Tracking the policy response of Asian insurance regulators to the credit crisis

1. Current crisis – Regulatory measures in Asia and their impact
Authors: Saptarishi Mandal, Ashok Antony
Asia-Pacific Risk and Insurance Association (APRIA) 13th Annual Conference
Beijing, China. July, 2009

2. 1. General overview methodology
The current financial crisis has affected major insurers globally and insurers have
witnessed huge investment loses due to exposure to equity markets and to risky
assets such as credit default swaps and mortgage backed securities. This had
impacted insurer’s solvency, liquidity and capital position with some of the leading
insurers requiring capital infusion from the government and private investors.
Asian insurers have been relatively safe compared to their global peers due to a
more conservative regulatory environment and limited exposure to risky overseas
assets. However, Asian stock markets have on an average dropped between 40%
and 70% which has impacted the investment yields as well as the sales of
investment linked products.
Regulators across the globe have been active in trying to limit the impact of the crisis
on insurers. Regulatory response has been varied within Asia. Countries such as
Taiwan have relaxed the mark to market requirement for insurers while countries
such as China have increased their supervision of companies with weaker capital
position. Regulators have also tightened the norms for selling investment linked
products and riskier complex products to consumers. Regulators across Asia have
also been active to prevent any run of the money attempt on AIG thereby limiting the
impact.
Methodology:
The paper makes a comparative study on policy responses across the Asian
insurance markets through extensive literature review. Regulatory actions are
analyzed in line with the state of regulation in the industry, extent of impact and
maturity level of the industry.

3. 2. Asia - Importance of regulatory role in a growing market
Except for Japan, South Korea and Taiwan, insurance in Asia-Pacific was for the
most part extremely underdeveloped. In Japan and South Korea, Insurance
premiums represent in excess of 8% of the country’s GDP but only 1% in Vietnam,
2% in India and 4% in China. However in the aftermath of the economic crisis,
Insurance products have become very attractive to the investors. This is because
more and more people are using insurance products to guarantee safer retirements,
children’s education, protecting their family from various calamities and also as an
investment instrument. Thus the shift from conspicuous consumption and
investments in direct market related financial instruments to safer products have
been a key driver for insurance products. Also there are various other favourable
factors in Asia that are driving the growth of insurance products, for example high
savings rate, favourable demographics and favourable regulations.
After the recent credit crisis regulation has become the single most important thing to
drive sustained growth of the insurance industry.
Through regulation, consumer protectionism, confidence and ‘willingness to invest’ in
insurance products is restored within investors. If there are too stringent regulations
so that the insurance companies are not been able to offer attractive products to its
customers, the customers would obviously shift to other financial instruments
available in the market. However too little of regulation would lead the consumers to
loose confidence with increasing number of cases of financial companies defaulting.
The insurance companies also have to be given enough incentive to operate
profitably and not overdose them with regulations. This has become more important
with majority of the players being from the private sector and attracting foreign
investments becoming an integral part of the various countries’ growth strategy.
In the era of globalization, even one or few loosely regulated markets has a trickle
down effect on the rest of the countries, especially when these countries are big in
terms of its global integration like the US and UK. Since regulations are meant to
shield the respective countries from any form of crisis, the happening of the recent
credit crisis is taken as a stepping stone to make its regulations more stream-lined
and efficient.
3. Impact of the credit crisis on insurers
The credit crisis in the US, beginning with the fall in housing and sub-prime markets,
has spread across the world impacting the financial markets and has brought down
the world economy to its knees. The direct impact on financial services companies
have been severe resulting in the winding down of some of the leading investment
and brokerage houses and nationalization of some of the large banks and mortgage
lenders.
Insurers in general have emerged largely unscathed from the crisis, with the
exception being American International Group (AIG), which despite its strong
insurance operations was brought down by its financial products units. While pure
insurance groups have been able to ward off the crisis to a large extent, insurers with
banking operations such as ING Group have been impacted due to asset write-
downs at the banking units.

