Summary of technical specifications for QIS 1 · PDF file · 2015-07-23Summary of technical specifications for QIS 1 April 2014 Singapore RBC 2 Review . ... discount rate used for

Summary of technical specifications for QIS 1

April 2014

Singapore RBC 2 Review

Section or Chapter title

1 | Summary of Technical Specifications for QIS 1 Singapore RBC 2 Review



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The Monetary Authority of Singapore (MAS) recently

issued a second consultation paper on the review of the

Risk-Based Capital framework for insurers in Singapore

(RBC 2). This paper was issued together with the detailed

technical specifications required for insurers to conduct a

Quantitative Impact Study (QIS 1).

Insurers are expected to conduct QIS 1 based on data with

the valuation date of 31 December 2013, with results for

Scenarios 1 and 2 due by 30 May 2014 and results for

Scenario 3 by 30 June 2014.

The MAS expects to finalize the risk calibration and

features of the RBC 2 framework by the end of 2014,

with likely implementation from 1 January 2017.

Key observations and challenges The second consultation paper contains 43 proposals and

16 consultation questions. Key changes and challenges

include:

• Gradual phaseout of the Long-Term Risk Free Discount

Rate (LTRFDR): The impact of using market yield curves

will depend on how the market for the 30 year

Singapore Government Securities (SGS) develops over

the next five years and the future interest rate

environment.

• Introduction of a matching adjustment: It will provide

relief to insurers, but significant efforts will be required

to demonstrate its applicability. For products where this

is not applicable, RBC 2 does not provide any

smoothing mechanism. As such, the volatility of the

capital charge due to interest rate changes may be

high, leading the industry to reconsider its investment

strategy and risk appetite.

• Revision of risk modules and sub-modules: Risk charges

have been calibrated on a 99.5% VaR basis. Some of

charges are new (e.g. operational risk charge) and

some are significantly higher than the current ones.

However, diversification benefit is included. Insurers

should consider ways to optimize risk adjusted return

via different investment and product strategies.

• Treatment of negative reserves: Insurers will benefit

from in the available capital calculation through the

inclusion of a portion of negative reserves as an off-

balance-sheet item.

• Treatment of available capital: RBC 2 intends to align

the classification of capital instruments (tiering) on the

banking rules. This might lead insurers to review their

current resources and reconsider their financing

options. This could result in higher price and lower

return on capital in the future.

• Internal reinsurance: For QIS 1, insurers cannot take

credit for reinsurance arrangements between related

entities. This could lead the head office or insurers to

review their internal and external reinsurance programs

in order for the branch/subsidiary to receive credit

for it.

• Inclusion of certain reinsurers’ business under RBC 2:

The MAS has proposed that the Offshore Insurance

Fund (OIF) of locally owned locally incorporated

reinsurers be subject to full RBC 2 requirements.

Appropriate transitional arrangements will be provided

for affected reinsurers.

• Intervention level: The MAS proposes two solvency

intervention levels: Prescribed Capital Requirement

(PCR) and Minimum Capital Requirement (MCR). If

capital falls below the PCR, an undertaking has three

months to restore it. Practically, the companies need to

integrate into their Enterprise Risk Management (ERM)

framework a recovery plan, management actions and

processes to anticipate such stress scenarios.

• Updates for general insurance: The MAS and the

industry are still working on the development of the

non-life catastrophe risk module.

Key considerations for insurers and reinsurers

Insurers need to consider the implementation issues

for carrying out detailed QIS 1. In particular, insurers

should consider required efforts and resourcing of

the following:

• Sourcing of information for the matching

adjustment calculation

• Modeling implementation issues for calculating

certain items such as C1 risk charges, credit

spread risk charges and negative reserves

• Setup of spreadsheet calculations to calculate the

diversified capital requirements at both fund and

company level

• Reclassification of available capital to align it with

the tiering requirements

• Completion of QIS templates along with

preparation of a consultation response

• Discussion with management and the board on

the possible implications of the RBC 2 proposals

Introduction




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The valuation of policy liability is proposed to be carried

out in a similar way to current processes under RBC except

that certain investigations will be carried out in QIS on the

use of a different discounting approach. In addition,

insurance companies will be allowed to use a matching

adjustment to increase the valuation discount rate for

certain portfolios meeting the required conditions.

The MAS has proposed two solvency intervention levels:

• Prescribed Capital Requirement (PCR) calculated at

99.5% VaR

• Minimum Capital Requirement (MCR) calculated at 90%

VaR and expressed as a fixed percentage of PCR

Both PCR and MCR will be applicable at both the fund and

company level.

