The Chinese Ministry of Finance (MoF) and the China Insurance Regulatory Commission (CIRC), the insurance industry regulator in the People's Republic of China, have jointly issued detailed rules requiring insurance companies to adopt new accounting standards in compiling their 2009 financial reports.
Under the new accounting rules, insurance-related risks under a mixed insurance and non-insurance policy will be recorded separately from non-insurance-related risks. Income from non-insurance-related risks will no longer be treated as premium income. Where separation cannot be made, the policy will be subject to the test of substantial insurance risk. This test must be applied as at the effective date of the policy and the key determination is whether or not the insurer will be liable to pay out substantial additional benefits on the occurrence of an insured incident. If yes, then the policy will be regarded as an insurance policy and the income will be treated wholly as premium income, and vice versa.
The new accounting rules also set out new standards for calculating provisions, which may help many insurers to reduce their provisions. As a result, most insurers are expected to report higher net assets and profits under the new accounting rules. However, MoF and CIRC emphasised that the implementation of the new accounting rules would not have significant impact on the financial condition and solvency of the insurers.
Prior to the implementation of these new accounting rules, insurance companies which are listed in both mainland China (i.e. A-shares) and Hong Kong (i.e. H-shares) had to prepare two different sets of financial reports to meet the Chinese domestic accounting standards as well as the Hong Kong accounting standards, which are in accordance with international accounting rules. The new accounting rules now require insurance companies to adopt unified accounting standards in their 2009 A-share and H-share financial reports. The MoF says that the aim of these new accounting rules is to move insurance companies towards adopting international accounting standards.