CIRC implements new solvency rules for insurers

China's insurers will have until December 31 to tweak their asset portfolios to meet new ratios. Foreign-affliated insurers are expected to file reports separately.
Following the announcement in July this year of its plan to overhaul solvency rules in China and its overall assessment of the outstanding risk exposure of the industry in August, the China Insurance Regulatory Commission (CIRC) says it has introduced new rules for the requirements of minimum capitalisation for the industry and is ready to implement these with immediate effect. Insurance companies will have until December 31 to meet the new targets.

The new rules will tighten requirements for minimum capitalisation for non-life and life insurers. The formula for the calculation of minimum capitalisation and required reserve capital will differ for product portfolios with different duration and sizes of liabilities, such as investment-linked policies, universal products, term-life and whole-life policies.

Meanwhile, income derived from repo securities will no longer qualify as insurersÆ investment funds. There is no change to the allowed allocation ratio for assets held in financial debt, corporate debt, equities, securities funds, indirect investments in infrastructure projects and overseas investments. However, with the removal of repo securities from the capitalisation requirements, insurers will need to adjust their asset structures to meet the new ratio requirements.

Insurers have 15 days at the end of each quarter to file their latest reports on solvency and capitalisation to the CIRC. The new rules will most likely hit smaller insurers that lack economy of scale and those that have been over-expanding their market share in recent years.

Foreign-affiliated companies are expected to file the reports separately. These companies will also be required to consolidate the balance sheets for all the business interests they have in China. The CIRC has tellingly said, upon confirmation, these companies will not be able to change the contents of their reports at a later date.

The CIRCÆs actions are a long-awaited response to the alarming state of ChinaÆs insurance industry. Having been ushered into the market economy two decades ago, a lot of these insurers have been running unprofitably to this day, and close to a quarter of the 40-odd companies in business have been identified by the CIRC as being under-capitalised.

It might be a modest beginning, and one that is still a far cry from EuropeÆs latest Solvency II directive, which if successfully implemented in 2012, is expected to transform the insurance world as Basel II had done with the banking universe. However, it will mark a long road ahead in the cleaning up of ChinaÆs insurance industry and is one that the nationÆs State Council has made a priority.
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