4. The International Association for the Study of Insurance Economics, or “The Geneva
Association”, classifies three major impacts of the credit crisis on the insurance
industry.
• The direct impact due to exposure to sub-prime mortgages
• Impact on companies with specific exposure such as credit default swaps (CDS),
banking operations and financial guarantee business
• Impact of asset meltdown across stocks, corporate bonds, real estate
investments and other investments resulting in huge investment loses and asset
write-downs1.
The Asian Scenario
Asian insurance industry has largely remained unscathed because of limited foreign
investment exposure and conservative investment regulations by the Insurance
Regulatory authorities in most developing markets. Since insurers are required to
invest a high proportion of assets under participatory insurance products (where
investment risks are borne by the insurer) in government securities and bonds, they
have not been largely impacted by asset meltdown. Hence unlike insurers in U.S.
and Europe, insurers in fast growing Asian markets such as India are more focused
on business and management issues such as managing sales and distribution rather
than investment performance2.
Much of the impact of the fall in stock markets has been borne by the consumers
since a large proportion of policies sold in Asia are Investment Linked Products
(ILPs), where investment risk is borne by the policy holder. With stock markets
dropping by more than 50%, ILPs have lost out of favor among consumers resulting
in a slowdown in premium growth in the industry in the second half of 2008. Slow
premium collection and consumer sentiments are also affecting the industry in near
term as most of the prospective customers had put their investment plans on hold.
4. Regulatory scenario across Asia
Regulatory scenario in Asia varies widely across countries which can be broadly
classified in line with the stage of insurance development. Developed economies
such as Hong Kong and Singapore are mostly self-regulated, while regulators in
emerging markets such as India and China continue to have a tighter grip on the
insurance sector
In Singapore and Hong Kong, both local and foreign insurance companies are
treated equally and are subject to the same regulatory and supervisory regimes. The
approach of the Monetary Authority of Singapore (MAS) in Singapore to the
supervision of insurance companies is described as "minimal control supplemented
by self-regulation and the regulatory measures in Hong Kong are supported by a
system of self-regulation by the insurance industry signifying considerable freedom
for operations with minimal regulatory supervision. Self-regulatory measures in the
insurance market are formulated by the insurance industry in consultation with the
Government.
In countries such as India China, Malaysia and Thailand ownership restrictions exist
and in China foreign insurers are subject to geographical limitations in China where
1
The Credit Crisis and the Insurance Industry, www.genevaassociation.org, 19 November 2008
2
Insurance Banana Skins 2009, PWC

5. insurers need to obtain permission to open branches as only phased expansion of 2-
3 branches are being allowed in a year.
Foreign ownership
Foreign ownership limits vary across countries. The developed block of Singapore,
Hong Kong, South Korea and Taiwan have no limits on foreign ownership stake.
Among the developing countries, India restricts foreign ownership to 26% while
China allows 50% ownership for foreign insurers. In Malaysia, new investment by
foreign companies in insurance companies is limited to 49%, while Indonesia allows
a maximum of 80% foreign stake in insurance joint ventures
Solvency
Solvency criteria vary across countries. Singapore and Taiwan have introduced a risk
based capital (RBC) framework In India insurers are required to maintain a solvency
of 150% while Korea requires 100% solvency margin and encourages insurers to
maintain 150% solvency.
Investment
Investment restrictions on policyholder’s funds are stringent in most developing Asian
countries. India requires insurers to invest at least 50% in government securities and
other approves securities, while China allows for a 10% exposure in stocks and 15%
in mutual funds China has also recently taken steps to allow 15% of assets to be
invested in overseas assets.
Distribution
Regulatory restrictions on bancassurance are minimal in Hong Kong, Malaysia,
Philippines, Singapore and Taiwan. India allows only single-tied distribution while In
Indonesia banks can sell products of two insurers. In Korea, which allowed
bancassurance sales in 2003, restrictions on type of product sales continue to exist
as the fourth stage of bancassurance liberalization is stalled.
5. Past Experience and Role of Regulation: The 1997 Asian Crisis
Financial sector weaknesses played a major role in the Asian crisis in 1997. This led
to the increased exposure of financial institutions to a variety of external threats,
including declines in asset values, market contagion, speculative attacks, exchange
rate devaluations and a reversal of capital flows. In 1998, the South East Asian
countries saw their economies shrink by an average of 7.7 percent and many millions
of their people lost their jobs.
The initial priorities in the hands of the regulators were to stabilize the financial
system and to restore confidence in economic management. Forceful measures were
implemented to stop bank runs, protect the payment system, limit central bank
liquidity support, and minimize disruptions to credit flows, maintain monetary control,
and stem capital outflows. Also emergency measures such as the introduction of
blanket guarantees and bank closings were accompanied by comprehensive bank
restructuring programmes, supported by macroeconomic stabilization policies.
During this crisis each of the affected countries turned to the International Monetary
Fund (IMF) for rescue, which came with various stiff conditions. The conditions
imposed by the IMF were to dismantle protected monopolies and slash deficits run by
national entities.
The South East Asian nations had a full and fast recovery post the criris. Between
1999 and 2005, their average per capita income grew 8.2%, investment grew by 9 %,