Insurers are expected to conduct QIS 1 based on the

valuation date of 31 December 2013. The three scenarios

to be tested are shown in the table below.

Scenario RBC 2 proposals Relevant for

Discount rate (≥30 years)

Matching adjustment

Others changes

Scenario 1 Weighted average*

No Apply All insurers

Scenario 2 Market yield of 30-year SGS

No Apply Insurers who discount liabilities

Scenario 3 Weighted average*

Yes Apply Insurers writing par and/or nonpar

*A weighted average of existing LTRFDR and the market yield of the 30-

year SGS

Life insurance RR

General insurance RR

C1 Insurance

Policy liability RR

Premium liability RR

Claims liability RR

C3 Asset concentration

Equity investment

RR

Interest rate mismatch RR

C2 Asset

Credit spread RR

Property investment RR

Foreign currency

mismatch RR

Counterparty default RR

Mortality (non-annuity) RR

Mortality (annuity) RR

Conversion of options RR

Insurance catastrophe RR

C4 Operational

Disability RR

Dread disease RR

Other insured events RR

Expense RR

Lapse RR

Insurance catastrophe RR

Surrender value condition RR

RBC2 risk modules for PCR calculation

New risk modules

Av

aila

ble

ca

pit

al

Policy liability

MCR

Free surplus

Ass

ets

PCR

CET1

AT1

T2

Adjustments

Overview of RBC 2 and QIS 1



Valuation of assets and liabilities


Authors Name


The MAS has proposed to change the valuation framework

for solvency purposes in two key ways:

i. Via the discounting approach for policy liabilities

ii. Introduction of a matching adjustment

Discounting approach for policy liabilities The MAS has proposed to phase out the use of Long-Term

Risk-Free Discount Rates (LTRFDR) for liabilities

denominated in Singapore dollars (SGD) of duration 30

years or more over the next five years.

(a) For life business

Under QIS 1, insurers are required to change the risk-free

discount rate used for SGD denominated liabilities, as

outlined in the following chart:

For Scenarios 1 and 3, the specific discount rate is

calculated using the weighted average of X% of the existing

LTRFDR under the current RBC regime and Y% of the

market yield of the 30 year SGS, where X and Y are

specified in the following table.

For Scenario 2, the discount rate to be used for liabilities

with durations of 30 years and above is the market yield of

the 30 year SGS.

(b) For general business

Under QIS 1, no discounting is required for liability

duration of above one year if the impact is immaterial.

However, if an insurer decides to perform discounting, the

same approach as (a) will be adopted.

Introduction of a matching adjustment (MA) The MAS intends to introduce a MA mechanism to the risk-

free discount rate used in valuing life insurance policy

liabilities where the liability cashflows can be predicted

with reasonable certainty. The objective is to reduce the

volatility of an insurer’s solvency position to market

movements.

Insurers are required to consider the conditions laid out in

Annex A of the second consultation paper before MA can

be applied. The MAS has issued a workbook to help

insurers select eligible products and perform the MA

calculation.

Once MA is applied to a portfolio of products, such

treatment cannot be reversed. In the event that the

conditions for MA no longer apply, insurers will be given

three months to restore compliance. The reinstatement of

MA can take place only after 24 months.

The MA will be applied as a parallel shift to the entire risk-

free yield curve for a portfolio of matched assets and

liabilities of products denominated in SGD or USD. The

formula for MA is as follows:

MA = Yield to maturity of actual bond portfolio – weighted

average liability discount rate – spread for default

and downgrade

Insurers should note that C1, C2 (except for credit risk

module ), C3 and C4 requirements are to be computed

assuming that MA does not apply.

Overall, insurers in general are not expected to face

major difficulties in incorporating the proposed

discounting approach for policy liabilities. However,

the impact of using 30 year market yield curve will

depend on how well the market for the 30 year SGS

will build up in the next five years and on the future

interest rate environment. The impact may well be

bigger for insurers with long-term liabilities, e.g.

whole life and annuity.

Duration of a liability

A B Apply

≤ A 20 - Market yield of SGS of matching duration as at valuation date

> A and < B 20 30 A yield that is interpolated from market yield of X-year SGS and a specific discount rate

≥ B - 30 A specific discount rate

Valuation date X% Y%

31 December 2013 90% 10%

31 December 2014 70% 30%

31 December 2015 50% 50%

31 December 2016 30% 70%

31 December 2017 10% 90%

31 December 2018 and beyond 0% 100%

From our experience with Solvency II, demonstrating

predictable cashflows and ring-fencing of assets and

liabilities for MA purposes would have its own

challenges. It is likely that diversification benefit with

other funds may not be allowed for portfolios where

MA applies, as they will be ring fenced.




