continuous Industry Engagement on RBC
• Continual engagement with IFG / Working Group
– Topical discussions
– Technical papers
• Q&A process
– Consistent understanding across industry
– Support to individual insurers where needed
• Consultation with stakeholders
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RBC Development - Pillar 2
New Guideline on ERM and ORSA for consultation from May to July 2018.
To enhance enterprise risk management (ERM) with a goal to identify, measure, report and manage risks on a continuous basis and in an integrated manner
To establish an Own Risk and Solvency Assessment (ORSA) process and reporting to assess from time to time the adequacy of its risk management and current, and likely future, solvency position.
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Background of the ERM Guideline
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➢ Insurance Core Principles (ICPs):➢ ICP 8 Risk Management and ICP 16 Enterprise Risk Management for
Solvency Purposes to have explicit ERM and ORSA requirements forming the integral parts of the RBC regime
➢ International practices
➢ Outcome from the Industry Focus Groups to identify best risk management practices of the industry
Objective and Approach of ERM Guideline
❑ Nurture a strong risk culture, reflected in business behavior
❑ Encourage a holistic approach towards ERM
❑ Level of sophistication commensurate with nature, scale and complexity of the insurer and the risk it faces
❑ Principle-based approach, and flexibility for compliance with due regard to insurer-specific circumstances
❑ Comply-or-explain supervisory approach to encourage efficient risk governance outcomes
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(a) Establishing an ERM framework with sufficient governance to ensure safe and sound operations;
(b) Setting a risk appetite framework that is supported by clear and well-documented risk limits and risk management policies and procedures;
(c) Encompassing regular activities of risk identification, risk quantification, risk monitoring and reporting, and management review and actions;
(d) Review of the ERM framework regularly in tandem with a robust feedback loop mechanism to ensure continued effectiveness of the framework; and
(e) Performing regular Own Risk and Solvency Assessment (“ORSA”) andthe approval at Board or Risk Committee level.
(f) Annual submission of the ORSA Report to the IA
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Key requirements of ERM Guideline
Overview of ERM Framework
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The Board of Directors and Senior Management have the responsibilities for establishing, overseeing, and implementing an effective ERM framework.
ENTERPRISE RISK MANAGEMENT (ERM) FRAMEWORK
Own Risk and Solvency Assessment
(ORSA)
ERM Policies and
ProceduresRisk Appetite Statement
ERM Framework Review
Risk Assessment and Control Process
Assessment of Current &
Future Solvency
and Liquidity
Risk Identification
Risk Quantification
Risk Monitoring & Reporting
Risk Management
Governance
Busi
nes
s
Own Risk and Solvency Assessment (ORSA)
ORSA is part of the regular cycle of risk assessment :
• Allows the Board and senior management of insurers to anticipate the key risks and capital needs from a prospective view on regulatory and economic capital, capital resources and target capital level
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Pillar 3 (Disclosure and Transparency)
On Pillar 3 covering disclosure to public and statutory reporting :
• IA will kick start the Pillar 3 work in the second half of 2018
• Industry consultations – 2019/2020
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The Journey towards RBC goes on…
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2017
QIS 1
(Completed)
QIS 2
(Work-in-progress)
Target on consultation on detailed rules
Target on implementation of Pillar 2 requirements
Pillar 1
Pillar 2
-----------------------------------------------------------------------------------------------------------------------------------------------------------------Issued the draft Guideline on ERM for consultation in early-May 2018
Legislative preparation Long run-in period
2022+2018 2019 2020 2021
IA to analyze QIS IA to analyze QIS
QIS 3
IA to analyze QIS
Finalizing the Guideline by end-2018
---------------------------------------------------------------------------------------------------------------------------------------------------------------Pillar 3
Conduct study Consultation with industry
Insurers to make preparations for RBC Pillar 1 implementation