National Economics University

Faculty of Mathematical Economics

GRADUATION THESIS

Insurance Capital Requirement and How to apply

Risk-based capital framework in Vietnam’s insurance
industry from Quantitative Impact Study 2

Student : Trịnh Thị Minh Nguyệt

Student’s ID : 11202937

Class : Actuary 62

Instructor : MSc. Nguyễn Mạnh Đức

MSc. Ngô Việt Hoàng

Hanoi, May 2024

Graduation thesis Faculty of Mathematical Economics

Acknowledgement
The opportunity to express my gratitude to those who have supported and guided me
throughout this journey is invaluable. This thesis would not have been possible without the
contributions of many individuals, to whom I am deeply grateful.

First and foremost, I would like to express my heartfelt gratitude to my supervisors, MSc.
Ngo Viet Hoang and MSc. Nguyen Manh Duc. Their unwavering support, invaluable guidance,
and continuous encouragement have been vital throughout my research and the writing of
this thesis. They have been exceptionally generous with their time and expertise, offering
insightful and constructive feedback fostering an environment that enabled me to complete
this work.

I am profoundly grateful to the professors of the Faculty of Mathematical Economics. Their

passion for teaching and willingness to engage in stimulating discussions have broadened my
intellectual horizons and inspired me to dedicate more effort to my studies.

I also wish to extend my sincere thanks to my family, as well as my colleagues, and my

friends, whose constant support, inspiration, and encouragement.

Thank you.

Trịnh Thị Minh Nguyệt

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Contents

A Chapter 1: Introduction 10

I Rationale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

II Literature Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

III Research Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

IV Research Question . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

V Research Object . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

VI Research Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

VII Research Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

B Chapter 2: Theoretical Background 16

I What is RBC? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

II RBC under Insurance Standard Capital ver 2.0 . . . . . . . . . . . . . . . . . 16

1 History/Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

2 Reference ICS: Market-Adjusted Valuation (MAV) . . . . . . . . . . . . 17

2.1 Valuation Principles . . . . . . . . . . . . . . . . . . . . . . . 17

2.2 Qualifying Capital Resources . . . . . . . . . . . . . . . . . . 20

2.3 Capital Requirement – The Standard Method . . . . . . . . . 20

2.4 Stress-based approach . . . . . . . . . . . . . . . . . . . . . . 21

2.5 Factor-based approach . . . . . . . . . . . . . . . . . . . . . . 22

2.6 The ICS coverage ratio . . . . . . . . . . . . . . . . . . . . . . 23

2.7 The Risks under ICS . . . . . . . . . . . . . . . . . . . . . . . 23

III What are the differences between Solvency II and RBC? . . . . . . . . . . . . 37

C Chapter 3: Methodology to calculate Capital Requirements under V-RBC

framework using risk factors from QIS 2 40

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I Summary of V-RBC framework . . . . . . . . . . . . . . . . . . . . . . . . . . 40

II The Risks under V-RBC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

1 Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

1.1 Interest Rate Risk . . . . . . . . . . . . . . . . . . . . . . . . 42

1.2 Asset’s Price Risk . . . . . . . . . . . . . . . . . . . . . . . . . 46

1.3 Currency Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

1.4 Asset Concentration Risk . . . . . . . . . . . . . . . . . . . . 48

1.5 Real Estate Risk . . . . . . . . . . . . . . . . . . . . . . . . . 48

1.6 Equity Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

2 Credit Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

3 Insurance Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

3.1 Life Insurance Risk . . . . . . . . . . . . . . . . . . . . . . . . 51

3.2 Non-Life Insurance Risk . . . . . . . . . . . . . . . . . . . . . 53

3.3 Catastrophe Risk . . . . . . . . . . . . . . . . . . . . . . . . . 54

4 Operational Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

D Chapter 04: Results 58

I Status of the capital regimes for life insurance in Vietnam . . . . . . . . . . . 58

1 Minimum Solvency Margin . . . . . . . . . . . . . . . . . . . . . . . . . 58

2 Valuation Methodologies and Assumptions . . . . . . . . . . . . . . . . 59

II Capital Requirement under V-RBC framework of B Life Insurance Company . 60

III Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

1 Life insurance capital regimes in Thailand. Why this country changes

from RBC 1 to RBC 2? . . . . . . . . . . . . . . . . . . . . . . . . . . 63

2 The transition from Solvency I to RBC framework in Vietnam . . . . . 66

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2.1 Comparative Analysis of Solvency Regulations: Vietnam vs.

International Standards . . . . . . . . . . . . . . . . . . . . . 66

2.2 What do insurers and regulators need to improve in order to

comply with RBC reporting requirements? . . . . . . . . . . . 68

2.3 Proactive step towards RBC framework . . . . . . . . . . . . . 71

E Chapter 5: Conclusion, Limitation, and Recommendation 74

I Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

II Limitation and recommendation of the research . . . . . . . . . . . . . . . . . 75

References 76

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List of Tables

2 Aggregation matrix between risks under ICS . . . . . . . . . . . . . . . . . . . 21

3 Market risks correlation matrix under ICS . . . . . . . . . . . . . . . . . . . . 25

4 Components of the Market risk charges under ICS . . . . . . . . . . . . . . . . 27

5 Credit risk charge for other exposure classes under ICS . . . . . . . . . . . . . 29

6 Life risks correlation matrix under ICS . . . . . . . . . . . . . . . . . . . . . . 31

7 Components of life insurance risk charges under ICS . . . . . . . . . . . . . . . 32

8 Risk exposure measures of ICS Non-Life Insurance Risk . . . . . . . . . . . . . 33

10 Solvency II and RBC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

11 Market risks correlation matrix under V-RBC . . . . . . . . . . . . . . . . . . 42

12 Product Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

13 Asset’s Price Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

14 Mapping to V-RBC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

15 Exposure of V-RBC Credit Risk . . . . . . . . . . . . . . . . . . . . . . . . . . 49

16 Risk Factors equivalent to Moody’s Rating . . . . . . . . . . . . . . . . . . . . 51

19 Risk Factors for each category of Products under V-RBC . . . . . . . . . . . . 52

24 Risk Factors for Non-Life Insurance Risk under V-RBC at 99.5% Confidence
Interval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

25 Within category correlation factors under V-RBC . . . . . . . . . . . . . . . . 54

26 Risk Factors of Catastrophe Risk under V-RBC . . . . . . . . . . . . . . . . . 57

27 Valuation Methodologies and Assumptions in Vietnam . . . . . . . . . . . . . 60

28 Life Insurance Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

29 Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

30 Credit Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

31 Risk Based Capital - Diversified over main category . . . . . . . . . . . . . . . 62

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32 Comparison with Minimum Capital Requirement and Solvency Margin using

current capital regime of Vietnam: Solvency I EU . . . . . . . . . . . . . . . . 62

33 Comparison of RBC1 and RBC2 Frameworks in Thailand . . . . . . . . . . . . 65

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List of Figures

1 Market-Adjusted Valuation approach . . . . . . . . . . . . . . . . . . . . . . . 18

2 ICS yield curve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

3 Stress-based approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

4 Factor-based approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

5 Types of Risk in RBC under ICS . . . . . . . . . . . . . . . . . . . . . . . . . 23

6 Categorisation of non-life exposure is aggregated . . . . . . . . . . . . . . . . . 34

7 Forward Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

8 Spot Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

9 Typical Insdustry Solvency Ratio Level in Asia . . . . . . . . . . . . . . . . . 63

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Notation List
Order Notation Meaning
1 RBC Risk-Based Capital
2 QIS 2 Quantitative Impact Study 2
3 V-RBC Vietnamese Risk-Based Capital
4 ISA Insurance Supervisory Authority
5 ICS Insurance Capital Standard
6 NAIC National Association of Insurance Commissioners
7 IAIS International Association of Insurance Supervisors
8 PCR Prescribed Capital Requirement
9 IAIGs Internationally Active Insurance Groups
10 MAV Market-Adjusted Valuation
11 GAAP Generally Accepted Accounting Principles
12 SAP Statutory Accounting Principles
13 MOCE Margin over current estimate
14 IRR Interest rate risk
15 NDSR Non-default spread risk
16 NAV Net asset value
17 GWP Gross Written Premium
18 VaR Value-at-risk
19 IFRS International Financial Reporting Standards
20 VAS Vietnamese Accounting Standards
21 LAT Liability adequacy test
22 ALM Asset-liability mismatch
23 CI Confidence Interval
24 UPR Unearned Premium Reserve
25 WL Whole Life Insurance
26 TL Term Life Insurance
27 CI Critical Illness Insurance

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28 UL Universal Life Insurance

29 VUL Variable Universal Life Insurance
30 COI Cost of Insurance
31 MoF Ministry of Finance

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Chapter 1: Introduction

I Rationale

The RBC framework revolutionized the enforcement of financial stability within the global
insurance industry, engendering a wave of regulatory reforms that stretched across continents.
At its core, the RBC model departs from a simplistic solvency scheme to one that is attuned
to the risk profile of each insurance entity, demanding that capital reserves are proportional to
the risks each firm is exposed to. The RBC regime is not only a yardstick for financial health
but also propels insurers towards efficient capital utilization, reinforcing industry resilience.

Looking around the globe, it’s evident that the trajectory of RBC adoption has varied,
reflecting each country’s unique response to its evolving economic landscapes. Japan was at
the vanguard, having instituted an RBC framework in 1996. By the turn of the millennium,
Australia followed suit in 2001, with Taiwan adopting a similar model by 2003. Singapore and
the UK began their implementation in 2004, with Switzerland and Malaysia enhancing their
regulatory frameworks in 2006 and 2009, respectively. In each instance, the transition to RBC
was driven by the need to synchronize with burgeoning market demands and international
standards while safeguarding against domestic risks.

Particularly influential in shaping this global discourse is the European Union’s Solvency
II directive, implemented in 2016. As a comprehensive RBC system, Solvency II has set
a high benchmark, emphasizing three crucial pillars: quantitative requirements, governance
and risk management standards, and disclosure and transparency mandates. Solvency II’s
robust framework reinforces insurers’ ability to absorb shocks while ensuring a fair, stable,
and efficient market, serving as a reference point for countries reforming their insurance
solvency regimes.

Vietnam’s insurance industry, adhering to the European Solvency I standard since the 1970s
as mandated by Article 64 of Decree 73/2016/NĐ-CP, has diligently observed these interna-
tional benchmarks. Despite its robust growth, the market remains susceptible to economic
shocks, necessitating a forward-looking approach to solvency regulation. In anticipation of
these needs, Vietnam is charting its course towards a strategic overhaul of insurance solvency

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standards, with the implementation of an RBC model earmarked for January 1, 2028.

QIS 2 is poised to play a decisive role in this transition. As part of a series of preparatory
steps, QIS 2 will provide empirical data and predictive analytics to create a succinct, feasible
and manageable Vietnamese Risk Based Capital (V-RBC) framework by the support of the
American People through the United States Agency for International Development (USAID),
the preparation of Integra Government Services International LLC for the Learning, Evalua-
tion, and Analysis Project (LEAP III) Activity, and the provision of requested data from the
ISA and insurers of Vietnam.

Up to now, a variety of approaches are accessible for managing capital requirements that suit
the distinct traits of each market. This includes systems such as the Solvency II framework by
the European Insurance and Occupational Pensions Authority (EIOPA), the RBC standard
from the NAIC, as well as the RBC guidelines from the IAIS. Notably, the IAIS has created the
Risk-Based Global ICS with the intention of establishing a unified framework for regulatory
communication. Consequently, the dissertation adopts the ICS methodology as a baseline for
implementation in the context of Vietnam’s market.

