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2 Introduction Asia is an exciting growth story in the global economy and as businesses and economies grow across the region, insurance needs to grow too. This creates opportunities for insurers in their local markets and also beyond their borders. Increasingly as markets evolve, it is just as important to have a regional view as well as local when pursuing opportunities for profitable growth. PwC has a leading network of insurance experts across the Asian region that work together to bring the benefits of this expertise when serving clients in a territory or across borders in the Asian region. We trust you find this overview of key Asian insurance industries of value, and would be delighted to discuss the following topic with you: "what you would like to grow in the Asian region?" Best wishes Scott Fergusson Editor & PwC Insurance Leader Australia Simon Copley PwC Insurance Leader Asia Pacific Please scan QR code from your ipad to download the FS Connect app. 2

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4 Legislative and regulatory framework The insurance industry provides general and life insurance to Australian individuals, households and businesses. General insurance companies must be registered under the Insurance Act 1973 and life insurance companies under the Life Insurance Act 1995 to carry on business in Australia. The applicable Act also dictates strict capital adequacy requirements to ensure insurers continue as a going concern. Government owned insurance writers also operate under specific Acts of Parliament. The Australian Prudential Regulation Authority (APRA) is the Commonwealth authority responsible for licensing and prudential regulation of all deposit-taking institutions, life and general insurance companies, superannuation funds and friendly societies. APRA supervises the industry through legally binding prudential standards and prescribed reporting to ensure the relevant insurance act is complied with. The standards cover topics such as risk management, reinsurance, business continuity, governance, fit and proper and outsourcing. The Australian Securities and Investments Commission (ASIC) is another key regulator responsible for market integrity and consumer protection functions across the financial system. The Corporations Act 2001 requires all sellers of insurance products to retail clients, including registered insurers and brokers, to obtain an Australian Financial Services Licence (AFSL). Insurers that are regulated by APRA are exempt from the financial obligations of an AFSL as their financial position is separately monitored by APRA. Australia 4

5 Financial reporting, capital and taxation Financial reporting requirements For the purposes of financial reporting, Australian insurers apply AASB 4 Insurance Contracts, the local equivalent of IFRS 4, which references two Australian Accounting Standards that prescribe recognition and measurement for insurance contracts. The Australian Accounting Standard specifically relevant to general insurers is AASB 1023 Financial Reporting for General Insurance Activities. This standard guides the accounting for the general insurance activities, including accounting for the investments. The general principles of AASB 1023 including earning premium in line with the pattern of risk, valuing claim reserves on a best estimate plus a risk margin basis, and applying fair value accounting where possible to other balances relating to the insurance contracts, for example assets backing the insurance liabilities. Life insurers follow AASB 1038 Life Insurance Business, which incorporates the reporting of premiums and claims, asset valuation and assets and liabilities. The key element of AASB 1038 is the requirement to release profit and value policy liabilities using a Margin on Services basis, whereby profit is released in line with the provision of service over the life of the insurance contract. Capital regime and requirements APRA s life and general insurance capital standards (LAGIC) review has culminated in the implementation of new capital adequacy standards effective 1 January The main objectives of the LAGIC review was to: improve the risk-sensitivity and appropriateness of the capital standards in general and life insurance where appropriate, improve the alignment of the capital standards across industries. The LAGIC capital adequacy framework is based on a three-pillar approach similar to capital requirements in Solvency II for insurers in Europe: Pillar 1: Quantitative requirement for the calculation of a Prudential Capital Requirement (PCR) and the recognition of an eligible capital base to meet this requirement. The prescribed capital amount is based on the following capital risks: asset risk, asset concentration risk, insurance risk, insurance concentration risk, operational risk and aggregation risk Pillar 2: Adequate system of governance including an effective risk management system and prospective risk identification through the Internal Capital Adequacy Assessment Process (ICAAP) which is owned by the Board and implemented by management. The Board is responsible for ensuring adequate capital given the scale, nature and complexity of an insurers business and risk profile Pillar 3: Reporting and disclosure requirements including private reporting to APRA ( ICAAP Report ), management and public reporting. Taxation Australian insurance companies are assessed under Division 320 and 321 of the Income Tax Assessment Act (ITAA) Tax is payable on the profits of a general insurer (if subject to tax) at the corporate tax rate, currently 30 per cent. Insurers are also required to account for GST of one-eleventh of the premium income collected (excluding stamp duty). The GST classification of general insurance will be different if a supply is made in relation to a risk located outside of Australia, in which case the supply of these policies may be GST-free (known as zero rated supplies in other jurisdictions). The GST legislation contains complex provisions in respect of general insurance businesses. Other taxes and levies include stamp duty, fire services levy, insurance protection tax, general insurance levy and life insurance riders which are typically state based taxes with differing rates by state. Life company tax is more complicated with different rates of tax applicable to life risk business (corporate tax rate of 30%), superannuation business (15%), or exempt classes (eg annuities at 0%). Australia 5

6 Products and the market Products The Australian general insurance sector (property and casualty) offers a full range of risk products and services to Australian households and businesses. Some of the more significant products include employer s liability, fire and industrial special risk (ISR), home owners/household, motor vehicle, professional indemnity, public and product liability, travel and lenders mortgage insurance. These products and services are distributed via brokers and agents, insurance companies, banks and the internet. In recent years there has been a trend towards direct selling as insurers focus on managing costs and look for ways to respond to more digitally aware customers. Compulsory Third Party and workers compensation are statutory classes of insurance that are administrated separately by each state of Australia. The majority of life insurance products currently sold by Australian life insurers include individual and group life, income protection and trauma risk business. Some life insurers continue to administer large back books of traditional endowment style life products however these are rarely sold in today s market. Life insurers also offer superannuation, retirement and investment style products. Headline market statistics and commentary Australia 6

7 Drivers General Insurance Fall in investment income resulting from the global financial crisis, and its aftermath. Financial markets in Australia did not rebound quite as quickly or as sharply as was anticipated. Widespread economic uncertainty and volatility continues. High catastrophic losses incurred resulting from a number of natural catastrophes including floods and bushfires. Unprecedented flooding hit Queensland during , resulting in claims that were far in excess of the long-term average. Australia s general insurers had cover from reinsures for a large proportion of the record claims that followed. The size of reinsurance payouts recovered as a result of the natural catastrophes meant Australia s general insurers are now facing escalating reinsurance costs. Life Insurance Uncertain investment conditions influenced by challenges in parts of the global economy, and consequential subdued consumer confidence and general risk aversion. Increase in lapse rates due to the high initial commissions and set-up costs, profitability is highly sensitive to lapse rates. Potential barriers to entry APRA is open to new licence applications however the breadth and complexity of requirements can take significant time to prepare for in the licence application process. It can be a challenge to achieve market share against dominant incumbents in a mature market. Acquisition of more than 15% of an Australian company requires Foreign Investment Review Board approval. Australia 7

8 Key developments and future outlook Key issues Significant regulatory change: insurers are working through an expansive range of regulatory changes from Australian regulators. These include new capital rules (LAGIC commenced 1 January 2013), removal of risk of conflict in financial product sales (Future of Financial Advice legislation commencing 1 July 2013), and the introduction of new regulations for superannuation entities (commencing 1 July 2013). In addition, insurers are working through the implications of overseas regulations such as the effects of Dodd Frank legislation in the United State of America Low investment yields: continuing low investment yields are putting pressure on insurers profitability and a renewed focus on underwriting results. Lower discount rates derived from low government bond yields in general also lead to higher policy liabilities and outstanding claims provisions Under-insurance: continuing but improving levels of under-insurance in both the general insurance and life insurance sectors. NATSEM research in 2010 revealed that 95% of Australian families are underinsured 1 New entrants: emergence of non-traditional sources of competition, for example the entry into the general insurance market of Coles, one of the two dominant supermarket chains in Australia Productivity: in the current lower growth environment, insurers are focusing on cost containment and productivity initiatives to maintain and achieve growth in profitability. This includes a growing trend to use off-shore resources for administrative processes. Future outlook An economy with modest growth forecast combined with premium rate increases in certain classes following the floods should see growth in premium revenue in the near term A better understanding in the community of the value of insurance, along with evolving and simpler products to meet customer needs will aid bridge the underinsurance gap Technology combined with greater sophistication in the use of data will play an increasingly important role for insurers in the attraction and interaction with the customer Continuing high levels of regulatory presence in the market Changing and toughening competitive landscape driven by a battle for the customer between traditional insurers and other mass customer interfacing businesses. 1 Financial Services Council news release, 3 August 2012, New Life Insurance Framework will reduce premiums Australia 8

9 Key players and competition Competitive environment General Insurance The general industry is made up of 121 registered companies 2 characterised by moderate concentration. The major insurers have built up years of goodwill and brand recognition which strengthens their competitive edge. IAG and Suncorp are particularly dominant in the home and motor classes. By focusing on brand and reputation insurers are securing business, particularly by focusing on product flexibility and service quality. Though the major players are fairly established, their collective market power has not constrained new entrants from successfully entering the market in recent years however these new, smaller entrants are yet to make significant gains in market share. Life Insurance The life insurance industry is moderately concentrated. Apart from AMP Limited, it is dominated by the local Australian banks. There has been a high level of mergers and acquisitions in the past ten years. AMP s takeover of AXA in March has seen a reclassification of the industry as highly concentrated. The last year has seen concentration fall, however, as some of the industries larger players, typically diversified financial institutions, have suffered from high exposure to weak investment markets. Mid-tier firms such as TAL and Challenger have gained ground on their top-tier counterparts. Key players 2 Quarterly General Insurance Performance Statistics, accessed on 16/04/2013, APRA website: Australia 9

10 Contacts PwC in the market Scott Fergusson Australian Insurance Leader +61 (2) Peter Kennedy Tax +61 (2) Christa Marjoribanks General Insurance Actuarial +61 (2) Jason Slade Life Insurance Actuarial +61 (3) Shane O Sullivan Strategy and Digital Advisory +61 (3) Mark Allaby Performance Optimisation +61 (2) Glenn Rogers Technology and Projects +61 (3) Nicole Salimbeni Risk and Forensics +61 (2) Australia 10

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12 Legislative and regulatory framework The China Insurance Regulatory Commission (CIRC) is an independent government agency directly under and authorized by the State Council to regulate the Chinese insurance industry and market. CIRC s main tasks are to: set the development strategy and plan for Chinese insurance industry and to formulate policies for the Chinese insurance industry scrutinize and approve : insurance companies operating in China as well as their subsidiaries and holding companies; representative office of foreign insurance companies; insurance intermediaries operating, including insurance agencies, insurance brokers and insurance assessment companies as well as their subsidiaries; insurance companies or noninsurance companies operating insurance business overseas; merger, division, alteration, dissolution, taking over and designated assuming insurance organizations; insurance asset management companies operating, and participate in the resolution of insurance company bankruptcy and liquidation; scrutinize and approve the qualification of senior management personnel and to set up qualification standards for insurance professionals scrutinize and approve the insurance product terms and rates for products with public social benefit, compulsory insurance products and new life insurance product types; to manage product terms and rates filing for other insurance products monitor and regulate the solvency and market conduct of insurance companies; to manage the insurance security fund; to set the insurance asset management regulations and to monitor the compliance of the insurance companies monitor and supervise government policy driven insurance and compulsory insurance business and activities, to monitor and regulate self-insurance and mutual insurance organization structures and business activities. To manage insurance industry associations, eg Insurance Association of China 3 and the Insurance Institute of China 4 investigate and penalize insurance organization or practitioner s non-compliance activities, unfair market competitions, and unauthorized organization conducting insurance related business activities regulate domestic insurance companies or domestic non-insurance companies operating insurance business overseas set up industry information standards, risk management evaluation, early warning and monitoring systems, in order to continuously monitor, analysis and predict insurance industry operational conditions, to responsible for organizing insurance industry data and financial statements to be issued in accordance with relevant state provisions undertake other assignments designated by The State Council. In September 2008, China Insurance Security Fund Co., Ltd was established as a non-profit state-owned corporation with a registered capital of RMB 100 million, its main responsibility is fund collection, managing and operating insurance security fund, participate in insurance industry risk resolution, manage and work out the insolvent company assets. Up to 30th September 2012, the fund is approx. RMB 29.5 billion (about US$4.8 billion). 3 The Insurance Association of China (IAC, hereinafter)was designed in the position of national-wide non-profit organization. Institutional members are insurance organizations holding operational licenses in China and individual members are proposed by CIRC. IAC main responsibilities can be divided into self regulated activities and service to CIRC and other government agencies for insurance industry. The IAC is supervised and conducted directly both by China Insurance Regulatory Commission (CIRC) and by national society management organization the Ministry of Civil Affairs of PRC as well. 4 The Insurance Institute of China (IIC, hereinafter)was designed in the position of national-wide non-profit organization, engaged in insurance academic research and policy-making analysis. The IIC is consisted of companies and specialists in insurance and other related fields, and supervised and conducted directly both by China Insurance Regulatory Commission (CIRC) and by national society management organization the Ministry of Civil Affairs of PRC as well. China 12

13 Financial reporting, capital and taxation Financial reporting requirements The Minister of Finance issued new accounting standards in 2009 which were IFRS based, including an equivalence of IFRS 4 Insurance Contracts. Under these standards, Chinese insurers must evaluate insurance liabilities using a three building blocks approach, ie best estimate + risk margin+ residual margin. Capital regime and requirements The current Solvency Requirement is similar to European Solvency I, its factor base and has been effective since For P&C insurance company, the minimum solvency capital requirement is the larger of the following two items: 18% of Net Retained Premium less than RMB100million and 16% of Net Retained Premium greater than RMB100million or 26% of the recent 3-year average claim amount less than RMB 70million and 23% of the recent 3-year average claim amount greater than RMB 70million. For life insurance, the minimum solvency capital requirement has two elements, one for long term business and the other for short term business. For long term life insurance products, the minimum solvency capital requirement is the addition of the following: for unit linked products, it is 1% of the statutory reserve and 4% of the statutory reserve for other life insurance products, plus 0.1% of the net amount of risk for less than 3-year covered products, 0.15% of the net amount of risk for 3-5 years covered products and 0.3% of the net amount of risk for products covered longer than 5 years. If the insurance company does not have the segregation by covered period, 0.3% of net amount of risk should be used. For short term business, the same requirement for P&C business as above is applied. In addition, CIRC assesses the need for regulatory actions on a three-tier structure: insurers that fall within the "Adequate II", ie with a solvency ratio greater than 150%, CIRC considered solvency level met; insurers with a solvency ratio between 100% to 150% are categorized as "Adequate I", and the CIRC can request them to come up with a insolventprevention plan; delinquent insurers with a solvency ratio below 100% would result the harshest sanction as they are deemed to be "Inadequate". In 2010, CIRC had begun to discuss the implementation of European Solvency II equivalent risk based requirements for China. CIRC introduced Draft Guidelines in 2010 that started the Chinese Solvency Reform work, which is expected to be effective in the next two to three years. The Chinese Solvency II equivalent is China Risk Oriented Solvency System (C-ROSS). This regime will consist of three pillars. New regulation on the new C-ROSS framework was issued on 3 May Another requirement that CIRC has announced before the C-ROSS was initiated was for all life, health and pension insurance companies to start submitting their own economic capital reports from 1st January Taxation The corporate tax rate is 25% and is based on the accounting profit under the new accounting standards issued in Insurance companies also pay premium tax, the tax rates are based on types of products, typically 5.55%. China 13

