A Study On China's Solvency Assessment Framework Reform

The key problem of insurance regulation is solvency regulation, while the key problem of solvency regulation is solvency assessment. Since the capital requirement was first proposed in china in 1996,10 years have been past and the solvency assessment framework has been well developed. The strengths of the existing framework are its simplicity and robustness.Furthermore, its results can be compared across companies. However, since no allowance is made for the company's specific risk profile, it's regarded as an interim solution on the way to a solvency regulation which more adequately reflects the risks an insurer is actually facing. With the launch of the latest 5 solvency report rule, the Solvency regulation in China is under reform. Some common area was found by structural comparison of the international prevalent solvency assessment models. Based on the finding, a new solvency assessment framework was proposed, which is targeted at reflecting the risks that an insurer is actually facing adequately and being feasible in china. The new framework is based on Basel IPs three-pillar structure, including 1st pillar - Quantitative requirements, 2nd pillar- Qualitative requirements and 3rd pillar- Market discipline. The introduction of a market-consistent valuation of assets and liabilities in pillar I is one of the major differences between new and old framework. It will fundamentally impact the outcome of the calculation of both the capital required as a safeguard for the company's risks (required capital) and the capital available for backing the requirements (available capital). Required capital will likely be higher than under the old framework (single-risk-factor based model), because the new framework will call for capital charges to be assigned to all risks an insurance company is facing. For some insurers, the new solvency regime may have a major impact on the capital they need to hold. Especially the investment risk, peak risks, insufficient diversification, reserving, disability and surrender risks may put pressure on capital requirements. Insurers with a high exposure to these risks may be confronted with higher capital requirements, while insurers with a conservative investment strategy and a less exposed product structure may need less capital.Compared to the current solvency assessment framework, the new integrated risk model is a fundamental change. The analysis of its impact on insurers' product design, investment strategy and insurance market structure was discussed. The major benefit of the new framework for the insurance industry is its enforcement of risk-adequate pricing of insurance products. It may therefore also foster product innovation that brings together customized products with manageable risk features. Furthermore, the new framework will reinforce insurers' focus on economic value creation, which is inevitably linked to strong risk management. However, should note the cost of regulation will be increased correspondingly.