C-ROSS: Construction, Framework and Phase II

Transcription

1 C-ROSS: Construction, Framework and Phase II Dr. GUO Jing Deputy Director General Finance & Accounting /Solvency Regulation Department China Insurance Regulatory Commission Beijing, 19th July 2017

2 Agenda Construction of C-ROSS Motivations Processes Principles Overall framework of C-ROSS Structure Features Mechanisms C-ROSS Phase II 2

3 State Ten Opinions State Ten Opinions is a top level document that outlines the comprehensive development of the insurance industry, enhances the insurance industry to be a strategic industry for China, and significantly expands available opportunities. On 13 August 2014, the state council s opinions about speeding up the development of modern insurance services, known as the State Ten Opinions were issued. The State Ten Opinions : Clarify the position of modern insurance industry in the development of the economy and society as a whole, point out the insurance is a critical industry in the modern economy, a basic approach to risk management, and an important element for social civilization progress, economic development and social governance. The healthy development of the insurance industry will provide protection to the stability and development of the society as a whole Year Insurance Total Premium Prediction +17% RMB trillion The Target of State Ten Opinions By 2020: Insurance premium is expected to reach RMB 5.1 trillion, with an average annual growth rate of 17%. Total insurance assets is expected to reach RMB 20 trillion. Premium for new policies is expected to reach RMB 1.2 trillion Life Insurance Non-Life Insurance 3

4 China s insurance risks have become more versatile and complex Inputs Products Traditional pro Participating (cash dividend / reversionary bonus) Universal life Unit linked Variable annuity Investing Assets pro Cash Government bond Term deposit Corporate bond Mutual fund Stock Real estate Private equity / Private debt Overseas investments Market Participants Life insurers P&C insurers Reinsurers Insurance asset managers Health insurers Pension companies Insurance groups Conglomerates Mutual insurers 4

5 Market Oriented Reform of China s Insurance Industry Deregulation of Investment:(2013) Deregulation of Pricing: Traditional life(2013) Universal life (2015) Unit-link life(2015) Auto insurance(2015) Market entry and exit Business exit Region exit Executive exit Shareholder exit Entity exit 5

6 The facts and main Issues of C-SI C-SI Facts Main Issues Prudent asset and liability valuation Volume based flat rate capital requirement 16%/18% of non-life insurance net premium 4% of life insurance reserve Does not comprehensively reflect risks Low sensitivity to risks Capital requirement rather than risk management Difficult to meet the requirements of: The management and regulation on more versatile and complex risk profile. Market oriented reform of insurance market. international convergence of regulation standards 6

7 Overview Global of Solvency Regulations United States NAIC solvency modernization Federal Insurance Office (FIO) Systemic risk regulation (FSOC) Rating agencies regulation Europe Solvency II implementing measures New supervisory architecture (ESAs, ESRB) Pension reforms Rating agencies regulation Latin America Mexico solvency reform Brazil reinsurance Asia Pacific Solvency reforms China Japan Singapore Thailand HK SAR Market access India Indonesia China International IAIS ComFrame and capital standards G-SII policy measures IASB & FASB project 7

8 Agenda Construction of C-ROSS Motivations Processes Principles Overall framework of C-ROSS Structure Features Mechanisms C-ROSS Phase II 8

9 Roadmap Phase II New era Milestone Official launch of C-ROSS Starting Overall Planing Blueprint Conceptual Framework 17 Technical Standards Transitional period Where to go How to do How long it takes 9 standards for Pillar I 3 standards for Pillar II 3 standards for Pillar III 1 standard for insurance group 1 standard for reporting Mar 2012 May 2013 Feb 2015 Jan 2016 April

10 Organization Chart Chairman C-ROSS Leading Board C-ROSS Executive Office Industry Org Task Forces Experts IAC IIC CAA CISFC IAMAC Valuation Non-life Insurance Risk Life Insurance Risk SARMRA Industry Experts Consultant Academia 10

