Asian crisis seen shifting insurance rules

Asian crisis seen shifting insurance rules

SINGAPORE (Reuters): Asia's economic crisis has triggered a shift towards a more Western-style supervision of insurance solvency and capital levels, industry experts say.

Although insurers face at least two years of painful recovery from the fallout of a financial crisis that has rocked Asian economies, the systems that have crumbled would be replaced with more robust regulatory regimes.

While investment income and premiums were expected to fall in the wake of the financial crisis, losses would result from exposure to depreciating currencies and claims costs would rise.

Changing the regulatory focus to financial strength would see Asian insurers consolidate to compete on the international stage.

"The crisis has set Asia moving towards the Western model of building an industry that is strong in terms of solvency and capital," said Philip Moore, partner for financial institutions consulting with accountancy firm Coopers & Lybrand in Hong Kong.

The turmoil, entering its sixth month, has highlighted the relative weakness of some domestic Asian insurers with high exposure to plunges in stock and currency values.

The position of some smaller insurers has become tenuous as slower premium flows hit, the result of falling incomes and the suspension of investment in key infrastructure projects.

The potential of a number of insurance failures has sparked a review of the need for more regulation of solvency and capital and less supervision of premium rates and product lines, the more typical regulatory style in Asia, Moore said.

"The one over-riding thing that a regulator hates is an insolvent company. It's the sort of thing that gets an insurance commissioner hauled up before his minister and sacked," Moore told Reuters in a telephone interview.

"You can hear regulators around Asia saying they want consolidation. They want bigger companies, better capitalized," Moore said.

Prudential governance, strong solvency, high capitalization and good transparency are key elements of the Western system.

They are getting higher on Asia's agenda as the influence of the International Monetary Fund grows through the billions of dollars it is pumping into the region to resolve the crisis.

"I think transparency is very important," said Henning Schulte-Noelle, Allianz AG chief executive, in a written response to questions.

Schulte-Noelle, on a regional tour, said "transparency will benefit not only foreign investors but also the individual countries within Asia".

Asian insurers have fallen under increasing scrutiny since the 200 billion yen (US$1.6 billion) collapse of Japan's Nissan Mutual Life in April.

Concern has been exacerbated by a financial crisis that has erased billions from stock values and sent currencies plunging against the U.S. dollar, two principal investment instruments.

Regulators in Indonesia, Malaysia, Singapore, South Korea and Thailand want to see their financial institutions strengthen to better compete in the face of international competition.

Competition is guaranteed to come as Asian markets liberalize and its arrival could be speeded by active searches for foreign funds to prop-up flagging domestic insurers.

Singapore made the latest move last week, bumping up the minimum paid-up capital requirements for insurers and reinsurers to Singapore $25 million (US$15.8 million) from the previous S$5 million and S$10 million respectively.

This followed Indonesia's announcement in October of tough new insurance rules to take effect from January 1, 1998 to bolster the financial security of domestic insurers.

"We want to ensure better stability for our insurance companies. Our concern is the financial strength behind the companies," M.A. Suyoto, head of the insurance directorate at Indonesia's Directorate General of Financial Institutions, said.