On 19 February 2021, the Monetary Authority of Singapore ("MAS") issued a consultation paper inviting public comments on proposed revisions to MAS Notice 126 on Enterprise Risk Management, MAS Notice 125 on Investments of Insurers and MAS Notice 124 on Public Disclosure Requirements.
The proposed revisions to MAS Notices 126, 125, and 124 are intended to align MAS' rules and regulations for insurers in line with the development of the Holistic Framework for Systemic Risk in the Insurance Sector (and corresponding updates to the Insurance Core Principles) by the International Association of Insurance Supervisors in November 2019 for the purpose of mitigating systemic risk in the insurance sector.
1. Applicability of the MAS Notices to Insurers
MAS Notice 126 applies to all licensed insurers, except for captive insurers and marine mutual insurers. The enterprise risk management requirements and guidelines in this Notice set out how insurers are to identify and manage interdependencies between key risks, and how these are translated into management actions related to strategic and capital planning matters.
MAS Notice 125 applies to all licensed insurers, with certain exceptions. This Notice governs the oversight of investment activities of an insurer and the investments of its insurance funds, and where it is incorporated or established in Singapore, the investments of its shareholders' funds as well.
MAS Notice 124 applies to all licensed insurers, except for captive insurers, marine mutual insurers, and run-off insurers. This Notice sets out requirements for an insurer to disclose relevant, comprehensive and adequate information on a timely basis in order to give a clear view of its business activities, performance and financial position.
2. Key Revisions to MAS Notices
a. MAS Notice 126 on Enterprise Risk Management
The proposed revisions to MAS Notice 126 are meant to strengthen insurers' risk management practices, which include the enhancement of liquidity risk management and stress testing processes, and to prevent insurance sector vulnerabilities and exposures from developing into systemic risks.
MAS is proposing that an insurer must adopt the following additional risk management practices:
- identify and address concentration risk in its enterprise risk management framework, in addition to the risks currently set out in MAS Notice 126, which include insurance, market, credit, operational and liquidity risks;
- as part of its Own Risk and Solvency Assessment ("ORSA");
- perform stress testing on material counterparty exposures;
- perform macroeconomic stress testing;
- establish liquidity management processes, in particular to:
- maintain an unencumbered portfolio of liquid assets;
- perform liquidity stress testing;
- establish a liquidity contingency funding plan to address liquidity shortfalls; and
- submit a liquidity risk management analysis as part of the ORSA report.
MAS has also proposed to issue guidelines to provide clarity on the new requirements to allow insurers to make the necessary changes to their risk management practices to comply with these new requirements.
b. MAS Notice 125 on Investments of Insurers
The proposed revisions to MAS Notice 125 are meant to provide more clarity on MAS' expectations regarding the investment activities of insurers.
MAS is proposing to require an insurer to include the following additional information in their board-approved written investment policy under Appendix A of MAS Notice 125:
- establishment of limits for the allocation of assets by type of asset and credit, in addition to the existing requirements to establish limits for the allocation of assets by geographical area, markets, sectors, counterparties and currency;
- a consideration of whether the formulation of a counterparty risk appetite statement is necessary, based on the size of the insurer's counterparty exposures, as well as the complexity and form of these exposures.
Additional changes proposed for MAS Notice 125 include the following:
- excluding special purpose reinsurance vehicles ("SPRVs") from the requirements under paragraphs 8 to 20 of MAS Notice 125, in addition to the existing exclusions for captive insurers and marine mutual insurers; and
- exempting an insurer from paragraphs 13 to 14 of MAS Notice 125 in respect of the part of any insurance fund established and maintained for its investment-linked policies under section 17(1A)(a) of the Insurance Act, in addition to the existing exemption from paragraphs 21 to 28 of the same Notice in respect of such insurance funds.
c. MAS Notice 124 on Public Disclosure Requirements
The proposed revisions to MAS Notice 124 are meant to enhance the public disclosure requirements in the areas of investment risk, company profile information, technical provisions, and non-GAAP financial measures.
Based on the existing requirements under MAS Notice 124, an insurer must disclose such information in its annual returns lodged with MAS and published on MAS' website, or in any document lodged with ACRA and made publicly available by ACRA, or on the insurer's official website (which may include an insurer's existing Group website). Such disclosures are also required to be made within 6 months from the last day of the financial year, or within 6 months from the last day of the accounting period applicable to the insurer.
MAS is proposing that an insurer must publicly disclose the following additional information:
- quantitative and qualitative information on liquidity risk,
- quantitative information on sources and uses of liquidity, and
- qualitative information on liquidity risk exposures, management strategies, policies and processes;
- known trends, significant commitments, significant demands and reasonably foreseeable events that potentially results in material improvement or deterioration in liquidity;
- quantitative and qualitative information on investment risk,
- quantitative information on currency risk, market risk, credit risk and concentration risk, and
- qualitative information on the management of investment risk exposures, use of derivatives for hedging investment risks and internal policies on the use of derivatives;
- information on its corporate structure, including any material changes that have taken place during the year, and key business segments;
- a description of the formula or methodology of financial measures used in its disclosures, other than those specified in the accounting standards or MAS' legislation (e.g. non-GAAP measures), accompanied by appropriate disclaimers that such financial measures do not have a standardised definition within the relevant accounting standards and MAS' legislation and hence may not be comparable with other entities.
Additional changes proposed under MAS Notice 124 include the following:
- amending the Notice to clarify that the disclosure requirement in respect of the determination of technical provisions shall be presented based on material insurance business segments; and
- excluding SPRVs from the public disclosure requirements in MAS Notice 124, in addition to the existing exclusions for captive insurers, marine mutual insurers and run-off insurers.
3. Closing Date of Consultation
The consultation closes on 19 March 2021 and a copy of the MAS consultation paper can be obtained here.
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