14 Products and the market Products For the life insurance business, participating products have dominated for the past 15 years, overall accounted for 80% of total premium income in the life market in recent two years. Wealth management products distributed through banks have gained its popularity as the wealth population continues to increase and the demands have also increased. Although traditional life insurance products are not popular or understood in the China market, big players have started the transformation from top line market share focus to bottom line value focus and long term protection insurance products through agency channel has regained their importance both within the insurance company and also the consumers as personal protection need is increased.. The market for universal life and unit linked was popular during due to heated equity market, in particular when the equity market generated high returns during In addition to the sharp declined in equity market in China early 2008, the adoption of IFRS 4 for the insurance contracts have significantly reduced the popularity of the investment related unit linked products. In the non-life sector, motor insurance has dominated the Chinese non-life market with premium income accounting for more than 70% total premium income. Commercial property insurance, agriculture insurance and liability insurance are the next three most significant product lines. The motor insurance class of business will continue to dominate given the growth in the motor industry and the high demands from consumers for car ownership. Headline market statistics and commentary China 14

15 Drivers General Insurance Life Insurance (inc healthcare) Pension The motor insurance market has been driven by the enormous growth in the car industry. There are other laws issued over the past few years to help the growth of non-life insurance market in China: Tort Liability Law issued on 1st July 2010 has clarified details on joint liability and special tort liability and became one of the main factors for the development of liability insurance market Employer Liability Regulation has raised the compensation standards for deaths due to work related reasons. This helped the development of employer liability insurance market. The regulation came into effective on 1st Jan2011. In addition, natural catastrophe events occurred in China in recent years (eg earthquake in 2008, flood in large areas in south China since 2008) has raised people s awareness on the needs for property insurance. Man-made catastrophe (eg fire in 2010 in Shanghai) has raised the profile of home owner & fire insurance. The past ten years are the golden era for the rapid growth of life insurance market in China. The main insurance premium came from participating business and bancassurance channel. Main factors are: The continuous high growth in GDP The increase in aging population The increase in urbanization The change in the social benefits. CIRC published new regulation in 2011 to regulate the bancassurance channel due to misconduct from selling practice. Banks are limited to carry products in bank branches no more than three providers. Consequently, a drop in the premium income from bancassurance channel was observed. Meanwhile, the development of other sales channels (individual agency channel, corporate agency channel and direct sales channel) is relatively slow. For example, the turnover rate for individual agency is high and it is costly. From the product perspective, the wealth management products issued by banks have become popular compared to the 5-year participating insurance products. The core business of pension insurance companies is the management of corporate pension schemes with other business such as individual pension and short term group insurance business. The market is far smaller than that for life or general insurance market, mainly due to the following reasons: Lack of individual tax incentive - A limit of 5% of salaries from employers contribution can be treated as tax free, relatively low comparing to other countries; - Employees contribution are not tax free - The tax incentive for annuity products is given at the investment and payment stage, not the contribution stage; - The trial implementation of tax incentive in Shanghai has been delayed The skewed structure of corporate pension scheme - Majority corporate pension schemes are set up for state owned companies and the overall % of coverage in the country is low; - The freedom of the scheme design for state owned companies is limited The pension providers are focusing on the increase of market share instead of scheme benefit innovation, product design, pricing and corporate structure. China 15

16 Key developments and future outlook Key issues Sales channel challenges the sales volume drops in bancassurance channel since the new regulation issued in There is no clear sign of improvement in the individual channel, in terms of sales staff recruitment and retention. Product innovation and transformation the market is dominated with bank distributed 5-year participating endowment products and they are low profit margin products. Some large companies are transforming the sales strategy from premium driven to value driven, with more focus on traditional products through agency such as whole of life and protection business CIRC issued new regulation on investment assets for insurance companies in 2012 and encouraging insurance companies use allowable investment assets to diversify risks, in particular in the equity and infrastructure projects. This brings new challenges to the insurance companies on improving asset-liability management and to take on appropriate risk to manage risk and return propositions Tax incentive is likely to be piloted in Shanghai this year and it brings opportunities and challenges to pension market. The main challenges are 1) lack of pension products, in particular group pension products 2) the introduction of group pension schemes to non-state owned enterprises. Future outlook General Insurance The pricing limits currently on motor insurance products could be lifted in the near future and the price would be based on supply and demand in the market. Large providers could benefit from operational synergies to achieve further expenses savings with extra pressure on small providers to survive. However, vicious competition on prices could happen again lead to market damage. Direct sales channels, in particular telephone sales in motor insurance have developed rapidly in the recent years. Internet sales could be something to look forward to as it is used only as means of prospective customer data collection. Life Insurance (including healthcare) A change of management behaviour from sales driven to value driven is expected in the next a few years. However, expenses overrun will remain a big problem for a large number of medium to small companies. The capital management framework will be risk based and more in line with the rest of the world, following the development of C-ROSS regime. From our current observation, the management team view this more of a compliance requirement instead of an internal management tool. The pricing interest rate of 2.5% could be lifted in This certainly will help the development of traditional life products as they will be cheaper. Similar to GI, vicious competition could be a potential problem to damage the market. Pension Tax incentive implementation trial in Shanghai is expected within this year. The implementation of tax incentive plan will certainly help the development of personal pension market. With the nature of structure of state own, we are expecting little change both in the client base and the scheme design. China 16

17 Key players and competition Competitive environment General Insurance Life Insurance Pension The increase in the market share of the top three companies is larger than those of smaller companies, due to the brand recognition, consumer loyalty and widespread network advantages in the sales channels. In addition, it is more predictable on the future development and sales of the top three companies because they have better developed and controlled underwriting, actuarial and claim processes. The four companies in the first tier are the only listed companies (A+H shares 5 ) in China insurance market and the market share changed slightly among the four in recent years and relatively stable. State owned companies are main customers for China pension market and the top two players take up 80% market share. Key players (2012) 6 5 Shanghai and Hong Kong stock exchange listed. 6 Data source: CIRC, market share by insurance gross premium income China 17

18 Contacts PwC in the market Shu-Yen Liu Actuarial Leader Tom TM Ling China Insurance Leader China 18

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20 Legislative and regulatory framework The Office of the Commissioner of Insurance (OCI) is the regulatory body set up for the administration of the Insurance Companies Ordinance (Cap.41) (ICO). The ICO regulates insurance operations in Hong Kong. The OCI is headed by the Commissioner of Insurance who has been appointed as the Insurance Authority (IA) for administering the ICO. The principal functions of the IA are to protect the interests of policy holders and to promote the general stability of the insurance industry through the monitoring and scrutinizing the financial position of insurers. The IA has the following major duties and powers: Authorisation: authorisation of insurers to carry on insurance business in or from Hong Kong. Regulation of insurers: the regulatory objective of the IA is to ensure the financial soundness and integrity of the insurance market. The primary duty is to ensure that insurers conduct their activities in a prudent manner so that their obligations and policy holders' expectations will be met. Other operational aspects, such as setting of premium rates and policy terms and conditions, are largely left to self-regulation by the industry. Regulatory work is done primarily through the examination of the annual audited financial statements and business returns submitted by the insurers. Regulation of insurance intermediaries: an insurance agent is required to be properly appointed by an insurer and registered with the Insurance Agents Registration Board ("IARB"). An insurance broker may seek authorization directly from the IA, or may apply to become a member of an approved body of insurance brokers, in order to carry on insurance broking business in or from Hong Kong. An approved body of insurance brokers is charged with the responsibilities of ensuring that its members comply with the statutory requirements and that the interests of policy holders and potential policy holders are properly protected. Regulation of intermediaries of Mandatory Provident Funds: the IA is given the statutory role for monitoring compliance of registered MPF intermediaries, of whom the IA has been assigned as the frontline regulator, with the conduct requirements stipulated in the Mandatory Provident Fund Schemes Ordinance. Hong Kong 20

21 Financial reporting, capital and taxation Financial reporting requirements Insurers incorporated in Hong Kong are required to prepare financial statements in accordance to the Hong Kong Companies Ordinance. The accounting principles generally accepted in Hong Kong are the Hong Kong Financial Reporting Standards (HKFRS) issued by the Hong Kong Institute of Certified Public Accountants (HKICPA). Insurers are also required to lodge with the IA certain financial information under the Third Schedule of the ICO. These include the following: Financial Information/Returns Time Audited Accounts prepared under Companies Ordinance Annually within 6 months of financial year end Yes General Financial information covering all business written by the insurer Statistical returns on annual underwriting results relating to the general Hong Kong business only (Part 8) Annually within 6 months of financial year end Annually within 4 months of financial year end Yes Yes A statement of Hong Kong assets and liabilities relating to the general Hong Kong business only (Part 9) Annually within 4 months of financial year end Yes Accounts prepared under Companies Ordinance Annually within 6 months of financial year end Yes Long Term Financial information covering all business written by the insurer Hong Kong Long Term Business Returns (HKL1 form) Annually within 6 months of financial year end Annually within 4 months of financial year end Yes Yes A summary of the actuarial valuation (required under part 7) and statement thereon by appointed actuary Annually within 4 months of financial year end No There are also various other reporting requirements specific to certain lines of business such as reporting to the Employees Compensation Insurer Insolvency Bureau, Motor Insurers Bureau of Hong Kong, Mandatory Provident Fund Authority, Professional Insurance Brokers Association, etc. Hong Kong 21

22 Capital regime and requirements An insurer must meet the solvency and minimum capital requirements set out in the ICO. The objective is to provide a reasonable safeguard against the risk that the insurer's assets may be inadequate to meet its liabilities arising from unpredictable events, The minimum paid-up capital is currently HK$10 million, or HK$20 million for a composite insurer (ie carrying on both general and long term business) or for a general insurer who intends to write compulsory business (ie motor, employees compensation) or HK$2 million for a captive insurer. For general business insurers, the valuation and admissibility requirements of the Insurance Companies (General Business) (Valuation) Regulation (Cap. 41G) must be applied to arrive at the following solvency calculation: If relevant premiums or claims (whichever is larger) are less than HK$50m, minimum solvency is HK$10m If relevant premiums or claims (whichever is larger) are between HK$50m and HK$200m, minimum solvency is 20% of the relevant premiums or claims outstanding; or If relevant premiums or claims (whichever is larger) are more than HK$200m, minimum solvency is HK$40m, plus 10% of relevant premium or claims outstanding in excess of HK$200m For general insurers writing compulsory business, the amount shall not be less than HK$20m Taxation The Inland Revenue Ordinance ( IRO ) is the legislation governing taxation in Hong Kong. Profits tax is generally charged at the rate of 16.5% of assessable profits of a corporation. Companies liable to profits tax are required to file annual profits tax returns and the supporting documents to the Inland Revenue Department. Assessable profits of a general business are generally calculated based on 16.5% of adjusted net profit. Only premiums in respect of a general insurance contract (i) made in Hong Kong or (ii) the proposal for which was made to the insurance company in Hong Kong are subject to tax. Assessable profits of a long term insurance business are calculated based on either 5% of net written premium or the adjusted surplus. Where no election is made, the 5% premium method automatically applies. The adjusted surplus method is based on the actuarial report which an insurance company must submit to the IA under the ICO. The election for adjusted surplus basis of assessment to apply is irrevocable and, although it may be made at any time, it will only be effective if the actuarial report is submitted to the Commission of Inland Revenue not later than two years after the end of the period to which it relates. Taxation of an insurance subsidiary or branch in Hong Kong is generally the same, but with certain exceptions. As of today, Hong Kong has entered into 29 comprehensive double taxation agreements. There are currently no value-added or withholding taxes charged in Hong Kong. For long term business insurers, the following solvency requirement is determined in accordance with the Insurance Companies (Margin of Solvency) Regulation (Cap. 41F): HK$2m; or An amount specified under the Insurance Companies (Margin of Solvency) Regulation Hong Kong 22

23 Products and the market Products In the general insurance sector, the main products are accident and health, general liability, property damage and motor vehicle. Most general insurance is sold through intermediaries and many of the main global insurance and reinsurance brokers are all represented. Based on net earned premium for the year ended 2012, the following shows a breakdown of the class of business most prominent in the market. Class of business Accident & Health 32% 33% General Liability 25% 24% Property Damage 14% 15% Motor 12% 12% Marine & Goods in transit 9% 9% Other 8% 7% *based on quarterly provisional statistics published by the OCI For the long term insurance sector, individual life business (including traditional life, unit linked, savings, participating and other products) continues to dominate the market with a total market share of 94% in terms of gross written premiums in 2012, followed by retirement scheme management (4%). As at the end of 2011, 9.6 million individual long-term policies were in force. Headline market statistics and commentary Hong Kong 23

24 Potential barriers to entry Section 6 of the ICO governs the authorization of insurance business being carried out in or from Hong Kong, which are limited to insurers authorized under Section 8 of the ICO, Lloyd's or an association of underwriters approved by the IA. Authorization to carry on insurance business in or from Hong Kong will only be granted to those insurers who meet the authorization requirements stipulated under sections 8(2) and 8(3) of the ICO, which focus on, among other things, adequacy of paid-up capital, maintaining a minimum required solvency margin, passing a fit and proper test and having adequate reinsurance arrangements. The capital and solvency requirements are the same as those discussed in the Capital Regime and requirements section above. Currently, licenses will be issued for long term (mostly life insurance), general (mostly property & casualty insurance) or purely reinsurance specialist companies (including captives, who have more lenient authorization requirements). For companies incorporated outside of Hong Kong, additional requirements must be satisfied. However, an overseas applicant may, if it so chooses, incorporates a subsidiary company in Hong Kong for the purpose of the application, in which event the additional requirements will not apply. An insurance agent is required to be properly appointed by an insurer and registered with the Insurance Agents Registration Board ("IARB"), in accordance with the Code of Practice for the Administration of Insurance Agents issued by The Hong Kong Federation of Insurers. An insurance broker may seek authorisation directly from the IA, or may apply to become a member of an approved body of insurance brokers, in order to carry on insurance broking business in or from Hong Kong. Hong Kong 24

