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Revisions to the

Risk-Based Capital
Framework
How will RBC2 and ERM
affect insurers in Singapore?

Contents

Introduction

01
02
06
08
14

Risk-Based Capital
Past, present & future
What could change and how is
this aligned to the Insurance
Core Principles and Standards?

What are the main implications


of Risk-Based Capital and an
ERM framework?
Challenges
Finding the right balance

2013 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

1.

Introduction

Integrating risk,
capital and performance
management can help you
and your organisation find
an appropriate balancing
point while allowing
you to meet stakeholder
demands for results. We
see greater advantages of
insurers capitalising on this
opportunity presented by the
regulatory enhancements
rather, than doing just what
is necessary for minimum
regulatory compliance.

Lau Kam Yuen


Partner
Head, Insurance

Since 2004, Singapores insurance RiskBased Capital (RBC1) framework has


served the industry well. Underwriting,
investment and concentration risk factors
prescribed in the RBC1 regulations are
applied to the assets and liabilities on the
balance sheet to determine the capital
and solvency positions of each insurer
and its insurance funds. These solvency
measures are applied at the level of
each insurance fund and at the level of
the entity to ensure each insurance
fund and the entity as a whole are both
solvent. These form the bedrock of the
regulatory capital requirements, which
define the minimum thresholds for the
fund-level Fund Solvency Requirement
(FSR) and the entity-level Capital
Adequacy Requirement (CAR).
The RBC1 framework which already
provides a sound foundation for
regulating the capital requirements
of insurers will be enhanced in
the RBC2 framework. The proposed
changes, together with a number of
other supervisory initiatives, will take
Singapore to a new level and enable
it to meet the requirements of the
Insurance Core Principles (ICPs) issued
by the International Association of
Insurance Supervisors (IAIS) in 2011.
Addressing many of the global changes
taking place, these proposals will
be making enhancements relevant
to the Singapore environment. The
Global Financial Crisis of 2008 showed
that the worlds financial systems are
more interconnected than we thought;
hence the regulatory developments are
now taking a global perspective. As
a response, the world has witnessed
unprecedented heavy waves of
regulatory reforms.
As part of the process to drive this
enhancement to RBC2, the Monetary
Authority of Singapore (MAS) has
conducted further regulatory reviews of
corporate governance, risk management,
risk-based capital standards and group
supervision for insurers. The MAS also
consulted with the industry on these

separate building blocks of its proposed


enhancements to the insurance
regulations. By drawing on the best
elements of the ICPs, Solvency II and
other regulatory developments relevant
to Singapore as an insurance hub, the
refinements to the Singapore regulations
gives Singapore the opportunity to make
the necessary changes to its already
robust regulatory framework.
In 2012 alone, the MAS released
close to a dozen Consultation Papers,
including one in June 2012 that set a
timeframe for the implementation of
RBC2 by the accounting year ending
31 December 2013. Given the tight
timeframe, the introduction of an
enhanced standardised framework
for the Total Risk Requirement (TRR)
calculation was consulted first, followed
by a second wave of Consultation
Papers released at the end of January/
early February 2013 on Enterprise
Risk Management (ERM) and Public
Disclosures, amongst others. The
proposals in the Consultation Papers
have since developed into regulations
(in the form of Notices) issued in April
2013 except for RBC2 where the
MAS is at the stage of defining its
quantitative impact studies.
These enhancements show that risk
and capital management are rapidly
becoming more important to insurance
companies as they focus on future
uncertainties in the market and as
they ponder the kind and magnitude
of regulatory responses such
uncertainties are likely to trigger.
This is an excellent opportunity
for insurers to enhance their risk
management and capital management
frameworks and put risk-based
considerations at the forefront of
business operations and decision
making. We expect that this will
trigger greater integration of strategic
decision making processes with ERM
as insurers seek to derive value from
these costly changes.

2013 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

2.

Risk-Based Capital
Past, present & future

Across almost all regional jurisdictions,


insurance regulatory regimes are
evolving away from deriving regulatory
capital through a formulaic risk-based
approach towards employing an
integrated risk-based approach. Greater
focus is also being placed on the
importance of risk management and
capital management as a regulatory tool.

The diagram below depicts the


changing trend of the different regimes
in Asia.

framework) that incorporates a riskfactored method for assessing capital


adequacy and insurance fund solvency.

Since 2004, with the exception of


captives and Lloyds syndicates, the
MAS has required registered insurers
in Singapore to adopt a risk-based
capital and solvency approach (RBC

In Singapore, the existing RBC1


framework is designed to incorporate
a number of risks faced by insurers,
namely: underwriting, investment and
counterparty risks.

