An Introduction to Insignificance: Risk Based Capital, Short Talk

by Victor

Following the announcement by Bank Negara that all insurers licensed under the Insurance Act 1996 are to be required to adhere to the risk based capital framework, which was to be fully implemented in 1st January 2009, the whole industry became abuzz with RBC. News report and insiders alike were concerned about the developments of the issue, so much so that it's quite the uncontested magic phrase for the insurance industry (finance department) for the year. The reason of RBC's sudden popularity is mainly due to the huge extend of its influence on the financial planning of the insurer. There will be shifts on asset classes preference, investment strategies, internal management and so on. Ergo, considering the significance of RBC, it will be of interest to dip in on a more detailed discussion on the history, justification and consequences of RBC. In 2002, Bank Negara initiated the study of RBC by gathering a team of experts to consider the various issues related to it. Following that, the first draft on RBC framework was produced and circulated to the industry for feedback and opinions in 2004. A second draft in 2005 and a finalized version in April 2007. Weighing in the development of risk based capital research in the international front, our local studies incorporated findings and methodology in accordance with international practice. The motivation for Bank Negara towards RBC is based mainly on several objectives which among them are to encourage prudent management of funds, incentive for establishment of appropriate risk management infrastructure as well as encouraging convergence with international standards so as to minimize regulatory arbitrage. In a broader aspect, the emphasis on RBC in also in sync with the increasingly popular idea of asset based reserve requirement (ABRR), which is a relatively modern economic management tool. Without going astray into discussing the multiple proposed advantages of ABRR, it should be sufficient to simply comment that RBC...

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