Authors Name


The MAS has proposed to align the capital framework to be

in line with the framework for banks. As a result, the MAS

has proposed the following amendments to the available

capital:

i. Classification of current Tier 1 capital into Common

Equity Tier 1 (CET1) capital and Additional Tier 1

(AT1) capital

ii. Transitional requirements

iii. Allowance of negative reserves as a positive

regulatory adjustment

iv. Changes to the calculation of reinsurance

adjustments

v. Reclassifying the allowance for provisions for non-

guaranteed benefits as a regulatory adjustment

CET1 and AT1 CET1 capital comprises all Tier 1 capital under the current

framework except the approved Tier 1 capital, which will

now be classified as AT1 capital.

The MAS further proposes to do away with the approval

regime for insurers planning to issue AT1 and Tier 2 capital

instruments that meet the criteria set out in Sections 3 and

4 of Annex C of the consultation paper.

Minimum floors on CET1 and Tier 1 capital The MAS has proposed minimum floors on CET1 and Tier 1

capital as a percentage of the total risk requirements of

insurance funds excluding the participating funds:

• The total CET1 must not be lower than 65%

(only for licensed insurers in Singapore)

• Total Tier 1 Capital must not be lower than 80%.

AT1 capital will have the principal loss absorption feature,

meaning that they will either be converted into equity or

written down upon a significant breach of CET1 capital

(defined as 70% of total risk requirement excluding

participating fund).

Transition arrangements Preapproved capital instruments not meeting the new

criteria will be recognized up to 90% at the RBC

implementation, reducing by 10% every year.

Treatment of negative reserves The MAS has proposed to allow part of the negative

reserves to be recognized as a regulatory adjustment in

the calculation of available capital for solvency purposes

only, noting that it will be an off-balance-sheet item.

The amount of negative reserves to be allowed will be

calculated after applying insurance stresses as per the C1

risk charge calculation and will be adjusted by the following

factors:

Reinsurance adjustments For QIS 1, the MAS has asked insurers not to recognize the

reinsurance arrangement between a head office and its

Singapore branch and between an insurer and its

downstream entities.

For general insurance, the MAS proposed to include claim

liabilities in the reinsurer’s share of liabilities to calculate

reinsurance adjustments.

The MAS also proposed to remove the licensing status of

reinsurance counterparty from adjustment formula. The

new reinsurance adjustment table is as follows:

Allowances for provisions for non-guaranteed benefits (APNGB) The MAS proposed to reclassify APNGB as a form of

regulatory adjustment to the available capital, rather than

one of the components along with Tier 1 and Tier 2 Capital.

Allowance of negative reserves in the available

capital provides a relief to insurers (especially the

ones with large portfolio of unit linked business and

some forms of protection business) in meeting

solvency requirements. However, the approach

adopted for the calculation of negative reserves is

expected to be under greater scrutiny from the MAS.

Insurance fund Percentage (%)

Participating 50

Non-participating 50

Investment-linked 25

Rating Default risk charge

AAA 0.5%

AA- to AA+ 1.0%

A- to A+ 2.0%

BBB- to BBB+ 5.0%

BB- to BB+ 10.5%

B- to B+ 20.0%

CCC+ and below 48.5%

Available capital




Authors Name


Component 1 (C1) requirement (a) For life business

The MAS has recalibrated the risk requirements using the

VaR measure of 99.5% confidence level over a one year

period. The MAS has determined the new risk factors and a

correlation matrix by performing statistical analysis on

Singapore data and checking against results generated by

other jurisdictions (e.g. Solvency II) and industry studies.

(b) For general business

The factors and methodology to derive C1 risk requirement

remains the same as specified in the Insurance (Valuation

and Capital) Regulations 2004. This will change once the

catastrophe risk has been defined, probably post RBC 2

implementation.

Modeling implementation needs to be considered for

calculating the C1 risk charges separately and

applying the correlation matrix. Some out-of-model

calculations may be required.

