Circular on Matters Relevant to the Implementation of the «Provisions for the Administration of the Solvency of Insurance Companies»

Bao Jian Fa [2008] No.89

Insurance companies and insurance asset management companies:

On July 10 2008 we issued the Provisions for the Administration of the Solvency of Insurance Companies (Order of the CIRC [2008] No.1; hereinafter the “Provisions”). In order to ensure smooth implementation of the Provisions, we hereby notify you on relevant matters as follows:

1. Criteria for Assessing Minimum Capital

(1) The minimum capital that a property insurance company is required to have is the total of the minimum capital for its non-life assurance business and the minimum capital for its non-life investment business.

(a) The minimum capital for non-life assurance business is the greater of the following two items:

(i) 18% of the amount below Rmb100 million and 16% of the amount at or above Rmb100 million of the company's retained premiums for the most recent financial year minus business tax and surcharges; or

(ii) 26% of the portion below Rmb70 million and 23% of the portion at or above Rmb70 million of the company's average total claims amount for the most recent three years.

Total claims amount is the total of claims payments, difference in outstanding claims reserve and re-insurance claims payments minus recovered re-insurance claims and recovery revenue.

An insurance company that has been in operation for less than three full financial years shall use the criteria set forth in Item (i).

(b) The minimum capital for non-life investment business is the total of the minimum capital for the risk premium portion and the minimum capital for the invested capital portion. The criteria for assessing the minimum capital for non-life assurance business is used to calculate the minimum capital for the risk premium portion of the non-life investment business, and the minimum capital for the invested capital portion of the non-life investment business is the total of the following two items:

(i) 4% of the period-end liability reserve for the invested capital in assumed income-generating non-life investment products; and

(ii) 1% of the period-end liability reserve for the invested capital in unanticipated income-generating non-life investment products.

(2) The minimum capital of a life insurance company is the total of the minimum capital for its long-term personal insurance business and the minimum capital for its short-term personal insurance business.

The term “long-term personal insurance business” means personal insurance business of which the term is more than one year. “Short-term personal insurance business” means personal insurance business of which the term is one year or less.

(a) Minimum capital for long-term personal insurance business is the total of the following two items:

(i) 1% of the period-end liability reserve for investment-linked insurance products and 4% of the period-end liability reserve for other life insurance products.

The term “liability reserve for investment-linked insurance products” means the unit reserve for investment-linked insurance products as determined in accordance with CIRC provisions. The term “liability reserve for other life insurance products” means the statutory minimum liability reserve after cession as determined in accordance with CIRC provisions, including the non-unit reserve for investment-linked insurance products.

(ii) 0.1% of the amount at risk for term life insurance with a term of less than three years, 0.15% of the amount at risk for term life insurance with a term of three years to five years and 0.3% of the amount at risk for term life insurance with a term of more than five years.

If, in the statistical calculation, term life insurance is not broken down into terms of different length, all amount at risk shall be calculated at the rate of 0.3%.

“Amount at risk” is the valid insured amount minus the period- end liability reserve. The term “valid insured amount” means the largest amount that the insurance company would be required to pay if an insurable accident paying out the largest benefit under the insurance contract were to occur. The “period-end liability reserve” is the statutory minimum liability reserve specified by the CIRC.

(b) The minimum capital for short-term personal insurance business shall be calculated based on the criteria for assessing the minimum capital for non-life assurance business.

(3) The minimum capital of a reinsurance company is the total of the minimum capital for its property insurance business and for its personal insurance business as calculated based on the respective criteria above.

(4) The aforementioned criteria for assessing minimum capital shall be implemented from preparation of the solvency reports for the third quarter of 2008, except for the criteria for the assessment of the minimum capital for the invested capital portion of non-life investment business that shall be implemented as of January 1 2009.

(5) Commencing from January 1 2009, insurance companies shall replace the original calculation form for minimum solvency levels with the minimum capital form attached hereto when preparing their solvency reports.

2. Consolidated Assessment of the Branches in China of Foreign Insurance Companies

(1) Foreign insurance companies that have more than one branch in China shall designate one such branch as the main reporting branch for solvency reports by October 31 2008 and report the same to the CIRC. Once the main reporting branch has been designated, it may not be changed indiscriminately.

(2) The main reporter of the branches of a foreign insurance company shall treat all of the branches in China as a single reporting entity and consolidate the solvency report therefor.

3. Time for Submission of Quarterly Solvency Reports

Commencing from the preparation of the solvency report for the fourth quarter of 2008, an insurance company shall submit within 15 days after the end of each quarter its solvency report for the quarter in question. In the event of National Day, the submission may be postponed by three days. The contents of, and the method of submission of, quarterly solvency reports shall remain unchanged.

4. Total Assets for the Purpose of Calculating the Percentages of the Application of Capital

(1) When an insurance company calculates, on the basis of its total assets, the percentages of investments falling within the scope specified in laws and regulations such as financial bonds, enterprise (company) bonds, shares (equity), securities investment funds, indirect investments in infrastructure projects and overseas investments in accordance with relevant CIRC provisions, it shall treat the total amount of its assets after the deduction of the amount of securities buyback financing funds as the basis for the calculation of the percentages of its application of capital. With respect to universal life insurance, investment-linked insurance and other such insurance products for which there are special provisions governing the percentages of the application of capital, the product's booked asset value after the deduction of the amount of securities buyback financing funds shall serve as the basis for calculating the percentages of the application of capital.

(2) If, based on the foregoing criteria for the calculation of the percentage of applied capital, an insurance company's investments exceed the percentages on the date of the issuance hereof, it shall promptly adjust its asset structure and satisfy the criteria no later than December 31 2008.

5. Specific Implementation Requirements

(1) Raising consciousness: each company shall treat the implementation of the Provisions as key to thoroughly implementing an objective development outlook and the State Council, Several Opinions Concerning the Reform and Development of the Insurance Industry, and as an opportunity to improve the level of internal risk management and promote the company's rapid and healthy development.

(2) Enhancing study and research: management of solvency has a bearing on various aspects of a company, such as its finances, product development, actuarial calculations, investments, information technology and internal controls. Accordingly, companies shall arrange for their relevant management personnel to conscientiously study the Provisions so as to ensure that they grasp the spirit and content of the Provisions.

(3) Due and thorough implementation: each company shall improve its internal solvency management mechanism and make compliant its internal risk management procedures in strict accordance with the requirements of the Provisions so as to ensure adequate solvency.

6. If you should have any suggestions in respect of the implementation of the Provisions or encounter problems in the course of implementation, please contact the Financial Regulation Section of our Finance and Accounting Department.

Contact persons: Wang Zheng, Guo Jing

Telephone: 010-6628612566286182

Appendix: Minimum Capital Form