25 Key developments and future outlook Key issues Hong Kong is one of the insurance markets in Asia with higher insurance premium per capital. With the aging population, the higher awareness of insurance protection needs and the increasing financial advisory needs, insurers are becoming more sophisticated in terms of product designs and service offerings. In Hong Kong, these are products such as health protection and retirement planning. The Hong Kong Government is seeking to reform the private market for voluntary hospitalisation reimbursement insurance through the Health Protection Scheme (HPS). Around 32% of Hong Kong residents are currently covered by this type of medical insurance. The reforms aim to improve product transparency and access to insurance for consumers while reducing the cost of the public health system. The government has commissioned a consultant (PwC) to study the local market, overseas experience and local insurance data to propose an actuarially feasible and sustainable HPS for Hong Kong. The proposed HPS will go through public consultation in early 2014 prior to implementation. Furthermore, health protection gaps in Hong Kong markets are recognised in the insurance industry. A recent study shows that while 74% of respondents owned at least one insurance policy, 48% have not purchased any medical insurance and 46% did not have critical illness coverage. Pension reform is also gaining traction due to the increasing focuses on investment returns, quality and efficiency of financial advice, and the need to enhance their social welfare and pension systems to cater to the aging population. It is expected that the total population of Hong Kong residents over 60 will be around 40% by Additionally, the low interest rate environment has also impacted the Hong Kong long-term insurance industry in the past couple of years, in terms of pricing and solvency maintenance. This has affected the product designs, capital efficiency and parent company funding decisions. Hong Kong is in the process of getting Legislation Council (Legco) approval for establishing an Independent Insurance Authority (IIA). The main purposes of establishing an IIA to replace the existing OCI and introducing a statutory licensing regime for insurance intermediaries to replace the existing self-regulatory regime to align with international practice that financial regulators should be financially and operationally independent of the Government, and modernise the insurance industry regulatory infrastructure to facilitate the stable development of the industry and provide better protection for policyholders. For both life and non-life business, it is recognized that Hong Kong s current solvency standard falls short of global best practice. The IA is considering the introduction of a risk-based capital system. The updated framework will need to align with the latest Insurance Core Principles (ICPs) put forward by the International Association of Insurance Supervisors (IAIS). The adoption of a new RBC system for Hong Kong is unlikely to take place until the establishment of an IIA. Future outlook It is expected that the insurance market in Asia will continue to grow at a good pace, given the relatively low penetration, the increasing awareness of insurance needs, the expected higher GDP growth, the increasing population and other factors. Furthermore, PRC continues to be viewed as the region of opportunities. Hong Kong's insurance players can benefit from the Closer Economic Partnership Arrangement signed with the PRC to tap into a market that has a much lower penetration rate. The industry has seen a significant increase in policies sold to Mainland China Visitors ( MCV ) while they are on holiday in Hong Kong. New MCV premiums represent a significant percentage of total new sale for individual policies in It is anticipated that this trend will continue. The industry is also seeing a growth in RMB denominated insurance endowment polices as Hong Kong investors take advantage of the rising yuan. The continued loosening of regulation on foreign insurer s ability to purchase RMB denominated assets through channels such as the Qualified Foreign Institutional Investor and the interbank bond market to hedge the currency risk associated with offering such RMB denominated products have further encouraged its growth. Mergers and acquisitions have become increasingly prominent in Asia and in Hong Kong. Local subsidiaries of multi-national insurance firms are being sold in response to the streamlining efforts of their foreign parent as they turn to focus more on their core operations. Additionally, insurers are finding themselves having to keep pace with products and services catering to the consumers increased use of mobile technology. This will require the development of new distribution and service channels such as like web portals and mobile apps, which will supplement the traditional agency channels. Hong Kong 25

26 Key players and competition Competitive environment Based on OCI statistics as at 31 March 2013, there were 154 authorized insurers in Hong Kong, of which 91 were pure general insurers, 44 were pure long-term insurers and the remaining 19 were composite insurers. On the distribution front, there are 2,406 insurance agencies, 36,875 individual agents and 27,868 responsible officers/technical representatives registered with the IARB and 613 authorized insurance brokers. Key players Based on 2011 OCI statistics, in the general insurance market, AXA (Including HSBC), Chartis Insurance, Bank of China, Zurich and Bupa make up over 30% of the total market share based on gross written premium. For long term insurance, AIA, Manulife, Prudential (UK), AXA and HSBC Life lead the industry in terms of in-force portfolio. HSBC, Bank of China, China life and AIA write over 59% of total new business premiums in Hong Kong. Hong Kong 26

27 Contacts PwC in the market Lars Nielsen Partner Insurance Leader Peter Whalley Partner Assurance Billy Wong Partner Assurance Jeffrey Boyle Partner Advisory Peng Jin Partner Actuarial +86 (0) Rex Ho Partner Tax Matthew Phillips Partner Transactions Hong Kong 27

28 Hong Kong 28

29 Legislative and regulatory framework The Insurance Regulatory and Development Authority (IRDA) is the Indian insurance regulator constituted under a Parliamentary Act of It is under the supervision of the Ministry of Finance, Government of India and headed by a Chairman with a team of five Members for (Life); (General), (Actuarial) and (F&I). The IRDA is mandated to issue, renew, modify, withdraw, suspend or cancel licenses or registrations to insurers (life and general) and intermediaries. The IRDA supervises the sector through legally binding prudential standards to ensure compliance and the sound development of the sector. The IRDA approves all insurance products, controls and regulates rates, regulates investment of funds by insurers, and monitors insurers solvency margins., India 29

30 Financial reporting, capital and taxation Financial reporting requirements The financial statements of Indian insurers are required to be prepared in accordance with Indian GAAP and IRDA reporting regulations for insurance companies. A life insurer is required to comply with the requirements of Schedule A of the Insurance Regulatory and Development Authority (Preparation of Financial Statements and Auditor s Report of Insurance Companies) Regulations, 2002, and a general insurer is required to comply with the requirements of Schedule B of those Regulations. The scope and content of the audit report is prescribed in Schedule C of the IRDA s Regulations. The actuarial valuation of liabilities for life policies in force is the responsibility of the Company s Appointed Actuary. Actuarial assumptions used for determining the actuarial valuation of liabilities are to be disclosed by way of notes to the accounts. Taxation Special provisions apply for taxation of profits from general insurance business which require taxable profits to be calculated in a prescribed manner. As per these provisions, accounting profits disclosed by annual financial statements are subject to adjustments relating to prescribed provisions which are disallowed as deductions, inclusion in taxable income of gains and losses on investments not taken through profit and loss, and the deduction for amounts taken to unexpired risk reserves up to prescribed limits. The tax rate for Domestic general insurance company is %. Profits of life insurance business are taxable at the concessional tax rate of 13.52%. Profits on life business means the incremental surplus/deficit as is determined based on the actuarial valuation made in accordance with the Insurance Act, A Minimum Alternative Tax (MAT) at effective rate of 20.01% of book profits is levied on companies whose tax payable under normal income tax provisions is less than 18.50% of book profits. A credit of such tax paid under MAT provisions by a company is allowed against a tax liability that arises in subsequent ten years under the normal provisions of Income tax law. MAT provisions do not apply to any income accruing or arising to a company from life insurance business (as per amendment made by Finance Act, 2012 with effect from 1 April, 2001). Dividend income, which is subject to Dividend Distribution Tax (DDT), is exempt in the hands of the shareholders. However, a dividend distribution tax of 16.22% is currently levied on companies declaring a dividend. General insurance premiums collected are subject to a Service Tax of 12.36% on the entire amount subject to exemptions for specific schemes, most of which are schemes of social importance such as cattle insurance, tribal insurance, and crop insurance. Life insurance premiums generally also attract a service tax at 12.36% (including education cess of 2%, and secondary and higher education cess of 1%) on the entire amount charged by the policy holder excluding the portion of investments. Insurers in some cases may be in a position to opt for the composite scheme whereby service tax is payable at 3.09% of the premium for the first year and 1.545% (both rates inclusive of education cess of 2% and secondary & higher education cess of 1%) of the gross amount of premium for the subsequent years, without a distinction being made between risk and investment portions. All goods sold in the course of interstate trade are subject to Central Sales Tax (CST) and sales within any State are chargeable to Value Added Tax (VAT) under the VAT laws of the relevant State. Applicability of VAT on insurance companies, depend upon the VAT laws of the respective State. If insurance companies are covered, then sale of moveable assets by insurance companies will attract the levy of state VAT. The rate of tax would vary as per the VAT laws of the respective states. India 30

31 Products and the market Products The Indian general insurance sector (P&C) offers a full range of products for the retail and commercial segments. The key products include fire, marine, aviation, engineering, motor/auto, workmen s compensation, public liability, product liability, personal accident, health, crop and credit. These products and services are distributed via brokers and agents, insurance companies and the internet. Large and commercial risks are managed either directly or in cooperation with brokers. Banks are currently licensed as Corporate Agents and permitted to distribute only for one insurer. This however may change as IRDA is contemplating changes in bancassurance laws. Digital and online activity has been focused largely around motor/auto; overseas travel and health products. Life insurers have been selling mainly individual and group life, unit linked, pension and endowment products. Since regulatory developments in 2010, which constrained the selling of unit linked products, life insurers have focussed on the sale of traditional life products. There is now a big push to distribute term life products online. Headline market statistics and commentary India 31

32 Drivers General Insurance When compared to other BRIC countries and other emerging markets like Thailand, India has the lowest penetration of 0.7 % of GDP, which is significantly lower compared to other BRIC countries like China (1.3 %), Brazil (1.5 %); Russia (2.3 %) and other emerging markets like Thailand (1.7 %) Underwriting losses were over $1.66 billion in FY 2012 largely increased due to increase in unexpired risks, inadequate risk-based pricing, leakage through inefficient claims practices. There is a considerable spread between the top quartile and bottom quartile in terms of returns. However, no player has been yet to achieve the balance between growth and underwriting profitability Motor is likely to continue being the largest line of business contributing around 40-45% of industry premiums, while health would be the fastest growing. In India, health is classed as General insurance. Within health, Government sponsored schemes are proliferating quite fast while the retail spread is perhaps likely to be the single largest segment. Life Insurance Impactful regulations since 2010 starting with guidelines on selling universal life; outsourcing of activities; agency persistency and productivity ; pension products; IPOs, ALM, and anti-fraud policies. There are more policies from the IRDA expected around bancassurance (open architecture regime) which are likely to cause further changes in business models Distribution remains the single largest piece of the puzzle for a successful insurance operation. While productivity and persistency have been falling for owned agents on the one hand, the rush to tie up with banks is at an all time high. Existing players have been also trying to secure banks as an additional JV partner Life insurers are looking to technology to resolve issues in distribution (Web 3.0 or online selling), analytics, Big Data, cloud computing and other aspects. Potential barriers to entry The IRDA is open to new license applications however the breadth and complexity of requirements can take significant time to prepare for in the licence application process. Insurers with a line of business speciality or that have a strong geographic Indian partner may be able to see some good successes. A preferable choice of foreign partners might have been a domestic bank, though the choices now are limited. India 32

33 Key developments and future outlook Key issues The IRDA is likely to introduce Bancassurance guidelines, which is expected to create more latitude for insurers to establish distribution arrangements with banks. The IRDA has asked insurance companies to put in place procedures for fraud detection and its control and to have a board-approved anti-fraud policy by 30th June The IRDA will be shortly releasing regulations for the amalgamation of life insurance companies, the issue of capital by non-life insurers and also draft guidelines on design of life policies. India s Cabinet has approved the Insurance Amendment Bill and is likely to present it for discussion and vote in the Parliament Future outlook The outlook for general insurance is largely positive driven by underlying demand tailwinds eg India s auto sector is likely to become the world s third largest while infrastructure spending is expected to be over $1 trillion as per the latest five year plan. Specialist insurers are likely to enter the market. Certain players may seek to become specific risk specialists, developing expertise or focus in a limited set of risks, channels, or geographies. While competing for market share, insurers are expected to look for ways to focus on improving profitability. Loss making agency models could give way to the more efficient bancassurance or alternate channels. Sustainable developments in the claims function are expected which may make it more efficient and less prone to error and fraud. Sound and stable economic environment framework, one of the few economies to continue growing in the range of 6+%. This is supported by the growing Indian middle class and rise in income levels: In India, the emerging middle class will constitute a $1 trillion market (2010 prices), by 2021, representing about 28% of India s GDP and about 16% of the Emerging Middle class global market of around $6 trillion. Political stability as India remains the world s largest democracy India 33

34 Key players and competition Competitive environment General Insurance Top five players, which include all four government general insurers, control over 65%of the market share Four Government run insurers have built years of customer loyalty and have deeply established distribution architecture of branch offices even in the remotest places, agents, brokers and now the online space as well. These insurers headquartered in each major metro (Delhi, Mumbai, Chennai, Kolkata) elicit good customer confidence due to their sovereign backing Amongst the private insurers, ICICI Lombard, part of the ICICI Group, holds the highest market share followed by Bajaj Allianz and IFFCO Tokio General insurance. Private players have been aggressively growing over the last 12 years with growth of over 24% YoY in FY They have focused on fine tuned underwriting controls, superior claims management and technology support. Life Insurance Top five players, including state run Life Insurance Corporation (LIC) control over 86% of the market share LIC, which has been synonymous with the more popular individual perception of insurance for a number of decades has maintained it s leadership position amongst 23 private life insurers. It s share has improved recently post the regulatory changes as consumers shifted loyalty albeit due to the perceived longevity and safety of a government insurer Private players have enjoyed good successes since market liberalisation. Their growth stride halted around 2008, essentially due to the economic downturn and then in 2010 post regulatory changes. Private insurers have reworked their business models, reduced costs drastically, re-aligned distribution architectures and have found technology as an able ally beyond traditional usage India s life market continues to be attractive as more foreign players seek an India presence. Key players India 34

35 Contacts PwC in the market Manoj Kashyap FS xlos India Leader Gautam Mehra FS Tax Leader Nitin Karve Tax Insurance Leader Anuraag Sunder Insurance Knowledge Manager India 35

36 India 36

37 Legislative and regulatory framework The insurance industry in Indonesia provides general and life insurance to individuals and businesses. Starting 2013, all insurance companies in Indonesia are licensed and supervised by the Indonesian Financial Services Authority (previously under Insurance Directorate of Capital Market Supervisory Agency under Ministry of Finance). The insurance sector is subject to the Indonesian Insurance Companies Law and other related government regulations. Indonesia 37