An Overview of RBC Regimes in Asia & The European Union

From risk-based capital to risk-based supervision

Formulaic
No risk weighting

Formulaic
risk-based

Integrated risk
and capital regimes

Asset/liability
risk weights/
stress tests
Many international
RBC regimes

Vietnam

Full internal
model regime

Point in time model,


submitted annually
and used as a
guideline to set
capital

Risk modelling
and data quality

Governance & risk


regime

Risk organisation

Economic balance
sheet

Model governance
& validation

Malaysia

Embedding and
business use
Philippines

Hong Kong

People's Republic of China

India

Indonesia

Group & Solo

Thailand

Model approved
to calculate real-
time capital

Singapore

South Korea

Taiwan

2013 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

Existing mechanisms for calculating the


optimum capital ratio are formulaic and
risk based. Current regulatory capital
is calculated based on prescribed risk
factors applied on largely fair value
measures of the assets and liabilities
of the insurer at entity and fund level;
established for each class of life
and general, onshore and offshore
insurance business.
While the current RBC framework
has served its purpose well, it has its
weaknesses and it may not aptly apply
in all circumstances and is therefore
being enhanced, especially with
todays more sophisticated financial
products, evolving market practices,
wider product spread and more volatile
external environment.
The first Consultation Paper issued
by MAS on RBC2 aimed to enhance

the comprehensiveness of the risk


coverage and risk sensitivity of the
current RBC framework. The
proposals included the explicit
assessment of additional risks including
operational risk, a calibration of the
regime to a 99.5% level of sufficiency
over a one-year time horizon and two
solvency intervention levels (which
aligns with emerging international
practice). The MAS plans to implement
these RBC2 standards by the end
of 2013, with a two-year parallel
transition period alongside the existing
framework.
To ensure that the pace of regulatory
change is also reflected outside
of the pure capital calculations,
enhancements have also been made
to the guidelines on risk management
practices for insurance business. The
guidelines on corporate governance

will also be extended to all locally


incorporated insurers and reinsurers
(previously these guidelines are
only applicable to direct insurers
incorporated in Singapore).
Notice 126 on Enterprise Risk
Management (ERM) for insurers
(under the RBC2 framework) was
issued in April 2013 to be effective
from 1 January 2014, applicable to
all licensed insurers. Proposals in
this document include an Own
Risk and Solvency Assessment
(ORSA) requirement in addition to
enhanced aspects of ERM including
the establishment of a risk tolerance
statement, and the extension of
ERM requirements to all insurance
groups (including a requirement to
take into account of risks arising
from non-insurance entities and
partly-owned entities).

Potential Risk-Based Capital and ERM framwork in Singapore

Risk Objectives & Strategy


Insurance risk

Risk Governance

Risk Tolerance Limits

Policies and Procedures

Liquidity risk

Credit risk

Operational risk

Organisation

Market risk

Quantitative
Measures

Models and
Validation

Risk
Assessment
(Identification
&
Qualification)

Risk
Monitoring
(Key Risk
Indicators) /
New risks

Own Risk
and Solvency
Assessment
(ORSA)

Risk
Reporting /
Management
Dashboard

Capital
Requirements
(SCR/MCR)

Risk Documentation (with assumptions)


Others
Assurance (including Audit and Compliance)

2013 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

Concurrently with these changes,


roles and responsibilities are
also evolving within insurance
organisations, especially for the
Chief Risk Officer (CRO) with a
greater focus on ERM.
In particular, the scope of the CRO's
role should be expected to encompass
at least the following:
Accountability for the establishment
maintenance and oversight of firmwide risk management.
Full independence from a firms
individual business units.
Unfettered access to business areas
which impact risk profile.
Responsibility to ensure that the
data used to assess risks is fit for
purpose.
Responsibility for the oversight and
validation of external reporting of
risk.
Responsibility for the adequacy of
risk information, risk analysis and
the training of the Board and senior
management on risk management.

Authority to challenge business


strategy or plans that exceed risk
appetite and tolerance.
In "MAS Notice 124 on Public
Disclosure requirements issued in
April 2013, the MAS introduced the
public disclosure requirements for
insurers in order to improve market
discipline and the understanding of the
risks to which an insurer is exposed
and the manner in which these risks
are managed. Such disclosures are
to include, inter alia, qualitative and
quantitative information on corporate
governance framework, measures
of ERM, Asset-Liability matching,
quantitative source of earnings analysis,
claims statistics (including claims
development) and pricing adequacy.
MAS, in its RBC2 Consultation Paper
and Notices on ERM for Insurers and
Public Disclosure requirements, has put
forward a challenging timeline for the
insurers to implement and comply with
new requirements.

