China set to squeeze insurers’solvency

2021-08-13 261
It is a testament to how well China has managed the Covid-19 pandemic that it is pushing ahead with tougher solvency rules for the country’s insurers, albeit slightly delayed.

An official with the China Banking and Insurance Regulatory Commission (CBIRC) announced in June that Phase II of the China Risk-Oriented Solvency System (C-Ross) would be introduced in July and take effect in January 2022. Industry sources say the third round of testing for the new rules happened at the end of June and the introduction is imminent.

Analysts predict that the changes introduced by the new rules will cut solvency ratios by at least 10 percentage points.

“Due to the more detailed and strict rules for the Phase II of C-Ross, some insurance institutions, especially small and medium insurance companies, may face the problem of a decline in solvency adequacy ratio or even failure to meet relevant regulatory standards during the transition period,” Zhan Hao, managing partner at Anjie Law Firm, told InsuranceAsia News.

Bigger companies should absorb the changes comfortably. Chinese insurers’ solvency held up well during the pandemic, falling just 1.4% across the whole industry, led by losses in the P&C sector.

However, the life sector continues to have a weaker overall solvency position of 240%, as of the fourth quarter of 2020, while the P&C sector had a solvency ratio of 278%.

The China Banking and Insurance Regulatory Commission (CBIRC) calculates insurers’ comprehensive solvency ratio as available capital (assets minus liabilities) divided by the minimum required capital.

Under the new rules, it is expected that the minimum amount of required capital will increase and insurers will also face higher capital charges on certain assets, which means that available capital will fall.

In particular, non-standardised assets containing multi-layer structures will incur a higher risk factor and credit guarantees will be assessed on the insured amount rather than the premium amount, leading to much higher capital charges. The biggest P&C insurers will also face higher risk factors across the board.

However, agriculture and insurtech lines will benefit from lower capital requirements as part of a government-sponsored effort to increase penetration among farmers and spur tech innovation.

In a separate move, insurers will also continue to enjoy lower capital requirements for business ceded to Hong Kong reinsurers after the CBIRC extended its preferential treatment regime, which was welcomed by the market.

“The extension of the preferential treatment will benefit Hong Kong-based reinsurers,” Franz-Josef Hahn, chief executive of Peak Re, told InsuranceAsia News.

He added that the extension will “enhance the development of the insurance market in both China and Hong Kong, and support Hong Kong’s role as a regional risk management centre”.

Enforcement of the new solvency rules is not expected to change. The CBIRC requires insurers to cut dividends and raise capital when the solvency ratio nears 100%, and to put a turnaround plan in place when it falls below 100%.

To help insurers restore their solvency, the regulator said in May that it wants to expand the channels available to insurers to raise fresh capital, including allowing them to issue perpetual bonds and other new instruments.





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