38 Financial reporting, capital and taxation Financial reporting requirements For the purposes of financial reporting, Indonesia insurers apply Statement of Financial Accounting Standard (SFAS) 62 Insurance Contract, SFAS 36 (revised 2012) Accounting for Life Insurance Contract, and SFAS 28 (revised 2012) Accounting for General Insurance Contract. SFAS 62 is adopted from IFRS 4 Insurance Contracts. The SFAS 28 and 36 aim to complement SFAS 62. There are no standards in IFRS/IAS which are equivalent to SFAS 28 and 36. Capital regime and requirements Under revised regulations, insurance companies were required to comply with the minimum capital requirement of Rp 40 billion by 2008 and Rp 100 billion by Due to the inability of many insurance companies to meet such deadlines, the Government extended the deadline to 2014 with the gradual increase of the minimum capital required of Rp 40 billion by 2010, Rp 70 billion by 2012 and Rp 100 billion by Indonesia 38

39 Products and the market Products In recent years, unit-linked products have dominated life insurance companies products. Premium from unit-linked products reached 60% of total life insurance premiums across Indonesia. For general insurance, premium from motor-vehicle business is increasing as a result of the growth of the automotive market in Indonesia. As at 31 December 2011, the investment portfolios of life insurers consists of 31% mutual funds, 23% shares, 19% government bonds, 12% time deposits and 25% attributable to other 7. For general insurance, the investment portfolio is dominated by 40% time deposits, followed by 22% marketable securities, 19% mutual funds, and 18% direct investments 8. Headline market statistics and commentary Drivers The growth in life insurance segment is dependent on growth of GDP, population and life density and awareness of insurance offering. The key drivers of general insurance segment is dependent on the growth of property, automobile financing and personal accident and health sector. Potential barriers to entry Indonesian market is very fragmented and significant presences from global players which is very dominant to the market penetration. Limited license issued by regulator and challenge from multiple new regulations are might become barrier to entry to the Indonesian market. 7 Investor Magazine July Investor Magazine, July 2012 Indonesia 39

40 Key developments and future outlook Key issues Insurers are dealing with new solvency regulations introduced in 2013 and the implementation of new accounting standards which could significantly impact insurers reported financial performance and position. These impacts mainly relate to the adequacy of an insurer s solvency ratio and requirements to do an assessment on insurance technical reserves through liability adequacy testing and assessment of the recoverability of deferred acquisition costs. Unemployment and lack of institutional transparency remain the concerns for businesses considering operations in Indonesia. Foreign investment inflows have been volatile, and the country depends on foreign capital markets to fund industrial and infrastructure developments. If the subprime crisis has a cascading effect on global credit markets, then the availability and cost of capital for high risk destinations such as Indonesia could become an issue. The political environment can create uncertainty for insurers and there is considerable bureaucracy, impacting the efficiency of the market. The next presidential election is due to be held in Potential floods or earthquakes that may result from poor environment management, global warming or natural cause remain a challenge for property insurers. Premium war in non-life motor vehicle insurance caused failures for certain insurers to pay out claims and had significant profitability impacts. The Government has issued new regulation to regulate pricing; however, insurance players have yet to fully comply with the regulation. Limited underwriting capacity of domestic insurers. Many domestic companies reinsure their risks to foreign reinsurers, shifting significant premiums overseas. With little premiums retained, the capacity of domestic insurers to cover risks remains weak. Future outlook The insurance industry in Indonesia still has large growth potential considering the current level of product penetration and density which are still much lower than those of other South East Asian countries. In addition, a large proportion of Indonesians are currently underinsured. Multi-channel distribution will grow in popularity in Indonesia to leverage customer bases and enhance cross-selling. Although agents will retain a strong presence in the near to medium future, bancassurance is drawing increasing interest for insurance companies as a significant distribution channel. Sharia insurance focus will continue to increase to cater for the fact that Indonesia has the world s largest Muslim population and therefore a huge market for sharia insurance. 80% of Indonesia s estimated 245 million population is Muslim. Indonesia 40

41 Key players and competition Competitive environment There are 45 life insurance companies operating in Indonesia and the market is dominated by only few insurance companies based on assets and premiums. The top ten companies hold almost 76% of the total market share without any significant dominant players. Improved macroeconomic conditions and higher life premiums per capita (life density) contributed to a better profitability compared to non-life segment. Key players There are 83 non-life insurance companies operating in Indonesia and the market is dominated by only few insurance companies based on assets and premiums. The top ten companies hold around 57% of the total market share without any significant dominant players. Particularly for motor vehicle insurance, intense competition has led to lower premiums and margins. Indonesia 41

42 Contacts PwC in the market Andry D. Atmadja Partner FS Insurance Leader ext Angelique Dewi Daryanto Partner Insurance Partner ext Lucy Luciana Suhenda Partner FS Assurance Leader ext Cliff Rees Technical Advisor Financial Services Leader ext Margie Margaret Tax Partner ext Cornelis P. Poelman RCS Technical Advisor ext Indonesia 42

43 Indonesia 43

44 Legislative and regulatory framework The insurance industry regulator in Japan is the Financial Services Agency (FSA). The FSA supervises financial institutions as well as certified public accountants and auditing firms. The FSA is responsible for ensuring the stability of Japan s financial system, and the protection of depositors, insurance policyholders and securities investors, through such measures as planning and policymaking concerning the financial system, inspection and supervision of private sector financial institutions, and surveillance of securities transactions. The insurance industry is highly regulated. Insurers require a licence approved by FSA to undertake insurance business in Japan. In 2007, the FSA kicked off a project, Better Regulation, to encourage financial institutions to maintain proactive and up-front communication with the regulator to avoid future surprises. The following pillars were established: First pillar: development of explicit rules and principles. Second pillar: timely recognition of priority issues and effective response. Third pillar: encouraging voluntary efforts and emphasis on incentives Fourth pillar: improving regulatory transparency. All life insurers are members of the industry s representative body, the Life Insurance Association of Japan (LIAJ). LIAJ is started as an incorporated association with formal sanction by the authorities concerned on 7 December There are two associations in Japan representing the general insurance market, the General Insurance Association of Japan (GIAJ) and Foreign Non-Life Insurance Association of Japan (FNLIA). Most domestic companies including 3 mega general insurance groups are the member of GIAJ. Most of foreign capital insurance companies including both of branch form and subsidiary form are the member of FNLIA. Japan 44

45 Financial reporting, capital and taxation Financial reporting requirements The Insurance Business Law in Japan requires an insurance company to file semi-annual and annual returns to the FSA, and then publish an annual disclosure report. No external audit of these statutory returns and annual disclosure report is required under the Insurance Business Law. An insurance company incorporated in Japan is required to prepare an annual financial report, which is subject to audit and based on the Japanese Company Act. Since the annual return to be filed with the FSA basically imports the financial part of the annual report under the Japanese Company Act, most of the financial aspects of the annual returns to the FSA are audited already. In contrast, a branch of foreign insurer, which is not a company incorporated in Japan, is not subject to reporting under the Japanese Company Act, and therefore it is also not subject to external audit. A listed insurance company is required to disclose financial results on a quarterly basis. Financial results for 1Q and 3Q are subject to external review, but 2Q is subject to external semi-annual audit. Insurance companies should follow Japanese GAAP unless overriding rules have been established by the Insurance Business Law and related regulations. In Japanese GAAP there are no comprehensive set of accounting standards for the insurance contracts (such as IFRS) or Insurance industries (such as USGAAP). The Insurance Business Law in Japan, related enforcement rules and announcements from the regulators define detailed and individual requirements for accounting for insurance companies. Such areas relate to methodologies for calculating policy liabilities and outstanding claims provisions, recognition of premium revenue, liability adequacy testing, and accounting for certain initial business set up costs, among other topics. Capital regime and requirements Solvency margin regulation was established in 1996 for both life insurers and general insurers. It has been revised couple of times and since 2012, the current regulation considers solvency from both a consolidated and stand-alone basis. The solvency margin calculation is a factor based calculation and similar to the US risk based capital requirement in concept. If solvency margin ratio is less than 200 %, the FSA will take prompt early warning measures which in the worst case can lead to a suspension of the insurance business. The FSA has indicated an interest in implementing a new solvency regime and in this regard is paying attention to the Solvency II outcome in Europe. Taxation Insurance businesses operating in Japan are assessed for tax under the Japanese Corporate Tax Laws. National corporations tax and local inhabitants tax are payable on the profits of insurance businesses at the tax rate, which is currently approximately 33.3%. This rate comprises the national corporation tax rate of 28.05% (25.5% plus temporal restoration surtax of 2.55%) and a local inhabitants tax rate of % applicable in Tokyo. The national corporation tax rate is scheduled to decrease to 25.5% for fiscal years beginning on or after April 1, In addition to the profit-based national corporations tax and local inhabitants tax, non-life insurance businesses are subject to size-based local enterprise tax and local corporate special tax. Local enterprise tax and local corporate special tax are payable on the premium income of an insurance business multiplied by a certain ratio at the tax rate of 1.332%. The applicable ratio, differs depending on the class of business, for example hull insurance (25%), land transport insurance and cargo insurance (45%), compulsory automobile liability insurance (10%), earthquake insurance (20%) and others (40%). The taxable basis of local enterprise tax and local corporate special tax for a life insurer is calculated as annual gross premium income (excluding reinsurance premium income and before deduction of ceded insurance premium) multiplied by the applicable ratio, ie group pension insurance (5%), group insurance other than the group pension insurance (16%), saving insurance other than the group insurance (7%) and other individual insurance (24%). The provision of services within Japan are generally subject to Japanese consumption tax at the tax rate, currently 5% under the Japanese Consumption Tax Law. Following the amendment to the Japanese Consumption Tax Law, the consumption tax rate will be raised to 8% from April 1, 2014 and to 10% from October 1, Certain types of transactions, however, are treated as non-taxable transaction for Japanese consumption tax purposes. Receipt of insurance premiums and payment of insurance claims are not subject to Japanese consumption tax. Japan 45

46 Products and the market Products Traditional life insurance products such as Whole life, Term life, Endowment continue to be the major products sold in Japan. Products such as Medical and Cancer insurance are heavily sold by foreign life insurers. Variable annuity products were well sold in 2000 to 2007 but decreasing the balance by reflecting depression of the economies. Group term life and Group annuity business is also sold largely to companies for the purpose of employee benefits and saving strategies. In Japan, there is a comprehensive range of general insurance products available for both of individuals and corporate policyholders. As with the life segment, individual insurance dominates the market. Total industry premiums are generally spread as follows: about 50% from Voluntary auto, 15-20% from Fire, 10-15% from Personal Accident, 10% from miscellaneous Casualty and 10% from Compulsory Automobile Liability Insurance (CALI). Marine and In-land transit is less than 5% share. CALI is a mandatory insurance for automobile liability required by CALI Act 1955, and coverage and premiums are regulated. Results of underwriting are gathered into a nation-wide pool then ceded back to the individual insurance companies who participate in the pool. A nation-wide earthquake program for households has been established through the Earthquake Insurance Act 1966, which can be sold as a rider on fire insurance. The coverage, premiums and claim payments under the program are regulated. Results of underwriting aggregate into a complex reinsurance program which is ultimately underwritten by the Japanese government. In-house or agencies tied to the insurer are the prime distribution channel for the traditional life insurance products. Independent agents tend to sell Medical, Cancer or Hospitalisation products. Bank channels typically sell Fixed Annuity and Variable Annuity products. The proportion of sales through the internet is gradually growing off a low base. Independent brokers are still the major distribution channel in general insurance market. Direct insurance for Auto and Personal Accident continues to grow gradually. The proportion of sales through the internet is gradually growing off a low base. Headline market statistics and commentary Japan 46

47 Drivers Growth in the insurance market follows that of the wider economy. Japanese GDP has been in decline The population has remained relatively stable for the past decade and there is an ageing population Continued competition in the mature market. Potential barriers to entry These are not necessarily barriers, rather uniqueness in the market: Regulation and supervision: the industry is regulated by the FSA who grants licences and expects upfront and proactive communication with licensees. Global trend in regulation: following the financial crisis and the reporting from the Financial Sector Assessment Program of some concerns with the regulatory framework in Japan, the FSA has been considering the enhancement of the supervision regime for financial institutions including insurers. No announcements have yet been made as to what changes will be made but any changes are likely to follow trends in global regulatory and capital frameworks, such as Solvency II. Talent shortage: the insurance market is relatively small compared to the capital markets, therefore, insurance experts may not be a large population like those in the capital markets. English education in Japan has focused on reading and writing skills rather than hearing and speaking skills. Documentation is written in Japanese with Chinese characters. Investment market: the investment market environment has been suffering lower returns due to poor performance of Japanese economy. Demographic change in Japan: due to change of the demographic derived from a decrease in population led by the lower birth rate and longer life expectancy, the Japanese population is expected to shrink. This means the nature of risk to be insured will shift which may create new opportunities. Japan 47

48 Key developments and future outlook Key issues High level concentration into Japanese Government Bond (JGB) may create future unrealized losses when interest rates increase. The impact of a JGB interest rate change may be larger for life than the general insurance industry due to the accumulation of long duration insurance contracts and related assets Selling stock investments in order to reduce equity risk exposure may impact profitability of insurers Consumption tax rate increase in the future may squeeze insurance profitability Some Japanese insurers are making investments in overseas insurance businesses which will require new management skills for the Japanese insurers Pricing competition in the lower investment yield market may squeeze insurance profit Automobile insurance pricing competition may continue to erode margins across the industry Potential increases in frequency of natural disasters may bring larger volatility to the profitability of insurers, compared to the past experience. Future outlook Continuously competitive markets Potential recovery in the Japanese economy may provide growth opportunities for the insurance industry Trends in regulation change, particularly around risk based capital, will impact insurers both in terms of how much capital is required but also the approach to managing the risk sensitivities around capital assessments. Japan 48

49 Key players and competition Competitive environment Life insurance The life insurance industry is considered to have a high level of concentration. There are 43 life insurance companies in Japan, including a government owned company, Kampo Life (Japan Post Insurance), 4 major domestic life insurers and another 38 companies. Kampo and 4 major insurers account for 70% of industry-wide total assets. 4 major domestic life insurers consisted of 3 mutual life insurers (Nippon Life, Meiji Yasuda Life and Sumitomo Life) and a listed stock life insurance company, Dai-ichi life, which demutualised in The use of the internet as a distribution channel has proven successful for internet based insurers. Larger market players have taken note of this innovation and have adjusted their pricing strategies. Foreign companies tend to focus on specific market such as cancer insurance or medical insurance, and have been successful due to the uniqueness in the product lines and brand value. General insurance The general insurance industry is considered to have a very high level of concentration. There are 53 general insurance companies in Japan and 29 companies are domestic insurers incorporated in Japan (5 companies are owned by foreign capital), while 24 companies are primarily branches of foreign non-life insurers or non-life reinsurers. There are 3 mega general insurance groups, Tokio Marine Group, MS&AD Group and NKSJ Group who account for around 85% of industry-wide total assets. The top five insurers by premium income are Japanese companies and account for more than 80% of the general insurance premium in the Japanese market. Key players Japan 49

