Keynote Address By Mr. Nik Mohamed Din Bin Nik Musa, Director-General of Labuan FSA at the Insurance Capital Adequacy Framework (ICAF) Conference
Insurance Capital Adequacy Framework (ICAF) Conference

21 September 2023

Keynote Address By

Mr Nik Mohamed Din Bin Nik Musa
Director-General, Labuan FSA
Y.Bhg. Datuk Iskandar Mohd Nuli, Exec. Chairman Labuan IBFC Inc.,
Y.Berusaha Encik Roy Sharma, Chairman Labuan International Insurance Association,
LIIA Council Members,
Participants from the LIIA,
Ladies and gentlemen, esteemed guests,
Assalamualaikum and good morning.

1. A very warm welcome to all of you as we gather here for the Insurance Capital Adequacy Framework Conference or ICAF Conference, a collaborative event organised by Labuan FSA and Labuan IBFC Inc. Sdn. Labuan FSA as the regulator has always made it a priority to ensure that the Centre is not just conducive for international businesses to grow; but has the regulatory safeguards well in place to preserve market stability and resilience. This is a paramount mandate that Labuan FSA has been championing thus far and will continue to drive going forward.

2. In the current international business landscape, financial markets are interconnected more than ever before. Fluctuations in global and regional economic factors have become more impactful and pervasive across international centres. These include rising inflation, interest rate hikes and, escalating natural disasters - all these demand for insurers to be resilient and able to withstand such shocks. Additionally, the recent US bank failures has led to stricter bank capital requirements imposed. This highlighted the role of risk-based capital regulation as a key component for financial resilience be it for the banking or insurance sector. With this in mind, "Enhancing Financial Resilience in a Dynamic Insurance Landscape", the theme of today’s Conference is indeed very apt. It resonates well with the need for Labuan’s insurers to be sufficiently resilient and adaptively agile to withstand any business stresses or economic shocks.

Ladies and gentlemen,

3. The International Association of Insurance Supervisors (IAIS) has recently launched the final public consultation on the Insurance Capital Standard (ICS) – which is the equivalent of Basel for insurance businesses. The ICS is a globally comparable risk-based measure on insurance capital adequacy, which will serve as a prescribed capital requirement for Internationally Active Insurance Groups, or better known as IAIGs. As many jurisdictions have already embarked on risk-based capital or RBC regulations, this will be further intensified with the new ICS requirement.
It is, therefore, very timely for Labuan’s insurers to embrace ICAF and embed this within their respective business planning, strategies and operations.

4. For over two decades, Labuan insurers had operated under the traditional Margin of Solvency or MOS regulations. As you know, MOS is not risk-sensitive and not adequate in calibrating to today's dynamic and volatile global insurance market. Now, Labuan IBFC is embracing this inevitable change. The issuance of the ICAF Guidelines by Labuan FSA in August last year was a pivotal milestone for Labuan IBFC's insurance industry. The ICAF signifies a new regulatory chapter for the Centre as Labuan insurance market shift into the RBC regime. Through ICAF, Labuan insurers will have adequate risk-sensitive capital buffer and shock absorber against financial uncertainties – which I must say is no less prudent to RBC requirements in domestic Malaysia or our neighbouring jurisdictions.

5. In addition, ICAF signifies moving away from the traditional one-size-fits-all capital approach to one which is fit-for-purpose solvency tailored to suit an insurer’s business risk profile. ICAF was designed as such that individual insurers are required to hold sufficient capital to commensurate with their respective unique business features. This is driven mainly by the nature of an insurer’s underwritten insurance obligations as well as their corresponding investment assets.

6. The journey to modernise Labuan IBFC's insurance solvency approach was set in motion by recommendations from the IMF’s Financial Sector Assessment Programme and the World Bank in 2012. It had taken almost a whole decade because Labuan FSA had intended for ICAF to be an evolutionary journey for the industry – instead of a big bang imposition that can cause disruption to the industry. Labuan FSA had embarked on a different approach in its policy development. Instead of exposure draft issuance, as we normally do for any new regulations, in 2014, we released a consultative white paper on RBC concepts for public consultation. This was to acid test the viability of having Labuan IBFC’s version of RBC as well as gauging the industry’s readiness for a paradigm shift in capital regulation. And from that exercise, we received more than 200 comments and feedback which collectively supported Labuan FSA’s proposal for the RBC adoption.