11 Technical Process Sample Testing Insert Text Alternatives Testing Parameter Testing Calibration Testing Sample companies run quantitative testing Publish consultation paper Refine consultation paper Run the IQT Companies submit IQT results with feedback 11

12 Policy Making Process State Council CIRC Chairman Industry Organizations Insurers Other Stakeholders C-ROSS Leading Board C-ROSS Executive Office Central bank Banking regulator Securities regulator Ministry of Finance Task Forces 36 CIRC provincial branches Report Approve Comment 12

13 Agenda Construction of C-ROSS Motivations Processes Principles Overall framework of C-ROSS Structure Features Mechanisms C-ROSS Phase II 13

14 Goals and Principles of C-ROSS Overall Goals Scientifically measure risks Promote effective risk and capital management, build mechanism to enhance enterprise risk management Provide useful experience to other emerging markets Core Principles Risk oriented Characteristics of China s market Internationally comparable 14

15 Agenda Construction of C-ROSS Motivations Processes Principles Overall framework of C-ROSS Structure Features Mechanisms C-ROSS Phase II 15

16 Risk Stratification Unregulated Risks Regulated Risks Inherent Risk Control Risk Systemic Risk Capitalized Risk Uncapitalized Risk Layer I Insurance Risk Operation Risk Strategy Risk Layer II Layer III Credit Risk Reputation Risk Liquidity Risk Market Risk 16

17 Three-Layer Framework: Risk, Capital and Value Value Layer III Company information disclosure Liquidity risk management Layer II IRR Regulator information disclosure Solvency Ratio SARMRA Stress Test Layer I Regulatory Measurement Analysis and Examination Credit Rating ERM (Enterprise Risk Management) Capitalized Risks Regulated Risks Overall Risks 17

18 Transformation: Three-Pillar Regulatory Framework Quantitative Capital Requirement Capitalized Risks Insurance Risk Credit Risk Market Risk Supervisory Tools Quantitative capital requirement Actual capital assessment Capital stratification Stress test Regulatory measurement Regulatory Discipline Comprehensive Solvency Ratio Core Solvency Ratio Qualitative Supervisory Requirement Uncapitalized Risks Operation Risk Strategy Risk Reputation Risk Liquidity Risk Supervisory Tools Integrated Risk Rating(IRR) Solvency Aligned Risk Management Requirements and Assessment(SARMRA) Liquidity Risks Analysis and Examination (A&E) Regulatory Measurement Regulatory Discipline IRR Ratings Control Risk Scores Market Discipline Mechanism Unregulated Risks Supervisory Tools Company Information Disclosure Regulator Information Disclosure Credit Rating Market Discipline 18

19 Agenda Construction of C-ROSS Motivations Processes Principles Overall framework of C-ROSS Structure Features Mechanisms C-ROSS Phase II 19

20 Risk oriented solvency system More comprehensive risk coverage Three pillar regulatory framework: More complete coverage of risks Risk identification, risk measurement and defense system More scientific risk measure Capitalized risk: practical, accurate models were implemented Uncapitalized risk: Integrated Risk Rating More sensitive risk response Accurate measure associated risks due to changes in: Operational behavior, business structure, investment strategy, etc More capital requirement for irrational competition, high risk investment Strengthen risk management Risk management capability tied to capital requirement In depth risk management indicators 20

21 Reflect China s insurance characteristics Rapid growth, Fast changing Gross premium growth rates in 2016: China: 27.5%; Global: 3.1% Frequent changes: economic environment, associated market, business model, legal system, capital markets, consumer behavior etc. Immature associated markets Emerging markets deviate further from complete, perfect, efficient market hypothesis Risk management tools used in mature markets sometimes are inefficient and ineffective in emerging markets 21

