The next step: China is developing a second generation of solvency rules.
"The industry needs this change, and generally speaking, it is ready for the change," said Zhang in a discussion about solvency development in China at a seminar hosted by A.M. Best recently in Beijing. In the aftermath of the global financial crisis in 2008, a new stage of regulatory evolution has been pushed for the global financial industry. China "is no exception," he added.
The China Banking Regulatory Commission already issued capital management methods for commercial banks in January 2013, in line with Basel III's implementation time line set by the Basel committee. However, Zhang said, "China's insurance solvency regulation lags behind the industry growth and demands reform."
China currently uses a Solvency I-type of framework based on the scale of premium, indemnity and reserves. The China Insurance Regulatory Commission requires insurers to maintain an adequate solvency level with a solvency ratio of not less than 100%. In general, the regulator assesses the need for intervention based on a three-tier system. The adequate 13 insurers with a solvency ratio greater than 150% draw the lightest regulatory attention. The CIRC can request an insolvency prevention plan with capital injections for the adequate I insurers that have a solvency ratio between 100% and 150%. Inadequate insurers have a solvency ratio below 100% and delinquent insurers face the harshest sanctions.
The first generation of the solvency regime "cannot reliably capture the real risk profile faced by insurers and the industry," Zhang said. While Europe "is embracing Solvency II and the United States is conducting the risk-based capital modernization work, the regulatory gap between China and developed markets is widening."
In May 2013, the CIRC officially issued a framework for the second generation solvency regulatory system for insurers, intending to enhance risk management of the local industry while connecting to the international solvency supervisory standard. It set out "three pillars" of solvency regulation, including quantitative capital requirements, qualitative requirements and market discipline mechanisms.
Insurers under the new framework are required to ensure their capital adequacy corresponds to their risk profile, while the risk has been properly analyzed and managed, along with sufficient information disclosure for decision making.
The development of the China risk-oriented solvency system is understood to include the components of solvency capital reform and a risk management framework, said consultancy KPMG in a report. This also signifies the move toward a more risk-based solvency capital calculation framework. The existence of financial conglomerates points to potential systemic risk exposures in insurance entities, and this is expected to come into regulatory focus as well.
The insurance industry's robust growth during the past decade "has also greatly increased the feasibility of a regulatory evolution," Zhang said. Insurers have to improve then-risk and capital management practices to cope with more complex risk profiles.
Foreign players have brought international practices to China, making it "not only necessary but also highly feasible for China's insurance industry to move to the next level of a solvency regime."
Premium income for the insurance industry in the Asia-Pacific region will double by 2020, according to a Munich Re report. China is expected to be the country with the highest increase of primary insurance premiums worldwide until 2020.
China now has nearly 150 insurance companies--more than 50 companies with a foreign background. "To better guide the industry growth and to let the market economy successfully play a bigger role, the regulator needs to adopt risk-oriented solvency regulations that would facilitate the reform of pricing and investment," Zhang said.
As the representative of emerging markets, China sees the importance of having its say in the global development of international regulatory rules and standards.
Like many other emerging markets, China faces certain constraints in regulatory reform, like the lack of sufficient accumulated historical data and resources for internal modeling. Therefore, Zhang said, "it's not in China's interest to see new international regulatory standards identical to Solvency II or modernized RBC."
In having its say in global regulations development, Zhang said China "needs to have its own applicable standards and experience to share with the global community," while the old solvency regime is unable to serve this purpose.
In October 2013, the International Association of Insurance Supervisors stated its commitment to develop a global insurance capital standard by 2016. Zhang said there is not much time left for China to do this. The CIRC's road map for the China risk-oriented solvency system framework "would just be in time to sync with the global timeline" if everything works out as scheduled.
* What Happened: In the aftermath of the global financial crisis in 2008, a new stage of regulatory evolution has been pushed for the global financial industry.
* The Situation: Europe and the United States are moving toward risk-based capital modernization work while the gap between China and the developed markets is widening.
* Watch For: China to move forward into a new generation of solvency rules because of global regulatory trends, the country's current market conditions and insurance growth over the past decade.
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|Date:||Apr 1, 2014|
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