Insurance Industry's Strategic Transition to Meet New Capital Standards
Table of Contents
You might want to know
- What are the new capital requirements for the insurance industry?
- How will the transition to the new ICS impact insurance companies?
Main Topic
The impending implementation of the new International Capital Standard (ICS) for the insurance industry marks a significant shift in regulatory requirements. Effective from 2026, the ICS aims to enhance solvency standards by increasing the confidence level in risk calculations from 95% to 99.5%, thereby broadening the scope of risks considered. These include traditional market and credit risks, while new risks such as interest rate, longevity, lapse, expense, non-default spread, and catastrophe risks will also be evaluated.
To aid the industry in transitioning smoothly to this rigorous framework, regulatory authorities have introduced a 15-year transitional measure focusing on capital and risk management adjustments. The initiative highlights an essential need for insurance companies to maintain a Risk-Based Capital (RBC) ratio above 200% to participate. As a part of this strategy, companies must submit their intention by November 7 and a formal application approved by their board by December 15. The measure is not designed to loosen oversight but to provide a structured 5-year capital strengthening strategy, aiming to create a "borrow early, repay early" cycle.
Particularly, the insurance bureau's head has indicated a substantial increase in the stringency of capital requirements. The self-owned capital and liabilities will now be evaluated on a fair value basis, creating a realistic reflection of an insurance company's risk profile. This approach will aid in gradually absorbing the impacts of interest rate fluctuations and allow adjustments over a defined period.
In a structured manner, there are three significant transitional measures companies can opt for, based on their financial and product structures. These include:
- Interest Rate Risk Transition Measures: Given the significant impact of interest rates on long-term life insurance products, the initial capital requirement is set at a minimum of 50% of the risk capital, increasing gradually to 100% over 15 years. This allows companies time to adjust their asset-liability configurations, cushioned against sudden capital requirement spikes.
- Emerging Risks Transition Measures: Covering risks such as longevity, lapse, expense, and catastrophe, initially set at 0% in the first year, the capital requirements will gradually incorporate these risks over the transition period, easing early pressure while allowing time for flexibility.
- Net Asset Transition Measures: Addressing old high-interest New Taiwan Dollar policies, this allows balance sheet fluctuations between insurance liabilities and assets, after tax adjustments, to be gradually phased into the capital.
Companies must meet predefined conditions by mid-2025 to be eligible, ensuring compliance with a minimum capital level. Additionally, ongoing reviews will reaffirm the commitment to enhancing capital resilience during the transition.
Key Insights Table
| Aspect | Description |
|---|---|
| Enhanced Risk Calculation | Confidence levels for risk calculation increased from 95% to 99.5%. |
| Fair Value Assessment | Capital and liabilities now assessed by Mark-to-Market basis. |
Afterwards...
Looking forward, the insurance industry is increasingly inclined to pursue technological advancements in risk modeling and capital management systems. These innovations can help companies navigate the evolving regulatory landscape while simultaneously enhancing prudential experience and shareholder value. Emphasizing sustainable practices and technological integration will be crucial as insurers aim to bolster both capital reserves and consumer trust.