ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) has issued a concept paper on Risk Based Capital (RBC) Regime, outlining the possibility of shifting from existing solvency-based regime towards an RBC regime for Pakistan’s insurance sector.
The proposed framework is consistent with international best practice, aimed at improving corporate governance, enterprise risk management and public disclosure practices of insurers. The existing requirements of Insurance Ordinance 2000 and Insurance Rules 2017 prescribe a rule-based capital adequacy framework for insurers in Pakistan.
This risk based capital framework, which includes a consistent approach to the valuation of assets and liabilities, will provide the basis for calculation of minimum capital which will serve as an effective buffer to absorb losses. With greater transparency, it will facilitate comparisons across insurance companies. It will also provide clearer information on the financial strength of insurers, and facilitate early and effective intervention by the Commission, if necessary.
While focusing on overarching principles, the Concept Paper contains clear and consistent valuation standards (including explicit best estimates of technical provisions and risk margins) and risk-sensitive capital requirements covering all types of risks which individual insurers are bearing. It also deliberates on the calculation, levels of capital adequacy, methodology for available and required capital and difference risk capital charges.
The concept paper is based on the recommendations of the Technical Working Group (TWG) formed by the SECP. The TWG was composed of officials of Pakistan Society of Actuaries, SECP representative and actuary from the private sector.
It has been recognized globally that the capital adequacy framework should consider risk factors of different insurers, and be conducive to enhancing the corporate governance, enterprise risk management (ERM) and public disclosure practices of insurers.
The International Association of Insurance Supervisors (IAIS) – the global standard-setter for the insurance industry – has issued Insurance Core Principles (ICPs) in relation to RBC requirements in late 2011. All insurance supervisors, including the SECP, in order to ensure conformity with best international practices are obliged to comply with ICPs.
Accordingly, the Commission plans to move from existing solvency regime towards an RBC regime, establishing a clear and consistent valuation standard (including explicit best estimates of technical provisions and risk margins) and risk-sensitive capital requirements covering all types of risks.
The choice and level of risk parameters is an issue of paramount importance for developing an RBC model. Therefore, data analysis and quantitative impact study is necessary to adjust the proposed level of capital charge and stress test in line with our local environment and industry dynamics. This is dependent on judgement as well as analysis of data.
To determine the risk charges, it is also necessary to develop an understanding of the loss function for each risk i.e. to measure the impact on a typical balance sheet at the desired confidence level. We are of the view that in the second phase a detailed data gathering exercise will be needed to access the level of proposed capital charges and level of capital adequacy.
Data analysis should be conducted for different types of insurers to ensure that the new regime is viable and practicable, and that it should not bring about instability to the insurance industry.
In order to have a broad-based consultation on the proposed regime and to ensure that the proposed RBC framework is viewed in the light of local industry feedback, SECP has invited all the stakeholders to provide their feedback and comments on the concept paper at RBC [email protected].
Copyright Business Recorder, 2022
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