The Implications of the China Risk-Oriented Solvency System on the Life Insurance Market
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The Implications of the China Risk-Oriented Solvency System on the Life Insurance Market Derrick W. H. Funga, David Joub, Ai Ju Shaoc and Jason J. H. Yeha a
Department of Finance, The Chinese University of Hong Kong, Shatin, New Territories, Hong Kong. E-mail: [email protected]; [email protected] b Taikang Life Insurance Company, Beijing, China. E-mail: [email protected] c Department of Risk Management and Insurance, Ming Chuan University, Taipei, Taiwan. E-mail: [email protected]
The China Risk-Oriented Solvency System (C-ROSS) was fully implemented in 2016. We analyse the effects of C-ROSS on the financial position, product mix and asset allocation of life insurers in the Chinese insurance market. Based on a data set of 66 life insurers, we find that the solvency position of life insurers specialising in writing long-term traditional life products with heavy protection elements improves under C-ROSS, but that the insurers are more vulnerable to decreases in interest rates. In contrast, the solvency position of life insurers specialising in writing short-term endowments and high cash value products deteriorates. C-ROSS also incentivises life insurers to consider asset–liability duration matching, accounting classification of fixed-income assets and underlying risks of equity investments when formulating their investment strategies. Life insurers may find it difficult to manage interest rate risk under C-ROSS due to the lack of available long-term bonds in the Chinese financial market. A stock market boom has a slightly negative effect on life insurers’ solvency ratios, and most life insurers can survive a severe market crash due to the pro-cyclical component embedded in the minimum capital requirements. The Geneva Papers (2017). doi:10.1057/s41288-017-0066-z Keywords: China Risk-Oriented Solvency System; risk-based supervision; insurance industry Article submitted 10 April 2017; accepted 19 July 2017
Introduction During the last two decades, the insurance regulatory systems in major economies have been reformed in favour of more risk-oriented frameworks. In North America, the National Association of Insurance Commissioners (NAIC) embarked on the Solvency Modernisation Initiative in 2008 with the objective of improving the U.S. risk-based capital (RBC) framework. In Europe, the European Union implemented the Solvency II system in 2016 after more than a decade of development. In Asia, the Financial Services Agency developed the Solvency Margin Standard in 1996 for Japanese insurers. As the third largest insurance market in terms of premium volume,1 China has also followed the international 1
Swiss Re (2016).
The Geneva Papers on Risk and Insurance—Issues and Practice
trend of insurance regulatory reform and implemented a risk-oriented regulatory system in 2016, now known as the China Risk-Oriented Solvency System (C-ROSS). The implementation of C-ROSS has led to widespread interest in studying this regulatory framework. Fung et al.2 analyse C-ROSS qualitatively and contrast its strengths and w
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