By weaving through the fabric of Vietnam’s ongoing regulatory evolution and juxtaposing
it with global trends, this essay aims to provide a nuanced examination of the current solvency
margin system and the transformative potential of the incoming RBC regime. Drawing from
international experiences and the critical insights of QIS 2, the narrative will shine a spotlight
on the structural enhancements necessary to elevate the Vietnamese insurance industry to a
globally recognized bastion of stability and growth.

II Literature Review

This literature review earnestly explores the strategic journey toward identifying the opti-
mal RBC framework for the peculiarities of Vietnam’s insurance industry. The study extends
beyond domestic borders, juxtaposing the nascent International Capital Standard (ICS) ver-
sion 2 alongside established RBC frameworks from other jurisdictions, aiming to distill a
synthesis of best practices and innovative approaches. The review pays particular homage to
the findings and lessons from the QIS 2, advocating for its role as a crucial benchmark in the
contextual adaptation process.

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Anchored by the introspective reflection on QIS 2, this review serves as a critical analysis
for evaluating the efficacy and resonance of these varied RBC methodologies within the Viet-
namese market. The deliberation includes how ICS version 2’s principles can potentially be
reconciled with Vietnam’s RBC approach, illuminated by QIS 2’s experiential data, guiding
the calibration of RBC standards to complement Vietnam’s distinct market dynamics and
regulatory landscape.

Post-QIS 2 assessments, complemented by the scrutiny of the ICS version 2 and other coun-
tries’ RBC applications, provide a concrete foundation upon which to understand the factors
that underpin financial stability within the industry. These insights reveal QIS 2’s instru-
mental role in identifying the strengths and limitations of current RBC models, while also
considering how ICS version 2 might influence future frameworks tailored to the Vietnamese
context.

Numerous critical analyses within the literature underscore the symbiotic relationship be-
tween policy formulation and practical outcomes. Drawing on QIS 2’s structured evaluation
of RBC application scenarios—and critically, on the learnings from ICS version 2 and inter-
national analogs—these studies proffer empirical evidence to suggest custom modifications
conducive to Vietnam’s socio-economic backdrop, thus enhancing the risk resilience of its
burgeoning insurance sector.

The collective wisdom gleaned from QIS 2, ICS version 2, and international RBC models
points to a didactic progression: a learning session from which to distill and deploy an RBC
framework that not only aligns with global best practices but also meticulously considers the
inherent specificities of the Vietnamese market. The discourse culminates in the construction
of an RBC environment that promises stability and sustainability for insurers and insured
alike, under the aegis of Vietnam’s emergent financial ethos.

In summary, the ambit of this literature review is to illuminate the pathways toward the
assimilation of an RBC framework befitting Vietnam’s unique market. Through the lens of
QIS 2 and with insights from ICS version 2 and other countries’ experiences, it endeavors
to present a confluence of recommendation and reflexivity, ultimately orienting toward the
formulation of a robust, adaptable, and forward-looking RBC system for Vietnam.

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III Research Purpose

General Purpose

The primary objective of this study is to draw on the insights from QIS 2, using it as a
foundational learning tool to ascertain and recommend the most fitting RBCframework for
effective application within the Vietnamese market, alongside deriving key conclusions from
the findings.

Specific Purpose

To achieve the main purpose, several objects could be listed below:

• The thesis commences by shedding light on the general framework of RBC requirements,
as seen through the lens of ICS version 2.0, while also offering a comparative view of
RBC frameworks in practice across a range of countries. Next, the document ventures
into the theoretical realms that support the determination of each risk charge and the
corresponding RBC requisites, detailing the intricacies of the calculation methods.

• Thereafter, the thesis proceeds to contextualize the aforementioned methodologies within

a typical Vietnamese life insurance entity, analyzing and presenting the outcome of this
application.

• Progressing further, the study explores the practical implementation of the RBC frame-
work within Vietnam, guided by insights gleaned from the QIS 2.

• To cap it off, the thesis culminates in a set of carefully considered recommendations

and practical suggestions regarding the deployment and refinement of the RBC method
within the unique Vietnamese insurance landscape.

IV Research Question

To attain the research objectives, it is essential to address the following queries:

1. What are the defined RBC requirements under ICS version 2.0?

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2. What is the status of the implementation of QIS 2 within the Vietnamese insurance
industry?

3. How RBC frameworks are applied internationally in other countries. Do the typical
traditional life insurance company meet an average regulatory solvency ratio of the
most of the markets using RBC frameworks?

4. What insights can be derived from the computational results, and how to apply RBC
framework in Vietnam?

V Research Object

This research uses the QIS 2 form from MoF and data of assets, liabilities cashflow in the
projection, reserve... from B Life insurance company. The assumption applying in QIS 2 is
based mainly on the business of B Life.

VI Research Methods

This research is done by using Microsoft Excel. The method of calculations, as well as the
steps of calculating each risk charge, will be explained detailed in the Chapter 3: Methodology
to calculate Capital Requirements under V-RBC framework using risk factors from QIS 2.

VII Research Structure

The research is organized into five chapters as follows:

1. Chapter 1: Introduction offers a brief overview of the main structure and content of the
research.

2. Chapter 2: Theoretical Background covers related knowledge about the detailed stan-
dards of the RBC framework and the global standard: RBC under ICS ver 2.0.

3. Chapter 3: Methodology to calculate Capital Requirements under V-RBC framework

using risk factors from QIS 2.

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4. Chapter 4: Result provides the result of the calculation for Capital Requirement, and
Capital Adequate Ratio (CAR) and making comparison with the average solvency ratio
of other countries.

5. Chapter 5: Conclusion, Limitation, and Recommendation provides final comments on

the calculation results, discusses the research limitations, and offers recommendations
for further study.

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Chapter 2: Theoretical Background

I What is RBC?

RBC is a regulatory system utilized by insurance regulators to determine the minimum

amount of capital that an insurance company should hold to mitigate the risk of insolvency.
It is a way of measuring the minimum amount of capital appropriate for an insurance com-
pany to ensure that it has sufficient financial resources to handle potential losses, fulfill their
commitments to policyholders, and support its business operations, considering the unique
risks inherent in the company’s profile.

Key elements of RBC include incorporating risk factors into the calculation, determining the
capital needed for each risk, and establishing available capital and intervention thresholds. The
specifics of the RBC model, such as regulations on risk factors, capital availability, calculation
methods, and intervention thresholds, will differ depending on the characteristics of each
market.

II RBC under Insurance Standard Capital ver 2.0

1 History/Background

In October 2013, the IAIS announced its plan to develop the ICS. This marked the beginning
of a significant initiative aimed at enhancing global insurance supervision.

Between 2014 and 2019, the IAIS conducted six quantitative field-testing exercises with
volunteer insurance groups. These exercises were crucial for refining the ICS and ensuring its
robustness and applicability across different insurance entities.

In November 2017, the Kuala Lumpur Agreement outlined the implementation of ICS
version 2.0 in two phases. The first phase involved a five-year monitoring period, which would
be followed by the implementation of the ICS as a PCR. The PCR serves as a solvency
control level that will trigger supervisory intervention if breached, ensuring the stability and
reliability of insurance companies.

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By November 2019, the IAIS Executive Committee had endorsed ICS version 2.0 for the
monitoring period. This endorsement was a critical step towards the full implementation of
the ICS.

In 2020, the monitoring period for ICS version 2.0 began. During this period, the IAIS
committed to publishing the register of IAIGs that are publicly disclosed by group-wide
supervisors. This transparency is intended to enhance the oversight and regulation of these
groups.

Looking ahead to 2024, the IAIS plans to adopt the ICS as a PCR. At this stage, the
IAIS will also assess whether the Aggregation Method being developed by regulators in the
United States and other interested jurisdictions provides comparable outcomes. The goal is
to ensure that the ICS and the Aggregation Method produce substantially the same results,
maintaining consistency and reliability in global insurance supervision.

2 Reference ICS: Market-Adjusted Valuation (MAV)

2.1 Valuation Principles

Overview of the MAV

The MAV determines how IAIGs should assess their assets and liabilities as part of the
ICS calculation. The MAV is based on audited, consolidated, general-purpose balance sheets
prepared according to GAAP or SAP. The MAV adjusts these valuations to minimize the
effects of artificial market fluctuations on the solvency position of IAIGs. By implementing
this, the ICS achieves its goal of providing consistent risk-based measurements of the capital
adequacy of IAIGs.

Insurance liabilities

Typically, insurance liabilities or technical provisions represent the most significant compo-
nents of an insurer’s balance sheet. Therefore, the computation method significantly impacts
the financial standing of an IAIG. The calculation of an MAV insurance liability is illustrated
in Figure 1.

In cases where specific financial instruments have the ability to reliably replicate future cash
flows, the market value of those instruments can be used to calculate the insurance liabilities.

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Margin
MAV
over current
Current
estimate
+ estimate
= insurance
liability value
(MOCE)

• Calculated as probability-
• Calculated as percentile of
weighted present value of
probability distribution of
future cash flows
losses in capital resources
• Discounted using IAIS-
• Life contracts: 85th per-
prescribed yield curves for
centile
35 currencies
• Non-life contracts: 65th
percentile

• Covers uncertainty inher-

ent in future cash flows of
insurance contracts

Figure 1: Market-Adjusted Valuation approach

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Discount
rate %

Duration

Segment 1 Segment 2 Segment 3

• Liquid segment • Extrapolation between • Long-term forward
• Based on observed segments 1 and 3 rate
market prices of govern- • Starts from the Last • Starts at the later of
ment bonds or swaps Observed Term (LOT) 30 years after the LOT
for each currency, or 60 years
where market prices are • A spread adjustment
deemed deep and liquid of 20–35 basis points
is added depending on
currency

Figure 2: ICS yield curve

Discounting has a crucial role in determining the ICS results. Even a slight adjustment in
discounting can lead to substantial fluctuations in an IAIG’s ICS outcomes. Therefore, there
has been extensive deliberation over the technical structure of the IAIS yield curve.

The risk-free yield curve, which consists of the following three segments, is the first step in
creating an ICS yield curve for each currency:

To mitigate excessive volatility in an IAIG’s ICS results caused by extreme credit spread
movements, a "three-bucket approach" is used to adjust the risk-free yield curve. This requires
categorizing insurance liabilities into three distinct categories based on their characteristics
and the assets supporting them, and applying an adjustment to discount rates as determined

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for each category.

2.2 Qualifying Capital Resources

All financial activities assess qualifying capital resources on a consolidated basis, which
include qualifying financial instruments and other capital elements that are not financial
instruments.

Capital resources that meet the necessary criteria may be subject to various adjustments,
exclusions, and deductions. The ICS capital requirement calculation must exclude items de-
ducted from capital resources.

Financial instruments and capital elements are classified into two tiers, depending on their
capacity to absorb losses, level of subordination, permanence, and lack of encumbrances or
mandatory servicing costs. There are restrictions placed on capital resources of lower quality.

• Tier 1 capital resources consist of financial instruments and capital elements that absorb
losses in both ongoing operations and winding-up scenarios.

• Tier 2 capital resources consist of financial instruments and capital elements that only
absorb losses in winding-up situations.When it comes to determining qualifying capital
resources, the ICS makes a distinction between mutual and non-mutual IAIGs.

2.3 Capital Requirement – The Standard Method

The types of risk included in the standard method are: Insurance risk, Market risk, Credit
risk and Operational risk. This figure 5 lists the risk categories, along with the individual
risks in each risk category.

