MAS issues consultation paper on capital treatment for structured products and infrastructure investments for insurers

28 November 2024

On 18 October 2024, the Monetary Authority of Singapore (“MAS”) published its Consultation Paper on Proposed Capital Treatment for Structured Products and Infrastructure Investments for Insurers (“Consultation Paper”).

The Consultation Paper sets out proposals to finetune the enhanced risk-based capital framework (“RBC 2 framework”) for insurers in Singapore by:

  • introducing a differentiated capital treatment for infrastructure investments; and
  • revising the capital treatment of structured products, including those which are infrastructure in nature.

The Consultation Paper outlines the key proposals of both reviews, which will be incorporated into Notice 133 on Valuation and Capital Framework for Insurers.

The consultation closed on 22 November 2024.

Structured products

Current approach

Currently, the capital treatment for structured products comprises two components of risk requirements: counterparty default risk requirement and market-related risk requirements.

An insurer must apply and compute the counterparty default risk requirement based on the credit rating of the product offeror of the structured products. The counterparty default risk charge must be applied to the market value of each structured product. There will be no change in the way the counterparty default risk requirement is to be calculated as it remains relevant.

When calculating the market-related risk requirements for structured products,
an insurer must either:

  • adopt a look-through approach and apply the relevant risk module, with a loading of 50% applied on the derived market-related risk requirement to account for volatility and illiquidity risks of structured products; or
  • apply a fixed 50% risk charge on the entire marked-to-market value of the investment.

Proposed revisions

MAS proposes to:

  • remove the option to risk charge at 50% of the entire marked-to-market value of the investment;
  • recognise the credit rating assigned by recognised external credit assessment institutions to a tranche of securitised assets;
  • remove loading on interest rate mismatch and foreign currency mismatch risk requirements;
  • adopt the following loadings on market-related risk requirement (excluding interest rate mismatch and foreign currency mismatch risk requirements):
    • maintain the 50% loading for rated debt-based securitised assets;
    • for rated non-debt based securitised assets, a loading of 300% for investment grade securities and 500% for non-investment grade securities;
  • classify certain structured products, such as re-securitised assets and unrated securitised assets, as non-standard instruments.

Infrastructure investments

MAS is reviewing how the RBC 2 framework for insurers, supported by evidence, can be refined to facilitate long-term infrastructure investments that align with effective asset liability management.

The consultation paper seeks comments on:

  • the definition of infrastructure, infrastructure assets, and infrastructure investments;
  • differentiating between investments in infrastructure projects and infrastructure corporates, and having variation in the proposed capital treatment for both types under RBC 2;
  • the qualifying criteria for infrastructure investments to be eligible for differentiated capital treatment; and
  • allowing the look-through approach for infrastructure investment via collective investment schemes.

Reference materials

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