Background

Thailand's insurance regulatory body, the Office of Insurance Commission (the OIC), has recently begun revising existing reinsurance regulations for both life and non-life insurance companies. Currently, reinsurance is regulated by the Notification of the OIC Re: Rules, Procedures, and Conditions on Reinsurance of Life and Non-life Insurance Company B.E. 2555 (2012) (Existing Reinsurance Notification).

The OIC intends to replace the Existing Reinsurance Notification by issuing a new notification (Draft Reinsurance Notification). The main objective of the Draft Reinsurance Notification is to ensure that insurers have proper mechanisms in place to address risks relating to reinsurance. This would align reinsurance regulations with the new risk management scheme previously announced in September 2017.

Key Aspects

In principle, provisions under the Existing Reinsurance Notification will not be substantially amended. The following are new points which we would like to bring to your attention.

1. Internal Compliance Requirement

1.1 Insurers are required to prepare a written Reinsurance Management Framework which must be approved by the board of directors.

Management responsible for reinsurance must ensure the following:

(a) Regulate, supervise, and follow-up to ensure that reinsurance is performed in accordance with the Reinsurance Management Framework.

(b) Provide written work process and guideline for reinsurance function to be in accordance with the Reinsurance Management Framework.

(c) Frequently consider the result of reinsurance.

(d) Arrange for an internal control system to report and monitor result of reinsurance.

1.2 Insurers must form a unit or appoint responsible persons to supervise and monitor reinsurance.

1.3 Insurers must arrange for the internal control department to supervise and monitor actions in relation to reinsurance to ensure that it is in accordance with the Reinsurance Management Framework.

2. Reinsurance Agreement Requirement

Insurers are required to ensure that reinsurance agreements (treaty and facultative) are suitable for their business, in line with the Reinsurance Management Framework, and is part of the company's risk management and capital fund management.

3. Financial Reinsurance and Finite Reinsurance

Financial reinsurance and finite reinsurance are still prohibited under the Draft Reinsurance Notification. In addition, insurers must be able to prove that their reinsurance agreements are not financial reinsurance or finite reinsurance with an acceptable method, i.e. 10/10 or expected reinsurer deficit.

4. Risk Management Requirement

Insurers must ensure that a proper risk control mechanism is in place to address the following aspects:

  • Credit risk
  • Concentration risk
  • Operational risk
  • Liquidity risk

5. Liquidity Risk Management Plan

In addition, insurers are also required to prepare a Liquidity Risk Management Plan in case of a significant event of loss or recurring compensation claim which must include (i) sourcing of fund, (ii) short-term cash flow management, and (iii) expedition of claiming reinsurance compensation.

6. OIC Authority

The OIC has the legislative authority to order insurers to revise their reinsurance agreements and to also request for side letters. In addition, the OIC may order insurers to perform a stress test to evaluate reinsurance effectiveness.

Conclusion

The OIC's board has approved the Draft Reinsurance Notification in principle and opened it to public comment. It is recommended that comments be submitted to the OIC before the end of March 2018. No formal submission form is required. Thereafter, the OIC working team will consider the comments and further propose the draft for the OIC's board final consideration. Therefore, the OIC will not be organizing a seminar to receive feedback from insurers due to the changes being minimal in nature and to ensure the Draft Reinsurance Notification comes into force as soon as possible.

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