## EXECUTIVE SUMMARY ## Source details **Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/cr/2017/cr17402.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17402.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17402.pdf.json) --- ### Sector growth, market developments, and risks - Chinese insurance sector "has been growing by over 20 percent a year" and "many individual, often newer, companies are growing at rates far in excess of the average." - New entrants, products, distribution channels, and liberalization of pricing have increased competition. - Slower economic growth and reduced investment returns expose established life insurers to the risk of loss due to the rising value of their liabilities. - Many non-life companies are moving into new lines of business as margins in established lines erode. - Resulting risks: threats to insurers’ business models, performance, solvency, and risks of misconduct in the treatment of insurance customers. ### Regulatory reform and supervisory strengths - Since the 2011 FSAP, CIRC has undertaken far-reaching reforms focusing on corporate governance, market conduct, and reshaping solvency standards into a modern, risk-based approach. - China‑Risk Oriented Solvency Standards (C-ROSS): - Draw on international practices and local market experience. - Define solvency requirements that "generally reflect risk" and reward sound risk management. - Link to in‑depth assessment of risk management, strengthening CIRC’s supervisory framework for solvency risk. - Enabled relaxation/removal of less risk‑based requirements such as new product (and reinsurance contract) approval and detailed investment limits. - CIRC applies extensive requirements on corporate governance, risk management, internal controls, reinsurance, disclosure, and conduct of business—appropriately applied to large insurance groups that account for the bulk of premium income. - Tailored approach developed for the one Global Systemically Important Insurer (G-SII) for which CIRC is lead supervisor; preparing similar regime for Domestic Systemically Important Insurers (D-SII). - Cooperates with international regulators for insurers/reinsurers doing business in China as branches, subsidiaries, or joint ventures. - Has extensive intervention and enforcement powers and a funded insurance guarantee scheme (CISF) to support orderly exit while providing policyholder protection. ### Overall assessment against ICPs and methodology - Regulatory system assessed to have "a good level of compliance with the Insurance Core Principles (ICPs)." - Assessment basis: ICPs issued by IAIS in October 2011, as revised up to November (2011 revision context noted). - Assessment team and timing: "This assessment was carried out by Ian Tower (IMF Expert) and Serap Gonulal (World Bank) from November 28 to December 17, 2016." - ICP assessment totals: - Observed (O): 8 - Largely observed (LO): 14 - Partly observed (PO): 4 - Not observed (NO): 0 - Total: 26 ### Identified gaps and areas for development - Supervisory prioritization and judgment: - No single supervisory process brings together an overall view of a particular insurer to ensure allocation of supervisory resources to mitigate the highest priority risks. - Need for more proactive assessment and relatively greater resourcing for larger insurers; likely requires increased resources for insurance group supervision or a stronger system of lead supervision. - Risk that cross‑departmental issues or groupwide risks may be missed despite good internal collaboration. - Cross‑agency and international cooperation: - Scope for increased cooperation with other agencies, including CSRC (asset management issues) and foreign regulators. - Need for CIRC to develop an approach to recognition of other supervisors in licensing and groupwide supervision. - Crisis preparedness and resolution: - More should be done on crisis management for larger groups, building on progress with the G‑SII on crisis preparedness, recovery, and resolution planning. - Market conduct and consumer protection: - CIRC’s focus on market conduct has benefited from a dedicated consumer protection function and increasing thematic work. - Recommended: review risks (including mis‑selling), develop a plan for supervisory resource direction, and fill gaps—particularly in disclosures—for supervision of intermediaries. - Further development of C-ROSS and solvency framework: - Implementation needs time to be embedded; "it will be appropriate for CIRC to plan for further movement to a more market consistent basis for valuation, taking account of local market conditions." - Incentivize development of more complex approaches (e.g., valuation of options and guarantees). - C-ROSS processes place particular weight on CIRC issuing risk ratings and delivering risk management assessments; some elements are "more mechanistic than judgmental" and could be developed to expand supervisory judgment in the "Pillar 2" process. - Development of a full Own Risk and Solvency Assessment (ORSA) regime is recommended—current C-ROSS gives limited role to insurers' own quantification of risks and solvency requirements. - Review approach to solvency control levels to clarify when CIRC will intervene above minimum requirements. - Improve public understanding of disclosures associated with C-ROSS. - Legislative and institutional issues: - Changes to the legislative framework are recommended to strengthen CIRC’s ability to undertake effective regulation and supervision. - While CIRC has clear statutory objectives and "a high degree of day-to-day operational independence," aspects of the framework expose it to undue political influence (particularly through its