MAS proposals widen investment scope for Singapore insurers

SINGAPORE, July 25 (IFR) - Insurance companies in Singapore will face less onerous restrictions to invest in bonds and equities under new rules that the Monetary Authority of Singapore has proposed.

The draft risk-based capital framework, which has been in the works for four years, is the insurance equivalent of the Basel III regime for banks. It aims to improve risk coverage and to assess capital adequacy better than the current 2005 framework.

“The biggest impact on insurers would be the widening of the eligibility criteria for matching adjustment,” said Sally Yim, Moody’s senior vice president for the Asia financial institutions group. “This is favourable for insurers as the proposed relaxed criteria would make it easier for insurers to perform their asset-liability management.”

The matching adjustment mechanism was introduced in a consultation paper two years ago as a calculation to balance life insurance liabilities against assets denominated in both Singapore dollars and US dollars, but the market felt that the proposed conditions were too conservative and too narrow.

In response, the MAS has relaxed the conditions, in particular, allowing the use of US dollar bonds to match Singapore dollar liabilities, subject to a suitable currency swap being in place, and the use of callable bonds, with only cashflows before the first call to be recognised.

“Lower requirements on insurers will mean they need to set aside less capital,” said a local DCM banker. “This should be more positive for insurers as investors in bonds.”

The MAS addressed only investments in Singapore dollars and US dollars since almost all the liabilities of the city state’s life insurers are denominated in these two currencies.

“Given the lack of depth in the SGD fixed-income market, and the fact that most insurance liabilities for life insurers in Singapore would be SGD, giving them the flexibility to match it with USD assets (which has a much bigger pool), with proper hedging in place, would widen the investment choices for insurers,” said Yim. Rating questions

Insurance companies will find less of an obvious solution to the matter of unrated bonds, which make up a large part of all Singapore dollar issuance.

Bankers say insurers have the most difficulty in buying such bonds as they attract a risk charge similar to that of non-investment-grade bonds. Of the total amount of corporate bonds that Singapore insurers hold, only around 10-20 percent are unrated Singapore dollar issues, with local statutory boards selling a significant proportion, while the balance is from financially strong companies that did not seek a rating.

The MAS had previously proposed that unrated bonds from statutory boards and recognised multilateral agencies would attract a credit spread charge tied to the sovereign AAA rating of the Singapore government.

Other unrated corporate bonds would attract a charge equivalent to paper with a rating between BBB- and BB-, prompting market participants to appeal for a lighter treatment for notes to be extended to government-linked entities that were not rated.

In response to this, the MAS is now willing to put the credit risk charge at 50 percent of that proposed for a AAA corporate bond to notes sold by Singapore statutory agencies. Still, for other unrated corporate bonds, the credit charge remains unchanged.

The risk charge has also been lowered in the latest revisions for other investments, including those in unlisted equities, such as private equity and hedge funds, and in fixed-income investments.

“These (reduced) risk charges are more in line with international standards now as the previous proposal was more punitive,” said Yim. “Hence, insurers would be required to hold relatively less capital for these assets and exposure than under the previous proposal.”

The July 15 paper of the MAS explores a number of alternatives to address the shortage of rated bond issues. One of these is for the MAS to recognise an insurer’s internal rating model to compute the credit spread risk calculations. While it has yet to commit to that approach, the central bank did acknowledge that it would be “useful to have a set of criteria for an admissible internal rating process”.

Another priority for the central bank is infrastructure financing, which it feels would match life insurers’ need for long-term assets. The MAS plans to gauge the interest of insurers for this asset class.

Feedback on the latest consultation paper is due on October 20. (Reporting By Kit Yin Boey; editing by Daniel Stanton and Vincent Baby)