The CRO role and responsibilities is also evolving

It is envisaged that there is much greater role for the CRO going forward

Chief
Financial Officer
Chief
Financial Officer
Chief Risk Officer

Chief
Financial Officer

Chief Risk Officer

Head of
Actuarial Function

Head of
Actuarial Function

Head of
Actuarial Function

Previously

At present

Going forward

Source: FSA, The developing role of the Risk Function (under Solvency 2) April 2011, and SYSC 21.1.2

2013 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

Expected Timeline and Roadmap for RBC2 and ERM

In April, MAS issued:


Notices
- MAS 126 ERM for Insurers
- MAS 124 Public Disclosure
Amendments to Insurance Parallel reporting based
Act & subsidiary legislation on RBC2 requirements

Q2 2012

Q2 2013

Q3 2013

Q4 2013

Calibration of factors under RBC2


Quantitative Impact Study
MAS issued CP on RBC2 in June 2012 (QIS) calibration factors
to be released

Public Disclosures to be implemented


by 30 June 2014 based on position as
at 31 December 2013

Q1 2014

Q2 2014

ERM for Insurers effective


1 January 2014

Q3 2014

Q4 2014

Expect finalisation of QIS factors


Study the internal model approach
over the next 2-3 years

2013 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

3.

What could change and how is this aligned to


the IAIS Insurance Core Principles and Standards?

The new proposals in the


Consultation Paper on ERM and
Public Disclosure requirements,
coupled with the proposals in the
earlier RBC2 paper, are changing
the Singapore insurance regulatory
regime.
We see that these changes introduced
are similar to and in keeping pace with
the revised ICPs that were issued by
the International Association of
Insurance Supervisors (IAIS).
Given the close alignment of the
requirements in the Notices with the
ICPs and also the main principles
of other regulatory regime changes
globally (such as Solvency II), it
is reasonable to infer from the
implementation of new regulatory
regimes globally, based off the ICPs,
what the new insurance regulatory
regime in Singapore is likely to
look like. This can allow insurers in
Singapore to learn important lessons
from the implementation of similar
regulatory requirements to avoid
mistakes made by others.
The Notices should trigger questions
in the mind of management regarding
the readiness of their organisation to
comply with these new regulatory
requirements.
Will more capital be required?
The MAS has proposed two triggers
for supervisory intervention when
assessing the capital adequacy of
an insurer - the Prescribed Capital
Requirement (PCR) and the Minimum
Capital Requirement (MCR). Under the
new regime, the PCR will be calibrated
to a Value at Risk (VaR) of 99.5-percent
confidence level over a one-year
period. The MCR will be calibrated to
a VaR of 90-percent confidence level
over a one-year period. The PCR and
MCR might replace the current Capital
Adequacy Ratio (CAR) formula for
determining capital adequacy.
The proposed approach for capital

adequacy measures under RBC2 is


consistent with the ICP 17 in that, as
stated above, there are two capital
requirements. Depending on the
level of calibration under the current
RBC regime in Singapore, this could
mean an increase or decrease in
capital requirements for insurers
depending on the business written
and the calibrations established. The
quantitative impact studies (QIS), the
first of which is planned for later in the
year, will reveal more by testing the
approach before implementation.
How different will the insurance
risk requirement be? The MAS has
proposed that RBC2 will extend the
current set of risk charges to include
explicit risk charges for spread
risk, operational risk and insurance
catastrophe risk. Even with other
calibration factors unchanged, this
could contribute to additional capital
requirements.
The MAS is not proposing to introduce
an explicit risk charge for liquidity
risk. Instead, it proposes to rely on
liquidity stress testing and reviews
of the soundness of liquidity risk
management processes. In a separate
paper, it is proposed that the regulator
will also be reviewing the capital
treatment of offshore insurance funds
for reinsurers.
How different will the asset risk
requirements be? Instead of applying
a fixed factor to the market value of
assets, the MAS is proposing to apply
a shock to the net assets and measure
the impact of the shock. This approach
is similar to the one taken in Solvency II.
The calibration of the standard formula
will be determined after the QIS
exercises are done. QIS1 is expected
to start in Q3 2013.
Will internal models be allowed?
Under RBC2, the MAS is proposing
that insurers may use partial or full
internal models to determine regulatory
capital requirements over the long

MAS hopes to work


closely with the industry on
the review, as was the case
when the RBC framework
was first developed. We
anticipate that the industry
will be involved through
workgroup participation,
quantitative impact studies and
consultation feedback.
MAS RBC2 consultation paper

run. This will be assessed in the next


phase, after the standardised approach
and model have been finalised and
rolled out. Solvency II allows the use
of internal models by insurers, subject
to supervisory approval, but allows
the application of formulaic rules
prescribed by the regulators.
Are all insurers in the same capital
tier? MAS is trying to create a level
playing field for all businesses in the
financial sector by establishing a
consistent regulatory and supervisory
framework for regulated institutions.
For the highest quality Tier 1 capital,
the aim is to align with the capital
adequacy framework for banks. The
MAS is proposing to incorporate the
same Basel III features as conditions
for approved Tier 1 capital instruments.
Additional proposals relate to the
quality of capital resources, including
the treatment of negative reserves,
and to the treatment of the aggregation
of allowances for the provision for nonguaranteed benefits.
Will there be changes to valuation of
assets and liabilities? The use of a
risk free discount rate and the provision
for adverse deviation will be reviewed
by MAS under RBC2. This is a topic
that is now being actively deliberated
in many regulatory regimes globally as
allowances for the time value of money
is consistent with the ICPs.

