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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
Section or Chapter title
2 | 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
Section or Chapter title
3 | Summary of Technical Specifications for QIS 1 Singapore RBC 2 Review
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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
Section or Chapter title
4 | Summary of Technical Specifications for QIS 1 Singapore RBC 2 Review
Valuation of assets and liabilities
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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.
Section or Chapter title
5 | Summary of Technical Specifications for QIS 1 Singapore RBC 2 Review
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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
Section or Chapter title
6 | Summary of Technical Specifications for QIS 1 Singapore RBC 2 Review
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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
Section or Chapter title
7 | Summary of Technical Specifications for QIS 1 Singapore RBC 2 Review
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)
Section or Chapter title
8 | Summary of Technical Specifications for QIS 1 Singapore RBC 2 Review
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)
Section or Chapter title
9 | Summary of Technical Specifications for QIS 1 Singapore RBC 2 Review
For more information or support, please contact:
Jonathan Zhao
Asia Pacific Insurance Leader
and Head of Actuarial Services
+852 2846 9023
Sumit Narayanan
Partner
+65 6309 6452
Ranjit Jaswal
Partner
+852 2849 9468
Patrick Menard
Partner
+65 6309 8978
William Liang
Associate Director
+65 6309 6634
Abhishek Kumar
Associate Director
+65 6309 6895
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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