Solvency II goes global 22 June 2012
Solvency II, even before it goes live, is having an impact far beyond the 30 European countries it applies to. Three countries have applied for equivalence with the EU regime, eight others are interested in the transitional equivalence provisions and other countries are adopting some of the principles of Solvency II, as Lorna Davies reports.
First wave of equivalence Bermuda, Japan and Switzerland are the three markets in the first wave of Eiopa's equivalence assessments. Bermuda
The European Insurance and Occupational Pensions Authority (Eiopa) has completed its on-site assessment of Bermuda's regulatory regime and found it to be broadly equivalent to Solvency II -with some caveats. The primary caveat for the commercial sector was the need for an economic balance sheet. The Bermuda framework uses GAAP as the basis for accounting and the Bermuda
Monetary Authority has said it expects to use this with the addition of prudential filters for the economic balance sheet. A consultation paper is expected in the first half of 2012. Japan
Japan is only being considered for equivalence under article 172 of the directive covering reinsurance supervision. Japan's Financial Services Agency (JFSA) rolled out its revamped solo solvency requirements and new group solvency requirement in March 2012. "Eiopa's recommendation to the Commission (on Japan reinsurance equivalence) was generally positive so we eagerly await the Commission's final decision on it," says Kuni Kawasaki, London liaison for industry and government affairs, corporate planning department, Mitsui Sumitomo Insurance. "On the remaining two areas (group supervision and group solvency), JFSA has not made any official comments as to where they stand," he added. "We, the Japanese general insurance industry, want to pursue it of course, but FSA has remained silent on the matter." JFSA also underwent the International Monetary Fund's financial sector assessment programme in the summer of 2011 and, according to Kawasaki, a final report on this should be out soon. "They [the JFSA] are currently looking to formally introduce ORSA [own risk and solvency assessment] requirements and are active in the International Association of Insurance Supervisors (IAIS), working on the G-SII [globally systemically important insurers] selection process and ComFrame," he says. Switzerland
Switzerland is the third country being assessed for equivalence with Solvency II criteria. The country's own solvency rules -- the Swiss Solvency Test (SST) -- were fully implemented last year and companies not adhering to them may be sanctioned. However, the Swiss Financial Market Supervisory Authority (FINMA) is looking to update aspects of the SST this year. FINMA has completed 31 internal model reviews from 70 submissions in the last 18 months. About 25% of the model applications have been unconditionally accepted, 50% have been conditionally accepted and 25% have been rejected.
Transitional equivalence provisions Eight regimes have expressed interest in being covered by the transitional provisions for equivalence with Solvency II - Australia, Chile, China, Hong Kong, Israel, Mexico, Singapore and South Africa. Australia
Insurers in Australia are in the process of preparing for the new life and general insurance capital standards (LAGIC), which are due to be released later this year and come into force on 1 January 2013. The Australian Prudential Regulation Authority (APRA) announced a capital framework overhaul in 2009, and said it is "watching [Solvency II] closely and assessing our own capital and other requirements against Solvency II", but APRA has said it doesn't want to take an "off-theshelf" approach to Solvency II. LAGIC, like Solvency II, has a three-pillar approach and is expected to increase capital requirements. It will include the internal capital adequacy assessment process (ICAAP) which is similar to Solvency II's ORSA. Australia has already undertaken two QISs. Chile
A draft of a new risk-based monitoring system -- based on Solvency II and other international practices -- was submitted to the Comisión de Hacienda de la Cámara de Diputados on 28 September 2011. Changes in the law include a new requirement for risk-based capital, a system for assessing and measuring the solvency of insurers and a new investment regime. Later in 2012, the Chilean securities and insurance regulator SVS aims to develop standard formulas to be used under the new supervision model. China
The China Insurance Regulatory Commission (CIRC, China's insurance regulator) has spoken about the importance of managing the capital strain of new business. KPMG has said it is "anticipating changes" to the current regulatory solvency capital standards to a more risk-based approach in the medium-term; the current approach is similar to Europe's Solvency I regime. Hong Kong
Hong Kong is going through internal regulatory changes - The Office of the Commissioner of Insurance (OCI), may be replaced by an Independent Insurance Authority (IIA) by 2013. In the meantime, the OCI is taking note of the Insurance core principles (ICP) of the IAIS and other overseas developments, and aims to align Hong Kong with international practice. However, the regulator is keen to stress that any proposed changes will be implemented only after a market assessment, and it has no intention of simply copying other jurisdictions. Israel
Israel is aiming to develop a Solvency II-type regime, although it is one or two years behind Europe. A key issue for Israeli insurers is the development of natural catastrophe scenarios, as earthquakes are quite common and the industry is collaborating with universities and the EU to design its own models. It is expected that initially few insurers in Israel will use an internal model for calculating capital, save for some international subsidiaries, as the regulator does not have the resources to assess the models in detail. Mexico
In 2007, Mexico's insurance watchdog, the Comisión Nacional de Seguros y Fianzas (CNSF), said it was preparing a work plan to move towards Solvency II. The plan has three pillars and will encourage insurers to adopt a risk-based approach. It has been reviewed by the ministry of finance and was passed by congress in September 2011. Key changes are in the determination of a company's liabilities -- mainly those related to technical provisions and solvency capital requirements -- and disclosure requirements. Singapore
The Monetary Authority of Singapore (MAS) is likely to supplement its existing risk management guidelines on core insurance activities with additional guidelines on enterprise risk management, based on a review of the IAIS ICPs and other overseas initiatives such as Solvency II, according to a report from KPMG. An ORSA consultation paper is expected to be released this year. South Africa
South Africa is developing a regime based on Solvency II, called Solvency Assessment and Management (SAM). According to the Financial Services Board (FSB), SAM will share the same broad features as Solvency II: being principles-based with a three-pillar structure and using an economic balance sheet. However, the FSB is keen to ensure that South Africa's regime reflects the characteristics of the domestic industry.