2013 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

In addition to the RBC2 requirements,


the new regulatory environment
proposed by MAS also incorporates
elements of ERM, Corporate
Governance and Public Disclosures.
How will Enterprise Risk
Management (ERM) come into play?
The MAS has introduced the ERM
requirements including those relating
to ORSA. The MAS has consulted with
the industry on the ERM framework
and is targeting implementation on
1 January 2014.
Insurers will need to demonstrate
that they have a robust risk
management framework and that
their Board understands and
challenges the outputs of their
risk framework. Such a framework
should be comprehensive in scope, it

should provide for the identification


of all risks under a sufficiently wide
range of outcomes using appropriate
techniques, and it should be
supported by accurate
documentation that contains detailed
descriptions and explanations of the
risks covered, the measurement
approaches used and the key
assumptions made.
A robust risk framework and ORSA
are also the main components of the
ICP framework through ICP 16, which
is designed to improve standards
of corporate governance and risk
management. We believe a similar
framework in RBC2 will require the
elevation of local practices to the
forefront of global regulatory best
practices advocated by the ICPs
established by the IAIS.

High level overview of the ICPs.


The ICPs have been developed
over a number of years to provide
an enhanced global framework
for regulators to use in their own
jurisdictions for insurance regulation.
As the insurance industry changes
so regulators have identified that the
insurance regulatory regime should
change to keep pace with the market
developments. The ICPs are very
wide ranging covering topics such as
public disclosure, countering fraud,
ERM and ORSA, capital adequacy,
reinsurance and corporate
governance. Like the MAS, many
regulators around the world have
moved to align their regulatory
frameworks with these standards.
A number of those that have not yet
moved are expected to do so over
the next few years.

High-level overview of ICPs


The themes of the 25 ICPs broadly encompass most aspects of insurance business
and regulatory environment. Some of the key themes are set out below:

Supervisory
review
process

Crisis
management

Corporate
governance

ICPs

Capital
adequacy
and valuation

Enterprise
risk
management

Consumer
issues
Group
supervision

Depending on the current level and complexity of your internal processes,


the implementation of the ICPs could have a profound impact

2013 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

4.

What are the main implications of RiskBased Capital and an ERM framework?

The Consultation Paper proposes


that RBC2 will run in parallel with
the existing framework for at least

two years. This transition period


is designed to facilitate a smooth
crossover to the new regime by

providing insurers with time to modify


and adapt their current practises.

Questions on implications that should be considered by management include:

What are these


changes and how are
they different from
current framework?

Will it compromise
my ability to drive and
grow my business?

How will this


impact my decisionmaking?

Where can I see


most value for my
organisation?

What is the area


that has the greatest
impact on my
organisation?

How will a parallel


run affect my resource
requirements?

Do I currently
comply with the
requirements?

What does this


mean for my business?

Does it mean
more capital and
compliance costs to
my organisation?

Where do I need
to prioritise activities
and resources?

2013 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

So what are some of these main


implications which will impact
insurers when RBC2 becomes
effective?
From our discussions with insurers
and our prior experience advising on
regulatory compliance readiness with
the ICPs, such as for Solvency II, we
believe that an arduous task lies ahead
in 2013 for insurers who are faced with
readying themselves to operate under
this new and challenging regulatory
regime.
Governance -- Currently, significant
insurers in Singapore are required
to comply with MAS Insurance and
Corporate Governance Regulations.
Insurers listed on the Singapore
Exchange must comply with the Code
of Corporate Governance. Direct
insurers incorporated in Singapore
must comply with MAS Guidelines
on Corporate Governance for Banks,
Financial Holding Companies and
Direct Insurers. These regulations
and guidelines specify minimum
requirements and best practices for
insurers, including the composition of
the Board of Directors and its roles and
responsibilities.
In April 2013, the MAS issued the
Insurance (Corporate Governance)
Regulations 2013 to extend these
requirements to all locally incorporated
insurers and reinsurers. Under the
new requirements, insurers must have
an effective system of governance in
place that incorporates a transparent
organisational structure, a clear
allocation and appropriate segregation
of responsibilities, and an effective
system for information disclosure.
Insurers will also be required to appoint
qualified and experienced directors
and senior managers, and to train their
existing management team.
Strategy / Business model -- Given
that RBC2 may result in higher
minimum capital costs and that in the
current business climate there is an
absence of a market for debt or equity
solutions, some insurers may find it
attractive to enter into reinsurance
arrangements to pass on a portion of
their risk. On the other hand, those
insurers that can more efficiently
manage their capital may reduce the
amount of reinsurance they buy.

