The next phase of the China Risk Oriented Solvency System, which would be C-ROSS Phase II, will introduce tighter requirements such as the expansion of look-through analysis to more asset classes. The changes will narrow the gaps between C-ROSS and Solvency II in Europe, says Moody’s Investor Service in a recent report.
C-ROSS Phase II, which will be finalised in 2020, will introduce more stringent capital requirements and improve transparency on asset risks, says Mr Frank Yuen, a Moody’s vice president and senior analyst in the report entitled “Insurance - China, Japan: Differences with Solvency II reflect regime design in China, voluntary efforts in Japan”.
A gap will remain
Nevertheless, some differences between China and Europe will remain because C-ROSS reflects more the fundamental needs and characteristics of China’s insurance markets, including its less-developed financial markets and the relatively short track record of risk management capabilities in the industry.
Like its European counterpart, C-ROSS is based on economic capital and a three-pillar regulatory framework of quantitative capital requirements, qualitative supervisory requirements and market discipline. This has underpinned some credit positive trends in the industry, including better asset liability management (ALM) practices, says Moody’s.
Launched in January 2016, C-ROSS has not fully adopted Solvency II’s market consistent approach in its asset and liability valuation. Adoption will reduce volatility in insurers’ solvency.
C-ROSS was designed to better fit the development stage of the insurance industry and the government’s broader economic agenda. For example, its capital charges on domestic reinsurance cessions and infrastructure investments are lower so to promote the domestic reinsurance industry and public projects. These preferential treatments, while also existing in Europe, are more prevalent in China.
C-ROSS also has a different approach to disclosure standards and capital charges. This approach results in lower capital requirements for equity and credit risks, and lowers the comparability between the two regimes. C-ROSS also uses regulator-led supervisory tools more extensively than Solvency II; these tools promote and unify risk management best practices. Nonetheless, these differences reflect the fundamentals of China’s insurance industry.
C-ROSS largely follows China GAAP accounting system as a basis for valuation. This allows insurers to value long-term equity investments and held-to-maturity assets on book value and to value insurance reserves using moving average government bond yields instead of the prevalent spot rates. As a result, C-ROSS ratios are less sensitive to short-term volatility of the capital markets, which reflect insurers’ long-term holding period of investments.
Lastly, the single-regulatory model in China favours the use of regulator-led supervisory tools because some insurers have less expertise in developing their own risk management model. From a development perspective, this promotes and unifies risk management standards and governance practices. In contrast, European insurers usually compute their operational risks through their own internal models and historical data. Moody’s says that this difference could lower comparability of C-ROSS against other international solvency standards such as Solvency II. A
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