22 Reflect China s insurance characteristics Low awareness of risk management With high growth potential, companies normally tend to focus more on the growth of market shares Fewer lessons learnt from crisis and losses Incomprehensive legal system and poor corporate governance lead to relatively high moral hazard Lack of expertise & financial resources Lack of experience for insurance professionals Small/medium, recently established insurers. Capital Shortage Unique risks & different risk characteristics Face greater uncertainty comparing with mature market Immature financial market brings more volatility Financial systems in emerging markets are more vulnerable 22

23 Reflect China s insurance characteristics Pillar I reflect China s unique risk characteristics, capitalized risk measurements adopted scientific, practical methods. Unique Business risks consistent & different valuation risk approach characteristics Net risk model Composite factor (K - factor) method 750 days moving average gov t bond yield curve used in liabilities discounting Factor based time value of options and guarantees (TVOG) valuation Attach more importance to Pillar II effect More attention paid to uncapitalized risk e.g. strategic and reputation risk Regulator guides companies to improve risk management capability Integrated risk rating (IRR) Solvency Aligned Risk Management Requirement and Assessment (SARMRA) Liquidity risk: integrated current ratio, liquidity coverage ratio 23

24 IRR Pillar I Capitalized Risks Insurance Risk Market Risk Credit Risk Pro-Cyclical Risk Systemically Important Risk Integrated Risk Rating (IRR) A B C D Pillar II Uncapitalized Risks Operational Risk Strategic Risk Reputation Risk Liquidity Risk Regulator assesses the overall risk of the insurance company quarterly 24

25 IRR Categorize insurance companies according to their risk level and take interventions for companies with C and D rating according to their risk exposure. Rating Capitalized risk Uncapitalized risk A B C D Solvency ratio meets regulatory requirements Solvency ratio meets regulatory requirements Solvency ratio meets or doesn t meet regulatory requirements Solvency ratio meets or doesn t meet regulatory requirements Minor operational risk, strategic risk, reputation risk and liquidity risk Relatively minor operational risk, strategic risk, reputation risk and liquidity risk Relatively severe operational risk, strategic risk, reputation risk or liquidity risk Severe operational risk, strategic risk, reputation risk or liquidity risk 25

26 Rating Method of IRR Weighted average method Depending on the absolute level and variance of the solvency ratio capitalized risks 50% Core solvency ratio Comprehensive solvency ratio IRR Operational risk 50% uncapitalized risks 50% Strategic risk 15% Reputation risk 10% Liquidity risk 25% Influenced by risk factors such as external environment, the distribution characteristics, expected loss and historical data etc. 26

27 Solvency Aligned Risk Management Requirement and Assessment (SARMRA) Risk Management Requirement and Regulatory Assessment Risk Management Requirements Risk Management Assessment Regulator publishes requirements on risk management Regulator evaluates the risk management abilities of the insurers 27

28 SARMRA Framework and environment (20%) Purpose and tools (10%) Insurance risk management (10%) Market risk management (10%) System comprehen siveness 60% Scoring S Fully compliant - get 100% of standard score. Largely compliant - get 80% of standard score. MC control =Q Mc capitalized Q= S+0.4; S>= 80, MC control <=0 SARMRA (100%) Credit risk management (10%) Operational risk management (10%) Strategic risk management (10%) Reputation risk management(10%) Liquidity risk management (10%) From 2 aspects 4 grades System effectiveness 40% Partially compliant - get 50% of standard score. Not compliant - get zero The final score of SARMRA is the weighed average of the 9 parts scores. S< 80, MC control >0 A comprehensive and effective risk management system is critical for insurers in order to decrease the capital requirement. The assessment results of SARMRA will directly affect the capital requirement of control risk The comprehensiveness and effectiveness of risk management will directly affect the capital requirement. 28