funding mechanism) and constraints on its ability to staff and organize as necessary. - CIRC’s mandate, functions, and internal organization are established by the State Council, creating potential conflict between regulatory and development objectives given the Government of China’s commitment to insurance market growth. - Recommendation: authorities should review the legislative framework for insurance to strengthen the independence of CIRC. ### Key policy recommendations (summarized) - Strengthen supervisory resources and group supervision capacity, including lead‑supervisor arrangements for large insurers. - Enhance cross‑agency and foreign supervisory cooperation and recognition for licensing/group supervision. - Advance crisis preparedness, recovery, and resolution planning for large groups and D‑SIIs. - Deepen market conduct supervision: review mis‑selling risks, prioritize supervisory resources, and fill disclosure gaps for intermediaries. - Progress C‑ROSS toward more market‑consistent valuation methodologies and greater supervisory judgment in "Pillar 2"; develop and implement a full ORSA regime. - Clarify solvency control levels and public disclosure to improve market understanding. - Review and reform the legislative framework to strengthen CIRC’s operational independence and minimize undue political influence. *Source: EXECUTIVE SUMMARY (cr17402), People’s Republic of China FSAP assessment; assessment carried out November 28 to December 17, 2016.* --- ### INSTITUTIONAL, MARKET, AND STATISTICAL OVERVIEW ### Supervisory authority, legal context, and structure - CIRC is the principal entity responsible for insurance supervision in China; a ministerial public service department reporting to, and carrying out administrative functions delegated by, the State Council. - CIRC supervises insurance, reinsurance, insurance asset management companies (IAMCs), insurance brokers and agents. - CIRC is financed by levies on insurers' capital and net retained premiums. - CIRC has 36 regional bureaus and its head office in Beijing. - Supervision largely based on the Insurance Law; insurers must also comply with other acts and CIRC regulations and rules. - China is a member of the IAIS, but is not a signatory of the IAIS Multilateral Memorandum of Understanding (MMoU). ### Industry structure, size and concentration (selected statistics) - 2015 market position and volumes: - Chinese insurance market was the third largest in the world in 2015. - Total industry premiums were 3.59 percent of GDP. - Total assets amounted to RMB 12.3 trillion. - The average Chinese citizen spends approximately US$280 per year on insurance. - Total gross insurance income of RMB 2.4 trillion was recorded in 2015. - As of end‑2015, there were 75 life and 74 nonlife insurance companies; among these 52 domestic and 22 “foreign invested” companies. - Life sector specifics: - Life insurance accounted for 56 percent of gross premiums in 2016. - Total written premium of the life insurance sector excluding personal accident and health: - 2014: RMB 1,090,160 million - 2015: RMB 1,323,925 million - 2016: RMB 1,744,222 million - Participating business throughout the decade has taken approximately 52 percent of the market. - 2016 premiums (Table 2 figures): - Life Premium (millions of renminbi): 2,223,461.28 - Non-Life Premium (millions of renminbi) including Personal Accident and Healthcare: 872,449.81 - Total Premium (millions of renminbi): 3,095,911.09 - Life Premium (millions of US dollars): 334,632.95 - Non-Life Premium (millions of US dollars): 131,304.49 - Total Premium (millions of US dollars): 465,937.44 - Percent of total market: Life 71.8; Non-Life 28.2; Total 100 - Non‑life and motor insurance: - In 2015, motor insurance accounted for over 73 percent of total non‑life premiums. - Motor accounted for 73 percent of total P&C insurance premiums in 2015. - Private cars rose by over 20 percent a year between 2003 and 2015. - Personal Accident and Healthcare Insurance account for close to 14 percent of premiums written. - Market concentration: - Top 10 insurance companies account for nearly 76 percent of Gross Premiums Written. - Non‑life market dominated by: - PICC Property and Casualty Company Limited (33.4 percent) - Ping An Property and Casualty Insurance of China (19.4 percent) - China Pacific Property Insurance Company (11.2 percent) - With exception of AIA, life insurance business is not open to foreign companies except through joint ventures where foreign shareholder may have up to 51 percent equity. ### Distribution channels, compulsory lines, and emerging channels - Distribution channels: insurance agents, insurance brokers, direct sales, and emerging channels such as the internet. - Bancassurance: - Bancassurance share is growing: it accounts 40 percent in life but is far less significant in non‑life. - Bank channel declined temporarily from 2012 due to regulatory restrictions and falling competitiveness of life policy returns; now growing again as more banks buy shares in their own insurance companies. - Emerging channels: telemarketing, cross‑selling and the mobile internet; "online-to-offline" business model growing. - Compulsory insurance lines: motor third party liability, carriers' liability and travel agents’ liability are compulsory. ### Financial aggregates (selected, end‑2015) - Total assets of life insurance companies: RMB 9,944 billion - Total assets of non‑life insurance companies: RMB 1.8 trillion - Life industry total profit: RMB 174.32 billion - Non‑life insurance premium income: RMB 842.17 billion ### Insurance pools and catastrophe risk arrangements - China Residential Earthquake Insurance Pool (CREIP): - Created by 45 