Asia Pacific - focus on insurance

Welcome to our quarterly bulletin on insurance issues in the Asia Pacific region. In this bulletin we will cover recent legal developments that may be of interest to insurers and reinsurers operating in the region.

Government endorses the recommendations of the Financial System Inquiry

The Government’s long-awaited response to the final report of the Financial System Inquiry (FSI) was released on 19 October 2015. The ministerial reshuffle brought about by Malcolm Turnbull’s promotion to Prime Minister delayed the release of the response; but newly appointed Treasurer, Scott Morrison, and Assistant Treasurer, Kelly O’Dwyer, did not veer from the expected course. The Government has backed all but one of the FSI’s 44 recommendations across five distinct strategic priorities, namely:

1. The resilience measures which are aimed at reducing the impact of potential future financial crises by ensuring Australia is better equipped to weather them and lessen their cost to taxpayers and the economy.
2. The superannuation and retirement incomes measures which are aimed at reducing the costs of the superannuation system to consumers.
3. The innovation measures which are aimed at unlocking new sources of finance for the wider economy and supporting competition and the facilitation of technology-led innovation.
4. The consumer outcomes which are aimed at providing consumers with confidence to participate in the financial system and confidence that they are being treated fairly.
5. The regulatory system measures which are aimed at making regulators more accountable for their performance, more capable and more effective.

For the insurance industry, the Government’s endorsement of the FSI’s recommendations will ultimately lead to some significant changes to regulation, particularly in the areas of consumer outcomes and innovation.

Consumer outcomes 

In the area of consumer outcomes, the Government has agreed to:

• create a targeted and principles-based financial product design and distribution obligation. This will see organisations taking greater responsibility for ensuring that products are only designed for, and sold to, customers for whom the product is appropriate;
• provide ASIC with a product intervention power to enable it to modify, or if necessary, ban harmful financial products where there is a risk of significant consumer detriment.  These powers are proposed to be based on similar powers granted to the UK’s Financial Conduct Authority in 2012;   
• remove regulatory impediments to innovative product disclosure;
• develop legislative amendments to raise the professional, ethical and educational standards of financial advisers by requiring advisers to hold a degree, pass an exam, undertake continuous professional development, subscribe to a code of ethics and undertake a professional year;
• support industry-led initiatives to increase guidance and disclosure in general insurance;
• take steps to more clearly differentiate financial products.  The Government has given its support to APRA in improving product differentiation for retail consumers; and
• rename ‘general advice’ to improve consumer understanding. The Government will consult with a wide range of stakeholders and conduct consumer testing before finalising the new term.

Innovation

In the area of innovation, the Government has agreed to:

• establish a permanent public-private sector collaborative committee (the Innovation Collaboration Committee) to facilitate financial system innovation. The committee will be linked to ASIC’s Digital Finance Advisory Committee;
• improve the use of data. The Government proposes to task the Productivity Commission with reviewing options to improve accessibility to data, taking into account privacy concerns and other existing Government processes; and
• amend priority areas of legislation and regulation to be technology neutral so as to prevent technology-specific laws and regulations from impeding innovation.  

Where to from here?

2016 will see Treasury embark on a range of consultations with stakeholders in respect of the recommendations. Implementation of any changes to financial services regulation is not likely to be seen before January 2017. There will be a Federal election before then (probably early 2016) which may disrupt this process.

Insurance industry reaction

The insurance industry has so far reacted positively to the Government’s response. The Insurance Council of Australia has stated that general insurers are “pleased” with the response, but that further detailed consultation is required to address the extent that the recommendations should apply to the insurance industry, as opposed to the banks and superannuation funds to which they appear more relevant. However, given global regulatory trends in these areas, particularly around product governance and intervention powers, the expectation is that any changes to financial services regulation will apply equally to insurance issuers and distributors.

For further information please contact Matt Ellis.

A tiger with teeth? User-pays model lays foundations for tougher regulator 

Even before the release of its response to the Financial System Inquiry (FSI) on December 7, 2015, the Australian Federal Government announced its support for a ‘user-pays’ industry funding model for the Australian regulator, the Australian Securities and Investments Commission (ASIC). A consultation paper on the funding model was released for stakeholder comment in late August and remains open for comment. In light of other recommendations of the FSI that will see a significant increase in the enforcement and intervention powers that ASIC will hold, and a corresponding drain on resources, an industry funding model always appeared to be a necessary cornerstone for the proposed regulatory changes.

