The CIRC's high-level guidance issued last week on its efforts to strengthen key aspects of the insurance regulatory regime, and close existing loopholes on policy implementation and risk management systems, sends a strong signal of policy continuation from the regulator after the latest changes among senior ranking officials, according to Moody's Investors Service.
Although the 7 April document is mostly a summary of recent policy changes including insurers’ shareholding management, life insurance product management and constraints on insurance fund investments, it also emphasises and details several regulatory issues for further refinement, notes Qian Zhu, Moody's Vice President and Senior Credit Officer.
The guidance highlights the need for the following enhancements:
- Tighter scrutiny of insurance fund usage, deleveraging investment portfolios and prohibiting insurers from investing in products with unclear risk-return characteristics;
- Refining risk factors on investment assets under China’s Risk-Oriented Solvency System (C-ROSS), the industry’s capital regime;
- Strengthening supervision, information collection and disclosures on related-party transactions, and recourse to responsible parties;
- Establishing guidance on asset-liability management (ALM), quantitative assessment of ALM effectiveness and stress tests.
The high-level guidance is credit positive because it shows the CIRC is aware of, and ready to address, several key loopholes in the current regime, such as inadequate scrutiny of shareholders’ qualifications and insufficient disclosure of related-party transactions, says Moody's. These loopholes can undermine the industry’s governance and development.
The guidance lays out a regulatory regime that will increase supervisory rigour in corporate governance, product design, agency force management, investment strategy, capital adequacy and risk management. Insurers face tougher corporate governance guidance that aims to reduce undue influence from single shareholders and prohibits improper related-party transactions.
Insurers would also be discouraged from making aggressive investments, or adopting aggressive product and acquisition strategies to grow their business. For example, they will likely face tighter restrictions on offering products that chase high investment returns without substantial protective elements.
Given China’s low interest rate environment over the past two years, these products have been highly popular and increase the industry’s profitability but pressure its asset quality and capital adequacy. The guidance indicates greater pressure on insurers to improve risk measure and management from both a regulatory and an operational perspective. In particular, the refinement of risk factors on both investment assets and insurance reserves under C-ROSS fine tunes the solvency measurement mechanism to better account for risks. Insurers would receive preferential capital treatment by selling long-term products that provide insurance protection instead of short-term savings products.
The developments’ effects will be greater for companies that have adopted aggressive strategies to achieve fast growth during the past few years. These strategies include, but are not limited to, boosting sales volume by selling single-pay savings products, offering low surrender charges, and chasing high yields by making concentrated investment positions.
In order to conform to the regulator’s new guidelines, these insurers will have to curtail such growth, but also face additional costs from having to update their product management, investment approach and risk management system.