primary insurers on April 16 2015; led by PICC Property and Casualty Company Limited. - Coverage: damage by earthquakes of magnitude 4.7 and above, fire following, tsunami and subsidence or landslide caused by earthquake. - Basic sums insured: RMB 50,000 for urban homes and RMB 20,000 for country homes. - First policy sold on July 1, 2016. - The average rate is reported to be 0.04 percent. - China Agricultural Reinsurance Pool (CARP): - Commenced operations on 1 January 2015 under administration of China P&C Re. - 23 direct insurers are members; China Re expected to write around 80 percent of the pool's estimated premium income of RMB 3.7 billion in 2015. - Direct insurers joining the pool must cede at least 50 percent of their agriculture cessions to the pool. - CARP writes around 50 percent of total agricultural reinsurance premiums. - China Nuclear Insurance Pool (CNIP): - Pool lacks legal capacity to issue its own policies; risks are written by individual pool members. - All premiums are ceded to the pool and retroceded to members according to underwriting capacity calculated by the CNIP board each year. - Pool managed by China Re P&C; pool members' nuclear risk capacity limited to 5 percent of their total assets. - CNIP writes shares of over 300 nuclear plants worldwide and is said to be the third largest nuclear pool in the world in terms of underwriting capacity. *Source: Assessment based on laws, regulations and supervisory practices in place at the time of the assessment in December 2016.* --- ### SUPERVISORY FRAMEWORK, RESOURCING, AND PRACTICES ### Supervisory framework and classification - CIRC has broad powers to supervise insurers, intermediaries, loss‑adjustors, actuaries and other persons in the insurance sector. - 36 local insurance regulatory bureaus participate in supervision and C-ROSS/SARMRA assessments. - Classification-based supervision uses integrated risk ratings (IRR) assessed each quarter on the previous 12 months' data; companies classified A, B, C, D with graduated supervisory actions: - Category A: meet required solvency standard and present no problems. - Category B: meet solvency but present certain problems; required rectification plans and potential increased inspections. - Category C: do not meet required solvency standard or present comparatively serious problems; may face capital increases, restrictions, portfolio transfer, sale of assets. - Category D: fall seriously below required solvency standard or present serious problems; may be subject to forced takeover. - CIRC has a Solvency Regulation Committee and a risk surveillance and analysis mechanism; Solvency Regulation Committee has held 35 quarterly meetings. ### Reporting, off‑site monitoring and on‑site inspection - Electronic filing system collects quarterly and audited annual financial statements in prescribed formats and over 100 indicators for risk monitoring. - C‑ROSS (Pillar 3) reporting from January 2016 enhances disclosure: quarterly solvency ratio (adjusted by SARMRA), IRR rating (A to D) and highlights of quarterly solvency report must be disclosed. - Off‑site monitoring: data on over 100 indicators; combination of solvency ratio and assessed unquantifiable risks drives IRR. - On‑site inspection: scope determined by annual plan; Inspection Bureau organizes planned and unplanned inspections; recent on‑site work includes products and sales practices and targeted corporate governance inspections (38 companies by end‑2015). - Supervision of groups relies on coordination within CIRC and a small coordination team; five staff in DRD responsible for group oversight. ### Organization, resourcing and human capital - Supervision undertaken by institutional and functional specialist units; core supervisory team typically includes a legal expert, an economist and a mathematician or actuary. - Three‑layer structure: headquarters, provincial offices and prefecture‑city Insurance Sub‑Bureaus. - "92.3 percent have more than five years of work experience." - CIRC believes it can attract sufficient talent but resources are stretched and under increasing pressure from need to analyze and respond to developments. - Assessment: Largely Observed with resource and capacity constraints noted. ### Preventive, corrective and enforcement powers - Legal powers (Insurance Law Articles 158 and 159) permit necessary measures to ensure firms meet legal requirements and commitments to policyholders. - Typical rectification measures include ordering capital increases or reinsurance, limiting business scope, restricting dividends, ordering auction of assets, stopping new business. - Escalation includes appointment of rectification teams and potential governance by CIRC for seriously insolvent firms. - Administrative sanctions framework exists; 2015 revision of the Insurance Law did not update Chapter VII Legal Responsibility; draft revision intends to upgrade penalty limits. - Assessment: Preventive and corrective measures Observed; enforcement Largely Observed. ### Winding‑up, exit and policyholder protection - Framework under Insurance Law and Enterprise Bankruptcy Law; CISF is the only guarantee scheme. - CISF balance as of end‑November 2016: RMB 94 billion. - CISF compensation limits: - life: individual policyholders no more than 90 percent of policy benefits prior to transfer; company no more than 80 percent. - non‑life: full coverage on losses up to RMB 50,000 and of any further loss, 90 percent for individual policyholders, and 80 percent for corporates. - Gap identified: no clear statutory point at which it is no longer permissible for an insurer to continue business (e.g., falling below a clearly‑defined minimum capital requirement). - Assessment: