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When Beijing-based Jiahe Life Insurance Co. released its financial report for 2011 in May, it grabbed the attention of insurance industry professionals because its solvency ratio for 2011 was minus 86.21 percent, far less than the country’s 100-percent minimum requirement for the solvency of insurance companies.
Solvency ratio, also the capital adequacy ratio of insurance companies, is a key indicator of China’s insurance regulation. The China Insurance Regulatory Commission (CIRC) requires unlisted insurance companies to submit annual financial reports in order to monitor their performance. Among the 101 unlisted insurance companies that submitted their 2011 reports to the CIRC, only three—Tianan Insurance, Dubon Insurance and Jiahe—failed to meet the solvency requirement.
Jiahe’s solvency ratio in 2011 represented a sharp drop of 157.47 percentage points from the previous year, which was affected by the company’s business development and capital market fluctuations, its report stated.
Luckily for Jiahe, the Agricultural Bank of China, one of the country’s “big four” stateowned commercial banks, in February 2011 agreed to pay 2.59 billion yuan ($411 million) for a 51-percent stake in the life insurance company. Jiahe’s report said that when the capital increase is finished, its solvency ratio is expected to exceed 150 percent.
To improve their solvency, Tianan and Dubon applied to the CIRC for capital increases, and both were approved in July.
According to the current solvency regime, most insurers are solvent. CIRC statistics showed that 96.15 percent of insurance com- panies met the minimum requirement of 100 percent at the end of March 2012. But a lack of capital and lackluster investment return he prevailed in the insurance industry in recent years, and many insurers, including some listed giants, saw declines in their solvency ratio last year, which can harm the development of the industry.
The CIRC said it realizes that it is a pressing task to impose stricter requirements than the sheer quantitative measurement of capital on insurance companies. The quality of their assets and the risks they face will be included in future solvency regulation.
China’s second generation of solvency regulation, similar to the EU’s Solvency II, will come out in the coming three to five years and will adopt a three-pillar framework: hing requirements on insurance companies’ capital adequacy, risk management and information disclosure. Building a riskbased system is a guiding principle of the new regulation, which will also meet national and international standards, according to the CIRC’s plan.
“A company’s capital requirement should be related to the underlying risks that the company is taking,” Zhuo Shihao, CFO of the Sino-U.S. United MetLife Insurance Co. Ltd. “Companies taking high risks and hing more volatile businesses should be required to he higher capital than those taking less risks and hing more stable businesses.”
“The new regulatory system will measure different categories of risks precisely to improve the accuracy and efficiency of solvency regulation, which will be conducive for the industry to fending off risks and for insurers to strengthening their inner control and risk management,” said Chen Donghui, chief actuary of PICC Property and Casualty Co. Ltd.
Potential impact
“The standards of the new regulatory system are still in the making. We can’t evaluate the specific impact on insurance companies, but overall it’s of great significance to the whole industry,” said Chen.
The new system underlines the establishment of insurers’ inner risk management, which can propel insurance companies to use modern tools to further systemize and standardize their risk management, he said.
Under the new risk-based system, companies with different business structures and different risk-diversifying abilities will face different solvency requirements. Chen said his company, PICC Property and Casualty, is more capable of preventing and diversifying risks, but this hasn’t been fully reflected in the current solvency regime. He expects the new system to more accurately classify insurance companies according to their risk-erting abilities.
For insurers with poor risk management, higher capital requirements should be imposed to enhance their ability to fend off risks, he said.
The CIRC said it would take into full consideration the development of each insurance company. While ensuring insurance companies’ capital capacity and steady development, the CIRC is aimed at achieving a ooth transition to the second generation of the solvency regime.
Protecting consumers is the ultimate goal of insurance regulation. In this regard, the new solvency regulatory system will be better equipped to do so.
The current regulatory system lays more stress on solvency ratio, which can lead to misconduct in the market, said Wang Zhichao, Secretary General of the Insurance Association of China, at a symposium in June. For example, if an insurance company delays payment or underpays the claims of policyholders, it can he a higher capital ratio and thus be more solvent.
The second generation of solvency regulation will take the market behior of insurers into consideration and increase the transparency of information disclosure. Therefore, for consumers, the new system can, to some extent, solve their problems of getting claims settled, Wang said.
