23-D-0404
July 12, 2023

Progress toward Introduction of Economic Value-BasedSolvency Regulations
The following is Japan Credit Rating Agency, Ltd. (JCR)'s opinion on the "Status of Considerations forFinalization of Economic Value-Based Solvency Regulations, etc." released by the Financial Services Agency(FSA) on June 30.

(1) The introduction of economic value-based solvency regulations (new regulations) is just around thecorner, and its contents are gradually becoming clearer. Mark-to-market is applied to valuation ofinsurance liabilities under the new regulations, which will have a significant impact on life insurers
with long-term assets and liabilities in their balance sheets. However, life insurers are working tolengthen asset durations and review their liability structures to reduce the total amount of interest raterisk, and are curbing the sensitivity in economic value-based indicators, including ESR (Economicvalue-based Solvency Ratio). JCR considers the sufficiency of capital on an economic value basis
when evaluating the capital adequacy of insurance companies, and the above perspective has
already been incorporated into the ratings of life insurers in stages over the past two years or so in
the review of their ratings.
(2) The introduction of new regulations is a major event that has been discussed for many years. The
FSA has been holding discussions at the Expert Committee and analyzing the results of field tests
with the finalization of the Insurance Capital Standard (ICS) in mind. The new regulations, which focus
on the calculation of ESR, are expected to be finalized in the spring of 2024, and the calculation andreporting of regulatory capital under the new standards will begin in FY2025. Based on the "Tentative
Decision of Basic Content Regarding Economic Value-Based Solvency Regulation, etc." released in2022, the release this time provides specific details of some of the regulations, which in the tentativedecision the main issues and the direction of considerations were only indicated. For example, withregard to "Supervisory Measures Based on ESR," basic directions were defined on the following:level of Prescribed Capital Requirement (PCR), recovery period in the event of a PCR violation, levelof Minimum Capital Requirement (MCR), treatment of substantial net assets, and other issues. With
regard to the third pillar, "Disclosure," a policy was set forth regarding disclosure deadlines forstatutory disclosure items. Several points that had been unclear up to now have been clarified, but
the content is being finalized in a manner that does not deviate from the assumptions JCR has
incorporated into its ratings. JCR believes that the revision of the treatment of substantial net assetsthat are not linked to economic value-based assessments is one of the turning points toward the newregulations.
(3) In assessing the creditworthiness of insurance companies, JCR focuses on capital adequacy in thequantitative aspect. JCR considers the adequacy of capital not only in accordance with current
regulations but also on the basis of economic value, and the higher the rating range, the higher theweighting of the evaluation based on economic value. The ESR figures disclosed by each company
are based on internally managed risk management, and there are differences in assumptions andother factors. After the introduction of the new regulations, a certain degree of uniformity inassumptions and other factors can be achieved, which should improve comparability in terms ofcapital adequacy. The perspectives of reducing sensitivity of ESR through risk reduction andcomparability of capital adequacy are presented in the news releases "JCR's Rating Review of Major
Life Insurers" (22-D-1315) and "Trends in Economic Value-Based Solvency Regulations and Others"(23-D-0239).
(4) Although the new regulations are expected to be more complex and impose heavier administrative
burdens than the current regulations, JCR believes that each company will be able to fully comply
with the new regulations and make a smooth transition. In addition, restructuring of the qualifying
capital structure in conjunction with introduction of the new regulations will mean that the currently
somewhat divergent evaluations of regulatory capital and rating capital will converge under aneconomic value-based approach. JCR will continue to monitor the progress of the finalization of the
new regulations, including the finalization of the ICS, and will also continue to confirm the status ofsystems and information disclosure of individual companies, as well as their adjustments with theapproach of capital based on internal management.
Kiichi Sugiura, Tomohiro Miyao, Seito Achiha, and Kota Matsuzawa
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