Largely Observed. --- ### RISK MANAGEMENT, VALUATION, INVESTMENT, AND SOLVENCY ### ICP 14 — Valuation (framework and life/non‑life specifics) - Valuation standards for solvency based on ASBEs; ASBEs based on IFRS since 2006 with adjustments by CIRC for solvency purposes. - Valuation interest rate for best estimate of life liabilities: based on a 750 day moving average of the government bond yield; prescribed premiums may be added to the risk‑free rate, including a liquidity premium varying by product type. - In absence of reliable government bond yield curve beyond 10 years, insurers must use an Ultimate Forward Rate for liabilities over 40 years (4.5 percent at present) and an extrapolation basis for 10 to 40 years period. - Prescribed factor‑based approach to TVOG; valuation framework does not allow adjustments for insurer’s own credit standing. - Life liabilities valued as sum of: - best estimate valuation; - risk margin over current estimate (MOCE) based on CIRC‑prescribed scenarios or cost of capital approach; - amount for TVOG (Solvency Regulatory Standard No. 3). - Caps on valuation interest rate for premium reserves: - ordinary and universal products: 3.5 percent; - participating products: the lower of the pricing interest rate and 3.0 percent. - Mortality/longevity assumptions based on prescribed table from 2000–2003; new table based on 2010–13 data under development. - Non‑life liabilities: unearned premium reserve, incurred and reported claims reserve, and IBNR as per CIRC‑prescribed methods; non‑life reserves are not discounted. ### ICP 15 — Investment framework and limits - Investment rules and limits (CIRC Notice on Enhancing the Supervision of the Investment Ratios of Insurance Funds): - equity: 30 percent; - real estate, excluding own‑use property: 30 percent; - other financial assets: 25 percent; - overseas investments: 15 percent. - For real estate, own‑use property may not exceed 50 percent of net assets. - Liquidity risk monitoring thresholds: - no less than 5 percent of assets liquid for life insurers; - 7 percent for non‑life insurers. - Concentration limits: - single fixed income/equity/real estate/other financial asset: 5 percent of total assets; - venture capital funds: 2 percent of total assets; - single fund: 20 percent of the fund’s offering size. - Derivatives may not be used to take on investment risk; simpler derivatives permitted for hedging. - IAMCs: permitted; must be at least 75 percent owned by insurance companies. ### ICP 16 — Enterprise Risk Management (SARMRA, classification and ORSA) - SARMRA requires organizational structures, management systems, risk evaluation mechanisms and a risk appetite system covering multiple risks. - Insurer classification for SARMRA: - Class I: established > five years and, if non‑life, written premiums > RMB 5 billion or total assets > RMB 20 billion; if life, written premiums > RMB 20 billion or total assets > RMB 30 billion; or >15 provincial branches. - Class II: branches of foreign insurers and any insurer not meeting Class I criteria. - At assessment time: 62 Class I companies and 100 Class II companies. - Expectations higher for Class I firms, including economic capital model use and stronger CRO role. - Group risk coverage not explicit in SARMRA; no full ORSA requirement aligned to ICPs—insurers must self‑assess some risks quarterly and annually but no comprehensive ORSA as described in ICPs. - Assessment: Partly Observed. - Recommendations: - Develop approach to include group risks explicitly in SARMRA. - Extend SARMRA to require ORSAs agreed by Boards and submitted to CIRC as input into SARMRA. - Make SARMRA more risk‑based after first year of assessments. ### ICP 17 — Capital adequacy and C‑ROSS structure - C-ROSS effective January 1, 2016; 17 standards; three‑pillar approach; calibration target: 99.5 percent over one year (same as EU Solvency II). - Pillar 1 (quantitative): addresses insurance, market and credit risks; excludes operational risk; prescribed factors deliver minimum capital requirements; available capital: equity and preference shares up to 30 percent of total eligible as core capital; supplementary capital includes subordinated loans (limited to 25 percent of total where under 5 years). - Minimum solvency ratios: 100 percent (comprehensive ratio) and 50 percent (core ratio) must be met at all times. - Pillar 2 (qualitative/SARMRA): evaluates four "unquantifiable risks": operational, strategic, reputation and liquidity; SARMRA results can adjust Pillar 1 minimum solvency requirement within bounds: maximum increase of 40 percent and low level of minus 10 percent. - Pillar 3 (disclosure): insurers must disclose quarterly solvency ratio (adjusted by SARMRA), IRR rating (A to D) and highlights of quarterly solvency report; IRR must be disclosed in documentation given to policyholders. - Solvency control levels and intervention: - CIRC views minimum solvency requirements as an MCR in ICP terms; strong action would be taken for failure to meet minimum though not immediate receivership. - Under previous system, 150 percent of minimum was trigger for intervention; CIRC deliberating intervention points above minimum. - Assessment: Largely Observed. - Concerns and recommendations: - Exclusion of internal models and full ORSA limits firm‑driven risk quantification. - Operational risks excluded from Pillar 1 even where quantifiable. - Review treatment of credit risk on offshore reinsurers and equity risk in light of market volatility. - Establish clear solvency control levels (PCR and MCR) and publish intervention approach. --- ### SYSTEMIC RISK, CROSS‑BORDER SUPERVISION, AND CRISIS PREPAREDNESS ### Products, channels and