The new funding model will require the biggest users of ASIC’s resources to pay up to $220 million of the $260 million that ASIC draws from the Federal Budget each year. Contributions will be raised by an annual levy calculated by reference to market capitalisation and an assessment of each sector’s risk to investors, and the areas of investigation and enforcement on which ASIC intends to focus. The fees are likely to initially comprise $53 million for banks and listed companies, and $91 million for investment banks, stockbrokers, insurers, and the superannuation and financial planning industries. If introduced, the levy will be phased in over the next three financial years.

The Government is expected to complete its capability review of ASIC and its consultation on the industry funding model by the end of this year.

So what does this mean for the insurance sector in Australia? The answer is that a sustainable funding model for the regulator is likely to provide ASIC with the resources it will require, in order to effectively wield the additional enforcement powers it will have at its disposal. By disconnecting funding from the Federal Budget, ASIC will obtain a transparent and consistent funding base and be somewhat unburdened from politicising the cost of its administration. Any need to rein in public spending will not impact on the regulator going forward.

One of the key recommendations of the FSI is the introduction of product governance obligations, and related product intervention powers for ASIC. In its recent response to the FSI, the Government has thrown its support behind these proposals. The Government said that following extensive stakeholder consultation, it will introduce legislation to make issuers and distributors of financial products accountable for their offerings and will develop a new ASIC product intervention power, which could be used to modify products, or if necessary, remove harmful products from the marketplace.

ASIC has also made it clear that it intends to focus on organisational culture, and considers that firms and directors could potentially face civil action if firm culture leads to poor consumer outcomes.
A regulator that seeks to intervene early in the product lifecycle, or closely monitor the culture of financial institutions in Australia, will need to maintain close oversight of the market. If it intends to use the product intervention powers it is expected to receive in coming years, it will need to be proactive, rather than reactive. For that end, it is likely to require significant additional resources to be effective.

For further information please contact Matt Ellis and Riley Gay.

Further regulatory reforms undertaken in Chinese intermediary market

The Chinese insurance intermediary market has been subject to various reforming measures since early 2012 when the China Insurance Regulatory Commission (CIRC) stopped issuing certain types of new insurance intermediary licences and raised the capital requirements for entry into the intermediary market. We reported on these developments in 2012 (for further information please refer to Asia Pacific – focus on insurance June 2012), when CIRC first undertook these measures.

After a settling in period of just over three years, the regulation of insurance intermediaries has again started to change following the issuance of amendments to the PRC Insurance Law (Amendments) in April 2015. The most significant change introduced is that it will no longer be a requirement for certain insurance intermediaries to seek prior-approval from CIRC before establishment. Instead, the following types of intermediaries need only request a permit post-establishment from CIRC after business licenses have been issued by the State Administration for Industry and Commerce or its local offices:

• professional insurance agents (PIAs);
• insurance brokers (IBs); and
• insurance loss adjustors (LAs).

Following the announcement of these Amendments, CIRC also then published further administrative requirements that will impact insurance intermediaries. These include but are not limited to:

• the change from prior approval on any break-up, merger, change of company form, establishment of branches or dissolution of PIAs and IBs to ex-post reporting to CIRC;
• the requirement for the approval of qualifications of insurance sales practitioners, insurance brokers and individual insurance agents has been abolished;
• the prior approval of the use of guarantee funds held by insurance agents (including PIAs and sideline insurance agents, SIAs) and IBs has been changed to ex-post reporting to CIRC;
• minimum capital requirements for the establishment of LAs and their branches have been abolished, and the requirement for paid-up capital for LAs has been changed to subscription only; and
• the qualification requirements for certain senior management personnel in insurance intermediaries have also been relaxed.

In addition, CIRC has recently published Opinions on Deepening the Reform of Insurance Intermediary Market (the Opinions). The Opinions propose the following reform policies for the insurance intermediary market:

• launching a licence classification system for PIAs, including national and regional licences, and establishing respective market access thresholds;
• appropriately promoting foreign investments in PIAs and LAs, and expanding the business scope of existing foreign invested IBs;
• enabling certain permitted insurance products to be distributed by SIAs; and
• encouraging insurance intermediaries to explore internet-based insurance intermediary business.

Amendments being proposed to modernise insurance law in China

The Legislative Affairs Office of the State Council of the People’s Republic of China (PRC) has published draft amendments (Draft Amendments) to the PRC Insurance Law for public consultation. Following the minor changes to the PRC Insurance Law in late 2014 and early 2015 respectively, these Draft Amendments are being seen as offering significant changes to insurance law in the PRC.

