Macau insurers prepare for costly RBC shift, advised to follow Hong Kong lead  

February 10 2025 by

With Macau insurance sector preparing for the implementation of the new risk-based capital (RBC) regime in 2027 that will replace the current Solvency I, local companies are likely to face complexities related to compliance, sophisticated risk modelling and staff training to pave the way for an effective future operating model, market experts told InsuranceAsia News (IAN).  

The new regime adopts a three-pillar framework similar to Hong Kong RBC, with pillar 1 covering the quantitative calculation of capital requirements, pillar 2 covering enterprise risk management (ERM) framework, and pillar 3 including all reporting disclosure for the regulator and public. 

The new regulatory standard will need complex modelling techniques and actuarial expertise for stochastic valuation of liabilities. Without these instruments, higher liabilities could negatively affect balance sheet, Florence Ng, APAC financial services office (FSO) and partner at EY explained to IAN.  

“Financially, the RBC regime will affect the solvency ratio due to the overhaul in the valuation approach of assets, liabilities, and capital requirements,” she said.  

Operationally, implementation of RBC regime will likely lead to higher costs which means there could be a shift towards less capital-intensive insurance products.

“The new RBC requirements may also retain certain prudent elements from the current solvency regime, demanding more capital.”

Florence Ng, EY

 

“The new RBC requirements may also retain certain prudent elements from the current solvency regime, demanding more capital,” she said. 

Once the RBC framework is adopted in Macau, asset mix, business composition, reserving, asset liability management (ALM), growth dynamics, and catastrophe risk will all need to be considered in the computation of insurers’ capital adequacy, said Terrence Wong, senior director at Fitch.  

“Unlike [under] current solvency regime, Macau insurers can’t just focus on business volume when determining their solvency strength,” Wong said. 

“They need to strengthen the sophistication and granularity of their risk management capabilities and build a holistic approach in identifying and assessing the risks they are subject to.”

Additional costs could be incurred because of upgrading IT and operational processes, creating a cost burden for smaller insurers with limited operating scale, Wong said.  

“Domestic insurers need to have well-considered and targeted solutions to manage the implementation and operating costs,” he said.

At the same time, according to Wong, “the new capital standard is unlikely to adversely impact the capital adequacy of international insurers, particularly those with foreign ownership, given the operating support these insurers can obtain from their foreign parents”. 

Leandro Ao, actuarial partner at KPMG, agreed that “it will be a challenge [for domestic insurers] to ensure timely and quality implementation whilst managing project costs and give path to a suitable future operating model”. 

“Insurers would need to ensure internal governance policy and signoff process are in place as part of the ERM framework.”

Dominic Chan, Deloitte China

Their views are echoed by Dominic Chan, actuarial director at Deloitte China, who said capital requirement is likely to be higher for some product types as the new RBC regime employs a risk-based approach to determine capital basis. 

This is different from the currently used factor-based approach.  

Chan highlighted product design and reporting process as key areas that are likely to be affected because of this difference.  

Products could be redesigned or replaced with innovative and more capital-efficient, he explained. 

On reporting, “[RBC regime] will have an impact on the actuarial valuation process, including the need to revamp the current actuarial and finance modelling, as well as the timeline to meet the internal and external reporting requirements,” he said. 

“Insurers would need to ensure internal governance policy and signoff process are in place as part of the ERM framework.”  

EY’s Ng advised insurers to start early by developing and documenting necessary information based on the latest RBC standards, such as data, assumptions, methodologies, and models for asset, liability, and capital requirement valuations. 

“They should also establish robust valuation processes and controls for the economic balance sheet, enhance asset and liability management, and foster a strong risk culture and enterprise risk management framework,” she said.  

Hong Kong example

RBC implementation is expected to have a significant impact on resources because of the significant difference from the current regime but the transition could be smoothed by learning from Hong Kong experience, experts told IAN.  

“Insurers would need to provide necessary training and guidance to existing employees so that they can keep up with the new RBC requirements,” said Chan. 

“Given the regime is fundamentally different from the existing regime, it is particularly challenging for these local insurers to identify and hire relevant expertise from the Macau market.”

This means carriers could seek external consultants to support the journey and rely on relevant expertise from mainland China and Hong Kong markets.  

“There is a need for other resources to support the new calculation process and valuation, along with the establishment of internal risk committee to monitor and report to the senior management and board on a regular basis,” he said.  

“As insurers in Hong Kong are now operating and producing pillar 1 results and pillar 3 regulatory reporting under the Hong Kong RBC regime and in some cases very efficiently, their experience can prove valuable for Macau insurers.”

 

“We believe insurers will begin to invest in advanced data analytics and technology to improve risk assessment capabilities and ensure compliance with RBC standards.”

Terrence Wong, Fitch

KPMG’s Ao agreed that “international companies with operation in Macau can leverage the infrastructure from Hong Kong RBC, ERM and ALM”. 

This can help choose target operating model that can maximise synergy, Ao said. 

“For those who are new to the journey, it is important to design solutions and operating model that are reflective of [their own] scale and complexity, to stay competitive,” he said. 

As Hong Kong has been using the pillar 2 ERM framework and guidelines since 2021 relying on external consultants, Hong Kong carriers could provide valuable insights including lessons learnt and tools to deal with the upcoming challenges, he explained. 

Regulatory preparedness

Macau insurers have already conducted the first quantitative impact study (QIS) initiated by the the Monetary Authority of Macau in the second half of 2024.  

The pillar 2 guidance was released in Macau in December, and insurers are preparing to receive feedback on QIS 1 and the QIS 2 template in Q1 2025.  

“Insurers are now developing their understanding of the Pillar 2 requirements, planning ahead on setting up an ERM framework and considering the approach to optimise their solvency position,” said Deloitte’s Chan.  

Some Macau insurers have engaged industry experts or consultants to evaluate their risk exposures and capital adequacy under the proposed RBC regime while others are investigating how their operating strategy can be amended to optimise their RBC position when the new capital regime is fully launched, said Fitch’s Wong.  

“Essentially, insurers need to re-evaluate their operating approaches, such as investment allocation or business mix, to ensure the cost of capital charges justifies the returns they can derive from their insurance book or invested assets,” Wong said. 

“We believe insurers will begin to invest in advanced data analytics and technology to improve risk assessment capabilities and ensure compliance with RBC standards.”

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