There has been a lot of focus on new regulation for banks, but insurers also face major changes in regulation and this is driving some to consider radical options, says KPMG.
In a new publication, Evolving Insurance Regulation: Time to get ahead…, KPMG provides an overview of global and local Asia Pacific insurance regulatory trends. A key issue emerging from this is whether the effect of these changes will be to drive business - and perhaps companies - to locations such as Hong Kong.
"As we've seen with some of the major banks, regulatory change is now forcing insurers to think about where they want to focus their business, and Hong Kong could well be a beneficiary of this" says Simon Topping, leader of KPMG's regulatory practice in Asia Pacific. "Hong Kong and particularly China are major potential growth markets, and the regulatory regime here is, some would say, more "balanced" than it is becoming in Europe. This means that insurers are looking hard at their options".
Insurers worldwide face the expense of adapting to major changes in solvency requirements stemming primarily from the "Solvency II" initiative. Many regulators in Asia plan to follow suit with their own local adaptations of Solvency II, but there is a feeling that regulators here are likely to show more pragmatism in implementation, which would be welcomed by insurers.
"It is important for the credibility and safety and soundness of the local market for Hong Kong and other Asian jurisdictions to adopt more advanced regulatory regimes similar to Solvency II and the "Insurance Core Principles" of the International Association of Insurance Supervisors" says Topping. "But at the same time, insurers are looking to the regulators in places like Hong Kong, which are important regional centres, to remain business-focused and not go over-the-top on regulation. This is one of the things that has made and continues to make Hong Kong attractive - an appropriate level of regulation, but with an eye to the role Hong Kong plays in respect of China and the wider region".
An additional complication is that moves are afoot to designate certain major insurers as "systemically important", which could mean enhanced oversight, a requirement to undertake recovery and resolution planning, and possibly additional capital requirements. "Classing insurers as 'systemically important' remains highly contentious" says Topping, "but it seems likely that regulators will push ahead with this, creating uncertainty and adding to the pressure on the major insurers".
Insurance regulators, including Hong Kong's Office of the Commissioner of Insurance, now have the mandate, through membership of the IAIS, to put through enhancements to risk and capital regulation. These enhancements are likely to lead to the implementation of a risk-based capital regime in Hong Kong, alongside required enhancements to the enterprise risk management (ERM) framework of insurers.
Based on experience in other overseas insurance markets, say KPMG, these enhancements are likely to mean a change in the basis and level of required solvency capital, and an increase in the sophistication that insurers are required to display when managing their business and strategising for future growth.
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About the Report
KPMG's report, titled Evolving Insurance Regulation: Time to get ahead…, is part of a series which focuses on the emerging regulatory developments currently facing the insurance and wider financial services industries. The publication provides insight on emerging global regulation and regulatory trends, as well as providing in-depth analysis and insight of local insurance markets across Asia Pacific, Europe, the Middle East, Africa and the Americas.
This year the focus of the publication continues on risk management and prudential regulation, and provides insight on the value creation that insurers are gaining from thoughtful implementation of change.
The 2012 publication also broadens the debate by discussing the increased focus by many regulators on a new wave of customer protection regulations hitting the sector.
KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 150 countries and have 138,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.
KPMG China has 13 offices (including KPMG Advisory (China) Limited) in Beijing, Shanghai, Shenyang, Nanjing, Hangzhou, Fuzhou, Xiamen, Qingdao, Guangzhou, Shenzhen, Chengdu, Hong Kong and Macau, with around 9,000 professionals.