We summarise some major changes being put forward by the proposed reform as follows:

• expanding the business scope of life insurance companies to include annuity business (both corporate annuities and occupational annuities)
• permitting insurance funds to invest in equity products, insurance asset management products, and derivative products if invested for risk management purposes only
• redefining the deposit fund of an insurance company as the ‘capital deposit fund’ which may only be withdrawn by insurers for the purpose of meeting debts during liquidation; the amount of the capital deposit fund has been decreased from 20 per cent to 10 per cent of the registered capital of insurance companies (with RMB 200 million as the maximum)
• incorporating the ‘C-ROSS’ regime into the Draft Amendments, in particular the mechanism for classification of capital, evaluation techniques, the capital replenishment mechanism and establishing risk-based capital requirements
• authorising the China Insurance Regulatory Commission (CIRC) to take action (e.g. limiting shareholders’ rights, requiring shareholders to sell shares, limiting the business of insurance companies) against insurance companies whose corporate governance structure does not meet statutory requirements
• authorising CIRC to, when necessary, require shareholders or de facto controllers of insurers and insurance intermediaries to cooperate in investigations conducted by CIRC
• strictly prohibiting investors which cannot meet the statutory qualification requirements (such as net asset value and profitability requirements, etc.) imposed on the direct shareholder(s) of an insurance company from indirectly making investments in insurance companies
• increasing the protection of policyholders, insureds and beneficiaries
• increasing legal liabilities for breaching requirements
• incorporating a regulatory regime for insurance loss adjustors
• incorporating a new chapter in the Draft Amendments to regulate the insurance industry association and other insurance related market organisations (such as China Association of Actuaries, Insurance Asset Management Association of China, and Insurance Intermediary Association).

The Draft Amendments demonstrate the Chinese government’s resolution to streamline administration in order to strengthen the insurance market. This is particularly reflected in the liberalisation of the business operations of insurance companies (such as expansion of business scope, elimination of self-retained premiums, etc.). However, on the other hand, the Draft Amendments also intensify and strengthen the sanctions and punishments that will be applied for breach of the regulations.

For further information please contact Lynn Yang or Ai Tong.

ASEAN/AEC commitments

As the deadline for the establishment of ASEAN Economic Community (AEC) passes (December 31, 2015), we foresee that there will be more actions undertaken by the Singapore government that will showcase the potential of AEC and more initiatives from the Monetary of Singapore as part of its fulfilment of AEC/ASEAN commitments.

For those unfamiliar with ASEAN, it stands for the Association of Southeast Asian Nationals. ASEAN in its 2007 Economic Blueprint introduced its goal of achieving closer regional economic integration among its ten member states, namely Brunei, Cambodia, Indonesia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. The AEC initiative holds exciting potential for this region as it aims to transform ASEAN into a region with free movement of goods, services, investment, skilled labour, and freer flow of capital.

A recent achievement of AEC/ASEAN was announced on September 4, 2015 with the issuance of a handbook concerning the multi-jurisdictional offering of equity or plain debt securities. This handbook provides detailed guidance on the operational aspects relating to the implementation of the Streamlined Review Framework for the ASEAN Common Prospectus, including criteria for ASEAN issuers. Under this Framework, issuers wishing to offer a multi-jurisdictional offering of equity or plain debt securities within ASEAN can issue one prospectus based on the ASEAN Disclosure Standards and benefit from a streamlined review process resulting in a shorter time-to-market with commitments by the authorities to complete the review process within four months from the date of submission. This will enable the issuer to have faster access to capital across the ASEAN region. With Singapore, Malaysia and Thailand being its current three signatory jurisdictions, it is anticipated that more member states will join in due course.

For the Financial Services Sector, under free flow of services, the commitments are to substantially remove restrictions for the insurance, banking and capital market sub-sectors with the intended liberalisation of Singapore’s direct non-life insurance, reinsurance and retrocession, insurance intermediation and services auxiliary to insurance sub-sectors. Despite ongoing concerns over the launch timing, many industry watchers remain optimistic on the progress of AEC which will most likely result in increased competition and provide the most benefits to multinationals based out of developed and established jurisdictions like Singapore.

For further information please contact Magdalene Teo-Yong or Anna Tipping in Singapore.