50 Contacts PwC in the market Takashi Idesawa Insurance Industry Leader Partner Takaaki Ino Insurance Assurance Partner Sachihiko Fujimoto Financial Service Tax Partner Abhijit Mukhopadhyay Insurance Advisory Consulting Partner Jeffrey Adams Insurance Advisory Consulting Partner Masahiro Komeichi Insurance Advisory Deals Partner Japan 50

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52 Legislative and regulatory framework The insurance industry provides non-life, life and type 3 insurance (a contract that promises the payment of stipulated money and other benefits to the insured for any disease, injury or nursing thereof for the purpose of guaranteeing any risk, in exchange for consideration) to individuals, households and businesses in South Korea. A person who intends to run an insurance business shall obtain a license from the Financial Services Commission (FSC) according to the types of insurance business stipulated in the article 4 of the Insurance Business Act. The purpose of the Act is to contribute to the sound development of insurance business and the balanced development of the national economy by ensuring the sound management of insurance business operators and by protecting rights and interests of policyholders, the insured and other interested persons. In addition, the Act stipulates that requirements for the authorization of insurance business, asset management, and capital adequacy. Insurance contracts written by the government are regulated by the specific Acts of the National Assembly. The life insurance industry is responsible for the national welfare of the public interest and accounts for a significant portion of the national economy. The insurance industry is regulated by the insurance business law, the commercial law, the regulation on supervision of insurance business, and other laws. The Financial Supervisory Service (FSS) was established on January 2, 1999, under the Act on the Establishment of Financial Supervisory Organizations with the primary role being to examine and supervise financial institutions, but may also perform oversight and enforcement functions as charged by the Financial Services Commission and the Securities and Futures Commission. Korea 52

53 Financial reporting, capital and taxation Financial reporting requirements Insurers have adopted IFRS for financial reporting, including IFRS 4 Insurance Contracts. Regulatory reporting is performed with reference to IFRS, the insurance business law, regulations on supervision of insurance business, detailed regulations on supervision of insurance business (Chapter 4 Insurance accounting offers detailed Korean insurance accounting practice), supervision manual for FSS, and other regulations. Capital regime and requirements A risk based capital (RBC) regime for life and non-life insurers commenced in April The risks are classified into insurance, interest, credit, market and operation risks and solvency requirements are assessed against the capital to address those risks. In its supervisory role, the FSC can intervene when the RBC ratio falls below a minimum threshold. The average RBC ratio for non-life insurers is at a sound 276.7%. However, there are significant differences for the ratio between the big four companies (317.0%) and smalland medium-sized companies (154.3%). The average RBC ratio for the life insurance sector is 311.2% (as of 30 Jun 2012) and has increased by 1.8% compared to previous quarter, but that of bank owned insurers focused on the bancassurance channel is 179.7% and has decreased by 15.8% on the previous quarter. Taxation Insurers are liable for corporate income tax under the Korea Corporate Tax Act. The tax rate applied is 10% for taxable income below two hundred million, 20% between two hundred million and twenty billion, and 22% over twenty billion. The taxation structure applied for insurers is identical to other industry, except on the deduction of reserves. Korea 53

54 Products and the market Products Under insurance business law insurance products are classified as non-life, and under commercial law they are classified as non-life and personal insurance. According to the Insurance Business Act, non-life is classified as fire, maritime, automobile, surety, reinsurance, liability, technology, title, pilferage, plate grass, nuclear, and weather. Long-term and automobile insurance were the main traditional non-life insurance products, but recently on-demand products, complementary products for national health insurance and automobile insurance sold by on-line channels are gaining popularity. Headline market statistics and commentary (2011) Personal insurance is classified as life and annuity as well as accident type insurance covering injury, disease and long-term care. The aging population and low birth rates in Korea have slowed down the growth of the life insurance market. Sales by on-line channels have increased, and there are trends toward simplifying the products and increasing awareness and coverage. Korea 54

55 Drivers Non-life Insurance Non-life insurers net income in 2011 is KRW18,155 billion and has increased by KRW 7,047 billion(63.4%) compared to New government measures to introduce a fixed rate for deductibles and apply commission restrictions have led to an improvement in the loss ratio and the expense ratio for the auto insurance sector. Life Insurance Life insurers Premium Income is KRW87.8 trillion and has increased by KRW4.8 trillion KRW (5.8%). Earned premiums have increased by KRW8 trillion(18.3%) compared to 2010 due to long-term insurance and the savings contracts showed 52.1% growth rate. Domestic life insurers focused on selling savings contracts and has grown by 4.4%, but foreign life insurers focused on assurance and variable products and showed negative growth due to decrease in premium income. Some domestic life insurers have exposures to real estate Project Financing (PF) loans. Although the outstanding balances on these loans have been decreasing, the nonperforming ratio for these loans is 12.5% compared to the overall non-performing loan ratio across mortgage loans in Korea is 1%. Potential barriers to entry An insurance company may commence its insurance business by obtaining a license from the FSC and putting up capital or fund of not less than KRW30 billion. The initial capital requirement is relatively high by global standards. The FSC also has powers to restrict the license or insurance business for example in limiting the number of sales people. Foreign insurers need to understand the Korean business environment to succeed. Korea 55

56 Key developments and future outlook Key issues Margin pressure on saving products: Even though investment returns and market interest rates have reduced with the declining investment market, saving contract sales have continued to increase in FY2011. Insurers are maintaining higher crediting rates in order to compete, which is likely to lead to lower profit margins on savings contracts. As the bancassurance distribution channel grows in importance, the impact of the banking industry on the product development and distribution remuneration may impact insurer business models and product propositions. Future outlook Impact of free trade agreement with the US on domestic insurance industry: After a 2-yearg race period ending in March 2014, branches and joint companies of US can be more competitive in terms of insurance products and services with the customer information Amendments to the insurance business law The FSC has sponsored a task force to make recommendations on how to improve the conduct of insurance. The amendments to the insurance business law will become effective in the first half of 2013 and will include measures to strengthen the investigation on claims payment for indemnity insurance, mobile phone insurance and preventing unfair subsidies to subsidiaries. Korea 56

57 Key players and competition Competitive environment Non-life Insurance For local non-life insurance market structure, the top five companies consist of more than 80% of market share. But the market concentration is becoming lower due to Bancassurance channel of small and medium-sized nonlife insurers Small and medium-sized non-life insurers focus on the ages between 20 and 30, and price discount strategy, but big non-life insurers concentrate on high prices and high value-added products with brand power and high quality of services. Life Insurance Top three companies consist of 60% of market share and other 23 companies are running the business. As NH Life Insurance entered the market, it is ranked as 4th in the industry and its presence has triggered competition. From the beginning of 2000, foreign life insurers have grown rapidly with advanced financial products and practices. But the market share has been lowered since the 2008 global financial crisis and showed negative growth compared to Domestic insurers have benchmarked advanced financial practices and focus on assurance products weakened competitiveness. Key players Korea 57

58 Contacts PwC in the market Sei-Youn Jung Assurance Partner Hoon Jung Tax Partner Chang-Ho Kang Consulting Partner Jong-Seok Kim Deal Business Partner Hong-Yong Lee Actuarial Senior Manager Korea 58

59 59

60 Legislative and regulatory framework The insurance and takaful (Islamic insurance) industry is governed by the Insurance Act, 1996 ( IA ) and Takaful Act, 1984 ( TA ) respectively. Both the IA and TA provide the legislative framework for improving the supervision and regulation of the industry in terms of operational and financial discipline, transparency of policies and practices, and protection of policyholders. The IA and TA empower Bank Negara Malaysia ( BNM ) to issue guidelines, circulars, notices or codes to facilitate its administration of the IA and TA. Licences for insurers and takaful operators are issued by the Minister of Finance on the recommendation of BNM. Depending on the terms of its licence, an insurer can provide all classes of life and general insurance cover, but cannot participate in non-insurance related business. An insurer with a takaful licence is allowed to provide takaful products. All licensed insurers and takaful operators are required to be public companies (limited liability companies owned by shareholders), except for professional reinsurers which are allowed to remain as foreign branches. The offshore insurance industry is governed by the Labuan Financial Services Authority. The offshore insurance business is transacted in foreign currency, and includes life, general, reinsurance, captive insurance, insurance manager, underwriting manager and insurance broking, but does not include domestic insurance business. Malaysia 60

61 Financial reporting, capital and taxation Financial reporting requirements For the purposes of financial reporting, the insurers and takaful operators in Malaysia adopt the Malaysian Financial Reporting Standards ( MFRS ) Framework which is compliant with the International Financial Reporting Standards ( IFRS ) for the financial period beginning 1 January BNM also issues certain guidelines on financial reporting for the insurers and takaful operators. The valuation basis of general and life insurance liabilities is prescribed in the RBC Framework and complies with the requirements of IFRS 4 Insurance Contracts. All insurers and takaful operators in Malaysia must submit two distinct sets of financial statements: annual financial statements to shareholders under the Companies Act, 1965 returns to BNM under the Insurance Act, 1996 and the Takaful Act, Capital regime and requirements Licensed local insurers are required to maintain a minimum paid-up share capital as follows: Direct insurance business: RM100 million Local reinsurer (life): RM50 million Local reinsurer (general): RM100 million. Licensed foreign reinsurers are required to maintain a minimum surplus assets over liabilities of RM20 million. The Risk-Based Capital ( RBC ) Framework which was implemented from 1 January 2009 applies to all insurers, including reinsurers, licensed under the Insurance Act 1996.Each insurer must set its own individual target capital level (agreed by BNM) to reflect its own risk profile. The individual target capital level must be higher than the supervisory target capital level of 130%. The RBC Framework for takaful operators will be effective from 1 January Taxation The principal tax in Malaysia is income tax. There is no capital gains tax except for real property transactions. Other taxes include sales tax, service tax, stamp duties and other miscellaneous indirect taxes. Income of the insurance business of a tax resident is subject to tax on a worldwide basis, whereas a nonresident insurer is taxed on the income accruing in or derived from Malaysia. There are special rules for determining the profits assessable on resident and nonresident insurance companies, depending on the type of insurance business transacted in Malaysia. The life insurance fund is taxed at the income tax rate of 8% whereas the general insurance fund and shareholders fund are taxed at the income tax rate of 25%. Currently, there is plan to introduce Goods & Services Tax ( GST ) in Malaysia. Based on the current proposals, insurance products are expected to be tax-exempted from GST and hence will not be entitled to input tax credit claims. Malaysia 61

62 Products and the market Products The main underwriting businesses for general insurance are motor, fire and medical and personal accident policies. Based on the BNM statistics for 2011, motor business, the largest segment, accounts for 46% of the general insurance industry gross premium income, followed by fire at 17% and medical and personal accident at 14%. Life insurance covers whole life, endowment, temporary, investment-linked and annuity policies. Based on the BNM statistics for 2011, temporary (or term life) policies accounts for 43% of the distribution of sum insured in force of the life insurance industry, followed by investment-linked at 23% and whole life at 20%. General insurers depend on independent agents and insurance brokers for their underwriting. Agents cater for personal line policies while brokers concentrate on commercial customers. There are more than 35,000 independent agents and 33 insurance brokers servicing general insurers nationwide as of December General agents are required to be registered with the mandatory insurance association namely Persatuan Insuran Am Malaysia ( PIAM ). Licences for insurance brokers are issued by BNM. Life insurance is sold through direct sales force, direct selling and independent agents. There are more than 83,000 independent life agents as of December 2012 who are required to be registered with Life Insurance Association of Malaysia ( LIAM ). Insurers are increasingly using banks to market and distribute their products. Banks offer convenience to customers by processing insurance policies together with banking transactions such as mortgage reducing term assurance, home mortgage with fire policy, hire purchase loan with motor vehicle policy and trade financing with marine cargo policy. Headline market statistics and commentary Malaysia 62

63 Drivers General Insurance Life Insurance Takaful The growth in general insurance was mainly driven by the growth in motor, fire, marine, medical and personal accident businesses. The dominant motor sector commands 55% of total net premium income. However, the Motor Act sector remained unprofitable with the claims ratio rising to a record high of 296%. The second most dominant sector is the fire insurance business (17% of total net premium income). This is consistent with the continuing importance of real estate in the Malaysian economy. However, the fastest growth sector remains to be medical insurance at an annual rate of 12%. This can be attribute to greater disposable income and awareness by the public. The growth in life insurance was mainly spurred by the growing demand for investment-linked, medical and health products at a compound rate of 9.6% in the last 10 years. However, the volatile financial markets and persistent low yields were a drag on profitability amid the continued search for reasonable investment returns. The lower profitability was mainly driven by: investment losses which substantially reduced the net capital gains (realised and unrealised); and higher net benefit payments mainly attributed to medical claims and bonuses paid. Consistent with the general insurance sector, the growth in general takaful was mainly driven by growth in motor, marine and personal accident businesses. However, the annual growth (at a compound rate of 20% in the last 10 years) is higher than the conventional sector in view that it has a lower base as compared to the latter. The growth in family takaful was mainly spurred by the growth in temporary policies relating to mortgages sold via the main distribution channel of bancatakaful. The takaful industry was also exposed to the volatile financial markets and persistent low yields which put pressure on the investment income. Potential barriers to entry Currently, there is a freeze on the issue of new insurance licences by BNM, although BNM may be open to consider applications on a case-by case-basis. Currently, there is a 70% limit on foreign equity owners. However, a higher equity limit beyond 70% will be considered by BNM on a case-by-case basis for players who can facilitate consolidation and rationalisation of the industry. As Malaysia seeks to position itself as a regional Islamic financial services hub, the possibility of new entrants to the takaful sector appears to be more realistic, subject to them having the required credentials in Islamic finance. BNM may be open to consider applications on a case-by case-basis. Malaysia 63