Main implications of RBC2

Disclosure

Governance

Strategy/
Business model

Capital

Implications of RBC2
Data, info
systems and MI

Asset-liability
management

More generally, the implementation


of this new RBC and ERM framework
may also cause insurers to re-evaluate
their portfolio of businesses, to rethink
the markets they choose to compete
in, and to reconsider their product and
distribution models. These actions, in
turn, may affect the types and amount
of business that will be written in the
future.
This new RBC and ERM framework
increases the level of transparency
within the business, making insurers
better aware of their portfolios risk
and reward profile. This can result in
insurers withdrawing non-performing
business lines and products, and be
more sophisticated in pricing.
Regardless of assets used to match
liabilities, risk free rates will be used
for discounting. As movements in
credit spreads affect asset values
while liabilities remain neutral to the
changes, this could result in greater
balance sheet volatility. This, in turn,
will affect the share price and the
attractiveness of their returns.

Structuring and
optimising group
supervision

Risk management

Guaranteed products may be impacted.


Issuing insurers may be forced to hold
more capital for options, and other
complex instruments they own, to
create these products.
Structuring & optimising group
supervision -- Companies may opt
to change their corporate structure
to improve capital efficiency and to
reduce the number of regulators and
regulations that they are required to
deal with. If captives are not
exempted from RBC2 they will
need more capital and they will
experience increased administrative
costs. This may lead to closure or
consolidation. Large cross-border
insurance groups will move to manage
and respond to various regulatory
requirements.
Risk management -- Insurance is a
business that, itself, requires the
management of risk. As a result,
most insurers tend to view risk
management as a regulatory
compliance procedure rather than
an integral part of the business.

2013 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

General insurance business mix to be reviewed?


Present

Post RBC2

Cargo
Hull & Liability
Fire
Motor
Work injury compensation
Personal Accident
Professional Indemnity
Others

Life insurance business mix to be reviewed?


Present

Post RBC2

Whole Life (non linked)


Endowment (non linked)
Term (non linked)
Others (non linked)
Whole Life (linked)
Endowment (linked)

Measuring interdependencies across


risk categories continues to be a
challenge. This activity should be
conducted within a comprehensive and
robust risk management framework
that adequately provides for the
identification and quantification of risk.
Under the new ERM requirements,
insurers will be required to conduct
their ORSA, which links together
strategic planning, risk and capital
considerations of the organisation

10

whilst continuing its focus to


maximise operational efficiencies
and performance. This will
necessitate the development of a
strong risk management culture.
To enable the identification,
measurement, monitoring,
management and reporting of risk
exposures in a timely manner, risk
appetite and tolerance statements will
have to be embedded in organisational
activities and in day-to-day operations
alongside governance processes.

2013 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

In our view, a robust risk management framework should contain the following components:

Risk Management Framework Component


Risk Management
Framework Component

What it means

Risk strategy & vision


A long-term plan of how risk management effectively supports the achievement


of the organisations goals

Capital management

Processes, procedures and systems (e.g. an internal capital model) for


understanding the impact of risk on the organisations capital and utilising this
information in its decision-making

Risk appetite & tolerance


The articulation of the organisations tolerance for risk-taking to achieve its


commercial objectives and preference for risk types

Risk governance

A structure within which responsibility and accountability for risk management


and oversight is defined and communicated throughout an organisation

Risk operating model


A structure within which risk management is delivered across the organisation,


typically defined as 3 Lines of Defence which is emerging as best practice

Risk methodology

Processes, procedures and systems for identifying, measuring, monitoring,


managing and reporting risk

Risk data, management


information & reporting

Accurate, relevant, timely and complete management information to support


effective, risk-focused business decision-making

Risk training & communication



Processes by which the risk capability, understanding and awareness of the


organisations people is developed and maintained (including Board training/
education on regulatory changes)

Risk culture

Embedded risk behaviours of the organisation

Effectiveness review

Internal processes by which the Board derives assurance that the framework is effective

An ORSA is a bespoke strategic


analysis process that links together
the management of risk, capital and
strategic planning to determine the
current and future risk profile and
capital requirements of a firm, based
on business strategy and external
environment. A comprehensive
assessment requires a multi functional
approach, incorporating a number of
components such as the past and
present solvency requirements of the
insurer, future solvency requirements,
the ORSA design and application across
the business.
Often referred to as the heart beat
of risk and capital management, this
assessment process brings together
many underlying components of risk,
capital and liquidity management. A
robust ORSA is often used to drive an
insurers strategy in a controlled, well
managed and co-ordinated manner.

