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China moves to a risk-based insurance solvency regime
By Sally Yim |
May 23, 2013, Thursday
|
Print Edition
Print Edition
VICE president and senior credit officer, Moody's Investors Service
Last week, the China Insurance Regulatory Commission (CIRC) published the Overall Framework for China Risk-Oriented Solvency System (C-ROSS). The new framework's concept, principle and content is quite similar to international standards in that it moves to a risk-focused regime from one focused on size, which is credit positive for Chinese insurers.
C-ROSS is based on a three-pillar system that requires insurance companies to maintain capital commensurate with their specific risks. The three pillars are quantitative capital requirements, qualitative regulatory requirements and market discipline mechanisms. The new regime will require companies to hold capital based on an assessment of risks such as investment, insurance and market risks. In addition, it will regulate capital requirements based on industry cycle and stage of industry development. In contrast, the existing Solvency I framework focuses only on insurance risks based on premium volumes.
While details of the new regulations will not be finalized for at least three to five years, the framework intends that firms will calculate capital requirements based on a standard formula, rather than allowing firms to use their own internal models. This approach considers the industry's infancy, lack of sophistication and lack of historical data in order to design appropriate models for regulatory compliance. We believe that such an approach is appropriate because it allows for easier regulatory supervision. In addition, internal company risk models may not capture the changing risks and dynamics of the industry in a timely fashion.
We expect small insurers to be the most affected when this regulatory regime comes into force in the next three to five years because such companies are less capitalized than larger insurers, and have less access to capital.
Risk management
The smaller companies' risk management systems are also weaker than established, large insurers because of the lack of resources and scale. Consequently, there may be some consolidation if smaller insurers cannot raise the requisite new higher levels of capital. Some features of China's new framework are relatively unique when compared with international standards to address risks and characteristics that are specific to the Chinese insurance industry, such as the country's emerging market status, the industry's early developmental stage and rapid growth.
Specifically, Pillar 2 of the new framework will establish a comprehensive risk-rating metric that would require insurance companies to qualitatively assess risks that are difficult to quantify, such as those related to operations, strategy, liquidity and reputation, in order to provide an overall picture of a company's ability to pay claims.
The new regime would also grade the operations of a company's headquarters and its individual branches.
We expect the assessment of the individual branches of insurance companies to promote a stronger culture of risk management at the branch level, which is also credit positive.
Last week, the China Insurance Regulatory Commission (CIRC) published the Overall Framework for China Risk-Oriented Solvency System (C-ROSS). The new framework's concept, principle and content is quite similar to international standards in that it moves to a risk-focused regime from one focused on size, which is credit positive for Chinese insurers.
C-ROSS is based on a three-pillar system that requires insurance companies to maintain capital commensurate with their specific risks. The three pillars are quantitative capital requirements, qualitative regulatory requirements and market discipline mechanisms. The new regime will require companies to hold capital based on an assessment of risks such as investment, insurance and market risks. In addition, it will regulate capital requirements based on industry cycle and stage of industry development. In contrast, the existing Solvency I framework focuses only on insurance risks based on premium volumes.
While details of the new regulations will not be finalized for at least three to five years, the framework intends that firms will calculate capital requirements based on a standard formula, rather than allowing firms to use their own internal models. This approach considers the industry's infancy, lack of sophistication and lack of historical data in order to design appropriate models for regulatory compliance. We believe that such an approach is appropriate because it allows for easier regulatory supervision. In addition, internal company risk models may not capture the changing risks and dynamics of the industry in a timely fashion.
We expect small insurers to be the most affected when this regulatory regime comes into force in the next three to five years because such companies are less capitalized than larger insurers, and have less access to capital.
Risk management
The smaller companies' risk management systems are also weaker than established, large insurers because of the lack of resources and scale. Consequently, there may be some consolidation if smaller insurers cannot raise the requisite new higher levels of capital. Some features of China's new framework are relatively unique when compared with international standards to address risks and characteristics that are specific to the Chinese insurance industry, such as the country's emerging market status, the industry's early developmental stage and rapid growth.
Specifically, Pillar 2 of the new framework will establish a comprehensive risk-rating metric that would require insurance companies to qualitatively assess risks that are difficult to quantify, such as those related to operations, strategy, liquidity and reputation, in order to provide an overall picture of a company's ability to pay claims.
The new regime would also grade the operations of a company's headquarters and its individual branches.
We expect the assessment of the individual branches of insurance companies to promote a stronger culture of risk management at the branch level, which is also credit positive.
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