systemic considerations - Insurers have experimented with products sometimes associated with systemic risk, including variable annuities (piloted in 2009) — limited success due to lack of deep derivative markets. - CIRC identified increased credit insurance (mostly loan insurance and performance guarantees) being written by non‑life insurers. - CIRC uses reported data and targeted stress tests and draws on macroeconomic data to monitor sector risks. - Focus largely domestic due to limited international footprint; monitors influence of distribution channels such as bancassurance. ### D‑SII and G‑SII frameworks and current application - CIRC developing D‑SII process and expects to finalize and implement framework in 2017; proposals based on G‑SII framework and consider corporate governance, scale, external interconnectedness, asset liquidation and substitutability. - CIRC applied the G‑SII framework to the Ping An Group: - Worked with group on Systemic Risk Management Plan, Liquidity Management Plan and recovery and resolution planning (RRP). - CMG established in 2014 for Ping An Group: CIRC (chair and groupwide supervisor and resolution authority), CBRC and CISF. - Assessment: Largely Observed for systemic frameworks. ### Cooperation and coordination domestically and internationally - Domestic cooperation: Financial Regulatory Coordination JMC established with secretariat by PBC; JMC remit includes regulatory policies, financial stability and information sharing; meets quarterly. - MoUs exist (e.g., with CBRC) and a working party of heads of three regulatory bodies meets quarterly. - Cross‑border cooperation: - CIRC has bilateral MoUs with overseas supervisors (examples include BaFiN, Hong Kong authorities, Macao, NAIC, EIOPA, IAIS). - China not signatory of IAIS MMoU but considering application. - CIRC has not established a college of supervisors; attends colleges established by foreign regulators where relevant. - CIRC does not carry out an assessment of equivalence of foreign regulators’ requirements ("supervisory recognition"). - Assessment: Partly Observed for cross‑border cooperation and recognition. ### Crisis preparedness, resolution and recommendations - CIRC’s cross‑border crisis management work limited reflecting low cross‑border business; focus on RRP for G‑SII (Ping An) with resolvability assessment completed first version in June 2016. - Experience with CISF support in 2008 for two life companies informs practice. - Recommendations: - Deepen supervisory cooperation within JMC and bilaterally, including with CSRC. - Establish framework for assessing equivalence of foreign regulators where significant. - Review and extend network of MoUs with foreign regulators to include supervisory cooperation provisions. - Develop crisis simulation exercises involving an insurance group to test communications, information availability, and tools. *People’s Republic of China — IMF Financial Sector Assessment (excerpt).* *Source: cr17402 (PDF).* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### Sector growth, market developments, and risks - The Chinese insurance sector "has been growing by over 20 percent a year" and "many individual, often newer, companies are growing at rates far in excess of the average." - New entrants, products, distribution channels, and liberalization of pricing have increased competition. - Slower economic growth and reduced investment returns are exposing established life insurers to the risk of loss due to the rising value of their liabilities. - Many non-life companies are moving into new lines of business as margins in established lines erode. - Resulting risks: threats to insurers’ business models, performance, solvency, and risks of misconduct in the treatment of insurance customers. ### Regulatory reform and supervisory strengths - Since the 2011 FSAP, the China Insurance Regulatory Commission (CIRC) has undertaken far-reaching reforms and modernization, focusing on corporate governance, market conduct, and reshaping solvency standards into a modern, risk-based approach. - China-Risk Oriented Solvency Standards (C-ROSS): - Draw on international practices and local market experience. - Define solvency requirements that "generally reflect risk" and reward sound risk management. - Link to in-depth assessment of risk management, strengthening CIRC’s supervisory framework for solvency risk. - Enabled CIRC to relax/remove less risk-based requirements such as new product (and reinsurance contract) approval and detailed investment limits. - CIRC applies extensive requirements on corporate governance, risk management, internal controls, reinsurance, disclosure, and conduct of business—appropriately applied to large insurance groups that account for the bulk of premium income. - CIRC has developed a tailored approach to the one Global Systemically Important Insurer (G-SII) for which it is lead supervisor and is preparing a similar regime for Domestic Systemically Important Insurers (D-SII). - CIRC cooperates with international regulators regarding insurers and reinsurers doing business in China as branches, subsidiaries, or joint ventures. - CIRC has extensive intervention and enforcement powers and a funded insurance guarantee scheme to support orderly exit while providing for policyholder protection. ### Overall assessment against ICPs - The regulatory system is assessed to have "a good level of compliance with the Insurance Core Principles (ICPs)." - The assessment was made against the ICPs issued by the International Association of Insurance Supervisors (IAIS) in October 2011, as revised up to November (2011 revision context noted in source). - The assessment team and timing: "This