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Preparing for a sea change in Asia’s insurance landscape

ALM & Regulatory Capital Strategist Francisco Sebastian and Insurance Strategist Max Davies discuss the shifting regulatory environment for Asia’s insurance industry and propose solutions that may help Asian insurers adapt accordingly.

The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

THE 21ST CENTURY HAS BEEN BILLED BY MANY AS THE “ASIAN CENTURY”, GIVEN THE REGION’S TREMENDOUS GROWTH POTENTIAL. Much like other industries, the insurance sector in Asia is subject to significant change, fuelled by an expanding middle class, rapid digitalisation and persistent downward pressure on global interest rates. We believe these structural macro changes, when combined with a shifting regulatory backdrop, mean that Asian insurance companies will need to adapt their business models and investment portfolios to capture the exciting opportunities the region has to offer.

The emerging Risk Based Capital (RBC) frameworks bear a strong resemblance to the prudential regulations that have been applied in Europe, notably Solvency II. As such, the experience to date in Europe can be instructive in helping Asian insurers to transition smoothly to their own new regulatory environment. In this paper, we discuss the drivers of balance-sheet management in European insurance and aim to provide tangible takeaways for Asian insurance companies. We also propose solutions that may help Asian insurers overcome the challenges that the new risk-based accounting and capital frameworks pose.

What’s been Europe’s experience with RBC frameworks?

Solvency II has shaken up the European insurance industry at all levels. The previous regulatory regime was largely static, accounting-based and bore low risk sensitivity. By contrast, Solvency II is dynamic, risk sensitive and grounded in actuarial and financial foundations. In short, it has made investments and asset-liability management crucial drivers of capital management and efficiency.

Prior to the official launch of Solvency II in 2016, European insurers had spent the better part of a decade testing the new regulatory framework through multiple “quantitative impact studies”. The results of these provided the opportunity for insurers to adjust their balance-sheet, governance and disclosure practises as needed.

The pace of regulatory change has slowed since the launch of Solvency II, but has by no means come to a halt. Indeed, the shifting economic environment in recent years and the dynamic nature of the regulatory framework have been pushing insurers to…

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