29 International comparable Design ideas Risk oriented solvency system Insurance group supervision: corresponding three pillar provisions for insurance groups, with specific regulatory standards Counter-cyclical (K-factor) : minimum capital requirement for stocks, investment property etc. Framework Three-Layer framework transformed to three pillar framework: comparable with international mainstream practices Standards & methods Capital measurement methods & models for capitalized risks Capital tiering Information disclosure Regulatory means XBRL (extensible Business Reporting Language) used to C-ROSS IT system Off-site analysis & on-site assessment 29

30 Agenda Construction of C-ROSS Motivations Processes Principles Overall framework of C-ROSS Structure Features Mechanisms C-ROSS Phase II 30

31 Combination of quantitative and qualitative regulation C-SI C-ROSS Focus on quantitative supervision, lack of qualitative supervision Solvency ratio is only standard Risk management capabilities were not taken into account. Focus on both quantitative and qualitative aspects Integrated Risk Rating (IRR) was invented to assess uncapitalized risks (operation risk, strategy risk, reputation risk, liquidity risk) IRR combines quantitative and qualitative assessment result, performing comprehensive evaluation towards company s risk exposure SARMRA is used to evaluate company s risk management capabilities, i.e control risk, and tied to capital requirement 31

32 Linkage between CIRC and CIRC local bureaus C-SI C-ROSS CIRC local bureaus: Unclear responsibility Less participations Not fully developed joint supervision with CIRC CIRC local bureaus: Integrated Risk Rating (Quarterly) Participate risk rating for insurance companies Evaluate operation risks in sales, underwriting, finance management of insurance companies branches SARMRA (Annually) Conduct on-site assessment 32

33 External supervision and market discipline C-SI C-ROSS Annual disclosure, limited information Lack of transparency, less market discipline Information Disclosure Company Quarterly disclosure, more comprehensive Daily disclosure Regulator Regular disclose solvency information Market mechanism Encourage insurance companies to do credit rating; regulate rating agencies behavior exchange information with stakeholders, analysts, agencies, etc. 33

34 Capital constraint and capital supplement C-ROSS Build capital supplement framework, enriching the diversity of capital supplement methods with enlarged financing alternatives for insurance companies Available capital includes: core tier 1, core tier 2, supplementary tier 1, supplementary tier 2 Capital tools include: subordinated debts, capital supplement bonds and subordinated convertible bonds, etc. Strict and sound capital requirement, relaxed and flexible capital supplement 34

35 Three Biggest Shifts C-SI From volumeorientation to riskorientation From single approach to integrated approach Increase the risk-sensitivity and risk-coverage of regulatory approaches Create incentives of more sophisticated risk-taking and risk management Change the industry focus from scale to risk & value Utilize uniform framework of financial reporting valuation, value measurement and capital management, to minimize the inconsistency of decision-making indicators Balance sheet, capital allocation, risk management and performance measurement within one basket C-ROSS From country focus to market focus China is the largest emerging insurance market Emerging markets shared many common key features As compatible system, C-ROSS could provide useful experiences to other emerging markets 35

36 Agenda Construction of C-ROSS Motivations Processes Principles Overall framework of C-ROSS Structure Features Mechanisms C-ROSS Phase II 36

37 Issues C-ROSS are facing Current rules need to be updated to cope with changing environment Regulatory cooperation should be further strengthened Voids in the system need to be filled, with conditions getting mature Problems exposed during implementation need to be solved 37

38 C-ROSS Phase II: Overall Target Adhere to Risk oriented Improve scientificness and effectiveness of C-ROSS Expand risk coverage Improve risk measurement Further enhance sensitivity to risk. Adhere to Problem-oriented Improve risk resistance capacity Strengthen capital constraints. Intensify policy conduction. Adhere to Openness-oriented Provide solvency regulation experience to emerging markets. Strengthen financial regulation cooperation and prevent cross-financial risks. 38

39 C-ROSS Phase II: Three Areas Three Areas Improve regulatory rules Reinforce the implementation mechanism Strengthen regulatory cooperation 39

