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Labuan Consults On Insurance Capital Adequacy

by Mary Swire, Lowtax.net, Hong Kong
30 January, 2014

The Labuan Financial Services Authority (Labuan FSA) is requesting written comments on a consultation paper it has issued with regard to improved risk-based capital standards for the Labuan insurance and takaful (Islamic insurance) sectors.

In line with the Labuan FSA's initiative for greater transparency and collaboration with wider stakeholders, the regulator is sharing its plans on a new Insurance Capital Adequacy Framework (ICAF). The consultation paper explains the various ICAF components and the required implementation phases, thus providing a well-planned roadmap and approach for the development of standards in the next four years.

In keeping with Labuan International Business and Financial Center's (Labuan IBFC) objective "to further strengthen insurance regulations in order to promote stability in the regional and international insurance business," it also recognizes that "regulatory conformance to international standards has become a necessity."

Labuan IBFCs commitment is detailed further in Malaysia's Financial Sector Blueprint 2011 that includes Labuan FSA's strategy to enhance capital standards for (re)insurers and (re)takaful operators. While the existing statutory margin of solvency framework has served its basic purpose in the past, it is said to be no longer regarded as sufficient.

As the current "one-size-fits-all approach" ignores the risk profile of insurers, and does not address the adequacy of reserving as well as asset and liability valuation for solvency computation purposes, Labuan FSA proposes a transition towards a risk-based capital approach via the ICAF, which has been developed based on the principles laid down by the International Association of Insurance Supervisors.

It has also taken on board the good practices of other jurisdictions. In this regard, Labuan IBFC's intends for ICAF to have broad consistency with Malaysia's risk-based capital framework, but with sufficient differentiation to cater for Labuan IBFC's international insurance business circumstances.

Ultimately, Labuan FSA intends for the ICAF to provide for a consistent valuation of assets and liabilities, as well as suitable forms of capital resources in arriving at the required capital adequacy level; and a robust, risk-based capital framework that takes into account all material risks of an insurer.

Labuan FSA hopes that the ICAF will already provide the insurance industry with an overview on the intended roadmap prior to issuing any relevant guidelines. In view of the extensive work envisaged, Labuan FSA seeks feedback on the details of proposed ICAF, with written feedback on the consultation paper required by February 24, 2014.

A comprehensive report in our Intelligence Report series which studies the 20 main offshore jurisdictions which offer captive insurance regimes is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report11.asp

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