Thailand introduces greater liberalisations measures to open up foreign investment in the insurance sector

Earlier this year, Thailand’s insurance regulator, the Office of Insurance Commission (OIC), published drafts of two new pieces of legislation that, when passed, will overhaul insurance regulation in the country and relax existing foreign shareholding limits in a move that is expected to modernise the Thai insurance market. The new Life Insurance Act and Non-Life Insurance Act (collectively the “Draft Insurance Acts”) would repeal and replace the current Life Insurance Act B.E. 2535 and the Non-Life Insurance Act B.E. 2535.

The Draft Insurance Acts, when passed, will bring Thai insurance regulation in line with the measures that currently regulate commercial banks and other financial institutions (FIBA).

Overview

Broadly the principal changes introduced in the Draft Insurance Acts are as follows:

• further relaxation of requirements for foreign participants;
• greater flexibility to effect portfolio transfers;
• new reporting/compliance requirements;
• more flexible capital controls; and
• greater director accountability.

In this article we focus on the impact of the measures to relax foreign investment in the Thai insurance market.

The Draft Insurance Acts anticipate that Thailand will enter into a greater number of bilateral treaties as the benefits of many of the relaxation measures enabling foreign participation in the Thai market are only available to insurers based in a jurisdiction recognised under such treaties.

Further relaxation for foreign participants

Forms of business entity

Under existing legislation, the forms of business entities which can apply for an insurance licence in Thailand are limited to a Thai incorporated public limited company (Thai PLC) or a branch of a foreign incorporated insurer (Foreign Branch). Under the Draft Insurance Acts, in addition to a Thai PLC and a Foreign Branch, the following forms of business entities would also be eligible for an insurance licence:

• a Thai PLC with at least 95 per cent of its shares held by a foreign insurer (“Foreign Subsidiary”); and
• any other form of entity, such as a mutual society (“Other Form”).

It is important to note that, as a matter of policy, the OIC is currently not issuing new insurance licences. The OIC’s policy on the issue of new insurance licences should be monitored in parallel with developments of the Draft Insurance Acts.

Foreign shareholding restrictions

Under the current law, non-Thai companies can hold up to 25 per cent of the total issued shares of a Thai insurer without any specific regulatory approval. OIC has the discretion to permit foreign shareholdings above 25 per cent, but only up to a limit of 49 per cent. The Ministry of Finance (MoF) (with the recommendation of the OIC) currently has the discretion to permit foreign shareholdings above 49 per cent in the event that the status or operations of the insurer (without such investment) might cause damage to insureds to or the public; to enhance the insurer’s operations; or to enhance the insurance sector as a whole.

Under the Draft Insurance Acts, foreigners will be able to hold less than 50 per cent of the total issued shares of a Thai insurer without any specific regulatory approval, removing the above thresholds. Specific approval from the MoF is still required for foreign shareholdings of more than 50 per cent, but the criteria for such approval have been expanded to be in line with FIBA. MoF (with the recommendation of the OIC) would have the discretion to permit foreign shareholding at, or above, 50 per cent in the following situations:

• to rectify the operations of the relevant insurer;
• to strengthen the financial stability of the relevant insurer;
• to protect the interests of the insured or any person who has a claim under the policy; or
• to ensure the stability of the insurance sector.

Under the Draft Insurance Acts, the restrictions on foreign shareholdings (and similar restrictions on foreign directors) do not apply to any insurer which is:

• a Thai PLC which is majority owned by shareholders based in a country recognised under a relevant bilateral treaty with Thailand;
• a Foreign Branch;
• a Foreign Subsidiary; or
• an insurer which operates under Other Form.

Foreign insurers writing policies

There is a general prohibition currently against any person issuing an insurance policy in Thailand without an insurance licence from the OIC. Under the Draft Insurance Acts, there is a specific exception to this prohibition to enable an insurer, not licensed by the OIC but licensed in a country recognised under a bilateral treaty with Thailand, to issue an insurance policy in Thailand. However, it is unclear from the provisions of the Draft Insurance Acts whether the eligible insurer would be required to comply with any registration or notification requirement and/or other regulations of the OIC in respect of the policies issued in Thailand. We expect the detailed requirements to be set out in regulations to be issued to implement the scheme. In addition, if the eligible foreign insurer will have a presence in Thailand it would be required to obtain a license under the Foreign Business Act B.E. 2542 (FBA), unless a specific exemption under the FBA would also be introduced.

For further information please contact Sarah Chen in Bangkok.