“The new system’s stricter requirement on information disclosure can also help consumers compare the financial strength of different insurers to make rational decisions,”said Chen.
Insurers’ reaction
PICC Property and Casualty, China’s biggest non-life insurer, is making a number of preparations for the new regulation, according to Chen. First, it has adopted an economic valueadded evaluation model for its products and branches since 2009, evaluating both profits from the year and returns from risk capital in order to guide its staff to attach importance to the management of risk capital.
PICC Property and Casualty has also researched foreign solvency regulatory practices. “We used our company’s figures and the methods and standards from the EU’s Solvency II to provide data for the development of our country’s new solvency regime,”Chen said. The first-round of risk assesent has just begun, and PICC Property and Casualty is among the insurers that will undergo examination.
In addition, PICC Property and Casualty is the first financial company to establish the compliance system in accordance with the Standard for Enterprise Inner Control created by six ministries, including the Ministry of Finance. It has found risk points and implemented measures for control. PICC has also hired consultants to develop a comprehensive risk management system for the company.
“While we are waiting for the details of China’s ‘Solvency II,’ we will continue to actively manage our capital,” said Zhuo of the Sino-U.S. United MetLife Insurance Co. Ltd., a joint venture established by a subsid- iary of MetLife Inc. and Shanghai Alliance Investment Ltd.
“Financial strength and risk management are MetLife’s core competencies, which we definitely abide by,” Zhuo said. Sino-U.S. United MetLife’s solvency ratio at the end of 2011 was close to 200 percent and was above 230 percent at the end of the second quarter of 2012.
The company has always paid attention to product design and product features to oid high capital-intensive products. Ithas also closely monitored the movement of capital markets which could impact the value of its invested assets, said Zhuo. It will continue to implement i
Insurance companies should make early preparations, Jia Jingwei, head of China business development of Swiss Re, told China Insurance News. First, they need establish or improve their data collection and risk management systems. Second, their investments should match their operations, and they should strengthen the interaction between business side of insurance and assets management. Third, insurers should take the classification of their self-owned capital into consideration.
In addition, enterprise risk management is an essential requirement of the new solvency regime. It should be systematic and integrated in insurers’ daily businesses and operations. The establishment of risk management will be a challenge for insurers, Jia added.
Solvency ratio, also the capital adequacy ratio of insurance companies, is a key indicator of China’s insurance regulation. The China Insurance Regulatory Commission (CIRC) requires unlisted insurance companies to submit annual financial reports in order to monitor their performance. Among the 101 unlisted insurance companies that submitted their 2011 reports to the CIRC, only three—Tianan Insurance, Dubon Insurance and Jiahe—failed to meet the solvency requirement.
Jiahe’s solvency ratio in 2011 represented a sharp drop of 157.47 percentage points from the previous year, which was affected by the company’s business development and capital market fluctuations, its report stated.
Luckily for Jiahe, the Agricultural Bank of China, one of the country’s “big four” stateowned commercial banks, in February 2011 agreed to pay 2.59 billion yuan ($411 million) for a 51-percent stake in the life insurance company. Jiahe’s report said that when the capital increase is finished, its solvency ratio is expected to exceed 150 percent.
To improve their solvency, Tianan and Dubon applied to the CIRC for capital increases, and both were approved in July.
According to the current solvency regime, most insurers are solvent. CIRC statistics showed that 96.15 percent of insurance com- panies met the minimum requirement of 100 percent at the end of March 2012. But a lack of capital and lackluster investment return he prevailed in the insurance industry in recent years, and many insurers, including some listed giants, saw declines in their solvency ratio last year, which can harm the development of the industry.
The CIRC said it realizes that it is a pressing task to impose stricter requirements than the sheer quantitative measurement of capital on insurance companies. The quality of their assets and the risks they face will be included in future solvency regulation.
China’s second generation of solvency regulation, similar to the EU’s Solvency II, will come out in the coming three to five years and will adopt a three-pillar framework: hing requirements on insurance companies’ capital adequacy, risk management and information disclosure. Building a riskbased system is a guiding principle of the new regulation, which will also meet national and international standards, according to the CIRC’s plan.
“A company’s capital requirement should be related to the underlying risks that the company is taking,” Zhuo Shihao, CFO of the Sino-U.S. United MetLife Insurance Co. Ltd. “Companies taking high risks and hing more volatile businesses should be required to he higher capital than those taking less risks and hing more stable businesses.”
