The CBIRC has updated its solvency regulations for insurers with the revised rules to take effect from 1 March 2021.
The “Regulations on the Solvency Management of Insurance Companies” aims at plugging regulatory gaps in the current solvency system by strengthening solvency supervision and consumer protection.
The “Regulations” is set out over six chapters and 34 articles, and is based on feedback submitted by stakeholders in a public consultation exercise conducted from 30 July to 29 August 2020.
The “Regulations” makes clearer the three-pillar framework for solvency supervision, consisting of quantitative capital requirements, qualitative regulatory requirements and market restraint mechanisms.
In detail, the quantitative regulatory requirements of the first pillar are to prevent three types of risks, namely, insurance risk, market risk, and credit risk, by placing quantitative capital requirements on insurance companies.
The qualitative regulatory requirements of the second pillar are to prevent operational risk, strategic risk, reputational risk, and liquidity risk.
The third pillar, which comprises market restriction mechanisms, promotes public information disclosure and improves transparency, etc.
The “Regulations” also aims to improve the solvency indicator system which guides supervision. A CBIRC official says that the solvency indicator currently in use is the solvency adequacy ratio.
Under the new three-pillar solvency regulatory framework system, indicators will comprise the core solvency adequacy ratio, comprehensive solvency adequacy ratio, and comprehensive risk rating.
Specifically, the core solvency adequacy ratio measures the adequacy of high-quality capital of an insurance company and shall not be less than 50%; the comprehensive solvency adequacy ratio measures the overall adequacy of the insurance company’s capital and shall not be less than 100%. The comprehensive risk rating measures the insurance company’s overall solvency risk. The rating for an insurer shall not be lower than Category ‘B’, out of four categories descending from ‘A’ (the best) to ‘D’.
An insurance company that meets the regulatory requirements for the above three indicators is a solvency-compliant company; if any indicator does not meet the regulatory requirements, the insurer is considered as non-compliant with solvency requirements.
A third goal of the “Regulations” is to strengthen the accountability of solvency management in an insurer. The “Regulations” requires insurance companies to establish a sound organisational structure for solvency management, establish a complete solvency risk management system, and formulate a three-year rolling capital plan to strengthen accountability for solvency management. The “Regulations” also links the risk management capabilities of insurance companies with capital requirements.
The “Regulations” states that the CBIRC should disclose regularly the overall solvency status of the insurance industry and solvency supervision work; while insurance companies should furnish quarterly solvency reports and provide solvency information to consumers and shareholders.
For insurance companies that fail to meet the solvency standards, the CBIRC shall take targeted regulatory measures in accordance with the insurance company’s sources of risk and degree of risk. The disciplinary measures that are to be taken by the regulator include: supervisory talks; requiring errant insurance companies to submit plans to prevent deterioration of solvency position or to improve risk management; limit the remuneration levels of directors, supervisors and senior managers; limit the payment of dividends to shareholders, etc. In addition, the CBIRC can also order errant insurers to increase their capital, suspend some or all new businesses of such insurers, order adjustments to the business structure, and restrict the companies’ expansion by withholding approval for new branches. If an insurer’s solvency position is still not significantly improved or has deteriorated further despite the various rectification measures ordered, the regulator may filed for the bankruptcy or winding up of the insurance company.
Furthermore, the “Regulations” state that insurance companies with core solvency adequacy ratios of less than 60% or comprehensive solvency adequacy ratios of less than 120% will be the focus of scrutiny by the regulator, including on-site inspections.