Changes to China’s solvency framework ‘credit positive’ for insurance market

Written by Adam Cadle

05/01/2022

The revised quantitative and qualitative requirements under the China Risk-Oriented Solvency System Phase II (C-ROSS Phase II) are expected to have significant impacts on the various insurance market segments, and are "credit positive", AM Best has said.

Under the updated solvency regime, capital recognition has been tightened and the industry is expected to see a drop in admitted capital in solvency calculations. Specifically, the regulator has changed the recognition of real estate held for investment purposes from fair value to value at cost, while insurers are required to make adequate provisions for impairment and apply timely and appropriate reductions to their capital. Another key update is the mandatory application of a ‘look-through’ approach in calculating minimum capital to support investment risk. AM Best has stated that this recent revision should allow for greater transparency in risks and capital quality.

“AM Best views these changes to be credit positive as they drive a more thorough understanding and accurate assessment of investment risk, and seek to improve insurers’ capital management strategies,” AM Best senior director, analytics, Christie Lee, said.

Under the updated solvency regime, capital recognition has been tightened and the industry is expected to see a drop in admitted capital in solvency calculations. Insurers will also face higher capital requirements arising from long-term equity investments, particularly for investments in non-insurance subsidiaries that give the insurer controllership, which will be 100% risk charged.

AM Best is of the view that the industry is able to mitigate the solvency pressure, given its current strong solvency. The China Banking and Insurance Regulatory Commission (CBIRC) is also allowing a transitional period for companies that are under pressure to come up with transition plans and implement the new rules in phases, with full compliance no later than 2025. “Nonetheless, with the implementation of the revised solvency regime, it will be incumbent upon insurance companies to revisit their business and capital strategies as they seek to better deliver on shareholders’ expected return on capital,” AM Best stated.

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