Jun 2010 Financial News

Tougher, risk-based standards... general insurers to face changes by year-end

Jun 02, 2010

Meeting the 150 per cent state-imposed statutory minimum asset test (MAT) requirement this year, up from the 135 per cent benchmark last year, may not be enough for the country's 12 general insurance companies, which among themselves boast total assets of $193.4 billion and raked in net premium income of $27.5 billion up to September last year.

The Financial Services Commission (FSC), the Government watchdog that regulates the industry, wants a new risk-based solvency model, the minimum capital test (MCT), now still being developed, to be in place by year-end to judge the health of general insurance businesses when they next file their financials.

"We hope to implement, by 2011, in time for the filing of the annual statements for 2010, the MCT, promoting the implementation of better techniques in risk management and asset liability management that have been revealed by the global crisis to be adequate," Leon Anderson, senior director of insurance at the FSC told Wednesday Business.

Financial health determined by solvency

So rather than simply looking at the general insurance companies' balance sheets and assessing the strength of their assets, these business will, possibly by year-end, have their overall financial health determined by their solvency as well as other threat indicators including insurance, asset default, catastrophe, credit, market, and foreign currency exposure risks. Insurance risks would include bad business, adverse claims and other underwriting perils.

"For the last two years companies have been filing both the MCT and the MAT which gave us a chance to compare, and what we have noted is that a company's MAT is higher because the MCT is taking into consideration the risk of each company, the MCT being a more individual measure, while the MAT is more or less global," said Anderson.

The FSC is currently combing through the results for each insurance company under the two standards and will eventually decide the minimum

MCT standard, which the regulator said, is be discussed and agreed with the industry.

At the end of December 2009, several insurance companies failed to reach the 135 per cent mandatory threshold level set by law and policed by the FSC. The regulator has noted with some concern that at 100 per cent the companies are already solvent with the other 35 per cent providing a buffer which, in the current economic environment it said, can disappear quickly.

Life insurance companies are already being scrutinised under a risk-based system, the minimum continuing capital solvency requirement (MCCSR).

The MCT model being developed is based on a similar system used by Canadian insurance regulators, and assesses the level of risk to which assets and policy liabilities are exposed by applying various factors and margins. The new measure, being hammered out by the FSC and the industry, also compares available capital to capital. The minimum level at which the MCT is to be set is still the subject of discussion between the regulator and the insurance companies.

"We are in the final stages of discussion with the insurance industry and development of the solvency mechanism standard is to be set, which, of course, will also require amendment to the regulation," said Anderson.

The amendments will be made to regulation 29 of the Insurance (Actuaries) (General Insurance Companies) Regulations 2001.

Changes in minimum solvency rates

Currently, changes in minimum solvency rates required of general insurers are set out in the regulations which stipulate, starting at 100 per cent in 2001, the year it was introduced, the minimum asset levels the companies must meet.

"These prudential regulations are to ensure that insurance companies are operating with adequate capital, that they are solvent and that they can meet their obligations as they arise," Anderson pointed out.

While general insurance companies are also now encouraged to voluntary conduct stress tests, Anderson noted that the regulation will also be amended to make it a mandatory action for companies.


Source:
Sabrina Gordon, Business Reporter
sabrina.gordon@gleanerjm.com
Jamaica Gleaner
Wednesday June 2, 2010

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