The ICS capital requirement is based on the potential adverse changes in qualifying capital
resources resulting from unexpected changes, events, or other manifestations of the specified
risks. Risk charges are prescribed for insurance, market, credit, and operational risks, mainly
using either a stress- based or a factor-based approach. The utilization of a vendor model
is allowed for assessing the risk of natural catastrophes. Actions to mitigate and manage
risks, which decrease the total amount of capital required, are acknowledged. The capital

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requirement is determined by aggregating the risk charges throughout the main risk categories,
including life risk, catastrophe risk, and market risk, as well as within each individual risk
category. The risk charges are adjusted to achieve a target criterion of 99.5% VaR over a
one-year time frame.

The ICS capital requirement is calculated by the following formula:

s X
2 2 2 2 2
R = RM arket + RCredit + RLif e + RN onLif e + ROperation + ρij Ri Rj
i̸=j

where ρij represents the correlation between risk i and risk j, as found in the Table 2

Life Non-Life Catastrophe Market Credit Operational

Life 100% 0% 25% 25% 25% 0%
Non-Life 0% 100% 25% 25% 25% 0%
Catastrophe 25% 25% 100% 25% 25% 0%
Market 25% 25% 25% 100% 25% 0%
Credit 25% 25% 25% 25% 100% 0%
Operational 0% 0% 0% 0% 0% 100%

Table 2: Aggregation matrix between risks under ICS

2.4 Stress-based approach

The stress approach employs a dynamic methodology by examining the balance sheet at
two distinct points: the IAIG’s current balance sheet before stress and the balance sheet
after stress. The risk charge for each particular risk is computed as the reduction in capital
resources from the pre-stress balance sheet (CR0) to the post-stress balance sheet (CR1).
Stresses can be applied individually, with separate stressed balance sheets calculated (CR0 –
CR1) to ascertain the risk charge for each specific stress. To simplify matters, the alteration
in net asset value is utilized to estimate the changes in qualifying capital resources.

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Capital Capital
Capital requirement
resources resources

Stressed
Assets Insurance Assets
insurance
liabilities
liabilities

Other Other
liabilities liabilities

Pre-stress balance sheet at time t Post-stress balance sheet at time t + 1

Figure 3: Stress-based approach

2.5 Factor-based approach

Using a factor-based methodology, the determination of the risk charge for a specific risk or
multiple risks involves applying factors to specific exposure metrics. This approach is generally
simpler to execute when compared to a stress-based methodology. However, it necessitates
the inclusion of additional metrics to accommodate IAIG-specific mechanisms, such as risk
mitigation strategies and profit-sharing arrangements, which serve to absorb losses. An illus-
tration of a factor-based approach can be seen in the computation for Premium and Claims
Reserve risk.

Stress factor ×
Exposure
amount
= Risk charge

Figure 4: Factor-based approach

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2.6 The ICS coverage ratio

The ICS coverage ratio is determined as follow:

Qualifying capital resources

ICS ratio =
ICS capital requirement

2.7 The Risks under ICS

Figure 5: Types of Risk in RBC under ICS

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1. Market Risk

Market Risk is a type of financial risk that results from the potential changes in the
market conditions which can affect the financial performance of an insurance company.
This might include fluctuations in interest rates, stock market performance, real estate
market conditions, or currency exchange rates, among others.

The standard method for ICS market risk charges includes 6 types of risks: interest
rate risk (IRR), non-default spread risk (NDSR), equity risk, real estate risk, currency
risk, and asset concentration risk. The charges are calculated using a stress approach,
except for asset concentration risk, wherein predefined stress factors are applied to
balance sheet items, and the resulting decrease in capital resources is recorded as the
risk charge. For asset concentration risk, a factor-based approach is used, which involves
multiplying prescribed factors by specific exposure measures.

The market risk charges are calculated as follows:

• Step 1: Gross Risk Calculation

The initial risk charge for each risk type is determined by assessing the direct
effects of the prescribed stress scenarios on asset and liability values, along with
the indirect impacts stemming from potential shifts in policyholder behavior. This
preliminary computation is termed the "Gross risk," signifying the risk prior to
factoring in management interventions and diversification.

• Step 2: Net Risk Calculation

The subsequent stage entails modifying the risk charge to account for management
actions aligned with specified criteria, such as actions demonstrated by prevailing
business practices and strategies. This revised risk charge is depicted as the "Net
risk," symbolizing the risk subsequent to factoring in management actions yet prior
to diversification. The disparity between the gross risk and net risk illustrates the
impact of management actions.

• Step 3: Aggregated Market Risk Charge

Ultimately, the risk charges are consolidated utilizing a predetermined correlation

matrix to compute the overall market risk charges. This ultimate computation,

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labeled as "Market type risks," considers both management actions and diver-
sification. The variance between the net risk and the total market risk charge
underscores the impact of diversification.

The structured approach of computing market risk charges ensures a comprehensive

assessment of potential market impacts on an insurance company’s financial health,
thereby enhancing risk management and strategic planning.

Formula:
s X
2 2 2 2 2 2
RM arket = RIRR + RNDSR Up + RNDSR Down + REquity + RReal Estate + RCurrency + ρij Ri Rj
i̸=j

where ρij represents the correlation between sub-risk i and j, as found in Table 3

Interest NDSR NDSR Real Asset

Equity Currency
Rate Up Down Estate Concentration
Interest Rate 100% 25% 25% 25% 25% 25% 0%
NDSR Up 25% 100% 100% 75% 50% 25% 0%
NDSR Down 25% 100% 100% 0% 0% 25% 0%
Equity 25% 75% 0% 100% 50% 25% 0%
Real Estate 25% 50% 0% 50% 100% 25% 0%
Currency 25% 25% 25% 25% 25% 100% 0%
Asset
0% 0% 0% 0% 0% 0% 100%
Concentration

Table 3: Market risks correlation matrix under ICS

Components of market risk charges

The table 4 describes constituents of Market Risk Charges:

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Risk component Description

IRR IRR is assessed individually for each currency
through designated formulas that capture the ef-
fects of five stress scenarios on assets and liabilities
sensitive to interest rates (excluding those catego-
rized as capital resources). These scenarios include
mean-reversion, level up, level down, twist up-to-
down, and twist down-to-up movements in interest
rates.
Equity risk Equity risk assessment involves evaluating changes
in the exposure of net asset value (NAV), encom-
passing both direct and indirect exposures, by ap-
plying stress factors to the level and volatility of
equities’ fair value.
Notably, stress factors vary based on market char-
acteristics, with listed equities in developed mar-
kets facing a 35% stress factor, and those in emerg-
ing markets encountering 48%. Hybrid debt and
preference shares are subject to stress factors rang-
ing from 4% to 35%, while other assets carry a 49%
stress factor. Additionally, implied volatilities are
factored in, with stress factors ranging up to 42
percentage points based on instrument maturity.
The charges associated with level risk are aggre-
gated using a correlation matrix and then merged
with volatility risk charges, without any credit risk
charge being applied.

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Real estate risk Assessing real estate risk involves determining the
change in NAV by implementing a 25% stress fac-
tor to the level of real estate prices for assets and
liabilities with corresponding exposures.
Currency risk Currency risk is calculated as the higher of accu-
mulated losses in two stress scenarios that repli-
cate an IAIG’s net open position, comprising both
direct and indirect exposures to that currency,
against its reporting currency. Stress factors of up
to 75% are applied to the net open position for
each currency, and losses are aggregated using a
50% correlation factor for each scenario.
NDSR NDSR is determined as the greater of upward and
downward stress on spreads of spread-sensitive as-
sets and liabilities, with the exclusion of those cat-
egorized as capital resources. Stress factors vary
from +/– 50 basis points to +/–100 basis points,
while downward stresses are constrained by a 50%
relative limit.
Asset concentration risk In the realm of real estate, asset concentration risk
is assessed as 25% of the net property exposure,
encompassing both direct and indirect exposures,
exceeding 3% of an IAIG’s total net investment
assets. For other asset classes, this risk is assessed
using a predetermined formula that factors in ex-
posures to related counterparties and the associ-
ated credit and equity risk charges for those coun-
terparties.

Table 4: Components of the Market risk charges under ICS

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2. Credit Risk

Credit risk is the risk of adverse changes in the value of capital resources due to unex-
pected changes in actual defaults, as well as in the deterioration of an obligor’s credit-
worthiness short of default, including migration risk and spread risk due to defaults.

General methodology and scope

The standard method for ICS credit risk charge aims to account for unforeseen changes
in the actual defaults of an insurer’s counterparties and any deterioration in the credit-
worthiness of its obligors. This risk charge is determined using a factor-based approach,
structured as follows:

The primary exposure classes, each associated with distinct sets of stress factors, include:

• Corporates

• Reinsurance (same stress factors as corporates)

• Securitisation

• Resecuritisation

Stress factors are typically determined based on the rating category and the time to
maturity of the exposure classes. The ICS outlines eight categories for rated, unrated,
and defaulted exposures. Time to maturity, also referred to as effective maturity, is
calculated by weighing the timing of cash flows, with the weights representing the cash
flows.

Other exposure classes

The table 5 sets out the credit risk charge for other exposure classes:

Exposure class Treatment

National government, multilateral No credit risk charge
banks, supranational organisations
Assets backing unit-linked business No credit risk charge
or separate accounts
Policy loans No credit risk charge

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Outstanding premiums included in No credit risk charge

technical provisions
Off-balance sheet exposures In the case of over-the-counter derivatives, the
credit exposure equivalent is determined using
the current exposure method as outlined in the
Basel Capital Framework. For other off-balance
sheet exposures, prescribed credit conversion
factors are utilized to ascertain the credit ex-
posure equivalents.
Mortgage loans Approaches differ depending on the type of
loan, such as commercial, agricultural, or res-
idential mortgages, and whether repayment is
contingent on property income. Stress factors
typically fluctuate based on loan-to-value ra-
tios.
Securities financing transactions The rating category is determined as the lower
of the counterparty’s rating and that of the se-
curities lent.
Short-term obligations of regulated 0.4% stress factor
banks
Receivables from agents and brokers 6.3% stress factor
All other assets 8% stress factor

Table 5: Credit risk charge for other exposure classes under ICS

3. Insurance Risk

Insurance risk embodies the potential for uncertainty in the occurrence and financial
impact of events that can lead to claims. It’s a concept that hinges on the balance
of surplus—the net assets that insurers maintain as a buffer against these potential
losses. Integral to insurance risk are the dual factors of unpredictable events and the
insurer’s ability to accurately predict and price these risks. Insurers must meticulously

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evaluate the likelihood and severity of potential claims to set premiums that are not only
competitive but also sufficient to cover anticipated losses and safeguard the company’s
financial stability.

Moreover, insurance risk reflects the challenge insurers face with potential overexposure
from inaccurate risk assessment or inadequate pricing, which could deplete surplus when
claims unexpectedly exceed reserves. Therefore, risk in insurance is not only about the
unforeseen but also about rigorous financial planning and strategic risk management to
ensure insurers can meet their obligations to policyholders while maintaining financial
solvency.

According to ICS ver 2.0, the insurance risk capital requirement is classified separately
into 3 categories: life risk, non-life risk applied for life and non-life insurers, respectively,
and catastrophe risk applied for both insurers.

3.1. Life Insurance Risk

To calculate the capital requirement to cover life insurance risk, a correlation matrix
of life risks is used. This matrix takes into account how the different risks can
offset each other, which is known as diversification. There are five distinct types
of life insurance risks: Mortality, Longevity, Morbidity, Lapse, and Expense. The
determination of these risk charges involves employing a stress-based approach that
evaluates the repercussions of adverse scenarios on an IAIG’s capital resources over
a one-year period. In practice, this entails reassessing an IAIG’s insurance assets
and liabilities using stressed valuation assumptions stipulated by the ICS. Post-
stress, the value of insurance liabilities increases, resulting in a depletion of capital
resources earmarked for life insurance risks.

