Solvency and Risk Management in the Asia-Pacific Insurance Market

Chinese Version

The insurance market in the Asia-Pacific region is diverse and dynamic, covering economies from emerging to mature. Each insurance market has its own characteristics and stage of development. With the rapid growth of the Asia-Pacific insurance market, the risks insurance companies face are shifting and becoming increasingly complex. In this context, the solvency regulatory framework is not only the cornerstone to help insurance companies operate soundly but also an important means for regulators in various regions to help ensure the healthy and orderly development of the industry.

This article is based on the 2024 Society of Actuaries (SOA) and China Association of Actuaries (CAA) professional development online training course, “Risk Management Experiences of Life Insurance Companies in the Current Environment.” It explores statutory solvency requirements, analyzes the common solvency regulatory system in the Asia-Pacific insurance market and shares practical experience in capital management.

Capital Requirements for Insurance Solvency

Solvency is an indicator measuring the ability of an insurance company to fulfill its obligation to pay indemnity policyholders. To ensure that insurance companies have sound financial capacity, insurance regulators in various countries will set different levels of minimum capital adequacy ratios to enable insurance companies to absorb unexpected, significant losses. In the balance sheet, premiums form assets, while reserve and other liabilities are accrued. Available capital is the value of assets minus liabilities, and the capital adequacy ratio is the available capital divided by the required capital. Regulators generally require the capital adequacy ratio to be greater than 100%. If it is inadequate, the regulators will take necessary regulatory measures.

Currently, there are three main solvency regulatory systems in use in the Asia-Pacific insurance market:

1. The European Union’s first-generation solvency regulatory framework (Solvency I). This early-stage solvency regulatory framework mainly relies on reserves or net amount at risk to calculate the required capital. Although it is simple to calculate and easy to operate, it has the defect that the capital requirements are weakly correlated with risks associated with an insurance company’s operations, and it is no longer mainstream in the Asian market. Currently, only a few regions, such as Vietnam, still use this system.
2. The American risk-based capital (RBC) system. This system originated in the United States in the 1980s and is a method of calculating risk capital based on a standard formula. It considers various risk categories, such as asset risk and operational risk, and assigns different weights to each risk category, thereby linking capital requirements to the degree of various risks. Currently, markets such as those in Japan and the Philippines apply this system.
3. The European Union’s second-generation solvency regulatory framework (Solvency II). This is an increasingly prevalent regulatory framework in the Asian market, similar to the “three pillars” regulatory framework in the banking system, which strengthens the measurement and capital requirements for various risks and adds a qualitative self-assessment of risk management capabilities. This system is regarded as a more advanced regulatory framework and has been adopted by many regions in Europe and internationally, such as Australia and mainland China.

The solvency regimes in the Asia-Pacific insurance market have been continuously reforming and developing. In recent years, mainland China, South Korea, Singapore, Malaysia and other places have carried out reforms in solvency regimes, gradually moving closer to the “three pillars” framework, similar to the EU’s Solvency II.

Hong Kong, Japan and other places also are planning or carrying out similar reforms:

• In July 2024, the Insurance Authority of Hong Kong reformed Solvency I, which had been used for many years, into a three-pillar solvency regulatory framework similar to Solvency II.
• In 2026, Japan will implement a new solvency regime based on the International Capital Standard for insurance.
• Also, in 2026, Malaysia will introduce a new draft to reform the existing system, and its direction will be consistent with international standards.

These reforms will affect not only the capital that insurance companies need to hold but also business strategies and management.

Sharing Experience in Capital Management

The new solvency framework requires insurance companies to use more complex risk-based management models to formulate and verify a company’s strategic decisions and manage its insurance business. In practice, it was involved in new product development, comprehensive capital management and sound risk management.

In the new product development stage, insurance companies conduct different sensitivities to identify the risk factors of each new product to ensure that it has a stable and healthy profit margin. Only on this basis can the new business achieve long-term profitability and provide stable cash flow to support further investment, thereby achieving positive feedback for policyholders and shareholders.

In the capital management stage, it is ideal for insurance companies to pay attention to the matching of assets and liabilities and optimize investment strategies to increase the capital adequacy ratio and reduce solvency volatility. For example, by reducing the allocation ratio of equity assets, the impact of capital market fluctuations on the company’s solvency can be mitigated; or interest rate hedging tools could be used to shorten the duration gap between assets and liabilities.

Conversely, insurance companies can formulate new product strategies and optimize the product mix to make it more adaptable to the changes in the solvency regulatory framework. For example, for participating products, insurance companies ensure that their guaranteed benefits are consistent with the investment strategy and the current market environment, and they adjust the guaranteed benefits appropriately according to the situation. When the market risk is high, the product focus will be shifted to product types with low investment risks. In addition, insurance companies also can actively utilize reinsurance arrangements to effectively transfer and control solvency risks and ensure that the solvency level is sufficient and stable.

In the risk management stage, insurance companies set appropriate capital adequacy ratio targets based on their own risk appetite and conduct stress testing regularly to identify risk factors. At the same time, they can formulate preventive or mitigating risk measures in advance to deal with different situations. For example, when the capital market is fluctuating, the asset allocation on highly volatile stocks should be reduced. When the capital adequacy ratio is low, insurance companies should ideally stop selling products with high required capital, issue capital supplementary bonds externally or ask shareholders to inject capital to ensure that the capital adequacy ratio is maintained at a healthy and stable level.

In contrast, when there is a sufficiently high capital adequacy ratio, insurance companies can consider distributing dividends to shareholders, ensuring that the solvency meets the long-term capital needs and sustainable development of business operations while taking into account capital efficiency and the interests of company shareholders.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.

Copyright © 2025 by the Society of Actuaries, Chicago, Illinois.