assessment was carried out by Ian Tower (IMF Expert) and Serap Gonulal (World Bank) from November 28 to December 17, 2016." ### Identified gaps and areas for development - Supervisory prioritization and judgment: - No single supervisory process brings together an overall view of a particular insurer to ensure allocation of supervisory resources to mitigate the highest priority risks. - Need for more proactive assessment and relatively greater resourcing for larger insurers; likely requires increased resources for insurance group supervision or a stronger system of lead supervision. - Risk that cross-departmental issues or groupwide risks may be missed despite good internal collaboration. - Cross-agency and international cooperation: - Scope for increased cooperation with other agencies, including CSRC (asset management issues) and foreign regulators. - Need for CIRC to develop an approach to recognition of other supervisors in licensing and groupwide supervision. - Crisis preparedness and resolution: - More should be done on crisis management for larger groups, building on progress with the G-SII on crisis preparedness, recovery, and resolution planning. - Market conduct and consumer protection: - CIRC’s focus on market conduct has benefited from a dedicated consumer protection function and increasing thematic work. - Recommended: review risks (including mis-selling), develop a plan for supervisory resource direction, and fill gaps—particularly in disclosures—for supervision of intermediaries. - Further development of C-ROSS and solvency framework: - Implementation needs time to be embedded; "it will be appropriate for CIRC to plan for further movement to a more market consistent basis for valuation, taking account of local market conditions." - Incentivize development of more complex approaches (e.g., valuation of options and guarantees). - C-ROSS processes place particular weight on CIRC issuing risk ratings and delivering risk management assessments; some elements are "more mechanistic than judgmental" and could be developed to expand supervisory judgment in the "Pillar 2" process. - Development of a full Own Risk and Solvency Assessment (ORSA) regime is recommended—current C-ROSS gives limited role to insurers' own quantification of risks and solvency requirements. - Review approach to solvency control levels to clarify when CIRC will intervene above minimum requirements. - Improve public understanding of disclosures associated with C-ROSS. - Legislative and institutional issues: - Changes to the legislative framework are recommended to strengthen CIRC’s ability to undertake effective regulation and supervision. - While CIRC has clear statutory objectives and "a high degree of day-to-day operational independence," aspects of the framework expose it to undue political influence (particularly through its funding mechanism) and constraints on its ability to staff and organize as necessary. - CIRC’s mandate, functions, and internal organization are established by the State Council, creating potential conflict between regulatory and development objectives given the Government of China’s commitment to insurance market growth. - Recommendation: authorities should review the legislative framework for insurance to strengthen the independence of CIRC. ### Key policy recommendations (summarized) - Strengthen supervisory resources and group supervision capacity, including lead-supervisor arrangements for large insurers. - Enhance cross-agency and foreign supervisory cooperation and recognition for licensing/group supervision. - Advance crisis preparedness, recovery, and resolution planning for large groups and D-SIIs. - Deepen market conduct supervision: review mis-selling risks, prioritize supervisory resources, and fill disclosure gaps for intermediaries. - Progress C-ROSS toward more market-consistent valuation methodologies and greater supervisory judgment in "Pillar 2"; develop and implement a full ORSA regime. - Clarify solvency control levels and public disclosure to improve market understanding. - Review and reform the legislative framework to strengthen CIRC’s operational independence and minimize undue political influence. *Source: EXECUTIVE SUMMARY (cr17402), People’s Republic of China FSAP assessment; assessment carried out November 28 to December 17, 2016.* ### 2015. The ICPs apply to all insurers, whether private or government-controlled. Specific ### 2015. The ICPs apply to all insurers, whether private or government-controlled. Specific ### B. Information and Methodology Used for Assessment - Level of observance for each ICP rated as: - Observed: all standards observed except those considered not applicable; supervisor must have legal authority and exercise it to a satisfactory level. - Largely observed: only minor shortcomings exist, which do not raise concerns about achieving full observance. - Partly observed: shortcomings are sufficient to raise doubts about achieving observance. - Not observed: no substantive progress toward observance has been achieved. - Assessment basis: - Solely on the laws, regulations and other supervisory requirements and practices in place at the time of the assessment in December 2016. - Does not reflect new and on-going regulatory initiatives; key proposals for reforms are summarized by way of additional comments in the report. - Authorities provided a full and comprehensive self-assessment, supported by anonymous examples of actual supervisory practices and assessments, enhancing robustness of the ICP assessment. - Acknowledgements: - Assessors received cooperation and valuable inputs from CIRC, insurance companies, and industry and professional organizations. ### C. Overview—Institutional