On October 21, 2008, the China Insurance Regulatory Commission of the PRC (CIRC) issued the Circular on Implementing the Administrative Provisions on the Solvency of Insurance Companies which went into effect on the same day. The Administrative Provisions on the Solvency of Insurance Companies, which the Circular intends to implement, replaced the 2003 Provisions for the Administration of the Insurance Company Solvency Quota and Regulatory Indices (the 2003 Provisions). The 2003 Provisions did not prioritize solvency issues. In fact, they did not even mention the responsibility of insurance companies to manage their costs and assure their solvency.
In a bull market, a weak regulatory environment that allows insurance companies to focus on chasing growth as opposed to shoring up their solvency is tenuous, but feasible, as long as the market continues to grow. In the midst of the global credit crisis, however, declining investment returns, excessive reliance on investment-type insurance products, and solvency problems have put serious strain on Chinese insurers. Moreover, demand for insurance policies is expected to drop this year, while overseas investment risks rise. In this context, the 2008 Provisions emphasize solvency issues and increase solvency requirements for insurance companies, particularly with respect to minimum capital assessment standards and solvency reports.
Minimum Capital Assessment Standards
According to the 2008 Provisions, the minimum capital of a property insurance company must be no less than the sum of the minimum capital for its non-life, guarantee-type insurance business (the NLGT Business) and the minimum capital for its non-life, investment-type insurance business (the NLIT Business).
The minimum capital for the NLGT Business is the larger of the following two numbers:
- The insurance company’s net premiums in the last accounting year after deducting business tax and surtaxes, 18 percent of the amount below 100 million RMB and 16 percent of the amount above 100 million RMB; or
- The average amount of “comprehensive indemnity” in the last three years, 26 percent of the amount below 70 million RMB and 23 percent of the amount above 70 million RMB.
The 2008 Provisions provide a formula for calculating the “comprehensive indemnity,” which equals the sum of the outstanding loss reserves drawn in the current period, outstanding loss reserves carried back from the last period and reinsurance indemnity expenses, less reinsurance recoverables and recovery income.
The minimum capital for the NLIT Business is the sum of the minimum capital for its risk-based insurance premiums and the minimum capital for its investment capital. In particular, the assessment standards for the minimum capital of the NLGT Business are applicable to the calculation of the minimum capital for risk-based insurance premiums, while the minimum capital for its investment capital is the sum of the following two numbers:
- 4 percent of the term-end liability reserves of the investment capital of non-life investment insurance products with assumed earnings; and
- 1 percent of the term-end liability reserves of the investment capital of other non-life investment insurance products aside from those with assumed earnings.
Similarly, the minimum capital of a life insurance company is the sum of the minimum capital for its “long-term personal insurance business” and the minimum capital for its “short-term personal insurance business.” In this context, “long-term personal insurance business” refers to personal insurance policies that last more than one year. “Short-term personal insurance business” refers to personal insurance policies that last one year or less.
The minimum capital for an insurance company’s long-term personal insurance business is the sum of the following two numbers:
- 1 percent of the term-end liability reserves of investment-linked life insurance products or 4 percent of the term-end liability reserves of other life insurance products, and
- 0.1 percent of the risk-based insurance premiums of term death insurance that lasts less than three years, 0.15 percent of the risk-based insurance premiums of term death insurance that lasts three to five years, or 0.3 percent of the risk-based insurance premiums of term death insurance that lasts more than five years and other types of insurance.
The risk-based insurance premiums equal the valid insured amount less the term-end liability reserves. Specifically, the valid insured amount refers to the maximum amount that the insurance company will pay in the event that an accident occurs that entitles the policy-holder to the maximum amount of compensation as stipulated in the insurance contract, while the term-end liability reserves refer to the minimum amount of liability reserves permitted by law.
The assessment standards for the minimum capital for NLGT Business are applicable to the calculation of the minimum capital for short-term personal insurance business.
The minimum capital of a reinsurance company is the sum of the minimum capital for its property insurance business and that for its personal insurance business as calculated according to the above-mentioned standards.
Consolidated Solvency Reports for Foreign Insurance Companies’ Branches in China
Before October 31, 2008, foreign insurance companies with more than one branch in China had to select their primary reporter of solvency reports and inform of CIRC of their selection. Primary reporters cannot be changed once they have been determined. The primary reporter shall not be changed at will once it is determined. The primary reporter of the branches of a foreign insurance company regards all of the company’s branches in China as a single entity for the purposes of consolidating solvency reports.
Time Limit for Filing a Quarterly Solvency Report
Insurance companies are required to file quarterly solvency report within 15 days after the end of each quarter. This time limit may be postponed for three days in the event that it falls on a national holiday. The 2008 Provisions do not alter the contents of a quarterly report or the method of filing such report.