China brings its insurance industry oversight further in line with Solvency II – Part 2

Contributor: Petra Wildemann

Chinese version (中文版)

Regulatory reform has affected both the banking and insurance market. This has created, tougher CAR requirements and need for greater transparency and data control. This time, we will explore how the CIRC is bringing reporting further in line with Solvency II and starting to put the regulations in place.

New CIRC guidelines bring reporting further in line with Solvency II
In 2010, CIRC released “Guidelines on Implementation of Enterprise Risk Management for Life and Health Insurance Companies.” While these new draft guidelines build on the CIRC risk management circular of 2007, they also introduce a new direction for China’s insurance industry by:

• Mandating board responsibility for an insurer’s risk management framework
• Requiring formation of a risk management committee reporting to the board
• Requiring a dedicated risk management function within the company

As a result, Chinese insurance companies must embrace risk management as a core business function, and insurance executives must take the new requirements to heart or face serious consequences. According to a recent Global Times article titled “China’s insurance regulator vows to punish illegal insurance agents,” the CIRC has vowed to “crack down on activities such as illegal financing and pyramid selling by insurance agents.” [1]

The new CIRC guidelines, which echo themes from the European Solvency II regulations, will result in significant visibility into the insurers’ CAR and allow regulators and buyers to validate that an insurer has the capital necessary to cover any potential losses.

What’s more,  the CIRC permits those insurance companies which are subject to its regulation to diversify their investments into the private equity and real estate sectors pursuant to the “Interim Measures for the Administration of Utilisation of Insurance Funds,” effective August 31, 2010.

The CIRC has also issued the “Interim Measures on Investment of Insurance Funds in Equity” (PE Regulations) and “Interim Measures on Investment of Insurance Funds in Real Estate” (RE Regulations), effective September 5, 2010, which provide more detailed guidelines.[2]

These new CIRC measures are certainly one ramification of Solvency II. Others are the capital requirement, risk awareness and the supervision for insurers to stay in business and operate under a controlled management supervision.

As a result, Chinese insurance companies are being urged to begin to draft Risk Response Plans that include risk migration targets and actions as well as a Risk Warning System to indentify and contain potential risk.  Looking forward, this writer believes that their greatest concerns as they implement these new controls will be:

• Accelerating time to market for new products / features
• Increasing the ability to change rates and product attributes
• Retooling product to react to market and regulatory changes

Summary
The China insurance industry has experienced dramatic growth and volatility resulting in more stringent regulatory requirements. The impact of Solvency II extends well beyond the EU. As the Chinese insurers adapt to the new CIRC guidelines, they are beginning to behave much like their European counterparts. The Chinese insurers are also developing risk models that will help them track and predict their individual tolerance for risk and are either considering or implementing ERM systems that will help them capture and track the data necessary to monitor and report their risk assessments to CIRC.  In anticipation of further CIRC guidance within[c1] the next several months, Chinese insurers are adopting a more European approach to industry oversight. It is crucial for Chinese insurers to understand the impact of these changes, and prepare for the operational transformational that is required to keep pace.

[1] Global Times, “China’s insurance regulator vows to punish illegal insurance agents,” October 19, 2010.

[2] Mayer Brown JSM, September 22, 2010

[c1]Is this still applicable?

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