C1 risk requirement (RR) Old factor (current RBC regime) New factor (QIS 1)

Mortality (non-annuity) 125% of rates in prescribed mortality standard table for the full policy duration in which premium rates are guaranteed; 112.5% of BE mortality rates otherwise

120% of BE mortality (non-annuity) rates

Mortality (annuity) 100% of rates in prescribed standard table for annuities with a five year setback

75% of BE mortality (annuity) rates

Disability 125% of BE disability incidence rates for the full policy duration in which premium rates are guaranteed; 112.5% of BE disability incidence rates otherwise

120% of BE disability incidence rates

Dread disease and other insured events (accident and health)

140% of BE DD incidence rates for the full policy duration in which premium rates are guaranteed; 120% of BE DD incidence rates otherwise

140% of BE DD incidence rates if premium rates are guaranteed for full policy duration; 130% of BE DD incidence rates if premium rates are not guaranteed for full policy duration

Lapse The higher policy liability value produced from either 75% of BE lapse rates or 125% of BE lapse rates

The higher policy liability value produced from either 50% of BE lapse rates or 150% of BE lapse rates

Conversion of options The higher policy liability value produced from either 90% of BE conversion rates or 110% of BE conversion rates

The higher policy liability value produced from either 50% of BE conversion rates or 150% of BE conversion rates

Expense 110% of BE of future experience for all years 120% in first year and 110% thereafter of BE of future experience

Insurance catastrophe None One-year mortality shock: +0.5 death per 1,000 to mortality rates across all ages One-year morbidity shock: +40 hospitalization claims per 1,000 to rates across all ages

Correlation matrix Mortality Mortality Other insured

events Dread disease

Catastrophe risk

(non-annuity) (annuity) Mortality risk Morbidity risk

Mortality (non-annuity) 1 -0.25 0.5 0.5 0.25 0.75

Mortality (annuity) -0.25 1 0.25 0.25 0 0.25

Other insured events 0.5 0.25 1 0.5 0.75 0.5

Dread disease 0.5 0.25 0.5 1 0.5 0.25

Catastrophe risk Mortality risk 0.25 0 0.75 0.5 1 0.75

Morbidity risk 0.75 0.25 0.5 0.25 0.75 1

Required capital



Component 2 (C2) requirement The MAS has proposed to remove debt investment and

duration mismatch risk requirements and replace them

with interest rate mismatch risk requirement and credit

spread risk requirement. Further it has combined the

counterparty risk requirements for different asset classes

into one single module. According to the MAS, any

potential diversification benefit between different risks has

been implicitly allowed for in risk calibration. In QIS, C2 can

be assumed fully independent of C1.

C1 and C2 risk charges have been calibrated on a

99.5% VaR basis, and some of them are significantly

higher than the current charges. However,

diversification benefit is proposed to be included.

Insurers should consider investment and product

strategies to optimize the risk adjusted return.

C2 risk requirement (RR) Approach Factor

Equity investment risk requirements

Apply risk factors to the market value of each equity exposure, and sum up the total risk requirements. The MAS is consulting industry on the allowance of countercyclical adjustment to equity stress.

Interest rate mismatch risk requirements

Calculate NAV from interest rate sensitive assets and liabilities in both upward interest rate scenario and downward interest rate scenarios; the larger of the reduction in NAV is the risk requirement.

• Upward adjustment(%): 100% - 30% for durations from 3M to 20Y+

• Downward adjustment(%): 70% - 30% for duration from 3M to 20Y+

• All absolute changes in interest rates are capped below 200 basis points.

Credit spread risk requirements Note: Also applicable to debt securities issued by governments or central banks that have a credit rating lower than “A-”

1. For assets, apply bps credit spread adjustment to yield curve, and calculate the reduced security values

2. For liabilities, apply revised Matching Adjustment (“MA”) to risk free discount rates used in valuing liabilities, and calculate the reduced liabilities

3. The change in NAV is the credit spread risk requirement

Short term ratings (by outstanding maturity term): • 140 – 580 basis points for rating from A1+ to B and below

Long term ratings (by outstanding maturity term):

• Up to 5 years: 140 – 580 basis points for rating from AAA to B+ and below

• Between 5 to 10 years: 130 – 540 basis points for rating from AAA to B+ and below

• More than 10 years: 100 – 490 basis points for rating from AAA to B+ and below

Property investment risk requirements

Includes all property investments. Apply risk factors to the market value of each property.

Immovable property for both investment and self-occupied purpose: 30% Collective real estate investment vehicles: 35%

Foreign currency mismatch risk requirements

Formula remains the same, except for the removal of 10% concession for SIF.