This calculation pertains to each set of life insurance policies that exhibit similar
risk characteristics, commonly referred to as homogenous risk pools. These pools
are distinguished by their stability over time. When pinpointing homogenous risk
pools, IAIGs take into account factors such as underwriting policy, claims settle-
ment pattern, risk profile of policyholders, product features (especially guarantees),
and anticipated future management actions.

For each of the five sub-risks, the risk charge is computed both with and without

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considering the influence of management actions.

The correlation matrix used for aggregating the life risk charges is the following:

Mortality Longevity Morbidity Lapse Expense

Mortality 100% -25% 25% 0% 25%
Longevity -25% 100% 0% 25% 25%
Morbidity 25% 0% 100% 0% 50%
Lapse 0% 25% 0% 100% 50%
Expense 25% 25% 50% 50% 100%

Table 6: Life risks correlation matrix under ICS

Mathematically, we may have the formula:

s X
Lif e 2 2 2 2 2
RInsurance = RM ort + R Long + RMorb + RLapse + RExp + ρij Ri Rj
i̸=j

where ρij represents the correlation between sub-risk i and j, as found in Table 6

Components of life insurance risk charges

The following table offers a concise summary of the primary components comprising
the standard method life insurance risk charges:

Element Component and description of stress factors

Mortality risk • Stress factors are defined in relation to the relative rise
in mortality rates across geographical regions.
• This calculation is specifically applicable to policies
where an elevation in mortality rates results in a reduc-
tion of capital resources.
Longevity • Stress factors are defined based on the relative decrease
in mortality rates.
• The calculation specifically pertains to policies where
a decrease in mortality rates results in a reduction of
capital resources.

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Morbidity and disability risk • Stress factors are specified for four distinct types of
benefits for policies akin to a life contract:

- medical expenses

- lump sum payment upon occurrence of a health

event

- short-term/long-term recurring payments

• Within each category, policies are further divided

based on whether their original term is up to five years
(short-term) or longer (long-term).
• Stress factors are specified concerning the increase in
inception rates and, in addition, for recurring payment
benefits, a decrease in recovery rates.
Lapse risk • The risk charge for lapse risk comprises two compo-
nents:

- level and trend component

- mass lapse component

• The level and trend component is computed as the

more severe of an upward and downward stress to lapse
rates
Expense risk • The risk charge for expense risk comprises two com-
ponents:

- unit expense

- expense inflation

• For each of the six geographical regions, stress factors

are defined in relation to the relative increase in unit
expense assumptions and the absolute increase in annual
expense inflation.

Table 7: Components of life insurance risk charges under ICS

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3.2. Non-Life Insurance Risk

The standard method ICS non-life insurance risk charges cover premium and claims
reserve risks. The premium risk charge is intended to address unexpected losses
from insured events that have not occurred, whereas the claims reserve risk charge
covers incurred claims, including those that have yet to be reported. Premium risk
factors do not include the impact of catastrophe events since catastrophe risk is a
separate risk within the ICS. The risk charges are calculated using a factor-based
approach by multiplying prescribed risk factors with specified risk exposures. The
risk exposure measures are:

Risk Risk exposure measure

Premium risk The higher value between the net premium earned (after considering reinsur-
ance) or the net premium expected to be earned in the upcoming year.
Claims reserve risk Net (after considering reinsurance) current estimate

Table 8: Risk exposure measures of ICS Non-Life Insurance Risk

An IAIG must initially classify its business into the following categories:

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ICS segments

(largely adheres to the regulatory classification in various jurisdictions)

ICS categories

(groups the ICS segments into 5 categories)

“Liability-like” “Property-like” “Motor-like” “Other” “Credit”

Figure 6: Categorisation of non-life exposure is aggregated

Aggregation steps

To consider diversification effects within and between various non-life insurance

risks, as well as across geographical regions, the following steps are undertaken to
aggregate the risk charges:

• Step 1: The premium and claims reserve risk charges for each ICS segment (ex-
cluding mortgage and credit business) are aggregated by applying a 25% correlation
factor.

• Step 2: The ICS segments within each ICS category are combined, applying
correlation factors of 50% for "liability-like" and "property-like" categories, 75%
for "motor-like" categories, and 25% for "other" categories.

• Step 3: The ICS categories within each of the five regions (European Economic
Area (EEA) and Switzerland, United States and Canada, China, Japan, other
developed markets, and other emerging markets) are aggregated using a 50% cor-

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relation factor.

• Step 4: Aggregation across the regions is performed using a 25% correlation

factor. Mortgage and credit business are aggregated across all regions and then
combined with risk charges for real estate and credit risks, respectively.

3.3. Catastrophe Risk

Catastrophe risk encompasses risks affecting both life and non-life businesses. The
Catastrophe risk charge addresses the risks associated with infrequent yet severe
events occurring at any point within the next 12 months, considering all anticipated
in-force business at the time of the event.

Catastrophe risk is segmented at the risk/peril level, covering both naturally oc-
curring perils (natural catastrophes) and man-made perils/scenarios (other catas-
trophes) and their outcomes.

The following principles are observed in computing the Catastrophe risk charge:

– Life and health business, along with similar business types, are considered
solely for pandemic and terrorism scenarios; and

– The impact on financial markets and the entire economy (Market and Credit
risks) is excluded from the Catastrophe risk calculation.

The perils covered by Catastrophe risk are:

– Natural catastrophe:

∗ Tropical cyclone, hurricane, typhoon;

∗ Extra-tropical windstorm/ winter storm;

∗ Earthquake; and

∗ Other material natural perils, such as:

· Flood;

· Tornado, hail, convective storms; and

· Other risks.

– Other catastrophes (Man-Made Perils/ Scenarios):

∗ Terrorist attack;

∗ Pandemic; and

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∗ Credit and Surety.

For computing the Catastrophe risk charge, the other catastrophe scenarios are
assumed to be mutually independent and independent of the natural catastro-
phe perils. The total ICS catastrophe risk charge will be determined as follows:

q
2 2 2 2
ICSCat = ICSN atCat + ICST error + ICSP and + ICSCredit & Surety

4. Operational Risk

Operational risk is defined as the risk of adverse change in the value of capital resources
due to operational events including inadequate or failed internal processes, people and
systems, or from external events. Operational risk includes legal risk but excludes strate-
gic and reputational risk.

The Operational risk charge is determined by applying specified stress factors to desig-
nated risk exposures.

The calculation of the Operational risk charge is based on data items categorized into
geographical segments and the following line of business segments:

• Non-Life – Insurance products not related to life or similar to life health insurance,
often termed as property and casualty or general insurance;

• Life (risk) – Insurance products related to life or similar to life health insurance
where the insurer bears investment risk; and

• Life (non-risk) – Products where the policyholder bears the investment risk.

Formula:
Risk Non-risk
ROperation = RNon-Life + RLif e + RLif e

Where

• Premium’s Charge = GWP × Factor

• Liability’s Charge = Gross current estimate × Factor

• Growth Charge = Max(0, GW Pt - GW Pt-1 × (1 + Threshold)) × Factor

• Operational risk components’ charge = Max(Premium’s Charge, Liability’s Charge)

+ Growth Charge

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III What are the differences between Solvency II and RBC?

Solvency II and RBC under ICS ver 2.0 while sharing the common purpose of protecting and
reinforcing insurance policies, they involve very different regulations. Here are the differences
and similarities between these two systems:

System RBC under ICS ver 2.0 Solvency II

Country of ap- International European Union
plication
1. Alignment with Strong alignment, more Partial alignment
General global regula- closely aligned with global
information tory trends regulatory trends and
best practices, ensuring
that companies are pre-
pared for future regulatory
developments
Year of introduc- 2018 2016
tion
Main pillars Capital Adequacy, Risk 1. Quantitative regulations
Management for capital requirements
2. Qualitative supervisory
review
3. Public disclosure
Regulated com- Insurers and reinsurers (do- Insurers and reinsurers (do-
panies mestic & foreign) mestic & foreign)
Consideration Yes Rudimentarily addressed by
of management pillar II
risk
Public disclosure Yes Yes
requirements

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Model typology Static factor model Static factor + dynamic

cash-flow model
Rules- versus Rules-based Principles-based
2. Defini- Principles-based
tion of Total balance Yes Yes
capital sheet approach
required Time horizon 1 year 1 year
Risk mea- Value at risk/99.5% confi- Value at risk/99.5% confi-
sure/calibration dence level (Target) dence level
Consideration of Yes Yes
operational risk
Consideration of Yes Yes (as part of underwriting
catastrophe risk risk)
Treatment of Comprehensive treatment Detailed treatment
reinsurance of reinsurance, considering
its impact on capital ade-
quacy and risk management
in a more holistic manner.
Flexibility in More flexibility in capi- Less flexible
capital require- tal requirements, having di-
ments versified risks and allow-
ing companies to adapt to
changing market conditions
and risk profiles more effec-
tively.
Use of internal Yes Yes
models
3. Defini- Definition based Market values Market values
tion of on market or
available book values
capital

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Classification of Yes (2 tiers) Yes (3 tiers)

available capital
Consideration Yes Yes
of off-balance-
sheet items
4. Levels of inter- Not defined yet but usually 3
Intervention vention have 5 levels
Clarity of sanc- Strict, clear rules Not clear yet
tions

Table 10: Solvency II and RBC

In these criteria, RBC under ICS ver 2.0 may have advantages over Solvency II in terms of
Global Harmonization, Flexible Approach, and Diverse Application.

Many insurance companies, especially those operating on a global scale, are leaning towards
applying the RBC framework, such as ICS version 2.0, instead of Solvency II. This shift is
primarily aimed at aligning with global standards, which is key for multinational companies
looking for consistency and comparability across different regulatory environments. The RBC
framework is seen as more adaptable to a variety of markets and offers a risk-sensitive approach
that better reflects individual company profiles, providing a tailored and flexible standard that
supports a more integrated global insurance market.

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Chapter 3: Methodology to calculate Capital

Requirements under V-RBC framework using risk
factors from QIS 2

I Summary of V-RBC framework

The V-RBC framework comprises three core components, commonly known as the "Three
Pillars," crucial for evaluating and handling risks within the insurance domain:

• Pillar 1 - Quantitative Requirements: This aspect centers on establishing the minimum

capital requirements essential for insurance firms to adequately mitigate potential losses, and
valuation assessment.

• Pillar 2 - Qualitative Requirements: This pillar delineates qualitative standards, encom-

passing corporate governance, Enterprise Risk Management, and Own Risk and Solvency
Assessment.

• Pillar 3 - Disclosure Requirements: This pillar emphasizes transparency and disclosure,

mandating insurers to furnish regulators and stakeholders with precise and punctual informa-
tion regarding their financial state, risk exposures, and governance methodologies.

These Three Pillars collectively form the backbone of V-RBC framework, providing a com-
prehensive approach to assess and manage risks within the insurance sector.

My thesis delves into the first pillar of the RBC framework. To comprehend the probable
impact of V-RBC on the industry, two rounds of QIS exercises and extensive industry-wide
data collection have been undertaken. QIS 2 plays a pivotal role in scrutinizing general risk
factors pertinent to all insurers in Vietnam, employing intricate mathematical models and
statistical analyses to evaluate various risk elements.