64 Key developments and future outlook Key issues Revisions to the BNM s Risk-Based Capital ( RBC ) Framework The revisions were made in May It is meant to converge the valuation rules under pinning the determination of regulatory capital with the Financial Reporting Standards. Further enhancements are being made to the RBC framework. Amongst the areas are: (a) Refinement of valuation methodology for life insurance liabilities and reinsurance arrangements; (b) Ensure consistency between current capital buffers provided under the RBC framework and (c) Implementation of more robust internal capital management processes for insurers. A new risk-based capital framework for takaful operators It will be effective from 1 January BNM issued guidelines on an internal adequacy assessment process ( ICAAP ) for conventional insurers It is effective from 1 September The Competition Act 2010 This is effective on 1 January 2012 and it introduced a new motor cover framework addressing pricing distortions and inefficiencies in the claims settlement process. It allows for gradual adjustments to the premium levels and will be phased in over a four-year period. Personal Data Protection Act, 2010 The Act is expected to be implemented in 2013 and could pose significant challenge in the availability of customer data for cross-selling purpose in the direct marketing/telemarketing business. Splitting of composite license into non-life/general takaful and life/family takaful businesses within a 5 year grace period This is based on recent regulatory/industry developments. There are potential merger and acquisition opportunities when the shareholders of existing composite licensed operators potentially seek to dispose either licenses or a tie-up with a strategic partner. Malaysia 64

65 Future outlook General Insurance Life Insurance Takaful The outlook is positive based on the following factors: Malaysia s GDP growth is expected to grow 5% to 6% The expansion of the Malaysian general insurance segment is correlated closely to GDP and disposable income. The main growth areas are expected to be from the services and manufacturing sectors. It is expected the gross premium income will increase to RM17.5b by Positive impact of government economic policies Government initiatives like the Employee Insurance Scheme, Private Pension Scheme and the Foreign Workers Health Insurance Scheme will incentivise players to develop new product offerings and increase the depth in the market. In addition, introduction of the 1Malaysia Micro Protection Plan will not only provide insurance coverage to small businesses enterprises but also raises the penetration rate of insurance in Malaysia. Bright outlook for motor insurance players Motor premium revenue will continue its growth given the premium tariffs are being revised (for the first time in 30 years) gradually over 4 years, and insurers are now adopting premium loading on older cars and commercial vehicles. In addition, better profitability from this segment is expected as the industry offloads the unfavourable motor risks to Malaysian Motor Insurance Pool. Growth in medical and personal accident insurance is expected to be fastest This is in line with greater public awareness and higher disposable income. Rates stabilisation for the large and specialised risks ( LSR ) and project engineering category However the segment is expected to benefit from government s mega infrastructure projects. The number of general insurers is expected reduce gradually as the industry consolidates further. The outlook is positive based on the following factors: Malaysia s GDP growth is expected to grow 5% to 6% Total life new business premiums are expected to grow 7% to 10%. Positive impact of government economic policies The introduction of the Financial Sector Blueprint ( ) by BNM which focuses on retirement planning and healthcare solutions coupled with tax incentives are for private pension plans is likely to accelerate development of the private pension market in Malaysia. Life insurers are provided the opportunity to play a key role in this segment by introducing new products like annuity plans for retirement needs. Vast untapped market with the current low market penetration of 43% This segment will benefit from the rising per capita income of the population and new and innovative products introduced by insurance companies. Escalating costs of medical and healthcare services This spurs the growth in health and medical products as public becomes more aware and realise the benefits of life insurance products. This encourages people to purchase additional life insurance policies for their post-retirement period. Current low interest rate environment It makes purchases of life insurance products attractive as it carries relatively high yield and yet stable returns. The outlook is expected to be positive based on the following factors similar to the conventional general and life insurance industry. The outlook for takaful business is expected to be good given Malaysia s predominant Muslim population and its penetration rate at a mere 10% compared to the conventional at 43%. The takaful business is also witnessing strong growth momentum. A growth of 15% to 20% is expected for the family takaful but a growth of 10% to 12% is expected for the general takaful segment. Positive impact of government economic policies The government is very keen in developing the Takaful market in Malaysia. A number of Takaful related initiatives have been enshrined in the introduction of the Financial Sector Blueprint ( ) by BNM. Some of the recommendations are: - Issue of new takaful licences to institutions with specialised expertise. - Promote the use of takaful and risk management tool in Islamic finance transactions. - Encourage greater involvement of takaful brokers to broaden the range of takaful product offerings and outreach by extending Malaysia International Islamic Finance Centre ( MIFC ) incentives. - Facilitate greater injection of foreign expertise in takaful broking and loss adjusting industries to better support takaful business. - Encourage international players to establish retakaful operations in Malaysia. Malaysia 65

66 Key players and competition Competitive environment The Malaysian insurance market comprises 57 insurers and takaful operators as of 31 December 2012, of which 9 write life business only, 19 write general business only, 6 composite insurers, 7 reinsurers, 12 takaful operators and 4 retakaful operators. The offshore insurance market comprises 4 life insurers, 9 general insurers, 2 composite insurers, 38 captive insurers, 39 reinsurers and 74 insurance brokers as of 27 December General Insurance Life Insurance Takaful The general insurance industry is still relatively overcrowded, with the top 10 of the 25 insurers commanding 65% of the market share in gross premiums in 2011, many of whom are primarily motor insurance companies. Other than the overcrowded market, this sector is less attractive due to the lower underwriting margins, especially in the dominant motor insurance class. However, there are opportunities in personal line classes such as personal accident and medical/health, and niche sectors such as marine cargo. Consistent with BNM s vision of consolidating the conventional insurance industry, the number of general insurance players has gradually reduced over the last decade, and further consolidation is expected in the near future. This is encouraged and achieved via a combination of incentives such as tax and stamp duty exemptions, regulatory measures such as increased capital requirements and the cessation of issuance of new licences. The life insurance sector is considered to have high level of concentration as it is currently dominated by a few key players, most of whom are household names regionally/globally. The top 5 of the 15 life insurers commanded a market share of 71% in terms of gross premiums in The key players are comparatively better resourced and well-marketed compared to the medium/small insurance players who continue to struggle to grow their new business. The takaful industry is growing, and currently, it is dominated by the pioneer takaful operators namely Syarikat Takaful Malaysia Berhad and Etiqa Takaful Berhad which commanded a market share of 60% in terms of gross contributions in As part of the Government and BNM s initiative to develop Malaysia as a leader in the takaful market, 4 new takaful licences were issued in 2011 to attract leading global players to establish a presence in Malaysia by partnering Malaysian companies. These 4 new takaful operators are AIA AFG Takaful Bhd, AmFamily Takaful Berhad, Great Eastern Takaful Sdn Bhd and ING PUBLIC Takaful Ehsan Berhad. There is intense competition to the conventional insurance players with the introduction of takaful operators, which meets the prevailing needs of the Muslim population for a Shariahcompliant takaful products. Malaysia 66

67 Key players Malaysia 67

68 Contacts PwC in the market Soo Hoo Khoon Yean Financial Services Industry Leader PwC Malaysia Lim Phaik Hoon Senior Executive Director +(60) Malaysia 68


70 Legislative and regulatory framework The insurance industry provides general and life insurance to New Zealand individuals, households and businesses. Under the Insurance (Prudential Supervision) Act 2010, all insurers must be licensed. The legislation is currently being phased in, with all existing insurers having to be at least provisionally licensed, and fully licensed by 7 September Some sections of the old Life Insurance Act 1908 are still in force; they cover assignment of policies, interest payable on death claims, non-forfeiture provisions and the insurance of minors. The Reserve Bank of New Zealand is the regulator of the insurance industry. Savings and investment products sold by insurers are classed as securities and therefore need to comply with securities legislation. This is regulated by the Financial Markets Authority (FMA). New Zealand 70

71 Financial reporting, capital and taxation Financial reporting requirements Financial reporting requirements are set by the New Zealand External Reporting Board (XRB). Accounting and financial reporting requirements are defined through New Zealand GAAP, in particular through the NZ equivalent to IFRS 4 (NZ IFRS 4). All insurers are issuers, as defined by the Financial Reporting Act 1993, which means they have to be fully compliant with IFRS standards. Appendix C of NZ IFRS 4 applies to life insurers and follows the Margin on Services methodology, whereby profit is released in line with the provision of service over the life of the insurance contract. It is largely consistent with AASB 1038 in Australia. The standard also applies to health insurance contracts sold by life insurers. Appendix D of NZ IFRS 4 applies to non-life insurers. It is largely consistent with AASB 1023 in Australia. Premium revenue is earned in line with the pattern of risk, and claims are reserved for on the basis of a central estimate plus a risk margin, while acquisition expenses are deferred and amortised over the life of the contract. New Zealand is likely to adopt the new insurance accounting standard once that is issued by the IASB. Taxation Capital regime and requirements There is a minimum capital requirement of $5m life and $3m non-life. Insurers must maintain a solvency margin of at least zero at all times, and three-year forecasts must indicate that this will be maintained. The definition of solvency margin is the margin of Actual Solvency Capital above Minimum Solvency Capital. The Minimum Solvency Capital requirement is made up of prescribed capital charges relating to various risks: Insurance Risk Catastrophe Risk (for life insurance this includes pandemic risk) Credit, Property and Equity Risk Foreign Exchange Risk Interest Rate Risk Asset Concentration Risk Reinsurance Risk. New Zealand insurance companies are assessed under the Income Tax Act 2007 and the Goods and Services Tax Act Non-life Company tax is based on profits, but with upfront deductibility of acquisition costs Special tax rules exist for the taxation of investment income GST is charged on premiums but deductible on claims Fire Service levy Earthquake levy. Life Company tax based on a two-tier system for shareholders and policyholders. Shareholder tax is based on premiums less claims, with upfront deductibility of acquisition costs Policyholder tax is based on an allocation of investment income attributable to policyholders, and claims received in the hands of policyholders are generally tax free Special tax rules exist for the taxation of investment income. The provision of life insurance contracts represents an exempt supply for GST purposes, provided the contract places sums at risk upon death or survival. GST will apply to non-life contracts sold by life insurers. New Zealand 71

72 Products and the market Products The general insurance sector offers a full range of risk products to New Zealand households and businesses, including personal, commercial, marine, rural, travel, and professional indemnity lines. Insurance for natural disasters is in part met by the stateowned Earthquake Commission (EQC). The EQC only covers domestic residences which hold private insurance; it does not provide cover for businesses. The EQC is funded by levies on insurance premiums paid to private insurers. Any claims payout is limited to the first $100,000 plus GST (goods and services tax) of any individual claim, with any amount above that covered by the insurance company holding the policy. Comprehensive compulsory no-fault accident insurance is provided through the government agency, the Accident Compensation Corporation. General insurance products are distributed by brokers and agents, banks, the internet, and direct. The life insurance sector provides term life, trauma, TPD, and disability income cover to both individuals and groups. In addition, some life insurers continue to hold large portfolios of traditional endowment and whole-oflife business which have been closed to new business. Some life insurers also offer superannuation, retirement and investment-style products. Some also have significant funds management businesses, including Kiwisaver (a work-based voluntary retirement savings initiative implemented by the government). New Zealand has a very small annuity market. Distribution of life products is still dominated by the brokers and aligned adviser channels. Bancassurance is continuing to grow, while the direct and online markets are in their infancy. Overall, the insurance industry is in the mature stage of the life-cycle. New Zealand 72

73 Drivers Performance trends are being driven by the factors affecting the general economy in New Zealand and continued economic pressure is expected. Non-Life insurance Claim settlement issues arising from the 2010 and 2011 Christchurch earthquakes. Property insurers have incurred substantial claims costs and the volume and complexity of evaluating claims has meant they are not being settled as quickly as the industry would like. This was a significant issue in 2011 but has had less impact in 2012 as most of the claims have been reserved already, with only the most significantly affected areas still outstanding. General insurers have seen a strong growth in premiums in the current year, but are contending with higher reinsurance costs as a result of the earthquakes. Historically New Zealanders have insured their homes on full replacement cost, but it is speculated that many insurers will move to a sum-insured model in the future. This will represent a fundamental change which general insurers will need to effectively communicate to policyholders. Vero, State, AMI and NZI will follow AA Insurance to switch their house insurance policies to sum insured from replacement value as a result of the Christchurch earthquakes in a big change for the industry. The move will shift the onus to understanding the cost of rebuilding from insurer to homeowner requiring homeowners to have a clear understanding of likely rebuild costs on the purchase or renewal of their policies. This change is being driven by reinsurers who want to have a clearer view of their natural disaster risk and the need to keep house insurance affordable. (Sunday Star-Times, 9 December 2012). Life insurance The life insurance market is struggling to increase premium revenue growth. In the current economic climate, households are focusing on reducing personal debt has led to a struggle for the life insurance sector. Limited growth is coupled with increasing competition. Recent Financial Services Council research 9 has discovered that: New Zealanders appear to place greater value on protecting their assets than on protecting their lives, household income and their family s future More than 95% of homes and cars are insured, but only 57% of New Zealanders insure their lives and barely 20% have income protection insurance 60% of New Zealanders were characterised as finding personal insurance all too hard Jargon used by the insurance industry and the complexity of the products on offer often make it hard to understand exactly what is being delivered and what is value for money. Potential barriers to entry Must be licensed by Reserve Bank of New Zealand and meet ongoing licensing requirements Must maintain a solvency margin at all times Minimum capital requirement of $5m life, $3m non-life Directors and key management must meet fit and proper requirements. 9 Financial Services Council Annual Review 2012 New Zealand 73

74 Key developments and future outlook Key issues Christchurch earthquakes: the affordability of insurance is a key industry issue on the back of large increases in premium costs in virtually all sectors over the last 18 months (premiums increased to offset the increase in reinsurance costs following the Christchurch events). According to the Insurance Council, the Christchurch earthquakes have created a permanent shift in the insurance market; for example: It is now more difficult to insure older buildings for replacement. The cost of insurance has risen dramatically and is likely to continue increasing. Significant levels of under-insurance were exposed, particularly in the commercial sector. The main reason for this was outdated property valuations. There is a growing concern that increases, for example to the earthquake levy, will see affordability issues arise and a potential reduction in the levels of insurance. Funding of the Fire Service: the industry has asked the Government to reduce the cost on households by ending the Fire Service levy on insurance premiums. The Government is reviewing funding of the Fire Service and a number of recommendations have been released earlier this year. Whilst there is still a degree of consultation and review to take place initial indications are that the levy will continue to be collected through insurance premium. Further consultation is expected over the course of Linking of traditional boundaries between life insurers and financial markets The Financial Services Council (previously the Investment, Savings and Insurance Association) represents certain investment and life insurance companies in New Zealand. During 2011 the members overwhelmingly agreed that the earlier loss of confidence in the financial services sector and the move to principles-based rather than industry-specific regulation, as well as the fallout from the global financial crisis, made a unified, effective financial services sector organisation a priority. Tax: Life insurers are in a transitional phase in relation to a new (since 2010) tax regime. A five-year transition period applies for most policy types provided the policy was in force at 30 June As new policies are sold and transitional relief stops for old policies, it is envisaged that life insurers will pay significantly more income tax than under the old life insurance tax regime. Regulatory changes: The insurance industry is facing greater scrutiny through changes in regulation: in particular, the staged implementation of the Insurance (Prudential Supervision) Act 2010, which requires all insurers to have a full licence by 7 September Financial Advisers are now governed under the Financial Advisers Act which requires them to have certain qualifications as well as certain processes in place when interacting with their clients. Another issue on the horizon is anti-money-laundering legislation. All insurers selling savings products will have to be in compliance with this by 30 June Although certain exemptions are expected for general insurers who sell risk-based insurance, it is expected that some life insurers who sell life products with an investment element will need to comply with new FATCA (Foreign Account Tax Compliance Account) rules imposed by the United States. Role of technology in insurance: Many insurers are faced with the challenge of changing technology in relation to improving claims management, distribution platforms, policy administration systems and data storage. AMI takeover by IAG: AMI is a key player in the general insurance market in New Zealand. In April 2012 IAG obtained regulatory approval from the Reserve Bank to complete its acquisition of New Zealand s AMI s insurance business. AMI had significant exposure to the Christchurch earthquakes which has now been taken over by the New Zealand government in the acquisition deal. 10, 9 August 2012 New Zealand 74