40 C-ROSS Phase II: Preliminary considerations Improve regulatory rules Comprehensive rules Amend the <Provisions on Insurance Company Solvency Regulation> Develop detailed rules for insurance group regulation Establish supervision rules for emerging insurance entities such as captives and mutual. 40

41 C-ROSS Phase II: Preliminary considerations Improve regulatory rules Pillar I Revise and perfect the standard of life insurance reserve assessment Thorough review and calibration towards capital requirements of market risk and credit risk Thorough review and calibration towards risk factors and correlation coefficient of insurance risk Improve solvency stress test rules Research on reinsurance related regulation 41

42 C-ROSS Phase II: Preliminary considerations Improve regulatory rules Pillar II Improve liquidity risk monitoring system Improve Integrated Risk Rating (IRR) system Optimize Solvency Aligned Risk Management Requirements and Assessment (SARMRA) system Pillar III Revise and perfect the rules on Pillar III, Further develop the role of market constraints 42

43 C-ROSS Phase II: Preliminary considerations Reinforce implementation mechanism Establish solvency risk analysis and monitoring system, form a mechanism for regulators, insurance institutes, academia and related units to participate jointly in supervision and decision support Establish a regular data quality and authenticity inspection mechanism Strengthen the supervision and assessment of accounting firms, actuarial advisory institutions, credit rating agencies and other intermediaries involved in the insurance business Improve C-ROSS information system 43

44 C-ROSS Phase II: Preliminary considerations Strengthen regulatory cooperation Strengthen domestic supervision cooperation with PBOC, CBRC, CSRC and relevant departments ; prevent and control cross-financial risks Strengthen communication and cooperation with foreign regulators; explore equivalence assessment mechanism with supervisory regimes in foreign markets Adhere to the basic ideas and principles of C-ROSS, actively participate in international rule making process, and promote the construction of a fair and rational system. 44

45 C-ROSS Phase II: Working Mechanism Unified leadership Lead by CIRC Party Committee Organize by CIRC Finance & Accounting /Solvency Regulation Dept Solvency regulation committee member units and related Depts. to participate Wide Participation Phase II will be project-based. Task will be divided into projects and commissioned to C-ROSS Advisory Committee members, insurance institutes, intermediary institutes or universities. Assignees, industry experts, CIRC and relevant depts. will jointly work as project team. 45

46 C-ROSS Phase II: Working Mechanism Professional Consultation Fully leverage C-ROSS Advisory Committee expertise, who is responsible for providing consultation and demonstration to the overall planning, framework, technical standards and implementation plan and reviewing the research results of the project team. This will ensure the system is scientific and effective. Openness Transparency Made public of the tasks, progress, test results, implementation of C-ROSS phase II to the industry, relevant ministries, consumers, media and etc. Absorb opinions from all sides and promote attention, understanding and support for C-ROSS 46

47 C-ROSS Phase II: Schedule The construction and implementation will go hand in hand. Projects will be published and implemented once ready. The whole process of phase II is expected to be 2 years. 47

48 Thank you!

49 C-ROSS: Implementation and Technical Approach Ellen Yang Associate Director, KPMG Beijing, 19th July 2017

50 Agenda Implementation of C-ROSS Technical Approach 50

51 Full Implementation of C-ROSS Pillar I Comprehensive Solvency Ratio Solvency Ratio Distribution 441% P&C L&H Reinsurer 418% 429% 396% P&C L&H Reinsurer % 278% 274% 280% 330% 269% % 250% 245% 236% 230% Q1 2016Q2 2016Q3 2016Q4 2017Q1 <100% [100%-150%) [150%-200%) [200%-250%) [250%-300%) >300% Industrial Results(RMB Bn) 2016Q1 2016Q2 2016Q3 2016Q4 2017Q No. of Insurers failed to achieve solvency requirements 3 3 P&C L&H Reinsurer Available Capital Minimum Capital Capital Surplus 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1