and Macroprudential Setting - Supervisory authority: - The CIRC is the principal entity responsible for insurance supervision in China. - CIRC is a ministerial public service department, reports to, and carries out administrative functions delegated by, the State Council. - CIRC supervises insurance, reinsurance, insurance asset management companies (IAMCs), insurance brokers and agents. - CIRC is financed by levies on insurers' capital and net retained premiums. - CIRC has 36 regional bureaus and its head office in Beijing. - Legal and international context: - Supervision largely based on the Insurance Law; insurers must also comply with other acts and CIRC regulations and rules. - Insurance Law regulates organization and conduct of insurance business and prescribes rights and obligations of participants. - China is a member of the IAIS, but is not a signatory of the IAIS Multilateral Memorandum of Understanding (MMoU) on Cooperation and Information Exchange. ### Industry Structure and Recent Trends - 2015 market position and volumes: - In 2015, Chinese insurance market was the third largest in the world. - Total industry premiums were 3.59 percent of GDP and total assets amounted to RMB 12.3 trillion. - The average Chinese citizen spends approximately US$280 per year on insurance. - Total gross insurance income of RMB 2.4 trillion was recorded in 2015. - As of the end of 2015, there were 75 life insurance and 74 nonlife insurance companies in the market, among which 52 were domestic companies and 22 were “foreign invested” companies. - Life sector specifics: - Life insurance accounted for 56 percent of gross premiums in 2016. - Total written premium of the life insurance sector excluding personal accident and health in: - 2014: RMB 1,090,160 million - 2015: RMB 1,323,925 million - 2016: RMB 1,744,222 million - Participating business throughout the decade has taken approximately 52 percent of the market. - Investment-linked insurance accounts for a miniscule fraction of the premium income of China’s life insurance sector. - 2016 premiums (Table 2 figures): - Life Premium (millions of renminbi): 2,223,461.28 - Non-Life Premium (millions of renminbi) including Personal Accident and Healthcare: 872,449.81 - Total Premium (millions of renminbi): 3,095,911.09 - Life Premium (millions of US dollars): 334,632.95 - Non-Life Premium (millions of US dollars): 131,304.49 - Total Premium (millions of US dollars): 465,937.44 - Percent of total market: Life 71.8; Non-Life 28.2; Total 100 - Non-life and motor insurance: - In 2015, motor insurance accounted for over 73 percent of total non-life premiums. - Motor lines historically underpin non-life market growth; motor accounted for 73 percent of total P&C insurance premiums in 2015. - Private cars rose by over 20 percent a year between 2003 and 2015. - Personal Accident and Healthcare Insurance account for close to 14 percent of premiums written; may be written by both life and non-life insurers. - Market concentration: - China’s life and non-life insurance market are highly concentrated. - The top 10 insurance companies account for nearly 76 percent of Gross Premiums Written. - Non-life market dominated by: - PICC Property and Casualty Company Limited (33.4 percent) - Ping An Property and Casualty Insurance of China (19.4 percent) - China Pacific Property Insurance Company (11.2 percent) - With the exception of American International Assurance Company (AIA), life insurance business is not open to foreign companies except through joint ventures where the foreign shareholder may have up to 51 percent of the equity. ### Distribution Channels and Product Mandates - Distribution: - Channels include insurance agents, insurance brokers, direct sales (by insurers), and emerging channels such as the internet. - Legal distinction: - Agents act on behalf of insurers; insurance agencies may be specialized or ancillary; individual agents may only sell life insurance products on behalf of one life insurer; insurance agencies are not subject to this restriction. - Brokers act on behalf of policyholders and collect fees from them. - Bancassurance: - Bancassurance share is growing: it accounts 40 percent in life but is far less significant in non-life. - Bank channel declined temporarily from 2012 due to regulatory restrictions and falling competitiveness of life policy returns; now growing again as more banks buy shares in their own insurance companies. - Emerging channels: - Fastest growing channels are telemarketing, cross-selling and the mobile internet, increasingly working together in an "online-to-offline" business model. - Agents supported by relatively high levels of commission; insurers increasing size and productivity of agency forces aided by tablet computers. - Compulsory insurance lines: - Motor third party liability, carriers' liability and travel agents’ liability are compulsory. - Local governments encourage liability insurance for environmental pollution, food safety, medical accident, campus safety and other areas, but these are not compulsory as defined. - Insurers sometimes required to pay deserving claims regardless of strict policy liability for compulsory classes intended to serve social purposes. ### Financial Performance and Balance Sheet Aggregates - As of end-2015: - Total assets of life insurance companies: RMB 9,944 billion - Total assets of non-life insurance companies: RMB 1.8 trillion - Life industry total profit: RMB 174.32 billion - Non-life insurance premium income: RMB 842.17 billion ### Insurance Pools and Catastrophe Risk Arrangements - China Residential Earthquake Insurance Pool (CREIP): - Created by 45 primary insurers on April 16 