By Min Liu | April 16, 2015

The domestic Chinese insurance market has been growing at an annualized rate of more than 20%, fueled by economic growth and booming car ownership, and is expected to continue expanding. With this rapid growth and an international trend toward more risk-oriented regulations and governance of insurers' solvency, the China Insurance Regulatory Commission (CIRC) has moved to further strengthen Chinese solvency regulation and harmonize it with regimes developing in Europe and Asia.

Following the publication of a framework for a second generation solvency regime in May 2013, CIRC published the final version of the China Risk Oriented Solvency System (C-ROSS) in February 2015.The system encompasses capital requirements, risk management, and governance and has three main goals:

  • The scientific and comprehensive measurement of the risks that insurance companies undertake
  • Ensuring reasonable capital requirements to improve the risk capacity of the Chinese insurance industry
  • Exploring new solvency regulation patterns to provide the global insurance market with experience of Chinese solvency regulation system building

In general, C-ROSS builds a new evaluation system with which to rate the risks carried by insurance companies, and thus to create reasonable regulations for the supervision of the industry under different risk conditions. The date for the full implementation of C-ROSS has not yet been announced, but the period of transition toward it has now been initiated. During this interim period Chinese insurance companies are required to prepare two sets of solvency reports based on both current and C-ROSS requirements.

The final version of C-ROSS publishes all of the rules for the regime and fleshes out details omitted from the framework. Like Solvency II, C-ROSS is built on three pillars-quantitative capital requirements, qualitative supervision requirements, and market discipline mechanisms. The first pillar establishes risk-based minimum capital requirements for insurance, market, and credit risk. C-ROSS now provides the method for calculating these minimum capital requirements for primary life and property insurance companies and reinsurance companies, as well as the standard measurement of actual capital.

C-ROSS creates a standard for regulators to evaluate an insurance company's solvency risk management from nine aspects covering operational, reputational, and liquidity risks. The regulator will assign each insurer a score (Integrated Risk Rating), which is a parameter used to estimate the minimum capital  required to control risk, together with the total minimum capital for measurable risks.

The regulating commission will classify insurance companies into four categories according to their solvency adequacy ratio (actual capital/minimum capital) and other risk management evaluation results, and build different regulatory policies and measures for each category of company. For modeling companies like AIR, the most relevant part of C-ROSS lies in the measurement of minimum capital requirements for insurance risk. C-ROSS defines insurance risk as a combination of the minimum capital for premium and reserve, and for catastrophe risk. CIRC's template for calculating the catastrophe minimum capital involves the capital for earthquake, typhoon, and typhoon-induced flood risk for property, and catastrophe risk for automobiles and crops.

The publication of C-ROSS is an important step forward for the Chinese insurance industry, and will improve the risk capacity and the capital efficiency of individual insurance companies. AIR will continue to develop ways to better help clients in this new regulation system.

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