52 Full Implementation of C-ROSS Pillar I Risk Structure as of 2017Q1(L&H) 150% 130% 96.21% % 21.12% 100% 90% 17.85% 70% 50% 30% 29.23% 10% -10% Insurance Risk Market Risk Credit Risk Diversification Loss Absorption Minimum Capital 150% Risk Structure as of 2017Q1 (P&C) 28.92% 150% Risk Structure as of 2017Q1(Reinsurer) 20.65% 100% 46.16% 28% 100% 100% 48.78% 27.97% 2 100% 50% 52.71% 50% 61.11% 0% Insurance Risk Market Risk Credit Risk Diversification Minimum Capital 0% Insurance Risk Market Risk Credit Risk Diversification Loss Absorption Minimum Capital

53 Full Implementation of C-ROSS Pillar II (IRR) CIRC 36 CIRC local bureaus Company data Uncapitalized Risks 50% System auto calculation Weighting method P&C Life Rating Categories 2017Q1 (average score:92.43) Pillar I Results Capitalized Risks 50% Reinsurer A B C D 2017Q1 : Integrate Risk Rating(IRR) 53

54 Full Implementation of C-ROSS Pillar II SARMRA Foundation and Environment Objectives and Instruments Insurance Risk Market Risk Credit Risk Operational Risk Strategic Risk Reputation Risk Liquidity Risk Result P&C L&H Reinsurer SARMRA (P&C) 2016 SARMRA (L&H)

55 Full Implementation of C-ROSS Pillar III Insurance companies should disclose solvency information to the public and stakeholders Continuous and interactive solvency information exchange mechanism with stakeholders Quarterly Disclosure Disclosing an abstract of quarterly solvency report Within 30 days after the end of each quarter On official website, as well as on official website of Insurance Association of China (IAC) Regular Disclosure Disclosing solvency information to stakeholders in the course of dayto-day operations Insurance company information disclosure Regulator information disclosure Insurance company credit rating Quarterly Disclosure CIRC&CIRC local Bureaus release quarterly Integrated risk rating (IRR) Results Semi-annual Disclosure CIRC disclose semi-annual solvency regulation information, including solvency profile of the industry, CIRC solvency regulation work, and other regulation information. Insurance company credit rating Insurance companies should conduct credit rating when issuing debt instrument and capital instruments Regulating rating agencies behavior with qualification requirements, administration and Supervision 55 55

56 Impacts From C-ROSS Market Capital Company More open market Fair play Enhance capital efficiency More capital Management tools Business structure transformation Business evaluation Speed up the development and reform Huge potential Better risk Management Corporate Governance Investment Raise risk management ability 56

57 Agenda Implementation of C-ROSS Technical Approach 57

58 Pillar I: Solvency Ratio Valuation Standards Capital Categorization Insurance Risk Market Risk Credit Risk Available Capital Minimum Capital Control Risk Additional Capital Solvency Ratio for Quantifiable Risk Core Solvency Ratio Comprehensive Solvency Ratio Stress Testing 58

59 Balance Sheet for C-ROSS ICS Solvency II C-ROSS ICS Solvency II Free Surplus Free Surplus Free Surplus Minimum Capital Available capital Minimum Capital Available capital MCR SCR Asset Risk Margin BEL(incl. TVOG) Total Reserve Asset Risk Margin (Deduction item) BEL(incl. TVOG) Total Reserve Asset Risk Margin BEL(incl. TVOG) Total Reserve Technical provisions 59

60 Pillar I: Valuation of Insurance Liabilities Under C-ROSS Discounting Curve 7.00% 6.00% Moving Average Risk Free Rate Transition Rate Ultimate Rate 5.00% 4.00% 3.00% Risk Margin Calculation Approach 1: Cost of Capital Approach 2: Scenario Based Article 21 of the Regulatory Standards No. 3: Insurance liabilities for life insurance contracts states the cost of capital method should be adopted in calculating risk margin OR PV scen. risk margin PV base 60