75 Future outlook General Regulatory environment The new regulation is likely to have a noticeable impact on the industry, particularly regulations regarding the level of capital insurers need to hold. With implementation of the Insurance (Prudential supervision) Act 2010, the Reserve Bank of New Zealand aims to ensure financial strength of insurance companies by applying prudent supervision on various areas. There is a move by the Reserve Bank towards a 1 in 1000 year event return period to model catastrophe events. (AM Best. Reactions Nov 2012) Technology Technology platforms such as Life Direct are making pricing comparisons quicker and easier for consumers to both choose and change their products. This is expected to lead to diminishing client loyalty. It is also expected that traditional marketing methods will be challenged by social media and consumers will be influenced by information available online. Life Sales growth Convincing New Zealanders that insuring themselves is just as important, if not more important, than insuring other assets is expected to remain an ongoing challenge for life insurers. Life insurance companies are struggling to get sales growth with households having to pay more for their house insurance and a national focus on paying down debt. Figures released by the Financial Services Council show total annual in-force premiums for ordinary term life insurance rose just 2% in the past quarter. 11 Low levels of life insurance The penetration rate of life insurance as a percentage of GDP is very low in the New Zealand market according to Gordon Watson, AIA Group regional managing director 12. He is bullish on growth opportunities. 11 Dominion Post, 12 December, 29 October 2012 New Zealand 75

76 Key players and competition Competitive environment The insurance market in New Zealand is considered to be competitive to highly competitive. Insurance in New Zealand is provided by around 100 companies which vary in the types of products they provide as well as in their size and ownership 13. A significant number are branches of overseas-based companies. There are also several smaller insurers, which highlights the existence of profitable niches. Key players 13 Reserve Bank of New Zealand, Supervision of the Insurance Industry, November 2012 New Zealand 76

77 Contacts PwC in the market Bruce Baillie Partner Michele Embling Partner Lisa Crooke Partner David Lamb Partner Insurance Leader Paul Rhodes Partner Daryl Eady Partner Karl Deutschle Partner New Zealand 77

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79 Legislative and regulatory framework The Philippine insurance industry provides general and life insurance to Filipino individuals, households and businesses. A number of players are engaged in both general and life insurance which includes health, accident and disability insurance. The insurance industry in the Philippines is regulated by the Insurance Commission (IC) of the Philippines which is a government agency under the Department of Finance. The IC is mandated to regulate and supervise the insurance industry in accordance with the provisions of the Insurance Code of the Philippines (the Code ) in order to ensure that adequate insurance protection is available to the public at a fair and reasonable cost and to assure the financial stability of the insurance industry so that all legitimate claims of the insuring public are met promptly and equitably. Also, it issues licenses to insurance agents, general agents, resident agents, underwriters, brokers, adjusters and actuaries. It has also the authority to suspend or revoke such licenses. No insurance company shall transact any insurance business in the Philippines until after it has obtained a certificate of authority for that purpose from the Commissioner upon application and payment by the company of the fees prescribed by the Code. Republic Act No. 68 or The Corporation Code of the Philippines (1980) governs the creation, activities and dissolution of corporations in the Philippines including insurance companies. Insurance Companies doing business in the Philippines that are incorporated under the laws of the Philippines are governed by the rules and regulations of the Insurance Commission and the Philippine Securities and Exchange Commission (SEC). Philippines 79

80 Financial reporting, capital and taxation Financial reporting requirements IC As required by the Code, every insurance company shall submit annually on or before the 30 April its annual statement signed and sworn to by the Chief officer. This statement is prepared in accordance with the uniform chart of accounts for insurance companies (Circular Letter No and No ). All insurance company issuing, delivering or using variable contracts shall annually file with the Commission a separate annual statement of its separate variable accounts. Such statement shall be on a form prescribed or approved by the Commissioner and shall include details as to all of the income, disbursements, assets and liability items of and associated with the said separate variable accounts. SEC Insurance companies engaged in insurance business in the Philippines which are incorporated under the laws of the Philippines are required to submit its audited financial statements to Securities and Exchange Commission (SEC) within the filing period as determined by the SEC. The financial statements of insurance companies in the Philippines shall be prepared in accordance with Philippine Financial Reporting Standards (PFRS), the local counterpart of the International Financial Reporting Standards (IFRS). Capital regime and requirements The existing capitalization requirements for foreign insurance companies is P1 billion (US$24.4 million) net worth and P500 million (US$ 12.2 million) paid up capital based on Department of Finance Order In addition to the capital requirement, as mandated by the Insurance Code of the Philippines, all insurance companies doing business in the Philippines shall at all times maintain a margin of solvency in accordance with Section 194 of the Insurance Code. In October 2006, the Insurance Commission issued Insurance Memorandum Circular No adopting the Risk-Based Capital (RBC) framework for insurance industry to establish the required amounts of capital to be maintained by insurance companies in relation to their investment and insurance risks. Every insurance company is annually required to maintain a minimum RBC ratio of 100% and not fail the trend test. The insurance company will be subjected to the corresponding regulatory intervention upon its failure to meet the minimum RBC ratio. Taxation Insurance companies in the Philippines are subject to the tax regulations and supervision of the Bureau of Internal Revenue (BIR). Taxation is based on the audited commercial accounts as adjusted according to tax rules. Companies are taxed at the higher of the 30% regular corporate income tax (RCIT) which is based on taxable net income or 2% minimum corporate income tax (MCIT) which is based on taxable gross income. The MCIT is only applicable from the fourth taxable year of business operations of the company. Companies including insurance companies are generally required to file income tax returns, value-added tax (VAT) returns, premium tax returns (for the premiums on health and accident insurance received by non-life insurance companies), withholding tax returns, fringe benefit tax (FBT) returns, and documentary stamp tax (DST) returns. Companies are also subject to local business tax which shall be paid to the local government of the city or municipality where its head office and branches are located. If the company has real property, it is also subject to real property tax. Philippines 80

81 Products and the market Products The general insurance sector (property and casualty) offers a full range of risk products and services to Philippine households and businesses. Some of the more significant products include marine insurance, fire insurance, casualty insurance, suretyship, motor vehicle, professional indemnity, public and product liability, travel and lenders mortgage insurance The majority of life insurance products currently sold by Philippine life insurers include individual and group life, term insurance and investment-linked products. In recent years, variable unit linked life insurance products have gained popularity. Premium income from variable unit linked has increased at a rapid rate of 21% in 2011 and already accounts for 45% of the total premium income in With the intention of alleviating the lives of the poor and the marginalized sector, microinsurance products are also being sold in the Philippine market. Insurance products in the Philippines are distributed by brokers, agents, through bancassurance and direct marketing. Bancassurance has been growing fast and now accounts for approximately 45% of all sales in the industry. Headline market statistics and commentary Philippines 81

82 Drivers General insurance The Philippines has been labelled one of the most dangerous places in the world when it comes to natural calamities. Being in the so-called Pacific Rim of Fire and the Typhoon Belt, the country is vulnerable to earthquakes, volcanic eruptions and super typhoons. In 2011, a total of 431 natural and human-induced disasters were reported in the Philippines. These killed 1,774 people, and affected more than 3 million families or 15.3 million people, and caused over P26 billion in economic damage. These figures earned the Philippines the top spot in the list of countries with the most number of reported natural disasters in According to the EM-DAT ( : The OFDA/CRED International Disaster Database, of the 302 natural disasters that happened worldwide, 33 occurred in the Philippines and 21 in China. The increase in premium income of non-life insurance industry is to some degree due to the growing awareness of the benefits of insurance coverage in the light of possible calamities. Life insurance The life insurance industry is in a period of solid growth driven by the robust economy. Variable unit linked products are popular due to the strong investment markets and the low interest rate environment which make traditional products less attractive. The record growth in life products is also attributable to greater financial literacy and protection awareness, aggressive growth of the industry s agency force, better partnerships through bancassurance, and heightened investment appetite. Potential barriers to entry Heightened competition: industry players consist of 34 life and 76 nonlife companies (as of December 31, 2012). The significant number of players has resulted in fierce competition which affected premium pricing. The life insurance sector also competes with other financial institutions such as mutual funds and banks. Financial incapacity of majority of the population: life insurance product is at the bottom of the priority list of most Filipinos. In a study done by The Philippine American Life and General Insurance Company (AIA), the Philippines ranked as the lowest in Asia in life insurance penetration rate, with only 1.1% of the country s total population having some form of life insurance. Also, based on the same study, only 25% of Filipinos believe in the concept of securing their future and achieving their dreams through life insurance. Despite increasing investor confidence alongside continuous economic growth, narrowing trade deficit, and increasing stock market values in the Philippines, financial incapacity still remains as the biggest hindrance to the growth of the life insurance market in the Philippines. The same study shows that 88% of Filipinos are actually interested to have an emergency fund for unforeseen events, but only 2% of them have actually secured themselves through life insurance. Higher capitalization requirements: the existing capitalization requirements (since December 31, 2011) for foreign insurance companies is P1 billion (US$24.4 million) net worth and P500 million (US$ 12.2 million) paid up capital based on DO The required capital has been gradually increasing since 2006 staring from P500 million and P250 million in net worth and paid up capital, respectively. With over 100 companies, with a relatively few big multinational companies and numerous medium and small-sized domestic companies, the industry is expected to continue to face challenges in meeting capital requirements, particularly for smaller companies. With the mandated boost in the minimum paid-up capital, together with prevailing low interest rate environment and higher reinsurance costs, many insurance companies had to close shop. At the beginning of 2012, there were 117 players (83 are general insurance, 29 are life insurance, 4 composite insurance and 1 reinsurer), by the end of 2012, the total number went down to only 110 with general insurance dropping to 76. Investment limitations: the Insurance Code requires insurance companies invest heavily in government securities which are safer but offer lower returns. At the same time, insurance companies are not allowed to invest in bonds or fixed-income securities introduced by foreign governments or corporations. Specifically for life insurance industry, the Code imposes limitations on investments in real estate and common stocks, preferred stocks and bonds of corporations or institutions created or existing under the laws of the Philippines. Philippines 82

83 Key developments and future outlook Key issues The mandated stepped increase in capital requirements for insurers, may have a larger impact on the non-life insurance sector and could lead to industry consolidation There are growing calls from the life insurance industry to remove premium tax to address the problem of low insurance penetration rate in the Philippines A bill to revise the 1974 Insurance Code of the Philippines has been passed by the senate aimed at strengthening corporate governance in the industry through the introduction of a system of scorecards to determine levels and quality of compliance. Future outlook Improving insurance penetration as the national economy and awareness of insurance grows The full implementation of the Asean Framework Agreement on Services (AFAS) means that the Philippine insurance industry will be competing for the thin local market against its counterparts from the Association of South East Asian Nations (Asean) More Filipinos prefer investment-linked policies, shunning bank products such as time deposits, as they can get guaranteed and decent investment returns due to the country s good investment climate The introduction of new life products, particularly VUL, and the double-digit growth of policies sold through bancassurance are still expected to be the leading drivers for the strong growth of the industry The Philippine insurance industry is ripe for consolidation as it faces tougher challenges in terms of increasing demand for capital, better services on claims, threats of worsening climate change, and intense competition. Philippines 83

84 Key players and competition Competitive environment Industry players consist of 34 life and 76 nonlife companies (as of 31 December 2012). The significant number of players has resulted in fierce competition which affected has premium pricing. The life insurance sector also competes with other financial institutions such as mutual funds and banks. General Relatively low levels of concentration in the general insurance industry. The top 10 non-life insurance companies in the Philippines contributed to 59% of the total premium earned in The mandated increase in minimum paid-up capital by the Department of Finance will be a challenge to new entrants. Also, the increasing number of natural catastrophes in the past two years in the Philippines had greatly impacted the general insurance industry. These factors are evident in the declining number of players from 88 at the beginning of 2012 to only 76 by the end of the same year. Life The market is moderately concentrated with 33 life insurance companies in the Philippines, of which the top 10 companies contributed 86% of the total premium income in out of the top 10 life insurance companies are foreign owned. Insular Life and UCPB are the locally owned companies. With the higher capitalization being imposed by the Department of Finance, it may be harder for small players to penetrate the life insurance industry. Key players Philippines 84

85 Contacts PwC in the market John-John Patrick V. Lim Assurance Partner +63 (2) Malou P. Lim Tax Partner +63 (2) Sherwin S. Sampang Director +63 (2) Philippines 85

86 86

87 Legislative and regulatory framework The insurance industry in Singapore is regulated by the Monetary Authority of Singapore (MAS). As Singapore's central bank and financial regulator, the MAS promotes sustained, non-inflationary economic growth through monetary policy formulation and close macroeconomic monitoring of emerging trends and potential weaknesses. MAS is an integrated supervisor overseeing all financial institutions in Singapore including banks, insurers, capital market intermediaries and financial advisors. The MAS is tasked with creating a leading financial services sector in Singapore, and promoting a strong corporate governance framework. The MAS also works with other government agencies and financial institutions to develop and promote Singapore as a regional and international financial centre. General, life and health insurers may carry on insurance business in Singapore as registered insurers or foreign insurers. Registered insurers are approved under section 8 of the Insurance Act (Cap 142) (IA). They can be registered as direct insurers, reinsurers or captive insurers. Foreign insurers are approved under the law of another territory to carry on insurance business in that territory. These insurers operate in Singapore under a foreign insurer scheme established under Part IIA of the IA. Currently the Lloyd s Asia Scheme is the only foreign insurer scheme in Singapore. Authorised reinsurers are approved under section 8A of the IA, and can provide reinsurance of liabilities under insurance policies to persons in Singapore. Lastly, representative offices are approved under section 6 of the IA. A Policy Owners Protection Scheme (PPF Scheme), administered by Singapore Deposit Insurance Corporation Limited (SDIC), has been set up in 2011 to protect policy owners in the event of failure of a life or general insurer which is a PPF Scheme member. The role of the SDIC is to collect levies from PPF Scheme members, manage the Policy Owners' Protection Life Fund and the Policy Owners' Protection General Fund, and make compensation payments. Singapore 87

