Regulators Closely Watch AIG's Impacts Across Asia

HONG KONG, Sep 29, 2008 (A. M. Best via COMTEX) -- AIG | Quote | Chart | News | PowerRating -- Government regulators are closely watching the development and operation of American International Group's local units across Asia in the wake of the US$85 billion (57.9 billion euro) bailout of the parent company by the US Federal Reserve.

In an effort to ease worries, local regulators promptly answered public enquires by issuing statement assuring that AIG's domestic units have sufficient capital and financial resources to meet liabilities to policyholders.

"As with all insurance companies in Singapore, [American International Assurance] is required under the Insurance Act to maintain statutory insurance funds, including an investment-linked fund. These funds are segregated from its head office and other shareholders' funds," said Kwok Mun Low, the Monetary Authority of Singapore's executive director of insurance supervision.

In most Asian countries, insurance companies must comply with domestic solvency requirements, which is the extent to which an insurance company's assets exceeds its liabilities. The solvency margin is set at 120% in Singapore, 150% in India and 100% in Korea.

The implications of AIG's problems for Asian regulatory authorities are hard to gauge, as insurance regulations in Asia vary across markets. In markets like Australia and Japan, which had experienced the collapse of insurance companies, AIG's situation is not expected to have a significant impact on the regulatory scene.

In Australia, regulation of financial services and banking had already been tightened after the collapse of HIH, one of the country's largest insurers, in 2001. This would not create much change in Australia, said Brian Greig, head of KPMG's Insurance Group.

As the assets of insurance companies are closely regulated by the government, Greig said policyholders are well-protected in Australia with an enhanced governance structure. As AIG's unit in Australia is relatively small, there would not be any dramatic change brought to the insurance landscape. Overall, Greig said Australian insurers are stable, and they generally do not have liquidity issues.

In Japan, Celent senior vice president Neil Katkov said consumer concern about AIG's financial issues is relatively low, supported by strong government regulations imposed on financial institutions after the experience of economic downturn and collapse of some insurance and financial companies 15 years ago.

In some markets, government regulators are stepping up to impose tighter measures on not just local units of insurance companies but also the offshore holding parent.

In India, the Insurance Regulatory and Development Authority asked AIG's two joint venture units, Tata AIG Life Insurance and Tata AIG General Insurance, to submit reports on U.S. developments related to AIG.

The China Insurance Regulatory Commission urged insurers place tighter controls on risk and asset management. In China, the insurance sector was the first among financial sectors to be opened up to competition, and hence was earliest to get foreign investment and open market development.

In the wake of AIG's financial crisis, the CIRC asked insurance companies to submit reports on their exposures to overseas investments and to make an instant and extensive assessment of potential risks.

In China, most insurance companies would not be directly affected by the U.S. subprime mortgage crisis as their assets only have limited channel to invest in overseas markets, said Wenli Yuan, senior analyst at Celent, an international strategy consultancy. China's three biggest publicly listed insurance companies China Life, Ping An and PICC, disclosed no investments in bonds issued by failed investment bank Lehman Brothers, for instance.

Raymond So, associate professor of the Chinese University of Hong Kong's department of finance, said people usually buy insurance products based on the insurer's strong capital back up from its parent company overseas. AIG's credit crisis may have disapproved this thinking, he said.

So said there is a need for regulators to monitor the financial condition of insurers' overseas parents by examining their assets, investments, loans and liabilities, given the globalized nature of capital. These are always the "grey areas" to examine in insurance companies' real financial strength, he said.

Hong Kong's insurance commissioner banned AIA, AIG's local subsidiary, from shifting assets to its troubled parent company without the approval of the regulator. Financial Secretary John Tsang said Hong Kong insurance authority is keeping a close watch on AIA's financial position and has contacted companies which have connections with AIG's U.S. and Hong Kong operations in order to assess impact of the crisis on these companies and their ability to make debt repayments.

In Hong Kong, AIG's crisis showed the insurance regulator the need to set up a compensation fund to pay policyholders in case their insurance companies collapse. Similarly, the Monetary Authority of Singapore requires all insurers to set up separate insurance funds for each class of business. The assets in each fund can only be used to meet the fund's expenses and liabilities, and each fund's assets must exceed its liabilities plus an imposed safety margin.

Such compensation funds are not widely developed in Asia. In this respect, AIG's crisis may offer an opportunity for regulators to further enhance regulations to protect policyholders. At the moment, the Hong Kong Confederation of Insurance Brokers Secretariat Eric Lee said we are taking a "wait and see" approach in the next step.

(By Iris Lai, Hong Kong bureau manager: Iris.Lai@ambest.com)

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