7. The ensuing years beyond 2014 has been critical for Labuan FSA to work with the industry to lay in the building blocks of ICAF. Again, a progressive approach was taken where ICAF roll-out was effected in two distinctive phases:

a) Phase 1 - where requirements on insurance liability valuations were introduced in 2015 to ensure prudent and harmonised reserving; and
b) Phase 2 – the final regulatory component to build up the risk-based capital regulations.

In fact, Phase 2 also entailed a parallel run implementation which kicked in this year alongside the existing solvency margin requirements - and we intended ICAF to officially take effect on 1 January 2024. Moving forward, Labuan FSA will develop appropriate ICAF regulations for the Labuan takaful operators akin to that of the conventional sector. This sequential approach allows the industry to ease into the ICAF environment and make necessary adjustments to their business and internal policies accordingly.

8. The ICAF was developed based on the IAIS’ Insurance Core Principles (ICPs) which include the asset and liability valuation, investment management, financial risk management, capital adequacy as well as market practices. While ICAF is broadly consistent with Malaysia’s RBC Framework, it incorporates tailored modifications to suit the Labuan IBFC's unique international landscape. Let's not forget, Labuan IBFC sits at the crossroads between domestic and international markets. Therefore, ICAF’s architecture blends in the best of both onshore and internationally accepted capital regulations. This is to ensure ICAF remains practical and relevant to Labuan IBFC’s midshore business circumstances.

9. Recognising the value of synergy, ICAF is also a product of collaboration. Firstly, the collaboration between Labuan FSA and Labuan Insurance Industry to validate and ensure the practicality of the requirements. Secondly, the consultation with BNM for independent views on ICAF and future RBC enhancements - some of which we have embedded within the ICAF.

Ladies and Gentlemen,

10. Let's dive into the benefits that ICAF would bring to the Labuan insurance landscape. Allow me to allude three main advantages that ICAF brings forth:

a)  Firstly, it addresses the limitations of the current MOS regulation. With transparency as one of its key tenets, ICAF:
  • focuses on the pressure points within an insurer’s financials;
  • fleshes out any hidden margins within the insurance provisioning; and
  • incorporates actuarial estimates and probabilistic uncertainties which are not apparent under the current solvency framework. This transparency goes hand in hand with a prudentially consistent approach for both asset and liability valuation, ensuring balance sheet uniformity between insurers.
b) Secondly, ICAF also accounts for all material risks of an insurer including insurance risk, assets, market and credit risks, as well as operational risks. This provides Labuan insurer a holistic perspective in managing its capital resources vis-à-vis the range of risks inherent within its business.

c) Thirdly, ICAF will be calibrated to the manner in which Labuan FSA supervises insurers as it links an insurer’s capital adequacy ratio or CAR to the supervisory rating accorded by Labuan FSA’s supervision. Declining CAR would be red flag triggers to prompt appropriate supervisory measures. This enables Labuan FSA to be more proactive in monitoring individual insurer’s health and effect timely interventions to address any financial distress.

11. Since ICAF’s parallel run took effect, Labuan FSA had received two quarters of ICAF reportings – a testament to Labuan insurers’ adaptability in embracing this new regulation. We are committed to working closely with the industry to provide constructive feedback and facilitate Labuan insurers’ compliance to ICAF requirements. To the industry players, I urge for you to treat ICAF beyond a mere compliance exercise. Embrace it as a means to elevate your business financial stature as well as to enhance your own enterprise risk management and business planning.

Ladies and Gentlemen,

12. Let me mention here that we are indeed privileged to have with us today esteemed speakers and panelists; ranging from subject matter experts from Labuan FSA and Bank Negara Malaysia to industry professionals. Before I conclude, I’d like to congratulate both Labuan FSA’s ICAF team and Labuan IBFC Inc. for their joint efforts to orchestrate this conference.

13. Wishing you a good intellectual discourse for the Conference ahead.

Thank you.
Mr Nik Mohamed Din Bin Nik Musa
Director-General, Labuan FSA
Copyright © Labuan FSA 
Generic Popup