The risk categories incorporated into the V-RBC system are aligned with ICS version 2.0
and encompass four primary risks: Market Risk, Credit Risk, Insurance Risk, and Operational
Risk. However, it should be noted that the Non-default Spread Risk is not yet included in the
calculations. Additionally, Currency Risk, Asset Concentration Risk, and Catastrophe Risk

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are being taken into account as part of the QIS 2.

RBC requirements denote the capital amounts exceeding reserves that an insurance com-
pany might require to cover losses from different risks in stress scenarios. QIS 2 typically
applies stress scenarios calibrated at 95%, 99%, and 99.5% Confidence Interval (CI) to deter-
mine RBC requirements for individual risks.

The calibration of RBC requirements reflects the potential volatility in risk drivers over a
one-year period, assessed using a VaR approach. The total RBC requirement comprises the
sum of capital requirements for each risk, adjusted by an explicit credit for risk diversification.
This explicit diversification credit supplements the implicit diversification inherent in many
individual charges calibrated with indices and industry-level data. It ensures that the sum of
capital requirements across each risk aligns with the defined stress scenarios.

To ascertain the total RBC requirements, QIS2 evaluates risk dependencies using correlation
assumptions as per ICS ver 2.0 between various pairs of risks. This explicit diversification
credit ensures that the sum of capital requirements across each risk matches the defined
stress scenarios. Correlation assumptions are applied at three levels:

• Level 1 diversification: Within business lines

• Level 2 diversification: Within risk categories

• Level 3 diversification: Between risk categories

The V-RBC capital requirement and V-RBC ratio also follows up ICS, and is calculated at
3 level CIs as stated above.

II The Risks under V-RBC

1 Market Risk

The V-RBC market risk charges encompass five risks: IRR, equity risk, real estate risk,
currency risk, and asset concentration risk. With the exception of IRR, these risk charges are
determined using a factor-based approach, which involves multiplying designated factors by
specific exposure measures.

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Formula
s X
2 2 2 2 2
RM arket = RIRR + REquity + RReal Estate + RCurrency + RConcentration + ρij Ri Rj
i̸=j

where ρij represents the correlation between sub-risk i and j, as found in Table 11

Interest Real Asset

Equity Currency
Rate Estate Concentration
Interest Rate 100% 25% 25% 25% 0%
Equity 25% 100% 50% 25% 0%
Real Estate 25% 50% 100% 25% 0%
Currency 25% 25% 25% 100% 0%
Asset
0% 0% 0% 0% 100%
Concentration

Table 11: Market risks correlation matrix under V-RBC

1.1 Interest Rate Risk

IRR is calculated based on the combination of two approaches. It is determined by applying

prescribed formulas that capture the effect of three stress scenarios on interest rate-sensitive
assets and liabilities (excluding those qualifying as capital resources). These scenarios include
mean-reversion, level up, and level down, each at three confidence interval levels.

Liability risks will be measured through a hybrid approach that balances the advantages of
factor and scenario approaches. Each insurer will provide the product specifications of each
sub-product type (long-term products only) listed in Table 12 below. A set of scenarios will
be constructed based on the data provided by the insurers to evaluate the impact on reserve
for each sub-product type.

The risk factors by sub-product type will then be determined based on the impacts on
reserve evaluated in the previous step. The reserve calculation method will be consistent with
the gross premium reserve method used in liability adequacy test (LAT) required by IFRS 4
(or VAS 19) using the best estimate actuarial assumptions applied in the calender year-end
valuation that will be provided by the insurers.

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NO. MAIN PRODUCT TYPE SUB-PRODUCT TYPE NOTES

1 Term Life Insurance (TL) TL TL with death bene-
fits only.
2 Whole Life Insurance (WL) WL WL with death bene-
fits only.
3 Endowment Insurance (END) END END with maturity
benefits only.
4 Annuity Insurance (ANN) ANN
5 Universal Life Insurance UL
6 Variable Universal Life Insurance VUL
7 Accident Accident
8 Health Insurance Cancer
9 Dread Disease
10 Medical (Fixed Benefits)
11 Medical (Reimbursements)
12 Others (specify features)

Table 12: Product Types

Asset-liability mismatch risk

The asset-liability mismatch (ALM) risk will be measured through duration, such as mod-
ified duration or Macaulay duration.

The asset-liability mismatch (ALM) risk will be measured through duration, such as Macaulay,
modified or effective durations (please refer to the formulas below).
Pn
P V (CFt ) × t
t=1
Macaulay Duration =
Market Price
where

• PV(CFt ): Present value of cashflow at period t, discounted using market yield

• t: Time period for each cashflow

• n: Total number of periods to maturity

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Macaulay Duration
Modified Duration =
1 + Market Yield
V−∆y − V+∆y
Effective Duration =
2V0 ∆y

where

• V−∆y : Market value/fair value if yield curve parallelly decreases by ∆y

• V+∆y : Market value/fair value if yield curve parallelly increases by ∆y

• V0 : Present value of cashflows

• ∆y: Magnitude of parallel change in the yield curve

On the asset side, Vietnamese insurers are not permitted to invest in assets with embedded
options, for example, callable bonds. Therefore, modified duration is a feasible tool to utilize
on the asset side. On the liability side, Vietnamese insurers are allowed to sell insurance
products with embedded options such as universal life products. Ideally, effective duration
should be used since the liability cashflows will fluctuate with interest rate changes. However,
modified duration will still be used on the liability side to simplify the calculation process.
The underlying assumption is that policyholder behaviors are independent of market interest
rate. Insurers can also submit effective durations and their modified duration, but effective
durations are not required.

Under economic value basis, the risk capital of ALM is the absolute value of the difference
between the dollar durations of asset and liability.

Risk CapitalALM = |DDAssets − DDLiabilities |

where

• DDAssets = V Assets x DAssets x i

• DDLiabilities = V Liabilities x DLiabilities x ∆i

• DD: Dollar duration

• D: Duration

• V: Market vale/fair value of assets or liabilities

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• ∆i: Scenario of interest rate shock

V Assets and DAssets should include all assets. Except for bonds, all other asset values will
not be affected by interest rate. That is, the durations of non-bond assets are assumed to
be zero. On the liability side, cashflows of all products must be considered. The actuarial
assumptions applied when calculating ALM risk capital should be consistent with the most
current best estimate assumptions used in LAT at the end of calculated calender year.

Hence, to calculate the interest rate mismatch risk requirement, companies must compute
the cash-flows of fixed interest income assets and insurance liabilities.

Figure 7: Forward Rates

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Figure 8: Spot Rates

1.2 Asset’s Price Risk

The other risks associated with V-RBC Market Risk in QIS 2 are assessed by considering
Asset’s Price Risk, which will be calculated using a factor approach. Here are the risk factors
categorized under three different confidence intervals:

Asset Type Risk Factor (95%) Risk Factor (99%) Factor (99.55%)
Deposits 0.0000 0.0000 0.0000
Government Bonds 0.0000 0.0000 0.0000
Local Government 0.0000 0.0000 0.0000
Bond
Government Guar- 0.0000 0.0000 0.0000
anteed Bonds
Corporate Bonds - 0.2887 0.2887 0.2887
Guaranteed
Corporate Bonds - 0.2887 0.2887 0.2887
Non Guaranteed

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Stocks 0.0000 0.0000 0.0000

Fund Certificates 0.0000 0.0000 0.0000
• Bond Type 0.0000 0.0000 0.0000
• Stock Type 0.0000 0.0000 0.0000
• Mixed 0.0000 0.0000 0.0000
Stakes in other en- 0.0000 0.0000 0.0000
terprises
Real Estate 0.1760 0.2400 0.2650
Advanced Pay- 0.0000 0.0000 0.0000
ments (Policy
Loan)
Investment Trust 0.0000 0.0000 0.0000
• Deposits 0.0000 0.0000 0.0000
• Government 0.0000 0.0000 0.0000
Bonds
• Local Govern- 0.0000 0.0000 0.0000
ment Bond
• Government 0.0000 0.0000 0.0000
Guaranteed Bonds
• Corporate Bonds 0.2887 0.2887 0.2887
- Guaranteed
• Corporate Bonds 0.2887 0.2887 0.2887
- Non Guaranteed
• Stocks 0.0000 0.0000 0.0000
• Fund Certificates 0.0000 0.0000 0.0000
- Bond Type 0.0000 0.0000 0.0000
- Stock Type 0.0000 0.0000 0.0000
- Mixed 0.0000 0.0000 0.0000
• Real Estate 0.1760 0.2400 0.2650
Others 0.2887 0.2887 0.2887

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Table 13: Asset’s Price Risk Factors

1.3 Currency Risk

Exposure to currencies other than the Vietnamese Dong (VND) incurs a currency risk
charge based on the net exposure.

The capital charge for currency risk is determined by multiplying the net exposure, which
is the difference between all foreign currency asset items and foreign currency liabilities, in
VND, by a factor known as the currency risk charge.

1.4 Asset Concentration Risk

Asset Concentration Risk is comprised of 3 types of Asset: stock, bond, and real estate.
Risk factors for each type of asset is calculated as 20% of risk factors as stated in asset’s
price risk above, except for risk factor of bond which is defined after calculating credit risk,
followed Taiwan RBC.

1.5 Real Estate Risk

The capital charge for Real Estate is determined by multiplying the risk factor, as indicated
in Table 13, by the value of this item.

1.6 Equity Risk

Here is the formula calculating Equity Risk Charge under V-RBC framework:

Equity Risk = Total Asset’s Price Risk – Real Estate Risk – Fixed Income Security Risk

2 Credit Risk

V-RBC framework uses the agency ratings listed in the table 14. Moody’s ratings are
utilized to determine the risk charge on exposures.

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Agency
Moody’s S&P Fitch JCR R&I DBRS AM
No
Best
1 Aaa AAA AAA AAA AAA AAA
2 Aa AA / A- AA / F1 AA / J-1 AA / a-1 AA / R- A+
1 1
3 A A / A-2 A / F2 A / J-2 A / a-2 A / R-2 A
4 Baa BBB / BBB / BBB / BBB / BBB / B+
A-3 F3 J-3 a-3 R-3
5 Ba BB BB BB BB BB B
6 B B/B B/B B / NJ B/b B / R-4 C+
7 Caa and CCC / CCC / B / NJ CCC / CCC / C and
lower C and C and c and R-5 and lower
lower lower lower lower

Table 14: Mapping to V-RBC

V-RBC Credit risk, followed Taiwan RBC, is comprised of 3 types with different exposures.
Additional, Credit Risk charge is equivalent at 3 level confidence intervals due to the similarity
of risk components across different CIs.

