Jurisdiction - Singapore
Singapore – MAS Issues A Second Consultation Paper On The Proposed Revisions To The Risk Based Capital Framework For Insurers.

20 May, 2014


Legal News & Analysis – Asia Pacific – Singapore – Insurance & Reinsurance


Following its consultation on the Review on Risk-Based Capital Framework for Insurers in Singapore started in June 2012, the Monetary Authority of Singapore (“MAS”) issued a follow-up consultation paper in March 2014.

A key component of the second consultation is a review of the proposed technical specifications, for which it is carrying out a Quantitative Impact Survey (“QIS”). All insurers (with the exception of captives, Lloyd’s insurers, and marine mutuals) will be required to conduct the QIS in respect of three scenarios. The completed results for the first two scenarios are to be submitted to the MAS no later than 30 May 2014, while the completed results for the third scenario must be submitted by 30 June 2014.

The MAS is targeting to implement the revised risk-based capital framework from 1 January 2017. It intends to finalise the calibration factors and features of the revised framework by 2014. The proposed changes to the risk-based capital framework are briefly summarised below:


Solvency Intervention Levels:

  • Notwithstanding that some initial responses to the earlier consultation paper suggested that it would be sufficient to apply the intervention levels only at the company level and not the insurance fund level, the MAS will be proceeding with its proposal to adopt the two supervisory intervention levels, Prescribed Capital Requirement (“PCR”) and Minimum Capital Requirement (“MCR”), at both the company as well as at an insurance fund level.
  • The MAS will take its strongest enforcement action if the MCR is breached. The MCR will be calibrated as a fixed percentage of the PCR for ease of computation and future monitoring, and the MAS will be proposing a simplified formula for consultation at a later stage, based on the results of the QIS.

Valuation Of Assets And Liabilities:


  • Following feedback from the first consultation, the MAS will not be adopting the cost-of-capital approach for deriving the provision for adverse deviation (commonly known as a risk margin).
  • The only changes that it is proposing to the valuation framework for solvency purposes are the discounting approaches for policy liabilities as well as the introduction of a matching adjustment mechanism.
  • In the case of discounting SGD denominated liabilities, the MAS proposes to gradually phase out the use of the stable long-term risk free discount rate (“LTRFDR”) and to instead adopt a methodology using a weighted average of the existing LTRFDR and the yield of the 30-year Singapore Government Securities (“SGS”).
  • In the case of discounting foreign currency denominated liabilities, the MAS proposes to work with the industry to develop prescribed discount rates.
  • The matching adjustment mechanism is designed to addressed the notion that insurers with more predictable future liability cash flows (and hence is more likely to have a bond portfolio which is to be held to maturity) are less exposed to market risk such as short-term volatility in bond prices. As such, such insurers should enjoy an illiquidity premium adjustment or matching adjustment to reflect the reduced risk profile. Such insurers are still however exposed to default or downgrade risk in their bond portfolio. The matching adjustment is a parallel upward adjustment applied to the risk free discount rate used valuing eligible policy liabilities, and is derived from the portfolio of bonds that are backing the eligible policy liabilities. In order to derive the matching adjustment, it is necessary to determine the spread for default and downgrade. The MAS is seeking feedback on the methodology of determining the spread for default and downgrade.


Components Of Required Capital:


  • The MAS has decided to proceed with its original proposal to recalibrate risk requirements using the VaR measure of 99.5% confidence level over a one year period.
  • When summing the C1, C2, and C3 requirements to calculate total risk requirements, the MAS proposes to allow for diversification benefits.
  • The second consultation also seeks feedback on the reorganisation of risk modules used for the calculation of the total risk requirement.

Components Of Available Capital:


  • The MAS proposes some alignment in the classification and definition of available capital components for insurers to be consistent with the capital framework for banks. This is in line with MAS’ stated objective of a consistent regulatory framework for financial institutions.
  • The MAS proposes to introduce a new category of Common Equity Tier 1 for licensed insurers incorporated in Singapore. The Common Equity Tier 1 is proposed to include paid-up capital and retained earnings, surplus of insurance funds (excluding participating fund),and surplus account for the participating fund.
  • The MAS will be proceeding with its proposal to incorporate for insurers the Principal Loss Absorption Feature for Approved Tier 1 (“AT1”) resource and the Point of Non-Viability Feature for AT1 and Tier 2 capital instruments.
  • The MAS also proposes to do away with the approval regime for insurers planning to issue AT1 and Tier 2 capital instruments which meet the prescribed criteria.
  • As regards its original proposal to recognise negative reserves and the allowance for provision for non-guaranteed benefits as a form of positive financial resource adjustment, it now proposes to recognise these as a form of positive regulatory adjustment.

Treatment Of Offshore Insurance Fund:


  • The MAS proposes to continue to exempt the offshore insurance funds (“OIF”) of licensed reinsurance branches from the solvency requirements, and to continue to subject the OIF business of foreign-owned locally incorporated reinsurers to the current simplified solvency requirement. It proposes that the OIF of locally-owned locally incorporated reinsurers be subject to full requirements of the new risk-based capital framework.




For further information, please contact:


Choon Yuen Hui, Partner, WongPartnership

[email protected]


Homegrown Insurance & Reinsurance Law Firms in Singapore 



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