Building a New Regulatory System for the Solvency of Insurance Companies

Stricter Solvency Regulation

Compared with the 2003 Provisions, the 2008 Provisions set down stricter regulatory standards of solvency.

Different classification standards are used to divide insurance companies into different categories according to their solvency status in the 2003 Provisions and the 2008 Provisions. The 2003 Provisions only divide insurance companies with solvency adequacy ratio below 100% into there categories: companies with solvency adequacy ratio of above 70%, companies with solvency adequacy ratio between 30% and 70%, and companies with solvency adequacy ratio of less than 30%. In the 2008 Provisions, however, insurance companies are divided into three categories: inadequate companies (whose solvency adequacy ratio is less than 100%), adequate companies I (whose solvency adequacy ratio is between 100% and 150%), and adequate companies II (whose solvency adequacy ratio is more than 150%). To some extent, the change of the classification standards reflects a situation where the insurance regulatory authorities begin to intensify their regulation of solvency of more insurance companies: while the 2003 Provisions only focus on the regulation of inadequate companies. The 2008 Provisions also place some emphasis on the regulation of adequate companies.

In addition, the 2008 Provisions provide an increase in regulatory measures for the CIRC to take against inadequate companies. According to Article 16 of the 2003 Provisions, different regulatory measures are provided for the three types of inadequate companies. Generally speaking, the less sufficient the ratio of an insurance company, the more regulatory measures may be taken by the CIRC. According to Article 38 of the 2008 Provisions, the same regulatory measures may be taken for inadequate companies regardless of their specific solvency ratios. Moreover, in addition to all the measures prescribed in the 2003 Provisions, new regulatory measures – restriction on funds utilisation channels and adjustment of persons in charge and relevant management personnel – have been provided for in the 2008 Provisions. All these enable the CIRC to take appropriate regulatory measures against inadequate companies based on the causes resulting in the inadequate solvency instead of the specific solvency ratio.

Also of note is the fact that adequate companies are also subject to some regulatory measures in the 2008 Provisions. According to Articles 39 and 40, the CIRC may require adequate companies I to submit and implement plans to prevent inadequacy of solvency, and in case of existence of significant solvency risks in adequate companies I and adequate companies II, the CIRC may require them to make some changes or take necessary regulatory measures. These stipulations not only mean stricter regulation of solvency, but they also enable the CIRC to be more proactive in solvency regulation. The 2008 Provisions also restrict profit distribution of insurance companies with solvency adequacy ratio of less than 150%.⁶

More solvency reports are required to be submitted under the 2008 Provisions. In addition to these annual reports as required in the 2003 Provisions, quarterly reports and interim reports are also required according to Article 11 of the 2008 Provisions. Insurance companies are also required to report the occurrence of certain issues if such issues have significant unfavorable impact on the solvency of the insurance companies. Moreover, according to Article 19 of the 2008 Provisions, if an overseas insurance company invested and established by an insurance company submits solvency reports compiled in accordance with its local regulatory rules, such reports shall also be submitted to the CIRC.

Other changes

One obvious change in the 2008 Provisions is the introduction of some new technical terms. The terms, “minimum solvency quota” and “actual solvency quota”, used in the 2003 Provisions, are replaced by “minimum capital” and “actual capital” respectively in the 2008 Provisions. Further, the term “capital adequacy ratio” is introduced in the 2008 Provisions for the first time. It is also notable that, instead of regulating the specific calculation rules of the minimum solvency quota and the actual solvency quota as the 2003 Provisions do, the 2008 Provisions only provide principled provisions regarding the definition and determination of minimum capital and actual capital, while specific calculation and evaluation rules are left to the compilation rules for insurance companies' solvency reports enacted by the CIRC. This will help facilitate adjustments of such calculation and evaluation rules by the CIRC without damaging the stability of the 2008 Provisions and thus enhance the flexibility of the CIRC in its regulation of solvency.

There are also some technical improvements in the 2008 Provisions. For example, with regard to the reporting of inadequate solvency in an insurance company at any time, other than at the company's periodical reporting date, the 2003 Provisions only stipulate that such a report shall be submitted to the CIRC “on a timely basis”, while the 2008 Provisions further clarify the meaning of “on a timely basis” by stipulating that such report shall be submitted “within five working days after such inadequate solvency is found”. Another example is the contents of the yearly solvency report are clarified in Article 14 of the 2008 Provisions.

