CIRC has issued a draft regulation which when approved would require credit insurers to have a core solvency ratio of at least 75% and a comprehensive solvency ratio of not less than 150% at the end of the immediate past quarter.
The goal is to strengthen the management of credit insurance business and to regularise its operations.
The insurance regulator also states in the draft that insurers which fail to meet the solvency requirements should suspend new credit insurance business until they are able to meet the requirements.
In addition, the amount of credit insurance underwritten and retained by an insurance company should not exceed 10 times the net asset value of the company at the end of the previous quarter.
Furthermore, the amount of credit insurance underwritten and retained in respect of a single customer or connected party should not exceed 5% of net asset value or CNY500 million (US$73.2 million), whichever is lower. Any excess must be placed with a reinsurer; otherwise, underwriting of the risk is disallowed.
Insurers which underwrite credit business must set up a special credit insurance department or management team. The team must have professionals covering three aspects of the business: risk control; audit and management.
In recent years, with the proliferation of P2P lending platforms, credit insurance business has also grown. Indeed, some online lending platforms lure lenders by citing the availability of credit insurance in their marketing. While credit insurance business is considered risky, the returns are considered high as long as there is no default.
The proposed regulation follows heavy losses suffered by a medium-sized insurer ZheshangP&C Insurance in the wake of the default of retail bonds issued by two subsidiaries of the Guangdong-based telecom group Cosun.
Hangzhou-based Zheshang reported a net loss of CNY649 million (US$94 million) for the 2016 financial year, the highest loss posted by a nonlife insurer in China last year. It had provided credit insurance on the bonds which were for CNY1.15 billion. The insurer which had net assets of less than CNY1.3 billion but had been exposed to risk of almost similar magnitude. A bank guarantee which Zheshang had relied on before it issued the credit insurance policy was said to be a forgery by the bank.
The proposed new rule will also bar insurers from doing business with online lending platforms which do not meet online financial regulations. In car and housing finance, insurers are not allowed to provide cover of more than CNY5 million to a single organisation and not more than CNY1 million to a single individual. The limits for other credit insurance cover are CNY1 million for organisations and CNY200,000 for individuals.