To meet ORSA requirements, the


following key components must be
in place
A robust risk management system.
A clearly articulated risk appetite
with associated risk tolerances
embedded within strategic decisionmaking.
The linkage of risk and capital
management to business strategy.
Evidence of risk assessments
incorporated within senior
management decision process.
Forward looking risk identification
(e.g. stress and scenario testing).
A robust and well-documented
ORSA process.
Asset-liability management -Under RBC2, decisions made regarding
the assets invested in and the business
written should not be taken in isolation
to reduce the risk of asset and liability
mismatch.

Data, information systems and


management information -- High
quality data and robust information
systems will be critical to meeting the
enhanced requirements of RBC2. In
many cases, the information available
to directors and managers will have to
be enhanced or upgraded to comply
with the provisions of the revised
regime, and to enable informed and
timely business and all operational
decisions. The ability to obtain pertinent
and timely information will also drive
insurers capital allocation and have a
direct effect on the bottom line.
Even with good information, however,
it will be difficult for insurers to quantify
the precise operational risks inherent in
business processes, operating systems
and the performance of individuals,
and to determine which data is most
appropriate to measure. Developing
these organisational skills will be

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11

very important under the new ERM


requirements. The cost of failure in
managing operational risk will be high.
Capital requirements -- Depending on
how capital requirements are calibrated
by the MAS, RBC2 may result in higher
capital requirements. The regulatory
approach is focused mainly on security
for policyholders, with return on capital
being only a secondary consideration.
Disclosure Singapore insurers and
reinsurers will be expected to increase
the extent and frequency of public
disclosures on its corporate
governance framework and risk
management practices. The increased
transparency of insurers use of
capital, ERM, asset-liability matching
and risk management will allow
members of the public, including
policyholders, to better assess and
compare the performance and risk

12

exposure of insurers and thereby


assisting them in their decision making
process. Whilst this will mean higher
compliance costs for insurers, the
enhanced disclosures will benefit
policyholders by facilitating improved
market discipline.
We expect that many insurers in
Singapore will be concerned that
the new regulatory requirements
will require a heavy commitment of
resources and a re-prioritisation of
activities over the next few years with
the result that compliance costs are
likely to increase and managers will
be increasingly distracted from core
business activities.
A new risk-based capital regime has
come to Singapore and it is for sure
not a tick-the-box directive. When
it arrives, it will have a significant
impact on all insurers. We see many

similarities between the regulatory


requirements of the new regime and
that of Solvency II and the IAIS' ICPs.
RBC2 requirements span the entire
insurance industry and require inputs
across all functions, including risk
management, internal control, financial
reporting and information technology.
The MAS has an ambitious timeline
for implementation and specific
well-defined objectives. Successful
compliance will require new kinds
of expertise, a serious investment in
data systems and infrastructure, and
even new approaches to conducting
business.
Insurers should start now to focus
on the challenges associated with
implementation, and on the competitive
advantage that they can gain from the
regulatory changes that are coming.

2013 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

Are you and your organisation ready for the new RBC and ERM regime?
Here are 16 questions that will help determine whether you and your organisation are ready for the new
requirements in Singapore with RBC2 and ERM. The answers you provide will tell you how prepared you are and
help you identify the areas where more preparation will be needed for compliance.

Q1

Does your organisation have procedures in place for assessing and evaluating the potential capital
requirements mandated by the new regulatory requirements?

Q2

Does your organisation have adequate actuarial capabilities to perform these assessments?

Q3

Have you established a robust risk management framework with the necessary components to meet the
requirements?

Q4

Does your organisation have a clear corporate governance framework in place to address the new regulatory
requirements?

Q5

Have you created a formal Technology Risk Management (TRM) framework that incorporates both the
business and IT perspective? Is your Board ultimately responsible and accountable for
managing and controlling technology risks in accordance with the new regulatory requirements?

Q6

If your organisation's IT function is outsourced, have you thought about how vendors will be able to meet your
requirements?

Q7

Does your organisation have a formal process in place for assessing and evaluating the types of assets to hold
or avoid?

Q8

Have you determined the most appropriate and efficient capital structure for your organisation?

Q9

Have you assembled a strategy toolkit that can help you and your managers make business decisions about
your business mix, pricing, reinsurance, etc.?

Q10

Have you considered how the new regulatory requirements can be optimised to provide your organisation
with a competitive advantage?

Q11

How prepared are you and your managers to carry on day-to-day business while making the changes that
the new regulatory requirements will require?

Q12

Does your organisation have the modeling capabilities in place to help you understand the implications of the
actions that will be taken to comply with the new regulatory requirements?

Q13

Does your organisation have sufficient time and resources to meet the new regulatory requirements?

Q14

Have you considered using external specialists to help prepare your organisation for the new regulatory
requirements?

Q15

Have you considered outsourcing to help your organisation meet the new regulatory requirements?

Q16

Have you identified the main areas of change?

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13

5.