Foreign currency mismatch risk charge: 12% SIF concession: 0% OIF concession: 20%

Counterparty default risk requirements

Apply risk factors to each counterparty exposure and sum up total risk requirements. For facultative reinsurance business, the table is applicable only for one year or less; 100% risk charge for over one year. For treaty reinsurance business, the table is applicable for two years or less; 100% risk charge for over two years.

Treatment of collective investment schemes (CIS)

Look through each asset class in the collective investment schemes. Under current RBC, it is just limited to CIS for debt securities.

If look through approach is not chosen, a 50% charge will be applied.

Treatment of structured products Look through approach will be required. We note that credit spread stress are higher than those for corporate bonds.

Equities listed in Singapore and developed markets 40%

Equities listed in other markets 50%

Unlisted equities (including private equity and hedge funds)

60%

Rating Default risk charge

AAA 0.5%

AA- to AA+ 1.0%

A- to A+ 2.0%

BBB- to BBB+ 5.0%

BB- to BB+ 10.5%

B- to B+ 20.0%

CCC+ and below 48.5%

Required capital (cont’d)



Component 3 (C3) requirement For QIS 1, there is no change from the Insurance

(Valuation and Capital) Regulations 2004.

Component 4 (C4) requirement

This is a new risk module proposed for the RBC 2

framework. For each insurance fund, the operational risk

requirement is computed as:

X% of the higher of the past three years’ averages of

• Gross written premium income

• Gross (of reinsurance) policy liabilities

where X = 4% (except for investment-linked business,

where X = 0.25%)

C4 risk charge is capped to 10% of the total risk

requirements (after diversification benefit and excluding

operational risk requirement) of the same fund. The MAS

may refine this approach in the future.

Diversification benefit for PCR calculation Some diversification benefits are explicitly allowed as

follows:

• In C1 risk charge calculations at the fund level

• Between C1 risk charge and C2 risk charge at the

fund level

• Between funds (excl. par fund) for interest rate

mismatch risk requirement

The C3 and C4 requirements are not considered in the

calculation of the diversification benefit.

Prescribed Capital Requirement and Minimum Capital Requirement These two new solvency intervention levels are different

from the existing financial resources warning event (CAR

below 120%) and minimum CAR requirement at 100%.

Under the PCR, insurers are required to hold

sufficient financial resources to meet the total risk

requirements that correspond to a VaR of 99.5%

confidence level over a one-year period. The total risk

requirements under the PCR are determined as

By concept, MCR correspond to a VaR of 90% confidence

level over a one-year period. The MAS will calibrate the

MCR level after reviewing the results of QIS 1. It is likely

that the MCR will be calibrated as a fixed percentage of the

PCR for ease of computation and future monitoring.

Insurers are not expected to be facing major

difficulties in incorporating the calculation of C4. The

percentage factors applied in the C4 formula seem to

be in line with Solvency II requirements, while the cap

seems to be lower.

C12 + C22 + C3 + C4.

There will be modeling implications with the

calculation of PCR, in particular on the diversification

benefits. The PCR formula is largely in line with the

Solvency II approach in that diversification benefits

between asset and insurance related risks are

recognized. Further, similar to Solvency II,

participating funds are ring fenced and no

diversification is allowed with this fund.

Required capital (cont’d)



For more information or support, please contact:

Jonathan Zhao

Asia Pacific Insurance Leader

and Head of Actuarial Services

+852 2846 9023

[email protected]

Sumit Narayanan

Partner

+65 6309 6452

[email protected]

Ranjit Jaswal

Partner

+852 2849 9468

[email protected]

Patrick Menard

Partner

+65 6309 8978

[email protected]

William Liang

Associate Director

+65 6309 6634

[email protected]

Abhishek Kumar

Associate Director

+65 6309 6895

[email protected]

EY contacts

Glossary

Abbreviation Definition

MAS Monetary Authority of Singapore

RBC Risk-Based Capital

QIS Quantitative Impact Study

LTRFDR Long-Term Risk Free Discount Rate

SGS Singapore Government Securities

PCR Prescribed Capital Requirement

MCR Minimum Capital Requirement

VaR Value at Risk

ERM Enterprise Risk Management

SGD Singapore dollar

OIF Offshore Insurance Fund

MA Matching adjustment

RR Risk requirement

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Summary of technical specifications for QIS 1 · PDF file · 2015-07-23Summary of technical specifications for QIS 1 April 2014 Singapore RBC 2 Review . ... discount rate used for