In January 2016, the China Insurance Regulatory Commission (CIRC) launched the China Risk Oriented Solvency System (C-ROSS).
The move has been widely regarded by financial service professionals as a major development in Chinese insurance regulation.
The gradual implementation of C-ROSS has meant that many insurers are only beginning to feel the impact of the new regulatory model, six months on.
When the CIRC published its conceptual framework for C-ROSS in May 2013, its main objectives for the new self-regulatory model included an internationally compatible solvency system, a strong emphasis on management of risk-orientation, and an improved supervisory ‘framework’ that accurately reflects China’s continuously evolving insurance market.
Timetric analyst’s view
Liberalisation and diversification are essentially the key objectives for the new regime.
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These new requirements will help create a fluid system that allows insurers to adapt quicker to the rapid changes, but might initially challenge smaller companies trying to meet heightened solvency standards.
For instance, insurers are expected to not only lower market-based pricing in order to maintain a high capital discipline, but also diversify their businesses more, moving into such lines of business as liability, and speciality to gain as much of a competitive advantage as possible.
‘Bearing the brunt’
Life businesses are expected to bear the brunt of this diversification, being asked to engage in increased promotion of affordable practices, such as regular premiums and savings in health care.
This will encourage better preparation for the next round of regulatory developments, but without meeting initial C-ROSS solvency requirements there is little chance of diversification or liberalisation. Thus, a failure to achieve solvency may leave some insurers unable to expand their businesses under the new model.
ACR’s group chief executive, Hans-Peter Gerhardt, expands on C-ROSS’s stance towards onshore reinsurers, stating that Chinese diversification of risk could be "negatively affected in the short term", because "more risks are either retained by cedants or diverted to domestic reinsurers". This may increase demand for non-proportional treaty reinsurance, to "cover more risks".
Non-life brokers should, perhaps, be the most concerned by these predictions. Technological innovation will play a large role in diversification under C-ROSS, and so the emerging presence of their online counterparts could result in a breakdown in relationship between them and customers.
After considering the complex nature of C-ROSS and its various implications, it is apparent that Chinese insurers and reinsurers are closer to working out how to prosper under the new regulation, but still have quite a way to go.
Willis Tower Watson China’s Benjamin Chen believes that if the acclimatisation process is to be seen as a two-tier challenge, then companies are "near to solving the first level challenge, and are positioning themselves to consider how to handle the second".
Because risk management plays such a large role in C-ROSS, insurers have had to quickly assess and reconsider the way they operate, in order to meet the increased solvency standard which will provide them with the basis upon which to liberalise and diversify.
These quantitative results hold the key to negotiating the so-called ‘second level’, reconfiguring strategies so that the insurer’s objectives give them a competitive advantage.
As insurers are not at the stage yet where they can acquire a definitive set of quantitative results, they can only speculate about which direction to take afterwards, a fact only made more complicated by the numerous amendments the CIRC will make to its new regulatory model in the future.
Thus, while the Chinese insurance industry certainly seems closer to cracking the code of C-ROSS, only time will tell which companies will benefit under the new regime.