MAS responds to feedback from consultation on Group Capital Framework for a Designated Financial Holding Company (Licensed Insurer)

25 August 2023

On 28 July 2023, the Monetary Authority of Singapore (“MAS”) published its response to feedback received from its consultation paper on Group Capital Framework for a Designated Financial Holding Company (Licensed Insurer) (“Response”).

Background

On 27 October 2022, MAS issued a consultation paper to seek feedback on the key proposals that will be encapsulated within the Group Capital Notice that applies to all designated financial holding companies that have a subsidiary that is a licensed insurer incorporated, formed or established in Singapore (“DFHC (Licensed Insurer)”). The Group Capital Notice sets out the valuation and capital requirements for all DFHC (Licensed Insurers) based on the RBC 2 consolidation approach.

Scope of FHC group for solvency assessment

The proposed Group Capital Notice states that all subsidiaries and any other entities within the financial holding company (“FHC”) group must be included in the calculation of Group Capital Adequacy Ratio (“Group CAR”) except for certain circumstances, such as if an entity is deemed as not material. Some respondents sought clarification on the process and timeline in including an entity that exceeds the materiality thresholds. There were concerns that an entity may exceed the materiality thresholds only temporarily, and lead time should also be given for the DFHC (Licensed Insurer) to include an entity for regular group reporting.

MAS said in its Response that it agrees that discussions with the DFHC (Licensed Insurer) would be necessary to better assess whether an entity should be included within Group CAR when it exceeds the materiality thresholds. Considerations would include the group’s business strategy, business plan and other related matters for the affected entity.

MAS will also change the approach to be taken under the Group Capital Notice such that a DFHC (Licensed Insurer) should, by default, include all entities within the FHC group for Group CAR calculation unless an exemption has been sought from MAS to exclude any entity.

Group financial resources

For any entity within the FHC group that is excluded from the computation of Group CAR (upon receiving an exemption from MAS), the proposed Group Capital Notice states that any deficit arising from such an entity must be included in the Group Financial Resources (“Group FR”), i.e. the deficits will reduce Group FR, and hence, Group CAR.

Following feedback, MAS said that given that such deficits on RBC 2 basis would not be readily available (since they are excluded from Group CAR calculations), MAS agrees for such deficits to be measured using prevailing accounting standards, i.e. those that are used for the preparation of the FHC group’s financial statements.

Interest rate mismatch risk requirement

MAS proposed to determine the interest rate mismatch risk requirement for the FHC group at each jurisdiction level (i.e. the dominant interest rate scenario would be determined for all entities operating within the same jurisdiction).
The dominant interest rate scenario is the upward or downward interest rate adjustment(s) that would result in a larger reduction in the net assets for all entities operating within the same jurisdiction.

Given that the correlation matrix to derive diversified market-related C2 requirement depends on the dominant interest rate scenario, clarification was sought on which correlation matrix to use in aggregating the C2 risk requirement at the overall group level if the dominant interest rate scenario is different across jurisdictions.

In the Response, MAS said that it will be adopting the approach where the dominant interest rate scenario in determining which correlation matrix to use in deriving market-related C2 requirement at the group level will be the scenario that results in the highest aggregated amount of interest rate mismatch risk requirement within the group.

Implementation date

MAS received feedback that it would be neater to implement the Group Capital Notice with effect from the beginning of a financial year rather than in the middle of a financial year. Feedback was also received that more time was needed to comply with the revised group reporting requirements under MAS Notice FHC-N129 on Returns.

MAS noted the feedback and will change the implementation date of the Group Capital Notice from end-June 2023 to 1 January 2024. MAS had earlier informed all DFHC (Licensed Insurer)s on the revised implementation date.

Reference materials

The Response is available on the MAS website www.mas.gov.sg.