Challenges Finding the right balance

The imminent implementation of the


new RBC and an ERM framework
is increasing pressure on insurers
in Singapore to find the right focus
between compliance and value for
their business. Finding the sweet
spot between the two will produce
business benefits that potentially
include improved risk management,
reduced capital requirements
and greater financial visibility for

management across the entire


business. If implemented in the right
manner, minimum compliance to the
new regime can be achieved along with
enhanced business benefits.
Unfortunately, finding such a balance
is easier said than done. The ultimate
goal, after all, is not just establishing
some arbitrary relationship between
risk and reward, it is ensuring that

the outcome of each risk/reward


decision will yield the best results that
regulatory and market constraints will
allow.
In other words, the ultimate challenge
for management is finding and
successfully pursuing business
strategies that will result in the highest
possible returns for the same or less
risk.

Optimal balance between risk, profitability and capital/equity

rs
lde
ho
are
al
Sh
pit
Ca
of
st
Co

Ca
pit
al
ma
rke
Pe
rfo
t
rm
an
ce

Profit

Sustainability

Risk

Solvency

Capital

Governance

14

2013 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

Two Approaches
There are two basic strategies that
businesses can employ to help them
decide which profitable business
opportunities to pursue.
The first takes the view that greater
risk will lead to higher rewards. In this
entrepreneurial approach, businesses
compete with each other to take
risks that reap the highest return on
investment.
The second approach takes a more
prudent risk-averse path. Such a
cautious approach involves a less
aggressive pursuit of business
opportunities, but it is intended to leave
an organisation in better financial shape
than its competitors during times of
stress.
The first approach can lead to disastrous
consequences, but the second
approach can lead to insufficient returns
on investment or to lost business
opportunity. So, in practice, each
business must strive to find a unique

balance between profit, risk and capital


that is in line with its risk appetite.
Risk management tools such as ERM
and Economic Capital Modeling (ECM)
are being increasingly integrated
into the decision-making process by
insurers to help them make these vital
decisions and achieve a competitive
advantage.
Typically, a company integrates its
strategic direction, focused on growth
and return, with the ERM/ECM structure
that is already in place. Risk appetite
statements can be used as an effective
decision-making framework to drive
controlled growth using the right levers
that consider the main business impact.
This can be qualified as integrated risk
and performance management, where
the risks taken by an insurance company,
and expected profit, would be under the
regulatory constraint of the MCR.
Effective risk management can
also reduce the volatility of results

Integrating Risk and Performance

Treatment of
Model Limitations
Well-understood risk
and performance
indicators

Governance
and Control
Environment

Integrated governance
structure and control
environment are crucial
for the Use Test

Reporting

Integrated view on risk


and performance

Strategy

Comprehensive
strategy that leads to
operational
decisions

Risk
Performance

Integrated with
Business Processes
Better fit of business
processes and
strategy

Risk Appetite
and Risk Tolerance
Better-aligned
business
decisions

Risk and
Performance
Measurement
Better-informed
management
decisions

Capital
Allocation and
Internal Competition
for Capital
More effective use
of capital

when implementing a framework to


minimise, monitor, and control the
probability and/or impact of negative
events or to maximise the realisation
of opportunities.
Integrated risk management strategies
consist of financial strategies
(including the design and placement
of financial transactions) and
organisational strategies (including the
mitigation of risks through process
design, organisational structure,
communication and contingency
planning), as well as incentives for
the management of risks through
performance measurement and
rewards, capital allocation and pricing.
As part of the implementation of the new
RBC and ERM requirements, insurers
may decide to invest in or develop
sophisticated internal models that value
assets and liabilities using a market
consistent view to better understand their
risks. As opposed to a standard formula,
which treat risks consistently across
the industry and require calibration,
such full internal models take into
account insurer-specific risks.
Standard models are less costly to
implement in the short term, but they
may place insurers at a disadvantage
over the long term by imposing higher
costs of capital and less robust risk
management capabilities.
A full internal model, on the other
hand, potentially requires that the
insurer maintain less capital. However,
the insurer must demonstrate that
the model is fully embedded in the
business and is based on robust
actuarial and statistical techniques. This
can be a costly and complex process.
European subsidiaries or branches
may be ready and able to leverage
the European-based internal models
of their home offices, but the MAS is
not likely to allow the use of such full
internal models until after the RBC2
second phase review.
In the end, insurers should not overly
or blindly rely on models, even for
just complying with regulation. It
is important for management to
have a realistic understanding of
business risks and the likely impact
on the organisation for every business
decision they make.

2013 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

15

Questions for Management


Insurers should ask themselves 6 tough questions to determine how balanced their risk/reward approach is.

Q1

Has the organisation taken full advantage of its investment in risk management to assist the delivery of its strategy?

Q2

Is it possible for the organisation to manage its business in a way that achieves greater returns with lower risks
through embedded risk appetite statements?