Another important change is the regulation of foreign insurance companies with several branch companies in China. According to Articles 10 and 18, a foreign insurance company that has several branch companies within the territory of China shall make consolidated evaluation of the overall solvency of all its branch companies within the territory of China, and shall designate a branch company in China as the principal reporting institution to perform the reporting responsibilities as required by the 2008 Provisions.

Urgent Need for Supplementary Rules

As already mentioned, the 2008 Provisions have left the specific calculation and evaluation rules of minimum capital to the compilation rules for insurance companies' solvency reports enacted by the CIRC. According to the Practical Guidelines for the “Compilation Rules of Insurance Companies' Solvency Reports No. 12 – Contents and Format of Yearly Reports”, however, minimum capital is calculated as the minimum solvency quota according to the 2003 Provisions and the CIRC has not provided regulations on the detailed list of minimum capital and the annotations to the minimum capital report. This gives rise to at least two problems. Is it proper to follow the 2003 Provisions, which have been expressly repealed, to compile minimum capital? How can insurance companies compile the relevant parts of the solvency report if there are no relevant compilation rules to follow? Therefore, the calculation and evaluation rules for minimum capital need to be enacted as soon as possible. In addition, the consolidated evaluation of all branch companies in China of a foreign insurance company also needs to be enacted soon.

Impact of Current Financial Crisis on Solvency of China's Insurance Companies

The global financial system is currently experiencing an unprecedented crisis. As part of this system, China's insurance industry is inevitably, more or less, affected by the crisis. Due to the small scale of Chinese insurance companies' overseas investments, however, the current financial crisis has, so far, had relatively little direct impact on the solvency of China's insurance companies. According to currently disclosed information, major domestic insurance companies with the qualification of qualified domestic institutional investor (QDII) have not invested in bonds and financial products connected with Lehman, Merrill Lynch and AIG. Looking at foreign-invested insurance companies, although there are a number of big foreign-invested insurance companies in China, their market share is less than 10% of China's insurance market. AIA, a subsidiary company of AIG, which has encountered a relatively large scale of policy withdrawals in Hong Kong and several other East Asian regions, appears to be operating normally in mainland China so far. This is in part due to the fact that its branches in the mainland have taken a comparatively more conservative position, focusing on the development of traditional protective products such as long term life insurance and dread disease insurance, etc., which are less likely to be affected by the financial crisis as compared to investment link insurance products. With the ongoing development of the financial crisis, however, China's insurance industry must pay close attention to the performance of the foreign insurance players, especially those that have branches or joint venture insurance companies in China and are seriously affected by the crisis, such as AIA and MetLife, and be well prepared for any possible impact on the solvency of such branches or joint venture companies.

Conclusion

The 2008 Provisions focus on the establishment of a regulatory system for solvency by prescribing the responsibilities of insurance companies and insurance regulatory authorities in solvency management and regulation. In this way, insurance companies are obligated to build sound solvency management systems and mechanisms to maintain adequate solvency, and in turn, insurance regulatory authorities gain more authority and flexibility in regulating the solvency of insurance companies. In the current ongoing world financial crisis, the CIRC will surely make use of such authority and flexibility to follow the changes of insurance companies' solvency and regulate the solvency of insurance companies more prudently. Therefore, the implementation of the 2008 Provisions will surely improve the efficiency and results of solvency regulation and help to discover and prevent solvency risks on a timely basis. This will in turn effectively protect the rights and interests of the insured, and promote the steady, healthy and fast development of insurance companies and the insurance industry as a whole.

The 2008 Provisions have also absorbed some experience of the more mature international insurance markets and established a solvency regulatory system in line with internationally accepted principles. This has provided favourable conditions for the connection of China's insurance market with the advanced financial markets, which not only helps China's insurance companies play a vital role in international market competition, but also helps to introduce international financial capital into China.

Endnotes

* Lü Guoming, Juris Master, is also a lecturer of law at Jining Medical College.

1. Please refer to the Interview with CIRC Officials Regarding the Provisions for the Administration of the Solvency of Insurance Companies on CIRC's official website: http://www.circ.gov.cn/Portal0/InfoModule_7518/76634.htm, particularly the part on background introduction regarding the promulgation of the 2008 Provisions.

2. Details as per Chapters 3 & 4 respectively of the 2003 Provisions.

3. Please refer to Chapter 5 ibid.

4. Details as per Article 42 ibid.

5. Details as per Article 29 ibid.

6. Please refer to Article 17 ibid.