Rapid pace of regulatory change in Asia
Peak Re is domiciled in Asia’s dynamic high-growth markets. The momentum of the region’s socio-economic and insurance market development is matched by a rapid modernisation of the regulatory landscape. This is particularly true for our home market Hong Kong as well as for Mainland China. The sophistication of insurance regulation and supervision will be of paramount importance for the region to sustain premium growth whilst maintaining market stability and promoting customer protection. A strong home regulator is critical for Peak Re’s ability to write business on a global scale.
Hong Kong’s adoption of Risk-Based Capital (RBC)
For the past three decades, Hong Kong has applied a rule-based capital adequacy regime for insurers, which is based on a predefined formula to determine the solvency margin requirement. In recent years, it has been recognized globally that the capital adequacy framework should take into account different risk factors of different insurers, and be conducive to enhancing the corporate governance, enterprise risk management (ERM) and public disclosure practices of insurers. The International Association of Insurance Supervisors (IAIS) – the global standard-setter for the insurance industry – has issued new Insurance Core Principles (ICPs) in relation to RBC requirements in late 2011. All insurance supervisors, including the Insurance Authority (IA) of Hong Kong, are obliged to comply with these new ICPs as soon as practicable. Hong Kong is implementing this in a multi-year effort with an objective of becoming fully in line by 2017. As a first step an Independent Insurance Authority has become introduced as of 1 January 2016. The new framework will be based on the ICP but be reflective of Hong Kong’s peculiar and highly diverse market structure. The framework will consist of the following three pillars, in line with the Solvency II concept in Europe:
- Pillar 1 – Quantitative requirements such as the consistent valuation of assets and liabilities, capital requirements, available capital and the quality of capital resources
- Pillar 2 – Qualitative requirements and supervision: Corporate governance, enterprise risk management (ERM) and own risk and solvency assessment (ORSA)
- Pillar 3 – Reporting requirements: Statutory reporting to the IA and public disclosure
Pillar 2 is generally considered to be particularly important as it includes minimum processes and procedures needed to identify, measure, monitor, manage and report risks, including their interdependencies. In addition, insurers need to produce risk tolerance statements and risk limits as well as a formal policy governing Asset-Liability Management (ALM). Furthermore, insurers will be required to conduct an ORSA which ‘links together the outputs of risk, capital and strategic planning to determine the current and future capital requirements of the insurer, having regard to its business strategy and the external environment’.
Regulatory sea change in China
Mainland China is arguably leapfrogging several stages of regulatory development in insurance as the market continues to display a remarkable growth momentum in all of the nonlife, life and health sectors. In 2014, the State Council (the central government cabinet) announced a strategic plan to boost insurance penetration (premiums as a share of GDP) to 5 percent, up from today’s 3 percent. Against this backdrop, the country’s insurance regulator rapidly developed the China Risk Oriented Solvency System (C-ROSS), a new three-pillar risk and solvency framework. Similar to Hong Kong’s proposed new framework, the new solvency capital regime will be more reflective of individual risk profiles and ERM program quality, with the latter being viewed vital to the sector’s future healthy development. Particular emphasis is being laid on Pillar 2. An insurer’s ERM quality can even impact the final minimum capital requirement.
Risk management as a strategic imperative
Risk-based capital requirements and effective risk management framework has been part of Peak Re’s DNA from the very beginning – and not simply in order to prepare for the earliest possible compliance with these widely anticipated regulatory changes. We rather embraced the principles of economic capital modelling (ECM) and ERM, based on its conviction that these are pivotal to making optimal pricing, underwriting, asset management and capital management decisions.
ECM is a powerful management tool to compare different options – should we grow our China property book or rather use our scarce capital to invest in Japanese bonds? – on a consistent basis in view of optimising the risk return profile of the company. However a model always remains just that – a model limited by the data and assumptions that go into it. This is why we put equal emphasis on judgement and expertise of our people.
It all starts with Peak Re’s risk culture. At the top it is evidenced by a combined experience of more than 120 years of the Company’s Board of Directors’ Risk Committee Members and a dedicated risk management function, currently led by our Chief Risk Officer, Eckart Roth, who has almost 25 years of experience. In addition, risk management processes and competencies are firmly embedded in key corporate functions such as underwriting, investment management and IT.
The CRO function cuts across the entire organisation and includes facilitating and continuously enhancing formalised risk appetite and tolerance limits. It takes charge of managing risk identification processes, such as developing risk registers leading into a risk map, and working with risk owners to ensure that key risks are identified and quantified in a consistent manner. Furthermore, it prepares a risk report for the quarterly Board Risk Management Committee meetings, develops hedging and other mitigation strategies for various risks in order to optimise the risk return profile of Peak Re. The ECM assesses solvency and capital needs and supports the implementation of capital based pricing tools. Monitoring compliance with regulatory and fiduciary requirements, supporting the rating processes and Internal Audit responsibility embed the function firmly in the day to day operation of the company.
Peak Re welcomes the regulatory evolution across the region. Rather than considering additional quantitative and qualitative supervision as an onerous compliance requirement, we recognise the opportunity to build a stronger industry with new opportunities for a strong reinsurer prepared to exploit them.