No. Type Exposure

1 Fixed Income Security Bond’s value.
Note: only non-government bond is filled in. For bond
without rating information, is categorized it as rating
"C".
2 Credit Insurance It is transferred from Non-Life Insurance Risk (stated in
Section 3.2 below)
3 Reinsurance Reinsurance Asset*

Table 15: Exposure of V-RBC Credit Risk

*Reinsurance Asset = Accounts receivable + Claim Recoverable + Assets of Ceded Liabil-

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ities

where

• Accounts receivable = Non-overdue + Overdue + Allowance for default (Non-overdue)

+ Allowance for default (Overdue)

• Claim Recoverable = Non-overdue + Overdue + Allowance for default (Non-overdue)

+ Allowance for default (Overdue)

• Assets of Ceded Liabilities = Ceded UPR + Ceded Claim Reserve

• Ceded UPR = Amount – Allowance for default

• Ceded Claim Reserve = Reported but not yet paid + Incurred but not yet reported –
Allowance for default

No. Moody’s Rating Risk Factor

1 Aaa -
2 Aa1 -
3 Aa2 -
4 Aa3 -
5 A1 0.0031
6 A2 0.0062
7 A3 0.0074
8 Baa1 0.0086
9 Baa2 0.0098
10 Baa3 0.0180
11 Ba1 0.0263
12 Ba2 0.0345
13 Ba3 0.0480
14 B1 0.0615
15 B2 0.0750
16 B3 0.1075

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17 Caa1 0.1400
18 Caa2 0.1725
19 Caa3 0.2112
20 Ca 0.2500
21 C 0.2887

Table 16: Risk Factors equivalent to Moody’s Rating

3 Insurance Risk

3.1 Life Insurance Risk

Product types listed in QIS 2 are specified in the table 19:

Section 1: Insurance with Coverage Period > 1 year

Applicable Category
No. Category of Actual Products
of Risk Factor
A As long as the product mainly provides lifetime death cover- WL
age.
B As long as the product mainly provides fixed-term death pro- TL
tection (including fixed and attained age protection periods).
C As long as the product mainly provides death protection (in- Endowment
cluding fixed and attained age insurance periods) and survival
benefits (regardless of regular payment of survival benefits or
lump-sum payment of survival benefits).
D As long as the product mainly provides critical illness protec- CI
tion (including fixed and attained age protection periods).
E As long as the product mainly provides regular cancer protec- Cancer
tion (including fixed and attained age protection periods).
F Other long-term products not included in No. A to No. E Max(WL, TL, Endow-
ment, CI, Cancer)

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Section 2: Insurance with Coverage Period <= 1 year

For product issued by life insurers with coverage period less than or equal to 1 year for any
kind of insurance event.

Section 3: UL and VUL

For UL and VUL, consider 3 sub Life Insurance risk: mortality risk, morbidity risk, and
expense risk in QIS 2 but only consider mortality risk in QIS 1.

Table 19: Risk Factors for each category of Products under V-RBC

Life Insurance Risk charge also is calculated using factor-based approach with the following
exposure:

Product type Exposure

Insurance with Coverage Period > 1 year Reserve
Insurance with Coverage Period 1 year Gross Premium of past 1 year
UL and VUL • Mortality risk: COI – Life Part of past 1
year
• Morbidity risk: COI - Non-Life Part of past
1 year
• Expense risk: Fees Income of past 1 year

The risk factors at different CIs are not the same. Here is at CI 99.5% for actual products:

Section 1: Insurance with Coverage Period > 1 year

Mortality Longevity Morbidity Lapse Expense

WL 2.7744% 0.0000% 7.4167% 29.8012%
TL 6.2167% 0.0000% 3.1381% 73.9396%
Endowment 0.2136% 0.0000% 1.0903% 1.9975%
CI 0.0000% 0.0306% 69.5180% 1.9743% 0.0000%
Cancer 0.0000% 0.0237% 56.7543% 0.1496% 0.0000%

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Others 6.2167% 0.0306% 69.5180% 7.4167% 73.9396%

Section 2: Insurance with Coverage Period <= 1 year

All the short-term product 12.5%

Section 3: UL and VUL

Mortality Morbidity Expense

Universal Life 6.25% 10.0% 1.5%
Unit Linked (Variable Universal Life) 6.25% 10.0% 1.5%

3.2 Non-Life Insurance Risk

Similar to ICS ver 2.0, the V-RBC non-life insurance risk charges encompass premium and
claims reserve risks. To acknowledge diversification effects within and between various non-life
insurance risks, these steps aggregating the risk charges are followed ICS. QIS 2 has already
categorized Vietnam business as follows:

Examples of risk factors at 99.5% CI:

Risk of Premium Claims Reserve

No. V-RBC Segment
category Risk Factor Risk Factor
[1] Accident Insurance Other 0.1500 0.1000
[2] Health Insurance Other 0.2500 0.2000
[3] Health care Insurance Other 0.2500 0.2000
[4] Property and Casualty Insurance Property-like 0.4325 0.4325
[5] Cargo Insurance Property-like 0.3500 0.3000
[6] Aviation Insurance Property-like 3.1828 3.1828
[7] Motor vehicle Insurance Motor-Like 0.3000 0.2500
[8] Fire Insurance Property-like 0.3000 0.8748
[9] Hull and PL Insurance Property-like 0.3500 0.3000
[10] Liability Insurance Liability-like 0.4500 0.4700

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[11] Credit and Financial Risk Insurance Credit 0.7509 0.7509

[12] Business loss Insurance Property-like 0.4734 0.4734
[13] Agricultural Insurance Property-like 0.8748 0.8748
[14] Guarantee Insurance Credit 0.7509 0.7509

Table 24: Risk Factors for Non-Life Insurance Risk under V-RBC at 99.5% Confidence Interval

• The correlation factors using in calculating risk charge are specified below:

– Correlation between premium and reserve risks: 25%

– Within category correlation factors

Correlation factor between segments

V-RBC Categories
within the V-RBC categories
Liability-like 50%
Motor-like 75%
Property-like 50%
Other 25%

Table 25: Within category correlation factors under V-RBC

– Correlation between categories: 50%

• The aggregation approach recognises the following sources of diversification:

– Between and within V-RBC segments

– Between V-RBC categories, which is a high-level grouping of the type of business

– Between Premium risk and Claims Reserve risk

3.3 Catastrophe Risk

While Catastrophe risk of ICS ver 2.0 affects both life and non-life business, Catastrophe
risk in V-RBC is considered for only non-life insurance company. Factor-based approach is

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used for this calculation with exposure is Total Insurance Amount classified into 63 provinces
of Vietnam, and risk factor is based on Loss Ratio at Var99.5 (1/1000).

Loss Ratio (Var99.5)

Zone Number Region
(1/1000)
Northern Region
1 Lào Cai 30.57691823
2 Yên Bái 30.57691823
3 Tuyên Quang 30.57691823
4 Hà Giang 30.57691823
5 Cao Bằng 30.57691823
6 Bắc Kạn 30.57691823
7 Lạng Sơn 30.57691823
8 Quảng Ninh 30.57691823
9 Phú Thọ 30.57691823
10 Thái Nguyên 30.57691823
11 Bắc Giang 30.57691823
12 Hà Nội 8.557918793
13 Hà Nam 30.57691823
14 Hải Dương 30.57691823
15 Hải Phòng 8.557918793
16 Hưng Yên 30.57691823
17 Nam Định 30.57691823
18 Ninh Bình 30.57691823
19 Thái Bình 30.57691823
20 Bắc Ninh 30.57691823
21 Điện Biên 30.57691823
22 Hòa Bình 30.57691823
23 Lai Châu 30.57691823
24 Sơn La 30.57691823
25 Vĩnh Phúc 30.57691823

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North Central Region

26 Thanh Hóa 11.13899519
27 Nghệ An 11.13899519
28 Hà Tĩnh 11.13899519
Central Region
29 Quảng Bình 11.493658
30 Quảng Trị 11.493658
31 Thừa Thiên-Huế 11.493658
32 Đà Nẵng (Thành phố Đà Nẵng) 11.493658
33 Quảng Nam 11.493658
34 Quảng Ngãi 11.493658
35 Bình Định 11.493658
36 Phú Yên 11.493658
37 Khánh Hòa 11.493658
38 Ninh Thuận 11.493658
39 Bình Thuận 11.493658
Central Highlands Region
40 Kon Tum 21.05515643
41 Gia Lai 21.05515643
42 Đắk Lắk 21.05515643
43 Đắk Nông 21.05515643
44 Lâm Đồng 21.05515643
Southeast Region
45 Bình Phước 22.52367223
46 Tây Ninh 22.52367223
47 Bình Dương 22.52367223
48 Đồng Nai 22.52367223
49 TP. Hồ Chí Minh 8.557918793
50 Bà Rịa-Vũng Tàu 22.52367223

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Mekong Delta Region

51 Long An 33.04540466
52 Tiền Giang 33.04540466
53 Bến Tre 33.04540466
54 Trà Vinh 33.04540466
55 Vĩnh Long 33.04540466
56 Đồng Tháp 33.04540466
57 An Giang 33.04540466
58 Kiên Giang 33.04540466
59 Cần Thơ 33.04540466
60 Hậu Giang 33.04540466
61 Sóc Trăng 33.04540466
62 Bạc Liêu 33.04540466
63 Cà Mau 33.04540466

Table 26: Risk Factors of Catastrophe Risk under V-RBC

4 Operational Risk

V-RBC methodology, assumptions in figuring out operational risk charge follows up ICS
ver 2.0, as stated in Part 4, Section 2.7, Chapter 02.

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Chapter 04: Results

I Status of the capital regimes for life insurance in Vietnam

Vietnam is presently using an EU Solvency I-type approach. However, the MoF, Vietnam’s
insurance regulator, is considering implementing an RBC regime. It is anticipated that starting
from January 1, 2028, insurers will be mandated to compute the solvency margin in compliance
with the RBCmodel, as outlined in Section 5, Article 94 of the Law on Insurance Business
2022. The V-RBC framework is currently undergoing research, followed by QIS2 in Pillar 1
and an ongoing draft process about Pillar 2 through 70/2022/TT-BTC.

1 Minimum Solvency Margin

According to Article 64 Decree 73/2016, the minimum solvency margin of life insurance
enterprises is calculated as follows:

• Unit-linked insurance contracts: 1.5% of technical reserves plus 0.3% of the sums insured
which carry risks.

• Universal Life insurance or Pension contracts: 4% of technical reserves plus 0.3% of the
sum insured which carry risks.

• Other life insurance and health insurance contracts:

– With a term of less than or equal to 5 years: 4% of technical reserves plus 0.1% of
the sums insured which carry risks.

– With a term of over 05 years: 4% of technical reserves plus 0.3% of the sums insured
which carry risks.

In conclusion, it is evident that Vietnam’s current solvency system primarily depends on

provisions, operating under the assumption that a larger technical reserve fund ensures greater
safety for firms. Unlike the RBCModel, it fails to account for all the risk factors affecting or-
ganizational operations, including Market Risk, Insurance Risk, Operational Risk, and Credit
Risk. Consequently, the RBCModel is superior to Vietnam’s existing solvency system.

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2 Valuation Methodologies and Assumptions

According to Decree 73/2016/TT-BTC, Circular 01/2019/TT-BTC, Decree 50/2017/TT-

BTC, Circular 67/2023/TT-BTC, the latest legislation pertaining to reserve methodologies
and assumptions in Vietnam are compiled in Table 27.

Items Regulation
Reserve Methodology and Basis Valuation interest rate (VIR) can change (reduc-
tion only) within the fiscal year without notifying
MOF but can’t be higher than the maximum VIR.
Determination of the discount Basic Yield: Government bond yield
curve
Maximum Valuation Interest • For NPV reserve calculation, the maximum val-
Rate (VIR) uation interest rate allowable has been revised to
be 80% of the simple average interest rate of long-
term government bonds (with terms of 10 years or
greater) issued in the last 24 months.
• The technical interest rate to be used for setting
aside the reserve shall not exceed

- the average investment rate of the immedi-

ately preceding 4 consecutive quarters of the
insurer, and

- the interest rate on the premium of each in-

surance product.

Valuation mortality • 100% of CSO-1980 (Commissioners Standard Or-

dinary mortality table 1980)
• Other technical basis in conformity with insur-
ance benefits that the insurer has committed to
provide for clients with insurance products en-
dorsed by the MoF.

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Minimum Valuation Methodol- Insurance policies with a term of

ogy (insurance policies with terms • > 1 year and ≤ 5 years
more than 1 year)
- Net Premium Valuation

- Other methods are acceptable but can’t be

less than those prescribed methods and ba-
sis.