Q3

Can the organisation further reduce its capital requirements while increasing capital adequacy and returns?

Q4

Does the organisation have the tools to take risk-adjusted returns into account in making strategic decisions?

Q5

Does the organisation have reliable decision-making tools to determine:


How best to structure its pricing strategies?
What segments, regions, lines of business or distribution channels should be emphasised?
How best to structure its reinsurance or strategy?

Q6

Can the organisation visibly demonstrate the basis for its strategies to third parties such as regulators, rating
agencies, and business partners?

Final Thoughts
Risk-taking is an essential element
of being an insurer. Take on too
little or too much risk and it could
affect returns. Risk taking should
be controlled within appropriate
parameters by using risk appetite
statements. Integrated risk and
performance management can help
you find an appropriate balance while
allowing you to meet stakeholder
demands for results.

Companies can effectively apply


these risk and capital management
tools to enhance the success of their
business strategy by embedding them
in performance management. Such an
approach is preferred by stakeholders and
is arguably a good way to run a business.
The new RBC and ERM requirements
represent a definite change in
Singapores regulatory environment and
all insurers are going to have to adjust

How can KPMG help?


We have extensive experience
both locally and globally with
implementing regulatory change
projects and risk transformation,
especially in the implementation of
ERM and ORSA. Over the past few
years, we have supported a number
of insurers globally with such
implementations and have worked
closely with regulators as well.
We can support the implementation
of these new requirements in your
organisation through our standard
implementation approach which
consists of:
An assessment of your business
against these requirements to
provide you with a gap analysis
and areas for prioritisation.

16

to it. Almost certainly, a fundamental


review of business models will be
necessary to ensure that governance,
processes and capabilities are fit for
purpose under the new regime.
As some smaller niche insurers
come to the realisation that they do
not possess the economies of scale
necessary to justify new and costly
compliance-related infrastructure, a
period of consolidation may be likely.

The design of a new enhanced


risk framework and the
development of an
implementation plan for these
changes.
The design of new components
for compliance with the new
regime, such as the ORSA and a
stress and reverse stress testing
framework.
Assistance with embedding these
changes in your business to
ensure that they are effective and
well understood.
Providing programme
management to support such
projects.

2013 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

Acknowledgements

We would like to acknowledge the contribution of our colleagues from across KPMGs Insurance
Sector in Singapore who helped develop this thought leadership paper.

Lead Editors:

Insurance Partners:
Lau Kam Yuen
Partner,
Head, Insurance
KPMG in Singapore
T: +65 6213 2550
E: kamyuenlau@kpmg.com.sg

Frank Dubois
Director, Advisory
Actuarial and Insurance Advisory
KPMG in Singapore
T: +65 6411 8187
E: fdubois@kpmg.com.sg

Steven Goh
Senior Manager, Audit
Insurance Centre of Excellence
KPMG in Singapore
T: +65 6213 3789
E: sgoh@kpmg.com.sg

Venkat Iyer
Partner, Insurance
KPMG in Singapore
T: +65 6213 2502
E: venkatiyer@kpmg.com.sg
David Waller
Partner, Insurance
KPMG in Singapore
T: +65 6213 3007
E: davidwaller@kpmg.com.sg

Paul Brenchley
Director, Advisory
Insurance & Risk Advisory
KPMG in Singapore
T: +65 6411 8402
E: paulbrenchley@kpmg.com.sg

Shirley Hu
Senior Manager, Audit
Insurance Centre of Excellence
KPMG in Singapore
T: +65 6213 2026
E: shirleyhu@kpmg.com.sg

Jeremy Hoon
Partner, Insurance
KPMG in Singapore
T: +65 6213 2608
E: jeremyhoon@kpmg.com.sg
Jeya Suppiah
Partner, Insurance
KPMG in Singapore
T: +65 6213 2413
E: jsuppiah@kpmg.com.sg

2013 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved.

17

Contact us
Lau Kam Yuen
Partner,
Head, Insurance
KPMG in Singapore
T: +65 6213 2550
E: kamyuenlau@kpmg.com.sg
Frank Dubois
Director,
Actuarial and Insurance Advisory
KPMG in Singapore
T: +65 6411 8187
E: fdubois@kpmg.com.sg
Paul Brenchley
Director,
Insurance and Risk Advisory
KPMG in Singapore
T: +65 6411 8402
E: paulbrenchley@kpmg.com.sg

KPMG Services Pte Ltd


16 Raffles Quay #22-00
Hong Leong Building
Singapore 048581
T: +65 6213 3388
F: +65 6223 3118
Find out more about our services at kpmg.com.sg

The information contained herein is of a general nature and is not intended to address the circumstances of any particular
individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such
information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such
information without appropriate professional advice after a thorough examination of the particular situation
2013 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the
KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss
entity. All rights reserved. Printed in Singapore.