C-ROSS Insurance Regulation Reform in China Jiangang He, FSA, FCIA & Ellen Yang, FFA IAA Fund Seminar November 7 th,2015 Bangkok
SPEAKERS Jiangang He Deputy Director CAA Jiangang has more than 10 years of experience in the life insurance and reinsurance industry in China and Canada, covering product development and pricing, valuation and financial reporting, MCEV, experience study, economic capital and actuarial system implementations. Jiangang is a Fellow of the Society of Actuaries, Fellow of Canadian Institute of Actuaries and Fellow member of China Association of Actuaries Ellen Yang Associate Director KPMG Ellen has more than 12 years of experience and qualified as a life actuary. She sits on the council of the IFoA. Ellen currently is seconded to the CIRC to help the implementation of C-ROSS. She was heavily involved in the discussions with various international organisations including regulators, actuarial associations and re/insurance companies. 2
AGENDA Development Technical Discussion Opportunity and Challenge 3
RMB Billion 1,600 1,400 1,200 1,000 800 600 400 200 0 Overview of China Insurance Market China Life Insurance Market Size (Direct Written Premium) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Life Insurance The past ten years have been the golden era for the rapid growth of the life insurance market in China. Main drivers were: Continuous high growth in GDP Aging population Urbanization CAGR=16% Change in the social benefits. Insurance premium mainly came from participating business and bancassurance channel RMB Billion 900 800 700 600 500 400 300 200 100 0 China Non-Life Insurance Market Size (Direct Written Premium) CAGR=20% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Non-Life Insurance Motor insurance has dominated the Chinese non-life market. Commercial property insurance, agriculture insurance and liability insurance are the next three most significant product lines. Natural catastrophe events in China in recent years have raised awareness of the need for property insurance and catastrophe insurance. 4
Marketisation on Front-end Reformation on asset management Ease restrictions on available investment instruments Relax the proportion limitations of investment classes Deregulating front-end Pricing deregulation on life products Traditional life(2013) Universal life (2015) Participating life(2015) Motor pricing deregulation(2015) Prior Approval to Filing Afterward 5
The Facts and Main Issues of C-SI C-SI Facts Main Issues Prudent asset and liability valuation Volume based fixed ratio capital requirement 16%/8% of non-life insurance net premium 4% of life insurance reserve Does not comprehensively reflect risks Low sensitivity to risks No considerations given to risk management capabilities Difficult to regulate the rapid growth market with more comprehensive risks Difficult to meet the requirements of: The management and regulation on more versatile and complex risk profile. Marketisation of insurance market. Sustainable and healthy growth of insurance industry 6
Suitable Regulation Reform for China Cannot use mature market model Based on mature market No reflection of emerging market features Not suitable to apply directly to emerging market Consider emerging markets situation Comply with the international development trend of the solvency regulation Actively participate in the formulation of international rules, reflect the requirements of emerging markets Historic opportunity - China's insurance industry to participate in international rule-making 7
Strengthen Back-end: C-ROSS 1 2 3 One Principle - Risk Oriented - Measure risks using quantitative and scientific methodology Two Objectives Build a new system targeting: - Globally comparable - Emerging Market Features Three Pillars under C-ROSS framework - Pillar One: Quantitative capital requirement - Pillar Two: Qualitative regulatory requirement - Pillar Three: Market discipline mechanism 8
C-ROSS Framework Centralized supervision Top level Characteristi cs of C-ROSS governance Emerging market Risk-oriented and value emphasized One regulatory body on nation-wide basis Avoid systematic and regional risks Consider both capital efficiency /benefits Put more emphasis on: - qualitative supervision - execution and discipline - market adaptability and dynamics - the cost of capital and capital efficiency Pillar I Quantitative capital requirement Pillar II Qualitative regulatory requirement Pillar III Market discipline mechanism Second level The Three Pillars Key objective:manage the quantifiable risks 1. Quantitative capital requirement 2. Actual capital position 3. Capital classification 4. Stress testing 5. Regulatory measures Key objective:manage the nonquantifiable risks 1. The comprehensive risk rating 2. Solvency Aligned Risk Management Requirements and Assessment (SARMRA) 3. Regulatory supervision and analysis 4. Regulatory measures Key objective: manage the risks not covered in Pillar I and Pillar II 1. Public disclosure 2. Market guidance Bottom level Regulatory Basis Solvency management on company level The solvency management is part of the insurance company internal management The premise and foundation of the solvency supervision The immune system and response system of an insurance company 9
Emerging Market Features C-ROSS Industrial policies changes quickly Data issues Rapid growth Emerging Market Lack of expertise Immature market Low risk management capabilities Standard approach, no internal model requirements, lower implementation costs, easier to regulate. Covering both quantitative and qualitative measurements, operational risk is assessed under Pillar II. Assessment of risk management capabilities led by regulator is appropriate for emerging market 10
International Comparable Standards:Is comparable with the international mainstream mode Philosophy :In accordance with international development direction of regulatory rules Framework:Consistent with Basel capital in the banking sector And Solvency Ⅱ Actively participate in the international insurance regulation construction Sharing the experience of C-ROSS especially to emerging market 11
Comparison on key features between C-ROSS and SII C-ROSS Solvency II Principles Principle and rule based Principle based Measures One-year VaR One-year VaR Valuation of asset Valuation of liabilities Solvency capital requirement Method to calculate SCR Book value (market value/amortised cost/historical cost) consistent with current accounting rules Best Estimate Liabilities + risk margin Non-economic Assumptions Best estimate with compulsory upper and lower limit Economic assumptions 750-day moving average gov t bond rate + comprehensive margin varies by business lines SCR = SCR Q +SCR NQ SCR Q - Market risk, insurance risk and credit risk Diversification Benefit SCR NQ = -0.005S+0.4, where S ranging from 0 to 100, score by regulatory assessment Standard formula Market value/fair value Best Estimate Liabilities + risk margin Non-economic Assumptions Current Best Estimate Economic assumptions Current risk free rate + illiquidity premium Quantifiable - Market risk, insurance risk, credit risk and operational risk Diversification Benefit Standard formula and internal model Compulsory floor BEL+RM+SCR floor at cash surrender value NONE 12
AGENDA Development Technical Discussion Opportunity and Challenge 13
02 Development 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 Academy 14
02 Development Technical Process Sample Testing 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 15
02 Development of Regulations Timeline and Framework Overall Planing Where to go How to go How long Review and Research C-SI self-evaluation C-SI vs. RBC vs. SII Research of Emerging Market Solvency Regimes Conceptual Framework Technical standards Transitional Implementation Transitional Arrangements 9 standards for Pillar I 3 standards for Pillar II 3 standards for Pillar III 1 standard for insurance group 1 standard for reporting Fully Implementation Effective Mar 2012 Oct 2012 May 2013 Dec 2014 Feb 2015 16
AGENDA Development Technical Discussion Opportunity and Challenge 17