• > 5 years

- Term life insurance: Net premium valuation

with adjustment of 12-month full prelimi-
nary term (FPT)

- Others: Zillmer with 3 % of sum insured

Unearned Cost of Insurance 100% of COI collected

(COI) reserve
Reserve for universal life insur- Account value or surrender value
ance
Reserve for minimum guaranteed Equal to the difference between the investment
interest rate earnings from insurance premium and commit-
ment interest rate of the insurer to clients as agreed
in the insurance policy.

Table 27: Valuation Methodologies and Assumptions in Vietnam

II Capital Requirement under V-RBC framework of B Life Insur-

ance Company

After applying the methodology in chapter 03 into data from B Life Insurance Company,
here is the ouput showing each risk charge, capital requirement, RBC ratio under V-RBC

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framework.

Confidence Level 95.0% 99.0% 99.5%

Mortality 16,178,855,192 16,713,660,026 16,713,660,026
Longevity 0 0 0
Morbidity 61,541,561,046 61,541,559,338 61,541,576,128
Lapse 2,636,480,237 2,636,480,237 2,636,480,237
Expense 6,866,716,840 13,913,696,282 21,164,843,035
Diversified Effect -15,828,248,148 -18,708,270,938 -20,994,264,815

Table 28: Life Insurance Risk

Confidence Level 95.0% 99.0% 99.5%

Interest-Rate 70,688,709,146 107,725,516,430 126,536,414,646
Equity 0 0 0
Real Estate 0 0 0
Currency 0 0 0
Asset Concentration 67,202,822,392 67,202,822,392 67,202,822,392
Diversified Effect 26,846,479,059 19,243,008,124 16,738,438,587

Table 29: Market Risk

Confidence Level 95.0% 99.0% 99.5%

Fixed Income Security 92,414,784,545 92,414,784,545 92,414,784,545
Credit Insurance 0 0 0
Reinsurance 9,296,807 9,296,807 9,296,807

Table 30: Credit Risk

Confidence Level 95.0% 99.0% 99.5%

Risk Based Catipal (RBC) 198,808,717,490 223,053,616,418 238,535,196,588
Life Insurance 71,395,365,166 76,097,124,945 81,062,294,612

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Non-Life Insurance 0 0 0
Catasrophe Risk 0 0 0
Market Risk 97,535,188,205 126,968,524,555 143,274,853,233
Credit Risk 92,424,081,352 92,424,081,352 92,424,081,352
Operational Risk 71,301,321,431 71,301,321,431 71,301,321,431
Diversified Effect -133,847,238,664 -143,737,435,865 -149,527,354,040

Table 31: Risk Based Capital - Diversified over main category

Confidence Level 95.0% 99.0% 99.5%

Own Fund 664,578,660,986 664,578,660,986 664,578,660,986
RBC Ratio 334.28% 297.95% 278.61%
Existing Minimum Solvency 406,739,469,030 406,739,469,030 406,739,469,030
RBC/Existing Minimum Solvency 48.88% 54.84% 58.65%
Existing solvency margin 656,775,667,484 656,775,667,484 656,775,667,484
RBC/Existing Solvency Margin 30.27% 33.96% 36.32%

Table 32: Comparison with Minimum Capital Requirement and Solvency Margin using current
capital regime of Vietnam: Solvency I EU

After analyzing the data from B Life Insurance Company, it was found that the company has
a strong capital position with a capital requirement that is well above regulatory minimums.

The RBC ratio in this company is in the range from 250% to 350%, indicating that the
company has sufficient capital to cover its risks.

From Figure 9, it is evident that the industry average CARs for several markets in Asia
fall within the range of 180% to 400%. However, Japan and Indonesia stand out with notably
higher average solvency ratios, exceeding 400%.

The CAR of Vietnam, as depicted in the bar chart alongside other countries, falls within
the range of 250% to 350%. In comparison to the CAR ranges of other countries, Vietnam’s
ratio places it in a similar bracket as countries like Japan, Singapore, and South Korea.
However, Vietnam’s CAR range is lower than that of Indonesia and Thailand, which have CAR

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Figure 9: Typical Insdustry Solvency Ratio Level in Asia

levels exceeding 350%. This positioning suggests that Vietnam’s insurance sector maintains a
solid but slightly lower capital adequacy level compared to some of its regional counterparts.
Overall, the data highlights the diverse range of capital strength across different countries,
with Vietnam situated within a moderate range of CAR values.

When comparing RBC requirement with current minimum solvency or solvency margin
applied according to Solvency I framework, apparently the V-RBC framework requires higher
capital, is more rigorous, and is more risk-diversified than current framework.

III Comments

1 Life insurance capital regimes in Thailand. Why this country changes from
RBC 1 to RBC 2?

The majority of insurance markets in Asia adhere to some form of RBC regime. However,
some, such as Hong Kong, India, Vietnam, and Brunei, still employ an EU Solvency I-type
approach at present. However, regulatory landscapes are evolving. For instance, insurance

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regulators in various markets are actively reviewing their existing capital regulations. In Hong
Kong, new rules will be effective in 2024, although some companies have already early-adopted
the new RBC regime. Japan will see new regulations in 2025, and Taiwan is set for changes
in 2026. Meanwhile, Malaysia is also considering enhancing its existing RBC requirements,
while discussions regarding updates to the regime in Thailand are ongoing.

On a different note, South Korea has taken significant steps by introducing K-ICS, an
economic value-based capital framework akin to ICS, effective from January 2023. Similarly,
in China, the CBIRC unveiled the new regulations of C-ROSS Phase II on December 30,
2021. These regulations have been enforced for solvency reporting since 2022, with a transition
period allowing for complete implementation by 2025.

Focusing on Thailand, a RBC framework was introduced for insurers in September 2011.
The Office of Insurance Commission (OIC), the Thai insurance regulator, has transitioned
from RBC 1 to a new framework, RBC 2, which is based on a 95th percentile confidence
level and includes several refinements. While the RBC 1 framework accounted for five risk
categories—insurance risk, market risk, credit risk, concentration risk, and surrender risk—the
RBC 2 framework introduces operational risk as a new category. The operational risk charge
is quantified as 1% of gross written premium over the past 12 months. Additionally, RBC 2
adds a subcategory of market risk called “specific risk,” which is associated with changes in
spreads and market prices of bonds. The risk charge for this subcategory varies depending on
the credit rating of the issuer and the remaining term to maturity of each bond.

Moreover, the correlation matrix for the diversification benefit for market risk has been
refined under RBC 2. This new framework also introduces correlations between asset risk and
insurance risk. The table below lists some other key changes to the existing components of the
RBC framework, reflecting the ongoing adjustments and refinements made to better capture
and manage risk in the insurance sector.

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Component RBC1 RBC2

Components of total - Available capital is catego- - Tier 1 capital is further
capital available rized into Tier 1 and Tier 2 subdivided into Common
capital based on asset qual- Equity Tier 1 (CET1) and
ity Additional Tier 1 (AT1).
- Tier 1 capital must > Tier - Tier 1 capital doesn’t
2 capital necessarily need to > Tier
2 capital. Instead, CET1
must constitute >= 65%
Total Capital Required
(TCR), and Tier 1 capital
must be <= 80% TCR.
Deductions from total - Deductions are imple- - Deductions are distributed
capital available mented at the Total Capital across capital tiers
Available level - Equity cross-holdings
between insurance compa-
nies (excluding investments
from reinsurers, brokers,
and fund management
companies) and equity
investments in other life
or non-life insurance com-
panies are deducted from
CET1
Premium Liability risk - Determined at the com- - Determined at the line of
charge pany level business level
IRR charge (referred to - Best estimate liability cash - 75th percentile liability
as “general market risk” flows cash flows
in RBC2)

Table 33: Comparison of RBC1 and RBC2 Frameworks in Thailand

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The RBC 2 framework in Thailand marks a significant improvement in capital standards,

with several refinements aimed at enhancing accuracy and aligning with evolving standards.
Notably, under this framework, the provision for adverse deviation (PAD) factors for insurance
risk charge parameters is reduced, while parameters for market risk charges are generally
increased. Additionally, refinements have been made to bond characteristics and risk grades
for determining credit risk charge. Long-term bonds of risk grade 1 now consist only of the
highest-rated bonds, leading to reclassification of certain bonds under RBC 2.

This transition represents a step towards global best practice standards, introducing an
operational risk charge and adjustments to other risk charges while maintaining a 95% con-
fidence level for calculations. It is anticipated to impose greater capital strain on life insurers
with larger asset/liability duration gaps and significant investments in equities and prop-
erty. Conversely, companies with substantial protection portfolios may benefit from reduced
insurance risk charges, potentially boosting their Capital Adequacy Ratio (CAR).

The gradual transition towards a 99.5% confidence level is viewed as a prudent move, given
challenges posed by low interest rates and fixed interest yields. As global capital and reporting
standards converge, local standards must keep pace with international developments. This
may necessitate revisions to operating models, product and distribution strategies, or the
acquisition of additional capital by existing players to ensure competitiveness and compliance.

2 The transition from Solvency I to RBC framework in Vietnam

2.1 Comparative Analysis of Solvency Regulations: Vietnam vs. International

Standards

Current Status of EU Solvency I Implementation in Vietnam

Monitoring the financial capacity of insurance entities through their compliance with capital
requirements and solvency standards from 2012 to 2018 reveals the following:

- In general, insurance entities have met the minimum capital and equity requirements.
However, certain latent risks persist, including:

(i) Potential difficulties in immediate insurance claim payments in case of widespread risks
or failure to recover reinsurance due to low quick payment ratios (the ratio of highly liquid

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assets to short-term liabilities);

(ii) High levels of bad debts necessitating provisions for difficult-to-collect receivables, such
as Groupama, with a recovery probability of receivables over total short-term receivables at
17%;

(iii) Low original insurance fee revenue to average equity capital ratios;

(iv) Deficits in shareholder-contributed capital, with equity capital ratios to charter capital
being less than 100% as with AAA;

(v) Non-life insurance entities predominantly deposit funds back to credit institutions,
despite their safety, resulting in relatively low profit efficiency.

- By the end of 2017, 50 out of 51 insurance entities ensured sufficient payment capacity,
with one entity, VASS (with a payment capacity below 100%), being inadequate. Some entities
had payment capacity ratios exceeding 1000 times (such as Cathay, Fubon, Phu Hung).

Differences in Capital Management and Supervision Regulations between Viet-

nam and International Standards

(i) Minimum capital and equity requirements still rely on the foundation of the Solvency I
margin management model;

(ii) Provisioning regulations: Vietnam currently applies reserve provisioning based on ad-
justed net insurance premiums, while other countries have adopted mathematical provisioning
methods based on gross insurance premiums. This method includes interest rates and is de-
termined based on best estimates;

(iii) Payment capacity regulations: Vietnam determines asset values in payment capacity
calculations based on book values, whereas countries applying RBC management models
determine asset values based on fair value/market value;

(iv) Regarding IT support systems, Vietnam’s system currently meets requirements to re-
flect asset values at cost and fixed assumptions during provisioning. However, to implement
a RBC management model, IT systems must handle more complex assumptions. This in-
cludes evaluating each contract according to specific risks, incorporating assumptions about
the correlation matrix between different risks, identifying various risk factors, and using com-
prehensive approaches to calculate each risk charge. These factors will enable the system to

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accurately record revenue and expenses, as well as present financial reports in accordance
with international financial reporting standards.

Advantages

(i) The government has advocated for adopting international accounting standards and
financial reporting according to IFRS;

(ii) The development of the financial market provides favorable conditions for implementing
new models.

