Benjamin Chen, deputy general manager of life insurance consulting, at Willis Towers Watson China, analyses the impact of the China Risk Oriented Solvency System (C-ROSS) and the challenges it is posing insurers.

C-ROSS background

A report by reinsurance broker Guy Carpenter explains that the China Insurance Regulatory Commission (CIRC) is instituting sweeping changes through its three-tiered C-Ross framework that will dramatically impact how (re)insurers conduct business.

The report notes that C-ROSS will strengthen capital requirements, risk management and transparency disclosures – bringing China in line with, and in some cases overtaking, global standards.

The C-ROSS framework is therefore similar to Solvency II: with its three tiers focusing on quantitative, qualitative and disclosure requirements.

"Less than three years from concept to full implementation: celerity of which European Insurance and Occupational Pension Authority officials can only dream, but time will tell if C-ROSS is ready for the market, and vice versa," says the Guy Carpenter report.

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Industry view on C-ROSS from Willis Towers’ Watson’s Benjamin Chen

C-ROSS has been effective since the beginning of 2016. By directly linking to the solvency status of an insurer, C-ROSS has brought management, especially risk management, to the forefront of their business priorities.

While projecting capital requirements, C-ROSS allows companies to use assumptions – which when compared to the solvency system before C-ROSS – are more reflective of how their business is performing.

So if a company is running well, i.e. continuously selling profitable products with proper management, its liability may reduce and more financial resources could be released to support business development.

On the other hand, by basing the required capital directly on the different categories that companies are facing, as well as their diversifications, C-ROSS sets a higher standard on the solvency margin on top of the liabilities.

In conclusion, for companies with higher profit margins, more can be recognised and capitalised in the available capital. But if greater uncertainties are associated with the future realisation of these profits, more capital is frozen with the solvency margin.

Such a new system may change a company’s strategy and operations. Insurers are expected to focus more on the balance between the profits they can achieve and the risks behind it, and seek a way of taking every unit of risk more efficiently.

Insurers also need time to develop. At Willis Towers Watson, we are seeing companies face two levels of challenges relating to C-ROSS. One is related to technique.

As C-ROSS is much more complex than CSI, many companies struggled to meet the new requirements within a tight timetable in the previous year when trial-runs were conducted.

The second level of challenge comes from strategy and objectives. In this new solvency regime, companies may need to rethink their competitive advantages stemming from new product design, sales and operations, risk management etc.

Few players can be clear how to manage the second challenge before handling the first one because the quantitative results will provide them with a direction on their future strategies. Through close and frequent communication with the industry, Willis Towers Watson believes that most of the companies are near to solving the first level challenge, and are positioning themselves to consider how to handle the second.