MAS consults on proposed framework for systemically important insurers in Singapore

10 November 2022

On 25 October 2022, the Monetary Authority of Singapore (“MAS”) published a consultation paper seeking comments on a proposed framework for systemically important insurers in Singapore. The consultation closes on 30 November 2022.

In the consultation paper, MAS sets out a framework to identify domestic systemically important insurers (“D-SIIs”) in Singapore and address the risks they pose. The proposed D-SII framework adds to MAS’ existing efforts to address the negative externalities associated with systemically important financial institutions and provides an outline of the methodology to be employed to assess the systemic importance of insurers in Singapore and a range of policy measures that may apply to D-SIIs.

In developing the proposals relating to the D-SII framework, MAS considered the assessment methodology for individual insurer monitoring by the International Association of Insurance Supervisors (“IAIS”), as well as the supervisory policy measures under the Holistic Framework for Systemic Risk in the Insurance Sector developed by IAIS and the Key Attributes of Effective Resolution Regimes for Financial Institutions issued by the Financial Stability Board (“FSB KA”).

Proposed D-SII framework

MAS seeks to develop a D-SII framework that achieves the following objectives:

• to update MAS’ diagnostic toolkit for assessing systemic importance of insurers and identifying D-SIIs; and
• to establish a range of policy measures that may be applied to D-SIIs.

The focus of the proposed D-SII framework is to identify insurers whose individual distress or disorderly failure would cause significant disruption to Singapore’s financial system and economic activity. As such, MAS proposes to assess all licensed insurers under the D-SII framework.

Assessment methodology

Indicator-based approach

MAS proposes to adopt an indicator-based approach to assess insurers’ systemic importance. The proposed indicators will be based on the following four factors:

• Size: MAS proposes to use share of Singapore Insurance Fund (“SIF”) total assets and share of SIF gross written premiums (“GWP”) as measures of size.
• Interconnectedness: MAS proposes to assess interconnectedness in the following areas: (1) insurer’s investments in the Singapore capital market, such as government debt securities, corporate debt securities, listed equities, and derivatives, (2) insurer’s borrowing via Singapore bank loans and overdrafts, and via Singapore’s debt market, (3) insurer’s financial guarantee business, (4) insurer’s linkage within the insurance market through reinsuring the risks, and (5) insurer’s linkage to another domestic systemically important financial institution.
• Substitutability: MAS proposes to assess substitutability of key business lines as part of the D-SII assessment framework and identify insurers with larger market share for the respective lines of business.
• Complexity: The following indicators will be considered when assessing the complexity of an insurer in Singapore: (1) the importance of its Singapore operations to the whole insurance group, (2) number of foreign jurisdictions in which a Singapore-incorporated insurer has branches in, (3) share of insurers’ non-SIF business by GWP, and (4) any non-insurance activities that increases system wide impact.

Assessment approach

MAS proposes to adopt a two-stage process for the assessment of an insurer’s systemic importance:

• Stage one - Preliminary section: MAS will select insurers that cross the threshold of any impact indicator in the size, interconnectedness and substitutability categories for further deliberation. As complexity itself is not a sufficient reflection of systemic importance, MAS will only select an insurer which is high in complexity if it is also near the threshold of an indicator in any of the other three categories.
• Stage two - Detailed consideration: MAS will make an overall assessment, taking into account all four factors of systemic importance. This second stage review is necessary to mitigate the limitations associated with an otherwise mechanistic indicator-based approach.

Periodic review

MAS proposes to assess insurers’ systemic importance on an annual basis. Two years of data will be taken into account before designation of a D-SII or removal of D-SII status.

Policy measures

MAS proposes the following policy measures specific to D-SIIs:

• Higher capital requirements: MAS proposes to impose a 25% capital add-on on D-SIIs, which will increase a D-SII’s higher and lower supervisory intervention levels as well as Common Equity Tier 1 and Tier 1 capital ratios. The 25% capital add-on will replace the high impact surcharge.
• Recovery and resolution planning: MAS proposes to subject D-SIIs to a requirement for an ongoing process of recovery and resolution planning, including providing information to MAS that is relevant to the preparation of resolution plans.
• Robust management information system: MAS expects all D-SIIs to put in place robust management information systems that allow information to be readily available for the orderly resolution of a D-SII. This includes the information set out by the FSB KA and information relating to the regulatory capital and reinsurance arrangements in place.
• Enhanced corporate governance requirements: With the introduction of the D-SII framework, MAS is reviewing the corporate governance requirements that should be applied to designated D-SIIs given their systemic importance. This will be part of a wider review of the corporate governance regulations for the insurance sector and the proposals will be consulted on separately.

Implementation timeline

MAS proposes to implement the D-SII framework on 1 January 2024 and will publish the initial list of D-SIIs by Q1 2024. This list of D-SIIs will be determined based on end-2021 and end-2022 data. The insurers who are designated as D-SIIs will be informed in Q4 2023.

MAS will publish the list of D-SIIs annually after each D-SII assessment exercise, when there are changes to the list.

To ensure that the framework takes into account developments in the insurance sector and in international assessment methodologies, MAS proposes to review the D-SII framework, including the methodology and indicators, every three years.

Reference materials

The consultation paper is available on the relevant webpage of the MAS website www.mas.gov.sg.