6. with foreign direct investment booming at an average annual rate of 17.5%. Korea,
Malaysia, Thailand, and Indonesia moved to improve banking supervision and
regulation and introduced more market discipline since the crisis. Supervision and
accounting transparency improved, and banks in Thailand, Malaysia, and the
Philippines have succeeded in ridding their balance sheets of nonperforming loans.
Thailand moved towards liberalization of the life sector under commitments to the
World Trade Organization on financial services. However limits on investment by
insurance companies were spelled out as part of Thailand's wider drive to reduce
risks in the financial sector.
Indonesia raised the minimum capitalization which was set at $ 214,000 for Life
Insurance companies.
Philippines: Income tax was reduced from 35% to 34% for 1998, 33% for 1999 and
32% for 2000 and thereafter.
China: People's Bank of China increased the range of annual compound interest on
life insurance premiums at 4 to 6.5%. Also China’s domestic insurance companies
signed a cooperation pact with the People’s Bank of China to bring to order the
(insurance) sector and strengthen the management and implementation of existing
regulations.
South Korea: South Korea allowed the nation's top five conglomerates to participate
in the life insurance industry.
Taiwan: Taiwan agreed with the US of not to implement regulations that would
severely restricted the operations of American insurance companies in Taiwan.
Singapore: Singapore liberalized the investment limits by insurance companies
• Aggregate limits in equities investments, including unit trust instruments,
were raised to 45% from 35%
• Limit of 10% was imposed on investment in any one unit trust
• Aggregate limits on property and property shares investments rose to 25%
from 20%
• Admitted investment values of foreign currency denominated and overseas
assets rose to 30% from 20%, except for non-investment grade foreign
assets which remained unchanged at 20%
6. Regulatory Measures after the Crisis
Boosting investor confidence: One of the major challenges for regulators in Asia
post the credit crisis was to limit the impact of the fall of AIG. Regulators across the
region assured policyholders to prevent a run on the insurer thereby limiting policy
withdrawals. Such measures including regulatory statements reassuring
policyholders on adequate reserves and stability of the local AIG units helped in
reassuring investor confidence among insurers in general. One of the major
measures post the crisis was the establishment of policyholder fund or initiatives
towards setting up a fund. CIRC set up a company to run insurance security fund
and in Thailand regulator was pushing for a contingency fund for protecting
policyholders.

7. Relaxing capital/investment norms: Another major challenge in countries where
insurers to market to market their loses, was the huge write downs which required
additional capital investment. Since the markets had fallen by more than 50% during
the period, countries such as Taiwan relaxed the RBC norms by letting Insurers to
recognize only 20% of paper losses on equity investments. Saving smaller insurers in
such scenarios was also a concern with Malaysia and Indonesia providing liquidity
assistance to the insurance companies with liquidity constraints and solvability
problem
The period also saw a relaxation of investment norms allowing insurers a wider range
of investment options and increasing the investment limits beyond government
investments. China raised the limits on infrastructure investments and allowed
insurers to buy equity in private firms. However falling equity markets was a concern
for regulators with China ruling out any proposal to raise the proportion for stock
investment of insurance capital at that point in time.
Scrutiny on Sales Practices:
The uproar over investment loses due to Lehman bonds led to closer scrutiny of
sales practices. In Hong Kong, the regulator required audio-recording of the sales
process and ancillary arrangements in the banking sector while selling ILPs. China’s
regulator conducted a nationwide check of agency services done by banks and
postal savings organizations while Korea regulator was trying out mystery shopping
to check on mis-selling practices. China eventually banned sale of ILPs in some of
the major markets including Shanghai and major insurers such as China Life stopped
selling ILPs.
Closer scrutiny and additional disclosures in India and China
Regulators in Asia especially in India and China increased their scrutiny and
disclosure requirements for insurers. China required insurers to submit daily reports
on their overseas investments in a move to check on the investment exposure to
troubled firms abroad. China also issued 22 new regulatory categories (include the
value at risk (VAR) of funds and stocks, AAA bonds, profit forecast for the next three
years, cash flow test for the next three years, and reserve adequacy test), under
which insurance institutions should submit relevant information starting January 1,
2009. Indian regulator asked for disclosure of more financial data, including solvency
margins, claims settlement records and loss ratios, on a quarterly basis and directed
insurers to furnish data on the performance of ILP funds
China’s regulator intended to check the facticity of financial data of insurers while
India asked all insurance companies to furnish the details of investments made in
Sep-Dec period and disclose ILP exposures to troubled company Satyam.
Conclusion
Unlike the Asian financial crisis, which resulted in a systemic failure of financial
institutions requiring broader intervention, the regulatory intervention in the current
crisis was limited. Except for some soured investments such as some insurers
exposure to Madoff and risky investments abroad such as Ping An’s exposure to
Fortis, which resulted in some write-downs, there were no broader systemic failure of
insurance companies. Hence regulatory role was restricted to measures to ensure
the safety of insurer’s investments and capital position and to improve consumer
confidence in insurers.

