global director of actuarial and Solvency II consulting, SunGard’s insurance business


China brings its insurance industry oversight further in line with Solvency II – Part1


Chinese version (中文版)

The European Union’s Solvency II regulations have been a huge catalyst for change within the insurance industry worldwide, not just in Europe. We will now turn our eye to China.  In this series, we’ll examine the role of China Insurance Regulatory Commission and look at how Solvency II is influencing insurance regulation in China.

All insurance companies operating in China are overseen by the China Insurance Regulatory Commission (CIRC). This governing body is authorized by the State Council to regulate Chinese insurance products and services and to assure regulatory compliance and stability in the insurance industry.  CIRC’s main tasks are to formulate policies for the Chinese insurance industry and to regulate pricing and insurance schemes. The Chinese regulators also are responsible for scrutinizing and approving insurance companies operating in China as well as their subsidiaries and holding companies. They monitor any changes or additional risks incurred by these companies and adjust regulations to address unlawful or unsatisfactory processes.

Last year, the CIRC had begun to discuss Solvency II, which European regulators have introduced to address capital adequacy among insurance companies. In fact, the CIRC introduced Draft Guidelines in 2010 that echo Solvency II and begin to channel Chinese insurers into a similar compliance framework. But before we jump into the new guidelines, let’s first look at the regulations that Chinese insurers are currently observing.

Capital requirements still follow banking rules
At this stage, the Chinese insurers follow banking regulations with banking authorities assuring that banks meet the capital adequacy ratio (CAR). Current Chinese banking policies address capital requirements, risk management data control and reporting for the industry.  Some key details:

Capital standards –Like many countries that follow the Basel II Accord, China requires its insurers to follow banking regulations, and the banking authorities advise that banks comply with a prudential regulation framework, which mainly consists of CAR, liquidity requirements and functional separation. As a result, Chinese insurers are required to maintain adequate capital to absorb their losses and, in the worst case, to wind down business without loss to customers, counterparties and without disrupting the orderly functioning of capital markets.

In September 2010, the China Business News reported that China Banking Regulatory Commission (CBRC) plans to increase capital adequacy ratio (CAR) requirements for banks under new rules likely to be released in 2011.  The CBRC would require large banks to increase their CAR to 11%, while smaller banks would have a minimum requirement of 10%. At present, China’s banks are required to have a CAR of no less than 8%. The new rules would permit regulators to increase a bank’s CAR by an additional 5 percentage points, and would set leverage ratios to require that banks’ core capital is at least 4% of total assets. No specific date[c1] has been given for the introduction of the new rules.

Chinese commercial banks have a comparatively high capital adequacy ratio worldwide, according to a survey made by the Basel Committee, which said China’s banking industry stands in a favorable position in the reform, CBRC official said.

As of June 2010, China’s banks’ capital adequacy ratio hit 11.1 percent on average, while the core capital adequacy ratio stood at 9 percent and core capital accounted for up to 80 percent of the total capital, according to the CBRC.[1]

Enterprise Risk Management (ERM) – Although Chinese insurers are not yet fully embracing ERM operations, they are considering parameters such as CAR. Both the Chinese and Hong Kong markets present many unique challenges in terms of potential growth and dynamic market requirements. One of the most challenging tasks is how to pull out of the current financial crisis.  Most likely, these markets will develop their own approach to risk management as they work to resolve these issues over the coming year.

Data control – Chinese insurers struggle with the same data control issues as their European counterparts, and those with European headquarters are already bringing their businesses in line with Solvency II standards to meet this challenge.

Reporting – While Chinese Company Law does not require the same level of self-regulating reporting that is required with Solvency II’s ORSA (Own Risk and Solvency Assessment), Chinese insurance companies are required to provide visibility into their financial operations. Failure to accurately report can result in several civil and criminal penalties for the Board members involved.

Our next post will explore the new CIRC guidelines bring reporting further in line with Solvency II. Part2

[1] China Business News, September 18, 2010, “China to unveil roadmap of capital regulation for commercial banks in due time”

[c1]Does this news have any impact on this statement?

6 Responses to “China brings its insurance industry oversight further in line with Solvency II – Part1”

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  6. […] 2010 the CIRC published a set of guidelines on risk management and governance for life and health insurance firms. These included introducing a risk management function and a […]

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