Strong capital foundation with new RBC

By Habhajan Singh
The implementation of the Risk-Based Capital Framework for Insurers (RBC) on Jan 1, 2009, completed an "important component" of the overall objective towards ensuring a strong capital foundation for the financial sector, the central bank said.
In its annual report for 2008, Bank Negara Malaysia (BNM) noted that the RBC provides for capital assessments that are more aligned to the specific risk profiles of individual insurers and is reflective of market consistent valuations.
"After a parallel run of almost two years during which the framework underwent several refinements to enhance its integrity, legislative changes were approved to bring the framework into effect," it said in its recently-released Financial Stability and Payment Systems Report 2008. The framework replaces the previous margin of solvency regime.
"A key objective of RBC is to ensure that prudential buffers reflect the underlying risk profiles of individual insurers. To achieve this, the RBC requires more explicit quantification of the various risks inherent in the insurance business," it said.
Under the RBC, the central bank noted that capital adequacy requirements are more granular and risksensitive compared to the previous solvency regime, which did not differentiate between the nature and sources of risk. Providing an example, it said insurers whose asset portfolios are concentrated in high-risk assets or assets that are inadequately matched with the corresponding liabilities will be required to hold more capital under the RBC compared to the previous solvency regime.
Similarly, insurers who underwrite volatile lines of business or are highly concentrated in a single line of business will be required to hold more capital than insurers with diversified portfolios of relatively stable lines of business.
In an interview with The Malaysian Reserve last month, then-president of Life Insurance Association of Malaysia (LIAM) Ng Lian Lu said, there was never a doubt that the transition to the new RBC regime would be smooth as companies have conducted parallel runs for two years and all teething problems have been addressed prior to the implementation of the new framework.
The central bank also noted that since the implementation of the framework, further adjustments have been necessary to address the impact of market interest rates used in the valuation standards moving significantly out of line with historical norms. Neighbouring Singapore went into the RBC mode some years ago.
In a statement dated Aug 25, 2004, the Monetary Authority of Singapore (MAS) announced an RBC for insurers in Singapore. In conjunction with the new framework, its regulator said the RBC aims to put in place a more transparent and risk-focused capital and valuation basis that reflects all major financial risks of insurers. It was developed in close consultation with insurance practitioners, and the actuarial and accounting professions, it said.
MAS also issued two consultation papers to discuss how the RBC and regulations will be integrated into the Insurance Act. The shift from a one-size fits all approach will also encourage insurance companies in Singapore to manage their financial risks more actively and raise overall prudential standards, it added.
Meanwhile, in its report, BNM said that the insurance and takaful sectors — while recording a stronger solvency position of RM16.6 billion compared to RM11.7 billion the year before, and attaining a capital adequacy ratio of 187.6%, which is well above the minimum requirement of 100% (2007: 158.4%) — faced challenges in maintaining the growth in premiums and contributions from new businesses amidst strong competition in the industry.
It said total net premium and contribution income of this industry grew by 2.4%, attributed mainly to the expansion in the market share of takaful business. At the same time, the growth of 5.5% in the general insurance and takaful sectors was driven mainly by the expansion in the fire segment while the modest growth of 1% in the life and family takaful sectors were a result of the weaker demand in investment linked business.
Nevertheless, it noted that the operating profit of the general insurance and takaful business declined by 44.5% to RM0.7 billion, mainly due to unrealised losses and deterioration in the motor insurance portfolio, as reflected in the higher claims ratio of 84.2%. - The Malaysian Reserve, p32, Apr 1, 2009

(This story appeared in The Malaysian Reserve on Mar 30, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on insurance & takaful called UNDERWRITER, appearing on alternate Wednesdays, edited by Habhajan Singh.)