“The new regulatory system will measure different categories of risks precisely to improve the accuracy and efficiency of solvency regulation, which will be conducive for the industry to fending off risks and for insurers to strengthening their inner control and risk management,” said Chen Donghui, chief actuary of PICC Property and Casualty Co. Ltd.
Potential impact
“The standards of the new regulatory system are still in the making. We can’t evaluate the specific impact on insurance companies, but overall it’s of great significance to the whole industry,” said Chen.
The new system underlines the establishment of insurers’ inner risk management, which can propel insurance companies to use modern tools to further systemize and standardize their risk management, he said.
Under the new risk-based system, companies with different business structures and different risk-diversifying abilities will face different solvency requirements. Chen said his company, PICC Property and Casualty, is more capable of preventing and diversifying risks, but this hasn’t been fully reflected in the current solvency regime. He expects the new system to more accurately classify insurance companies according to their risk-erting abilities.
For insurers with poor risk management, higher capital requirements should be imposed to enhance their ability to fend off risks, he said.
The CIRC said it would take into full consideration the development of each insurance company. While ensuring insurance companies’ capital capacity and steady development, the CIRC is aimed at achieving a ooth transition to the second generation of the solvency regime.
Protecting consumers is the ultimate goal of insurance regulation. In this regard, the new solvency regulatory system will be better equipped to do so.
The current regulatory system lays more stress on solvency ratio, which can lead to misconduct in the market, said Wang Zhichao, Secretary General of the Insurance Association of China, at a symposium in June. For example, if an insurance company delays payment or underpays the claims of policyholders, it can he a higher capital ratio and thus be more solvent.
The second generation of solvency regulation will take the market behior of insurers into consideration and increase the transparency of information disclosure. Therefore, for consumers, the new system can, to some extent, solve their problems of getting claims settled, Wang said.
“The new system’s stricter requirement on information disclosure can also help consumers compare the financial strength of different insurers to make rational decisions,”said Chen.
Insurers’ reaction
PICC Property and Casualty, China’s biggest non-life insurer, is making a number of preparations for the new regulation, according to Chen. First, it has adopted an economic valueadded evaluation model for its products and branches since 2009, evaluating both profits from the year and returns from risk capital in order to guide its staff to attach importance to the management of risk capital.
PICC Property and Casualty has also researched foreign solvency regulatory practices. “We used our company’s figures and the methods and standards from the EU’s Solvency II to provide data for the development of our country’s new solvency regime,”Chen said. The first-round of risk assesent has just begun, and PICC Property and Casualty is among the insurers that will undergo examination.
In addition, PICC Property and Casualty is the first financial company to establish the compliance system in accordance with the Standard for Enterprise Inner Control created by six ministries, including the Ministry of Finance. It has found risk points and implemented measures for control. PICC has also hired consultants to develop a comprehensive risk management system for the company.
“While we are waiting for the details of China’s ‘Solvency II,’ we will continue to actively manage our capital,” said Zhuo of the Sino-U.S. United MetLife Insurance Co. Ltd., a joint venture established by a subsid- iary of MetLife Inc. and Shanghai Alliance Investment Ltd.
“Financial strength and risk management are MetLife’s core competencies, which we definitely abide by,” Zhuo said. Sino-U.S. United MetLife’s solvency ratio at the end of 2011 was close to 200 percent and was above 230 percent at the end of the second quarter of 2012.
The company has always paid attention to product design and product features to oid high capital-intensive products. Ithas also closely monitored the movement of capital markets which could impact the value of its invested assets, said Zhuo. It will continue to implement i
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ts overall risk management, help its capital management and look for various ways to mitigate its capital burden.Insurance companies should make early preparations, Jia Jingwei, head of China business development of Swiss Re, told China Insurance News. First, they need establish or improve their data collection and risk management systems. Second, their investments should match their operations, and they should strengthen the interaction between business side of insurance and assets management. Third, insurers should take the classification of their self-owned capital into consideration.
In addition, enterprise risk management is an essential requirement of the new solvency regime. It should be systematic and integrated in insurers’ daily businesses and operations. The establishment of risk management will be a challenge for insurers, Jia added.