8. The crisis also presented an opportunity for regulators to plug some loopholes in the
system and place closer scrutiny on the insurers who were in need for capital and
liquidity. China’s layered method of categorizing insurers based on their solvency
margin is a good example which enables the regulator to focus on troubled insurers.
Such a measure should exclude the other insurers from more stringent regulatory
and disclosure norms which place a burden on insurers in compliance costs and
executive time.
The crisis also brought to fore the important role of the regulator and also the
effectiveness of self regulation in countries such as Hong Kong. Hence a move
towards a stringent direct supervision should not be considered to be a solution to
the crisis. This should bring into focus a much more self-regulated practices in other
developing countries such as China and India which will ease the current regulator
led norms and guidelines.
This study finds that the impact of the current crisis on regulations in Asia will be
more of a short term nature which is unlikely to hamper any of the long term
regulatory environments in these countries. This has been signified by the move to a
RBC norm by Malaysia and India’s efforts to further open up the markets to foreign
insurers.
Developing Asia still continues to have a restricted insurance environment in terms of
foreign ownership and distribution restrictions. The credit crisis has brought to the
fore some of the major concerns such as the exposure to ILPs and the capital
position of insurers. The period till 2012 is set to see a wider move to RBC norms
across some of the major countries with enhanced measures to improve consumer
protection

9. Table 1 - Summary of key regulatory initiatives post the credit crisis
Commissions/ Related party
Capital/Solvency Liquidity Investment Norms:
transactions
Approval for insurers to
buy equity in private firms;
Insurers now allowed to
China buy local government
Layered regulation: bonds and some To make detailed and
Categorizing insurers debenture bonds; set a 5 operable internal control
into four classes for per cent limit for systems to guard against risks
separated regulation infrastructure investments in related party transactions
India IRDA relaxed solvency Insurers to disclose the details
norms for ILPs, Insurers’ exposure limit to of payments by the company
annuities, pension plans infrastructure sector hiked to all intermediaries, except
, term and health plans to 20% from 15% individual agents
Liquidity assistance to
Indonesia Extending the enactment the insurance
of minimum capital companies with
regulation as from end of liquidity constraints and
2008 to 2010. solvability problem
Malaysia's central bank
Malaysia Risk-based capital provided a liquidity
framework to be effective facility to insurance
Jan 1, 2009 and takaful firms
Adjustment in RBC
Taiwan norms: Insurers to
recognize only 20% of
paper losses on equity Higher offshore asset
investments allocation limits
Misselling/Consumer
Investment linked Products (ILPS) Policyholder Fund
protection
CIRC to conduct nationwide
ILPs will be not allowed to be sold via banks' check of agency services done
savings counters; CIRC issued a notice to by banks and postal savings
insurers, requiring them to develop risk organizations; Insurers to
China
prevention and long-term savings products; demonstrate the settlement rates
Sales of endowment products with less than of new personal insurance
five years of insurance period and less than products clearly when selling CIRC set up a company to run
ten times installment premium banned them insurance security fund
Mandatory requirements for the
audio-recording of the sales
Hong Kong process and ancillary
arrangements in the banking Insurers propose to set up
sector while selling ILPs protection fund
Ombudsman to come under the
purview of IRDA is to streamline
the consumer grievance
India mechanism; Companies can’t
deny health cover renewal, says
Irda; IRDA to penalize agents if
IRDA directed that the premium of ILP life insurance policies are not
products second year should not be less renewed in a move aimed at
than 75 percent of the premium of first year curtailing misselling

