China's insurance regulator has just released a consultation paper offering guidance for insurance companies implementing its investment capital rules framework. 

The “China Risk Oriented Solvency System”(C-Ross) has existed since being published as a conceptual framework in 2013. But the CIRC's new consultation paper on the rules, which was issued on October 10, offers guidance for insurance companies implementing on the capital usage side, as part of an initiative by the watchdog to strengthen risk management in the industry.

Industry experts have stressed that to comply with C-Ross Chinese life insurers will need to review their asset allocation and asset-liability management processes (ALM).

Under C-Ross, internal management of risk will be assessed using a rating system which directly affects the capital adequacy requirements of insurers and potentially constrains their investment capability.

“There has been a lot of news about C-Ross in the past few weeks, and everybody is studying on how to adapt to the new system,” said Stephen Tong, senior investment consultant at consultancy Willis Towers Watson, at AsianInvestor’s 4th China Global Investment Forum in Beijing late last month.

C-Ross was launched in 2016 and CIRC will press for implementation over the next three years, the regulator said in a statement on September 20, also announcing some adjustments to the rules and a detailed plan for the second-phase of implementation, which starts this year.

Based on the original CIRC mandate, the C-Ross regime has three pillars.

The first sets out risk-based minimum capital requirements for insurance, market and credit risks. Pillar two defines the qualitative criteria for assessing risks that cannot be quantified, covering operational, reputational and liquidity risk, and sets out recommended governance structures. Pillar three mandates transparency and discipline by requiring insurance companies to make disclosures of the details behind their capital adequacy ratios to the market.

The C-Ross rating system also scores insurers on the overall quality of their risk management. The higher the score, the lower the permitted capital adequacy ratio for an investment portfolio, a top executive at a major Chinese life insurance company told AsianInvestor, on condition of anonymity. And that “really gives insurers the incentive to improve their risk management,” the executive added.

C-Ross also encourages insurers to improve their ALM, as the better they do with ALM, the more latitude they will be granted in making investments, Tong said.

Draft investment rules

CIRC’s newly-released guidelines will remain open for public feedback until October 23, and will initially target equities, real estate and financial products.

The guidelines further stipulate that to qualify to invest in all three of these areas, an insurer should not have violated regulations in the past three years, and must demonstrate that it is effectively managing a range of defined risks including market, underlying investment, legal, operational and moral risks.

Companies are also required to set up dedicated functions to manage each of these three areas of investment with clear accountability mechanisms. Robust risk management and investment management mechanisms are also mandated with detailed underlying processes.

These must include research, review, decision-making, transaction execution, post-investment management and disciplined information disclosure. There are also other risk assessment requirements tailored specifically to each asset class.

Room for improvement

C-Ross has generally been well received by the industry which believes that its design matches China’s special requirements as an emerging market, a Hong Kong-based senior executive at a major regional insurer told AsianInvestor, on condition of anonymity.

The country's insurance watchdog has been praised for the speed of implementating the new rules.

“Solvency II in Europe took over a decade to evolve, and is still not yet fully implemented. In contrast, CIRC’s journey for C-Ross has been very fast. It took the Chinese regulator only two years to implement C-Ross. CIRC deserves respect for that,” Eunice Tan, director of financial services ratings at S&P Global Ratings, told AsianInvestor.

But there is definitely room for improvement, especially in some of the detailed provisions limiting investment risk. A senior government official overseeing the insurance industry talked to AsianInvestor and mentioned that although the market in general does not believe that public-private partnership (PPP) investment is risky, PPP is nonetheless categorised as a risky asset class in C-Ross, so such investment imposes a high capital charge on insurers.

CIRC has also implicitly recognised that the current framework is not perfect, and emphasised in its September 20 statement that it will continue to improve the system over the next three years.