MAS drops capital provisions for insurers

The Monetary Authority of Singapore has announced a drop in capital requirements for insurers

Insurance News

By Jordan Lynn

The Monetary Authority of Singapore (MAS) has announced a drop in capital requirements for insurers.

In its third consultation paper on proposed revisions to the Risk-Based Capital (RBC) framework for insurers, MAS revised down the capital standards of insurers following feedback from the industry.

“Since the first consultation in 2012, MAS has been closely engaging relevant stakeholders in its review of the RBC framework to ensure that the framework remains relevant to industry’s needs while enhancing protection for policyholders,” MAS said in a statement.

“The review reflects MAS' ongoing efforts to maintain prudent capital requirements that are commensurate with insurers' risk profiles and business activities and in line with international standards and best practices. 

“The revised RBC framework will create a more conducive environment for insurers to invest in equities and long-dated bonds and offer long-term insurance products for policyholders.
“Policyholders will benefit from better product pricing and asset allocation decisions made by insurers.”

The consultation paper also adjusted the discounting of life insurance liabilities to help reduce short-term volatility and allow insurers to provide sustainable, long-term insurance to policyholders.

“For life insurers with predictable liability cash flows, the bonds that are held to back these liabilities are typically held to maturity. Under the current RBC framework, an insurer’s capital adequacy fluctuates with the short-term market volatility in interest rates and credit spreads, even though the underlying financial strength of the insurer has not changed,” the paper says.

“To address this issue, MAS consulted in 2014 on the use of an MA (matching adjustment).

“This is a parallel upward adjustment to the risk-free rates used for discounting the eligible liability cash flows. It is derived from the actual bonds that insurers hold to back their liabilities, and is equal to the spread of the bond yields over the risk-free rate, less an estimated spread for the cost of default and downgrade of the bond. The resultant effect is that it allows policy liabilities to mirror closely the market changes in bond values that are unrelated to defaults or downgrades.

“Given the consultation feedback, MAS proposes revisions to widen the eligibility criteria for the use of the MA.”

Chua Kim Leng, assistant managing director (Banking & Insurance) of MAS, said that the purpose of the revisions is to ensure that MAS better reflects the insurance industry.

"Insurers in Singapore are well-capitalised,” Leng said.

“The purpose of the RBC 2 review is therefore not to raise regulatory capital requirements, but to ensure that our framework for assessing capital adequacy better reflects an insurer’s activities and risk profile.”

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