10. MAS is consulting the public on
proposals to further safeguard
Singapore consumers’ interests and
promote higher industry
FIs will be required to undertake an standards for the sale and
enhanced product due diligence process marketing of unlisted investment
before selling new investment products products
Taiwan
Requirement for insurers to consider
product suitability when selling investment-
linked insurance products to customers
Thailand Regulator seeks permission from
the Finance Ministry to set up a
USD 292m contingency fund to
protect consumers
Disclosures Executive compensation
Insurers to submit daily reports on their overseas
investments; Issued 22 new regulatory categories
(include the value at risk (VAR) of funds and stocks,
AAA bonds, profit forecast for the next three years,
China cash flow test for the next three years, and reserve
adequacy test), under which insurance institutions
should submit relevant information starting January State-owned insurers to cap executive salaries;
1, 2009; CIRC to check the facticity of financial data insurers to suspend stock incentive plans until
of insurers in a bid to ensure a healthy and stable government issues new rules permitting such
insurance market schemes at financial institutions
Starting 1 Apr 2009 life insurance companies to
show all details of charges deducted from premiums
of ILPs.
Disclosure of more financial data, including solvency
India margins, claims settlement records and loss ratios,
on a quarterly basis; To direct life insurers to furnish
data on the performance of ILP funds.
All insurance companies to furnish the details of
investments made in Sep-Dec period; ILP Cap on CEOs pay at Rs 1.5 Crores per Annum
exposures to troubled company Satyam to be Modified norms for the issuance of ESOP/sweat
disclosed equity to CEOs.
Singapore Insurers are required to issue statements on
participating funds for 2007, in the form of an
'annual bonus update'
Tie-ups Other
Licence
CIRC issued 407 administrative penalties to New accounting standards: Investment
insurance branches, insurance income and savings income charged
intermediaries and other unlawful CIRC and China Banking together with the premium will no longer be
China corporations; Sino-US MetLife Fined Regulatory Commission calculated into premium income; New
CNY100,000 for misleading sales; (CBRC) will join hands in legislation gives the China Insurance
Regulator hits PICC Health for violating regulating the mainland's Regulatory Commission (CIRC) greater
regulations on universal life products bancassurance market power in regulating insurers' capital level
Hong Hong Kong to consider independent
Kong insurance authority to further improve the
insurance supervisory framework

11. Insurance industry to have new M&A
guidelines by March 2010; IRDA working on
guidelines to allow insurance companies to
India
hedge their portfolios with derivatives;
Drawing up plans to strictly monitor
insurers' expenses and premium charged
for group and guaranteed return policies
Indonesia Government to revoke agency license
Finance Minister revoked the business temporarily to prevent from insurance
license of PT Asuransi Jiwa Jaminan 1962 agency pouching
35 insurance firms yet to comply with the House body has recommended the
Philippines government's prescribed capitalization Insurance Commission (IC) as regulator of
requirements face cease-and-desist orders the pre-need industry
Signed a MOU with Dubai
Financial Services Authority
for supervisory cooperation
Singapore in banking, insurance and
capital markets; Singapore,
3 firms told to cease financial advisory Germany to co-operate on Amendments to the Insurance Act enables
service due to lack of adequate insurance and banking policyholders to change beneficiaries of
management oversight and control policies supervision insurance policy
Tied up With Financial
Authority in Dubai; Signing
Taiwan
of MOU for the financial
sector with expected tby
mid-2009
Thailand
Revoked the license of Samphan Tax breaks on A&H riders or additional
Insurance as it failed to raise capital to contracts attached to life insurance policies,
meet the required level to end

12. References
The Credit Crisis and the Insurance Industry, www.genevaassociation.org
Swiss Re Sigma reports
Insurance Banana Skins 2009, PWC
Asia Insurance Review
Country Regulatory websites, news releases and policy documents
Country Life Insurance associations