Challenges

(i) Common challenges in the insurance market regarding databases, IT, lack of experienced
professionals, and handling surplus from switching provisioning methods;

(ii) Difficulties in financial areas such as developing risk assessment units, credit rating, risk
measurement, and building correlation matrices between risks due to insufficient assessment
bases.

2.2 What do insurers and regulators need to improve in order to comply with
RBC reporting requirements?

On November 16, 2022, the MoF issued Circular No. 70/2022/TT-BTC regarding risk
management, internal control, and internal audit of insurance enterprises, reinsurance enter-
prises, branches of foreign non-life insurance enterprises, and branches of foreign reinsurance
enterprises.

The Circular specifies risk management, initially establishing a legal framework for risk
management activities at insurance enterprises to identify, measure, evaluate, report, and
control effectively risks arising from insurance business operations. Specifically, the compo-
nents of the risk management system of insurance enterprises include: Structure, organization
of the risk management system; Policies, internal regulations of the risk management system;
Risk identification, measurement, monitoring, and control; Testing the enterprise’s resilience
in adverse scenarios; Risk management reporting; Management information system; Informa-
tion technology system; Risk management culture, professional ethics standards.

At the same time, the Circular supplements additional regulations to complete the legal

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framework for internal control, internal audit at insurance enterprises: (i) Specific provisions
on the internal control activities of insurance enterprises; Requirements for business process
procedures; Duties of the compliance control department; (ii) Regulations on internal audit
activities including: Duties, principles of internal audit activities; Regulations, procedures
for internal audit, internal audit planning; Authority and responsibilities of the internal au-
dit department; Responsibilities of business departments during the internal audit process;
Reporting on internal audit.

For insurers: To adapt reporting in line with RBC requirements, according to Circular
70/2022/TT-BTC, which is facilities for Pillar 2 of V-RBC framework, insurance companies
in Vietnam may need to enhance several aspects of their operations:

- Risk Assessment and Management: Strengthening risk assessment and management pro-
cesses is crucial. This involves identifying, assessing, and managing various risks faced by
the insurance company, including underwriting risks, investment risks, operational risks, and
others. Companies should have robust risk management frameworks in place to ensure that
all material risks are adequately addressed.

- Internal Capital Adequacy Assessment Process (ICAAP): Developing and maintaining an

effective ICAAP is essential for insurance companies. This process involves evaluating the
company’s overall risk profile and ensuring that it holds adequate capital to cover these risks.
Enhancements may include more sophisticated risk modeling techniques and scenario analyses
to assess capital adequacy under different conditions.

- Governance and Controls: Strengthening governance structures and internal controls is

vital for ensuring effective risk management and compliance with RBC requirements. This
includes establishing clear roles and responsibilities, implementing robust risk management
policies and procedures, and enhancing oversight from the board of directors.

- Supervisory Review Process: Enhancing the supervisory review process involves improv-
ing communication and cooperation with regulatory authorities. Insurance companies should
be prepared to provide regulators with timely and accurate information about their risk pro-
files, capital adequacy, and risk management practices. This may involve implementing more
rigorous reporting and disclosure mechanisms.

- Data Management and Reporting: Improving data management capabilities is essential

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for meeting RBC reporting requirements. Insurance companies should ensure that they have
reliable systems and processes in place to collect, store, and analyze data related to their risk
exposures, capital positions, and other relevant metrics. Enhancements may include investing
in data analytics tools and technologies to improve reporting accuracy and efficiency.

- Stress Testing and Scenario Analysis: Conducting regular stress tests and scenario anal-
yses is crucial for assessing the company’s resilience to adverse events. Insurance companies
should enhance their capabilities in this area by developing more comprehensive stress testing
frameworks and conducting scenario analyses covering a wide range of potential risks and
scenarios.

- Training and Capacity Building: Investing in training and capacity building initiatives is
essential for ensuring that employees have the necessary skills and knowledge to comply with
RBC requirements effectively. This may include providing training on risk management best
practices, regulatory compliance, and data analysis techniques.

By enhancing these areas, insurance companies in Vietnam can better adapt their reporting
processes to meet RBC requirements and improve their overall risk management practices.

For regulators: In preparation for the full implementation of the RBC framework by
January 1, 2028, regulatory agencies in Vietnam play a crucial role in providing guidelines
and support to insurance companies. These guidelines are essential for ensuring a smooth
transition to the new regulatory regime and maximizing the benefits of the RBC framework.

Firstly, regulatory agencies need to provide comprehensive guidelines outlining the require-
ments and procedures for insurance companies to comply with the RBC framework. This
includes specifying the risk factors that insurers should consider, the methodologies for cal-
culating capital requirements, and the reporting requirements for demonstrating compliance.
Clear and detailed guidelines help insurers understand their obligations and facilitate consis-
tent implementation across the industry.

Furthermore, regulators should offer training and capacity-building initiatives to help in-
surance companies develop the necessary skills and expertise to effectively apply the RBC
framework. This may involve workshops, seminars, or educational materials covering topics
such as risk assessment, capital adequacy modeling, and regulatory reporting. By investing in
the capabilities of insurers, regulators can enhance the overall resilience and stability of the

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insurance sector.

In addition to providing guidelines and training, regulatory agencies should establish mech-
anisms for ongoing supervision and evaluation of insurers’ compliance with the RBC frame-
work. This includes conducting regular assessments of insurers’ risk management practices,
reviewing their capital adequacy ratios, and addressing any non-compliance issues in a timely
manner. Effective supervision helps maintain the integrity of the regulatory framework and
instills confidence in the stability of the insurance market.

Moreover, regulators may need to collaborate with industry stakeholders, such as indus-
try associations and professional bodies, to ensure a coordinated approach to implementing
the RBC framework. This may involve consulting with industry experts to refine guidelines,
sharing best practices, and addressing any practical challenges that insurers may encounter
during the transition process.

Overall, the period leading up to the full implementation of the RBC framework represents
a critical phase for regulators to provide guidance and support to insurance companies. By
offering clear guidelines, facilitating capacity-building efforts, conducting effective supervision,
and fostering collaboration with industry stakeholders, regulators can help ensure a successful
transition to the new regulatory regime and promote the long-term stability and sustainability
of the insurance sector in Vietnam.

2.3 Proactive step towards RBC framework

The V-RBC framework is a substantial evolution from the Solvency I regime. It represents
a move towards a more sophisticated, risk-sensitive approach to assessing insurers’ financial
health. Here are some of the key advantages that V-RBC has over Solvency I:

1. Risk Sensitivity:

• V-RBC introduces a more nuanced approach to risk by categorizing and measuring

different types of risks such as insurance, market, credit, and operational risks. This
granular assessment better reflects the actual risk profile of insurers.

• Solvency I, on the other hand, generally uses a one-size-fits-all approach where

capital requirements are based on premium and claim volumes, which may not

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Graduation thesis Faculty of Mathematical Economics

accurately represent an insurer’s risk exposure.

2. Capital Adequacy:

• Under V-RBC, capital requirements are more accurately aligned with the actual
risk borne by an insurer, ensuring that capital reserves are more appropriate for
covering potential losses.

• Solvency I’s capital requirements might not be adequate in certain cases because
they do not differentiate between the risk levels of different assets or liabilities.

3. Risk Management and Governance:

• The V-RBC framework encourages insurers to develop sophisticated risk manage-

ment systems and governance structures, which are crucial for early identification
and mitigation of risks.

• Solvency I, due to its less complex nature, may not stimulate the same level of risk
management practices within insurance companies.

4. Global Alignment and Competitiveness:

• V-RBC is designed to be more in line with international standards like the ICS,
facilitating better integration of the Vietnam insurance market with global markets.

• Solvency I is viewed as less compatible with international standards, potentially

putting Vietnamese insurers at a competitive disadvantage.

5. Market Discipline and Transparency:

• The V-RBC regime is likely to introduce higher levels of disclosure, promoting

market discipline and fostering a more transparent insurance market.

• Under Solvency I, the lack of detailed disclosure requirements may lead to a less
informed marketplace.

6. Consumer Protection:

• By ensuring that insurers maintain sufficient capital to withstand significant losses,

V-RBC enhances the protection afforded to policyholders.

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Graduation thesis Faculty of Mathematical Economics

• Solvency I may not provide the same level of assurance regarding an insurer’s
ability to meet its obligations to policyholders, particularly in adverse scenarios.

7. Flexibility and Adaptation:

• The V-RBC is expected to be more adaptable to innovation and changes in the

market, given its risk-based structure.

• Solvency I might be more rigid and slower to adapt to changes in the financial
landscape and the evolution of new products and risks.

In conclusion, the V-RBC framework represents a marked improvement over the current
Solvency I regime due to its comprehensive risk assessment, risk management requirements,
and alignment with international practices. This transition is aimed not only at bolstering the
stability and resilience of Vietnam’s insurance sector but also at enhancing consumer trust
and market efficiency.

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Chapter 5: Conclusion, Limitation, and

Recommendation

I Conclusion

In conclusion, the thesis has successfully utilized the methodologies of ICS 2.0, Taiwan RBC,
and the predefined approach in QIS 2 to determine the capital requirements for insurers in
Vietnam. The research goals have been effectively addressed within the scope of the study. The
thesis has delved into three main keys, each contributing significantly to the understanding
of capital requirements in the Vietnamese insurance sector. Firstly, the exploration of the
significant impact of different types of risk on the capital requirement sheds light on the
complex interplay between risk factors and capital adequacy. Secondly, the in-depth discussion
of the theoretical background and algorithm used to calculate the capital requirement provides
a robust foundation for the methodology employed in the study. Lastly, the presentation of
the results derived from applying these methodologies to Vietnam offers valuable insights
into the practical implications of the research findings. By encompassing these key aspects,
the thesis has not only met its research objectives but has also contributed to the body of
knowledge surrounding capital adequacy in the Vietnamese insurance industry.

Finally, it can be concluded that the QIS 2 has a pivotal role in crafting an effective V-RBC
framework. By analyzing the data gathered from insurers in Vietnam, the team responsible
for this endeavor is equipped to identify risk factors specific to the region, as derived directly
from the QIS 2 findings, and consider non-default spread risk after. The remarkably practical
nature of the V-RBC and its increasing incorporation within the local industry have solidified
its status as a trustworthy methodology. For actuarial professionals, the V-RBC framework
serves as a robust tool in the precise management and assessment of risks, tailored to the
distinct demands of the Vietnamese insurance sector.

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II Limitation and recommendation of the research

Although the study was successful in applying V-RBC framework to calculate the capital
requirement and its effectiveness for insurance market of Vietnam, it also has some limitations
which can be improved in the future research. Currently, in QIS 2, V-RBC framework uses
factor-based approach to figure out each risk charge, except interest rate risk charge.

The continued reliance on factor-based methodologies within the RBC framework often
fails to comprehensively reflect the potential impact on a company’s profit and loss. This is
primarily because these traditional factors are typically more static and do not account for
the dynamic nature of financial markets or the specific risk profiles of individual companies.

To address this issue, there’s a growing consensus on the need to incorporate more stress-
based approaches. Such approaches involve simulating various financial scenarios, including
extreme market conditions, to assess how different stress factors might affect a company’s
assets and liabilities, and consequently, its profit and loss.

By integrating stress tests into the RBC framework, companies can gain a more nuanced
understanding of their vulnerabilities. This comprehensive view allows them to better predict
potential strains on capital resources and adjust their risk management strategies accord-
ingly. This shift towards a blended model that includes both factor-based and stress-based
approaches enables a more accurate representation of a company’s financial resilience and
prepares them to handle the unpredictability of markets effectively.

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