Countries adopting some features of SII Many other major economies are reviewing their solvency regulations and some are expected to share key features of Solvency II. Argentina
In May 2010, Argentina's insurance regulator, SSN, asked insurance companies and consultants for their thoughts about the possibility of implementing Solvency II. It has not yet issued any solvency standards comparable to international regulations, but has set requirements governing minimum capital and internal controls for accounting purposes. Brazil
Minimum capital standards for insurers in Brazil were established by the regulator, the National Council of Private Insurance, in 2006. The minimum capital requirement comprises an amount of base capital plus a variable amount of additional capital. Towers Watson says another supervisory body, SUSEP, aims to align Brazilian regulations with best international practices and adds that "solvency regulations in Brazil are expected to follow those in Europe." Canada
Canada is not seeking equivalence with Solvency II but, according to KPMG, its regulatory framework already has many elements in common with the EU rules. The Canadian regulator, the Office of Supervision of Financial Institutions, has introduced changes to the existing capital rules which KPMG says could increase capital requirements for some insurers but reduce them for others.
India
The Insurance Regulatory and Development Authority has introduced a number of reforms in recent years including regulation on investments that insurance companies can make, risk management guidelines and treatment of customers. The regulator is also calling for companies to establish a risk management committee with direct access to the board and to appoint a chief risk officer. Indonesia
The Indonesian regulator is currently studying the newly adopted IAIS ICPs. According to KPMG, there is also speculation in the market that the regulator may impose tighter controls on risk management and investments. Korea
Korea's insurance regulator, the Financial Supervisory Service, has a regime based on three pillars: risk-based capital (RBC); a risk assessment and application system; and risk disclosure. The RBC regime was introduced in 2009 and efforts are underway to enhance the internal assessment of risk by encouraging the development of internal economic capital models, including regulatory model qualification and approval standards. Further enhancements to RBC and internal models are expected to be similar to the requirements of Solvency II. Malaysia
Malaysia introduced an RBC regime for conventional insurers in 2009, and is planning on expanding this for Takaful (an Islamic insurance concept) in one to two years' time. New Zealand
The insurance sector in New Zealand is working on a regulatory overhaul while also dealing with the impact of the Christchurch earthquake of 2011. In September 2010, the Insurance (Prudential Supervision) Act replaced the Insurance Act of 1908, and the Reserve Bank of New Zealand, the insurance regulator, required provisional licence applications to be in place by 7 March 2012 in order for companies to continue writing new business. Insurers will need to obtain full licences by 7 September 2013. A more focused and frequent compliance process, with enhanced solvency standards, is expected, says KPMG.
Taiwan
The Taiwanese insurance regulator, the Insurance Bureau, has said it is studying Solvency II, as well as other risk-based solvency regimes. Thailand
Thailand has a new risk-based capital regime - introduced in September 2011 - but the floods which hit in the second half of last year resulted in many insurers not meeting capital standards. It is expected that there will be further capitalisation of the industry and possible consolidation of the 70 non-life insurers in the market. No changes are expected to the regulatory framework until 2015. Turkey
Turkish insurers are currently regulated by Solvency I and the country's domestic regulator is keen for local insurers and reinsurers to sign up to Solvency II in order to bring the insurance industry into line with the EU. As is the case for Israel, one of the more challenging parts of the process for the Turkish regulator will be the treatment of catastrophe risks, particularly how the catastrophe scenarios for Turkey will be designed and how partial internal models will be developed. Few Turkish insurers are expected to use internal models initially. US
National Association of Insurance Commissioners (NAIC) president, Kevin McCarty, has said the US is not going through a formal equivalence process with Solvency II. But Eiopa is working with both the new Federal Insurance Office and the NAIC to find a way to address the needs of both markets. A transitional period of six years for equivalence to be agreed has been suggested by members of the European Parliament in the Omnibus II draft. Capital requirements in the US have been risk-based for more than 10 years but the NAIC has embarked on a wide-ranging Solvency Modernisation Initiative covering areas such as group supervision, the ORSA and governance. All major policy decisions on this are expected to have been taken by the end of 2012. Some individual states have already moved to ease restrictions on foreign reinsurers.