88 Financial reporting, capital and taxation Financial reporting requirements For both non-life and life business, the basis for an insurer s financial accounts is the Singapore Companies Act and Singapore Financial Reporting Standards (FRS). Singapore uses both FRS39 & FRS104 (based on International Accounting Standards (IAS) 39 and International Financial Reporting Standards (IFRS) 4, respectively) with effect from Separate insurance funds must be maintained for Singapore policies and Offshore policies. For each insurance fund established in Singapore under the Insurance Act, insurers must file quarterly and annual Insurance Act returns with the MAS. Such returns are prepared in accordance with the valuation and format prescribed by the Insurance Act. For life insurance business, both the Singapore Insurance Fund (SIF) & Overseas Insurance Fund (OIF) must be further segregated into separate insurance funds maintained for participating policies, non participating policies and investment linked policies. There is separate accounting for policyholders and shareholders profits within an insurers accounts. The transfer of profits out of insurance funds is subject to regulatory requirements. Capital regime and requirements The existing capital regime in Singapore is Risk Based Capital 1 (RBC1) and is regulated by the MAS. The minimum paid up capital requirement for a direct insurer involved in investment-linked policies only or short-term accident and health policies is SGD 5m. For any other type of direct insurer the minimum requirement is SGD 10m, and for reinsurers it is SGD 25m. Prior written approval is required from the MAS should a registered insurer incorporated in Singapore wish to reduce its paid-up ordinary share capital or redeem any preference share. The calculation of solvency margin, or Total Risk Requirement (TRR), is based on standard formula calculations for 3 risk groups: Insurance Risks Market risks Concentration risks The TRR of a registered insurer is the aggregate of the total risk requirements of every insurance fund established and maintained by the insurer under the Insurance Act. In the case where the insurer is a registered insurer incorporated in Singapore, it is all assets and liabilities of the company (including any assets and liabilities of any of the insurer s branches located outside Singapore). In the light of evolving market practices and global regulatory developments (ie Solvency II), MAS is currently reviewing the risk-based capital framework for insurers in Singapore. The review ( RBC 2 review ) aims to improve the risk coverage and risk sensitivity of the current framework and to specify the MAS supervisory intervention threshold. In order to arrange a smooth transition from the current to the new framework, MAS plans at least two years of parallel run with the existing framework. The calibration of the required capital calculations is expected to be completed during The new regulations intend to target a similar level of capital as Solvency II. At this stage it will be based on a standard model rather than an internal model approach. The actual implementation date is yet to be confirmed. Singapore 88

89 Taxation The profits of an insurer carrying on a business in Singapore are subject to Singapore income tax under sections 10(1) and 26 of the Income Tax Act (ITA). While section 10(1) is the general charging section, section 26 lays out some specific rules to arrive at the taxable income of a general insurer, a life insurer and a composite insurer. A general insurer is required to compute its taxable profits based on its total income, including premiums, interest and other investment income. It is allowed adjustments for unexpired risk reserves and deductions for actual losses, distribution expenses and allowable management expenses. The calculation of a life insurer's taxable profits is fund based, being the aggregate of taxable profits of its Par Fund, Non-Par Fund, Investment-linked Fund and Shareholders Fund. The taxable profits of these funds are determined according to specific and rather complex rules laid out in section 26 of the ITA. A composite insurer's taxable income is the sum of the taxable profits of its general insurance business and life insurance business. Other than the taxable profits allocated to policyholders of the par fund which is taxable at 10%, income of an insurer is normally subject to tax at the corporate tax rate which is currently 17%. Tax exemption or lower concessionary tax rates of 10% or 5% are also available under a range of tax incentive schemes. There are qualifying criteria and conditions for these tax incentive schemes. In addition, to enjoy such tax incentive schemes, an insurer is required to apply to the MAS to be an approved insurer. Common tax incentives available to the insurance industry include the following: Offshore insurance business tax scheme 10% Offshore takaful and retakaful business tax scheme 5% Offshore specialised risks tax scheme 0% Marine hull and liability tax scheme 0% Offshore captive business tax scheme 0% Offshore broking tax scheme 10% Financial sector incentive headquarter services tax scheme 10%. Goods and services tax (GST) at the standard rate of 7% (currently) generally applies to general direct insurance premiums, except for certain qualifying direct premiums from international marine and aviation insurance, travel insurance and export credit insurance which can be zerorated. General reinsurance premiums are exempt from GST. Similarly, life insurance and reinsurance premiums are exempt from GST. There is no stamp duty on insurance premium in Singapore. There is also no premium tax in Singapore. Singapore 89

90 Products and the market Products In the domestic non-life sector, the main products are motor, personal accident, workers injury compensation, health and fire. The Offshore Fund is dominated by marine cargo and hull, although Singapore is developing as a key regional hub for complex insurance and reinsurance underwriting. Commercial insurance products are offered through the companies market and a growing Lloyd s platform. Most general insurance is sold through intermediaries and the main global insurance and reinsurance brokers are all represented. The Life market offers regular and single premium products. Participating (Par) products are the most popular, followed by Non-Par and Investment linked. Of the total Single premium sales, a significant amount is comprised of CPF (Central Provident Fund) sales. The CPF is a comprehensive savings plan for working Singaporeans and permanent residents to fund their retirement, healthcare, and housing needs. Tied agency is the main distribution channel for life business in Singapore, with many insurers looking to enlarge their agency force and/or take steps to boost agency productivity. Bancassurance is expanding rapidly, and the Financial Advisor channel has gained traction in recent years. Many insurers are actively exploring non-agency channels, including a growing (but still relatively modest) trend of companies adopting the direct/online channel in Singapore, primarily for travel, home, personal accident and motor insurance. The MAS recently introduced the Financial Advisory Industry Review (FAIR). This is a comprehensive evaluation of the financial advisory industry with the Review Panel chaired by the Monetary Authority of Singapore (MAS). See key issues for further information. Headline market statistics and commentary Singapore 90

91 Drivers General insurance Offshore gross premium accounted for 65% of total general insurance premium in High catastrophic losses incurred resulting from a number of natural catastrophes in the region and insured/reinsured in the Singapore Offshore Insurance Fund (OIF). Events included earthquakes in Japan and New Zealand, and floods in Australia and Thailand. The OIF continues to grow as Singapore develops as a key regional hub for complex insurance and reinsurance underwriting. Of 2011 Offshore total gross premium, S$1,632.8m is from direct business, S$3,700m from reinsurance and S$1,064m from captives. The largest sources of reinsurance premium in the OIF are China (19%), followed by Australia/New Zealand (18%) and Japan (13%). Despite increased gross premium and only marginal rise in claims incurred, increases in distribution costs and management expenses caused an overall reduction in underwriting profit of the domestic Singapore Insurance Fund (SIF). There was a return to profitability of motor insurers in The underwriting profit for that line amounted to SGD21.2m, and it was the first year since 2005 that motor insurers have achieved an underwriting profit. All major classes of business in the SIF achieved growth in premiums written with health recording the highest increase in earned premiums at 14%, after seeing no growth in Personal accident showed 8% growth, and motor 4.5%. Net Incurred Loss Ratio % of the SIF deteriorated slightly from 55.1% in 2010 to 56.3% in Non-Life insurance penetration (% of GDP) in Singapore has risen over the years (from 2.55% in 2005 to 2.9% in 2011). Low interest rates and investment returns are impacting profitability. The focus is on core functions like underwriting and claims. Direct Life insurance Consumer confidence in life insurance solutions has remained strong, despite the uncertain economic climate. This has led to 22% growth in new business sales (weighted basis). Various initiatives have contributed to this growth, including programmes to boost agent productivity, the development of bancassurance and other distribution channels, and launches of new products. However Financial instability has undermined investment earning on Investment Linked Products (ILPs). Of new business sales, single premium increased by 17% and annual premium by 24%. Significant impact from new entrants selling high net worth products. Singapore 91

92 Potential barriers to entry In 2000, the MAS introduced a programme to liberalise the insurance industry. This removed the closed-door policy on direct insurers, and allowed the admission of new entrants based on the following criteria: Domestic and international rankings. Present and past credit ratings. Track record and reputation. Commitment to contribute to Singapore s financial sector development. Applicants with a strong record in product innovation and use of alternative distribution channels, or in specialist fields, will receive favourable consideration. There is not any fixed limit on number of new entrants, but admission will be spaced out to minimize the risk of unsound, short-term market practices. Foreign ownership is permitted in the form of wholly owned subsidiaries or branches. There are no restrictions on the level of foreign ownership. Foreign insurers and reinsurers are also allowed to set up representative offices, though these are not authorised to write business. There is a requirement for any increase in shareholdings (local or foreign) in a locally incorporated insurer to 5% or 20% to be approved by the MAS. Reinsurance companies and captives have an open policy on admission. Along with the liberalization, MAS introduced measures to raise standards of corporate governance and market conduct, strengthen protection of policyholders interests by insurers, implement revised minimum capital requirements and enhance the efficiency of distribution. The continuation of this can be seen in the imminent changes to capital requirements (RBC2) and Financial Advisory Industry Review (FAIR). Singapore 92

93 Key developments and future outlook Key issues In 2012, the MAS introduced the Financial Advisory Industry Review (FAIR). This is a comprehensive evaluation of the financial advisory industry with the Review Panel chaired by the Monetary Authority of Singapore (MAS). There are 5 key thrusts of FAIR: Raise the competence of financial advisory representatives Raise the quality of financial advisory firms Make financial advice a dedicated service Lower distribution costs of insurance products Promote a culture of fair dealing. In January 2013, the MAS released the 28 recommendations from the FAIR review panel making proposals in each he above 5 areas. In the light of evolving market practices and global regulatory developments, MAS is reviewing the riskbased capital framework for insurers in Singapore. The review ( RBC 2 review ) aims to improve the risk coverage and risk sensitivity of the current framework and to specify the MAS supervisory intervention threshold. In order to arrange a smooth transition from the current to the new framework, MAS plans at least two years of parallel run with the existing framework. In line with international developments MAS is planning both to increase the scope of the risks to be included in the TRR calculation and to recalibrate the required risk charges for existing risks. The overall impact will not be assessable until the calibrations are set and based on experience in other jurisdictions the impact may vary widely between insurers. The proposal is that TRR will include elements for credit spread risk, insurance catastrophe risk and operational risk. The calculation of these risk charges has still to be set. However since these risks have not been considered in RBC calculations so far, this will lead to an increase in the base capital requirement calculation. In addition to the review of the current Risk-Based Capital ( RBC ) regime, in January 2013 MAS has released a consultation paper that sets out proposed new ERM requirements to be applied. The objective is to improve industry standards on ERM practices. This will enhance an insurer s understanding of the risks and its potential impact on business, and focus management actions on implementing risk management policies and practices to ensure ongoing business viability in line with long term business goals and strategy, and its capital resources. There have also been consultation papers released by the MAS in early 2013 on the following topics: Proposed Public Disclosure Requirements for Insurers The MAS is proposing to enhance the public disclosure requirements for insurers to ensure that they disclose relevant, comprehensive and adequate information on a timely basis in order to give members of the public, including policyholders, a clear view of their business activities, performance and financial position. This is expected to enhance market discipline and understanding of the risks to which an insurer is exposed and the manner in which those risks are managed. MAS proposes to apply the disclosure requirements to all registered insurers, except for captive insurers and marine mutual insurers. Review of Requirements on Investment Activities of Insurers All insurers are expected to observe MAS Guidelines on Risk Management and maintain sound investment practice. Direct life insurers are subject to additional requirements on their asset management processes. With the growth of assets and corresponding increase in the investment activity of direct general insurers and reinsurers, MAS proposes to extend the scope of these additional requirements to include direct general insurers and reinsurers. The proposals relating to the governance and risk management requirements would cover insurers on a solo basis and insurance groups. Singapore 93

94 Future outlook General insurance Non-Life penetration (% of GDP) has risen over the years (from 2.55% in 2005 to 2.9% in 2011). This is high for the region, and growth is expected to continue. Premiums are growing, however only at single figure rates in the SIF. Demographics indicate long term growth potential in health insurance. The development of the domestic non-life segment will be dependent on consumer confidence and the continued trend of global companies setting up operations in Singapore, due to the stable business environment. A strategy for the government is to develop Singapore as a key regional hub for complex insurance and reinsurance underwriting. There is still huge scope for expansion of the offshore insurance business. The growth of the economies in South East Asia bodes well for growth prospects of Singapore as a regional insurance hub. Direct Life insurance Singaporeans continue to see life insurance as a beneficial channel for organised savings. Life density rose from about US$1,893 per capita in 2005 to US$3,106 in Density is expected to increase further if there is sufficient investor confidence. However, volatility in global and regional financial markets could cause density to remain flat. Insurers are looking at developing innovative products or increasing productivity of their distribution channels as a way to increase premiums and market share. Expected further population growth offers future opportunities. Singapore 94

95 Key players and competition Competitive environment Singapore is a leading insurance centre in the Asia Pacific region, with 161 registered insurers and reinsurers. Non-life insurance in Singapore is made up of a mature domestic segment and a rapidly developing offshore segment. The offshore segment benefits significantly from the overall economic growth of South East Asia. Singapore is also a regional centre for reinsurance, with global reinsurers already making up a large proportion of the offshore non-life business written. Singapore has a mature domestic life insurance segment. Life insurance premiums continue to grow strongly as a result of high income levels and high savings rates. There is also a growing high net worth market that writes both domestic and offshore business. General insurance There are 46 active direct general insurers in Singapore. Foreign insurers have a stronger presence in the non-life segment than the life segment. The SIF is considered over serviced with a market of just over 4.2 million people. However, a large amount of general insurance premium comes from the offshore business due to Singapore s role as a major regional insurance centre and an important shipping hub. Life insurance There are 16 active direct life insurers in Singapore. Prudential, AIA and the local life companies (one of which is a subsidiary of a very large local bank) are dominant within their segment, and some foreign companies have found it difficult to achieve a significant market share. Key players Singapore 95

96 Contacts PwC in the market Roy Clark Partner Insurance Leader Kwok Wui San Partner Regulatory Advisory Services Alywin Teh Partner Business Consulting Siang Thnia Lim Director Actuarial Ang Sock Sun Partner Assurance Woo Shea Leen Partner Assurance/Market Entry Yip Yoke Har Partner Tax Stuart Last Associate Director Transactions Singapore 96

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