Capital standards, climate rules drive APAC insurance reform

New capital frameworks and climate-related rules will take effect across the APAC insurance landscape in 2025, according to speakers at Fitch Ratings’ webinar “Global Insurance Regulation – What to Expect in 2025 (APAC/EMEA).”

In the May 15 briefing, Fitch analysts highlighted wide-ranging regulatory changes, including the adoption of Insurance Capital Standards (ICS) in Korea, Taiwan and Japan, and climate-linked capital charges in Malaysia and Australia.

Kanishka de Silva, Director of APAC Insurance at Fitch Ratings, noted varying progress across jurisdictions. “In APAC, both Taiwan and Japan are getting closer to going live with their versions of ICS, and this is following Korea’s adoption back in 2023,” said de Silva. “The major shift we are seeing in these markets is the transition to a more market-consistent approach for their balance sheet valuations.”

In March, Korea’s Financial Supervisory Service proposed lowering the K-ICS capital adequacy ratio from 150% to 130–140% and introducing a minimum 50% core capital solvency ratio. The changes are set to take effect for year-end 2025 financial statements.

In Taiwan, insurers with high-guarantee savings products face higher interest rate-related capital charges, prompting a shift toward health and protection products with more stable liabilities. To lower capital costs, Taiwan’s FSC has allowed insurers to create overseas special purpose vehicles (SPVs) to issue capital-qualifying bonds. “We’ve already seen several issuances happening out of Singapore in this regard,” said de Silva.

Meanwhile, Japan is moving to an economic value-based solvency regime, prompting insurers to invest more in long-term domestic bonds and reduce exposure to foreign bonds, supported by rising yen yields. “As a result of all of these, we think interest rate risk and the duration matching at Japanese life insurance have significantly reduced in recent years,” said de Silva.

Indonesia is also preparing for a major capital overhaul that will create Asia’s highest capital floor. Under the P2SK Law, the Financial Services Authority (OJK) has mandated two sharp hikes in insurers’ minimum capital – from US$6.2m to US$15.2m by end-2026, and to US$62m by 2028.

The enormous jump in capital reserve requirements in Indonesia “will be a significant global MCR event,” said Justin Ward, Head of Capital Advisory for APAC at Guy Carpenter, speaking at an event held by the reinsurance brokerage in Jakarta on February 20.

“Our business is relatively niche, focused on serving local branches of corporates from our home market,” said the head of an Asian insurer’s Indonesian operations speaking at the same event. “We would really need to think hard about making the capitalisation leap.”

Reinsurance costs squeeze APAC insurers

Beyond capital standards, insurers are also facing pressure from rising climate risks. Extreme weather is driving up catastrophe reinsurance costs and increasing insurer retentions across the APAC region.

De Silva cited Australia, where costly reinsurance has widened the protection gap and pushed premiums higher. Regulators like the Australian Prudential Regulation Authority (APRA) are encouraging alternative risk transfer solutions, including catastrophe bonds.

“One big change they are considering is easing the reinstatement requirements for cat reinsurance. This could be a win for alternative structures like cat bonds that typically don’t have such provisions,” de Silva explained.

Other APAC jurisdictions are implementing similar reforms.

Malaysia is rolling out its RPC 2 framework, which introduces new risk charges for natural catastrophes, such as floods, earthquakes, and windstorms. “Reinsurance is crucial here in reducing the net exposures and managing that capital requirement,” de Silva noted.

In Hong Kong, The University of Hong Kong (HKU) outlined seven policy recommendations to expand climate insurance and reinsurance markets and enhance resilience.

Another area of regulatory focus is the growing use of artificial intelligence in insurance operations. Robert Mazzuoli, Director of EMEA Insurance at Fitch, stressed the importance of supervisory frameworks to prevent bias, reduce error risk and strengthen cybersecurity.

“What regulators are trying to achieve is that insurance companies integrate certain compliance rules that deal with certain topics, like discrimination, because artificial intelligence, depending on what data they are fed on, could produce biased results that then would exclude certain client groups or recommend unfair pricing,” said Mazzuoli.

China, Taiwan adjust investment rules

De Silva also flagged key developments in China and Taiwan affecting solvency metrics and investment strategies.

“In APAC, the Chinese regulators are really pushing to boost equity holdings to help stabilise the domestic capital markets,” said de Silva. A recent move by the State Council Information Office reduced the capital charge on equity investments used in solvency ratio calculations by 10%, easing capital requirements.

“It’s the latest in a series of moves, including easing investment limits, launching long-term investment pilots, all aimed at encouraging equity exposure,” de Silva said.

While life insurers are already heavily invested in equities, the reduced charges still benefit them by improving solvency ratios and freeing up capital for expansion. However, non-life insurers are less likely to increase equity holdings due to the need for liquidity to match short-term liabilities.

“In the short term, we expect service ratios to stay stable. That’s the 10% cut on equity investments. But looking ahead, insurers might face pressure on their capital buffers as they grow their business. So, earnings could also become more volatile in the longer term if they increase their equity assets significantly,” said de Silva.

Taiwan’s regulatory authorities, meanwhile, are grappling with the effects of a strengthening local currency.

“The [Taiwan] regulators have been active in addressing FX-related risks for Taiwanese insurers, so these insurers often use US dollar assets to back their Taiwanese dollar liabilities, and this is a key risk to their credit profiles,” said de Silva.

In response, new Financial Supervisory Commission (FSC) rules announced in August 2023 adjusted the calculation of foreign exchange reserves and allowed insurers greater flexibility, including higher reserve-setting ratios for unhedged positions. As a result, insurers must now allocate more reserves each month.

These adjustments come amid increased currency volatility. A sharp 8% appreciation of the Taiwan dollar over just two days earlier this year raised concerns about substantial unrealised losses on insurers’ portfolios. “We think this is likely to prompt some form of intervention from the regulator sometime soon,” said de Silva.