Clifford Chance

On 21 September 2023, the Monetary Authority of Singapore (MAS) published its framework for designating domestic systemically important insurers (D-SIIs) in Singapore, to take effect from 1 January 2024.

The framework will formalise and update the existing supervisory framework for assessing the impact of financial institutions on Singapore's financial system and the broader economy. Under the framework, insurers whose failures are assessed to have a significant impact on the financial system and broader economy in Singapore will be formally designated as D-SIIs and subject to additional supervisory measures.

Four insurers have been designated as D-SIIs, namely:

• AIA Singapore Private Limited;
• Income Insurance Limited;
• Prudential Assurance Company Singapore (Pte) Limited; and
• The Great Eastern Life Assurance Company Limited.

Assessment methodology

The D-SII framework adopts an indicator-based approach based on four factors – size, interconnectedness, substitutability and complexity – to assess insurers' systemic importance.

The following indicators will be considered in respect of each factor:

The MAS will adopt a two-stage assessment process for the assessment of an insurer's systemic importance, involving a preliminary selection based on whether an insurer crosses the threshold of any impact indicator, and a further detailed consideration using supervisory judgment along with the consideration of other supervisory information.

An insurer's systemic importance will be assessed annually. MAS will publish any revisions to the list of D-SIIs following each annual assessment.

Supervisory measures

A D-SII will be subject to additional supervisory measures which are largely similar to those applicable to domestic systemically important banks.

Such measures include and are not limited to:

• higher capital requirements – a 25 percent capital add-on will apply from 1 January 2024, replacing the 25 percent high impact surcharge applicable to the four D-SIIs under the existing framework. This capital add-on will increase a D-SII's higher and lower supervisory intervention levels, as well as Common Equity Tier 1 and Tier 1 capital requirements. Newly-designated D-SIIs will have up to one year to comply with the 25 percent capital add-on requirement;
• recovery and resolution planning (RRP); and
• robust management information systems (MIS).

Consultation on RRP requirements

In relation to RRP and MIS, the MAS has launched a public consultation on "New Notice on Recovery and Resolution Planning for Insurers and Proposed Enhancement of Resolution Powers for the Insurance Sector" (Consultation Paper).

Amongst other things, the Consultation Paper contemplates that:

• the RRP requirements shall be set out in a new Notice on Recovery and Resolution Planning for Insurers (Notice). MAS plans to issue the new Notice by 1 January 2024 and intends for it to take effect on 1 January 2025;
• the RRP requirements in the Notice shall apply to D-SIIs initially, even though MAS expects all insurers to have a recovery plan (RCP) in place to identify actions that can be taken to restore its financial position and viability under severe stress;
• the proposed RRP requirements in the Notice include the preparation of a RCP, review and testing of RCP, and notification of risk of non-viability to MAS immediately;
• in relation to MIS, insurers shall be required to maintain MIS systems that are able to produce information required for RRP, resolvability assessment and the conduct of resolution. To this end, MAS plans to provide further guidance through a separate set of guidelines which MAS shall subsequently seek feedback on;
• an executive director shall be appointed to oversee the RRP process;
• the statutory bail-in regime (which currently applies to Singapore-incorporated banks and designated bank holding companies) shall extend to Singapore-incorporated licensed insurers and designated insurance holding companies. In particular, it is envisaged that the statutory bail-in regime shall be applied to their equity instruments (except ordinary shares), unsecured subordinated liabilities and certain types of unsecured senior liabilities, issued or contracted after the effective date of the relevant legislative amendments specifying the bail-inable instruments for the insurance sector; and
• in relation to temporary stays, MAS has proposed to prescribe in regulations a maximum duration of two business days for stays on reinsurers’ rights to terminate coverage relating to periods after the commencement of resolution. MAS had earlier acquired the statutory power to stay the early termination rights of reinsurers in connection with their contracts with a ceding insurer or reinsurer in resolution.

The deadline for submitting comments on the Consultation Paper was October 31, 2023, and MAS is expected to release its final position in the coming months.

Impact

The D-SII framework and additional supervisory measures have a direct impact on the four named D-SIIs. While all insurers are expected to have RCPs in place, it is crucial for D-SIIs in particular to have a clear understanding of MAS' RRP requirements, and review these against their own RCPs. D-SIIs should address gaps identified and look to aligning their RCPs with MAS' final RRP requirements by the end of next year.

Non-D-SIIs with operations in Singapore should also be cognisant of the assessment criteria for identifying D-SIIs, especially if there are major shifts in their business models towards Singapore, which may tip the balance towards them being identified as a D-SII.

Separately, the extension of the statutory bail-regime regime to Singapore-incorporated insurers and designated insurance holding companies may have an impact on their contracts. The effectiveness of MAS' statutory bail-in powers may be uncertain where the liabilities are governed by foreign law. As such, it may necessitate the use of bail-in provisions or language in foreign law contracts where Singapore-incorporated insurers or designated insurance holding companies are a party to.