61 Pillar I: Valuation of insurance liabilities Spurious volatility 7.00% 6.00% Moving Average Risk Free Rate Transition Rate Ultimate Rate 5.00% 4.00% 3.00% Application of 750 days moving average of government bond yield to avoid the swap rate volatility on the valuation date Application of ultimate rate of 4.5% to avoid unnecessary far end volatility of the interest rate yield curve 61

62 Valuation of Life Insurance Contracts Available Capital Capital Surplus Minimum Capital Asset Financial Liability Other Liability Liability Liability of insurance contract Outstanding Benefits Reserve Outstanding Loss reserve BEL Risk Margin Recognized at the book value PVCF TVOG 62

63 Differences for life insurance contract CSI Reserve Net Premium Conservative C-ROSS Reserve Gross Premium, cover all cash flow BEL+Risk Margin No Residual Margin Residual Margin Asset Risk Margin Factor2:Time value Discounted to assessment point C-ROSS Reserve Liability C-ROSS Reserve BEL BEL CF CF CF CF Policy year Factor1:Cash flows estimation

64 Pillar I: Solvency Ratio Valuation Standards Capital Categorization Insurance Risk Market Risk Credit Risk Available Capital Minimum Capital Control Risk Additional Capital Solvency Ratio for Quantifiable Risk Core Solvency Ratio Comprehensive Solvency Ratio Stress Testing 64

65 Pillar I:Capital Definition and Categorization Capital Definition: Available capital shall demonstrate four key characteristics: Permanence Subordination Availability Absence of Encumbrances Capital Categorization Distinguish available capital resources from high quality to low quality according to their loss absorbing capacity: Tier 1 Core Tier 2 Core Tier 1 Supplemental Tier 2 Supplemental 65

66 Pillar I: Solvency Ratio Valuation Standards Capital Categorization Insurance Risk Market Risk Credit Risk Available Capital Minimum Capital Control Risk Additional Capital Solvency Ratio for Quantifiable Risk Core Solvency Ratio Comprehensive Solvency Ratio Stress Testing 66

67 Pillar I: Methodology Net Risk Model Net Risk = Inherent Risk Control Risk Systemic Risk Quantifiable inherent risks MC (Pillar I) Control risks MC (Pillar II) Overall Minimum Capital Requirement (MC) Additional MC (Pro-cyclical Risk, GSII, DSII ) 67

68 Pillar I: Methodology MC Components Quantifiable inherent risks Market risk Credit risk Insurance risk Interest rate risk Credit spread risk Non-life insurance risk Life insurance risk Reinsurance risk Equity risk Default risk Premium risk Mortality risk Life reinsurance Property risk Reserve risk Longevity risk Non-Life reinsurance Overseas assets risk Catastrophe risk Morbidity risk Currency risk Expense risk Surrender risk 68

69 Pillar I: Methodology - MC Calculations Based on China s industry data Fit probability distribution Calibrate at 99.5% percentile Standard formula to calculate MC Composite factor based method: MC=EX RF which: EX is the risk exposure; RF is the risk factor; RF = RF 0 (1+K) RF 0 is the base risk factor, K is the characteristic factor K i is the characteristic factor based on specific risk or entity, n is the number of characteristic factors Scenario based method: Used to calculate one year VaR; Applied on catastrophe risk for non-life, interest rate risk and insurance risk for life insurers 69

70 Minimum Capital Risk Diversification: Risk Diversification: Correlation matrix is used for capital aggregation to reduce overall minimum capital requirement Insurance Risk Risk Diversification Credit Risk Market Risk Loss Absorption: Minimum capital requirements for par and universal life business can be reduced via risk share with policyholders Minimum capital before loss absorption Loss absorption Minimum capital after loss absorption No risk diversification or loss absorption under SI 70

71 Q & A