2015. - Led by PICC Property and Casualty Company Limited appointed as executive office with responsibility for product design, premium rating and risk diversification. - Coverage: damage by earthquakes of magnitude 4.7 and above, fire following, tsunami and subsidence or landslide caused by earthquake. - Basic sums insured: RMB 50,000 for urban homes and RMB 20,000 for country homes. - Members began selling individual household earthquake policies on a voluntary basis; first policy sold on July 1, 2016. - The average rate is reported to be 0.04 percent. - China Agricultural Reinsurance Pool (CARP): - Commenced operations on 1 January 2015 under administration of China P&C Re. - 23 direct insurers are members; China Re expected to write around 80 percent of the pool's estimated premium income of RMB 3.7 billion in 2015. - Direct insurers joining the pool must cede at least 50 percent of their agriculture cessions to the pool, though they may use other reinsurers. - CARP writes around 50 percent of total agricultural reinsurance premiums and will be the main vehicle for agricultural reinsurance in China. - Purposes: - Ensure agriculture insurance can be ceded at an appropriate price. - Provide reinsurance support to agricultural policies encouraged by the government such as price insurance, special crop insurance and fishing insurance. - China Agriculture risk-pooling approaches: - (a) Direct insurers required to set aside catastrophe risk reserves, rolled over annually. - (b) Direct insurers share risks with reinsurers by purchasing reinsurance. - (c) China Agriculture Reinsurance Community composed of institutions engaged in agriculture insurance to raise domestic risk tolerance and establish a risk pooling mechanism. - (d) Some local governments fund a catch-all mechanism for catastrophes. - China Nuclear Insurance Pool (CNIP): - A total of 29 insurers and reinsurers (including Swiss Re, Lloyd's China, SCOR and Hannover Re) participate in the CNIP (establishment details continue beyond provided excerpt). *Source: Assessment based on laws, regulations and supervisory practices in place at the time of the assessment in December 2016.* ### 1999. Because the pool lacks the legal capacity to issue its own policies, risks are written by ### cr17402 - 1999. Because the pool lacks the legal capacity to issue its own policies, risks are written by ### Nuclear Pool (CNIP) and Related Arrangements - The pool lacks legal capacity to issue its own policies; risks are written by individual pool members. - All premiums are ceded to the pool and retroceded to members according to their underwriting capacity calculated by the CNIP board each year. - Additional reinsurance is arranged if necessary. - The pool is managed by China Re P&C, which arranges reinsurance for its own account and the other pool members. - Pool members' nuclear risk capacity is limited to 5 percent of their total assets. - CNIP writes shares of over 300 nuclear plants worldwide and is said to be the third largest nuclear pool in the world in terms of underwriting capacity. ### Key Risks and Vulnerabilities — Insurance Sector - Life insurers: principally exposed to market risk from asset–liability mismatch due to long-duration traditional business; falling interest rates increase liability costs. - Asset and liability management (ALM) hampered by limited availability of longer maturity investments and hedging instruments, including swaps. - Trend toward higher-yielding and foreign investments increases credit and liquidity risks and demands stronger fund management expertise. - Some life insurers reducing liability duration by selling high volumes of short and medium term savings products via bancassurance and online channels; recent CIRC action requires significantly higher insurance content in such products. - Non-life insurers: risks associated with growth of new business lines and rapid expansion (example: credit guarantee insurance); potential mismatch between underwriting capabilities and new product risk profiles. - Development of insurance pools, particularly for earthquake risk, expected to mitigate catastrophe exposure. - Sector growth and rapid change: - Premium income increasing at over 20 percent per year. - Many individual companies growing far in excess of the average. - Agency-based selling competing with low-cost online and other innovative distribution channels. - Pressure to meet government targets (State Council strategic objectives) for increased insurance penetration. - Operational and reputational risks: - Limited penetration and lack of understanding of protection and investment-linked products increase misselling and poor advice risks. - Commission-based agency distribution models raise risks of misselling, customer losses, and reputational damage. - Extensive data and internet use improve customer screening and pricing but increase risks of compromised private customer information and cybercrime. ### Preconditions for Effective Insurance Supervision — Macro and Institutional Framework - Macroeconomic policy orientation: reorienting toward consumption-led growth, articulated in the 13th Five Year Plan. - Target premiums per capita: RMB 3,500 by 2020; RMB 1,157 in 2015. - Government plans to move to an effectively floating exchange rate regime by around 2018. - GDP growth remains high; fiscal policy expansionary; government debt relatively low; inflation low; China continues to run a large current account surplus. - Sector-based regulatory framework in place since the late 1990s: CBRC, CSRC, CIRC; PBC responsible for financial stability; all agencies under State Council leadership. - Legal and judicial infrastructure: company, bankruptcy, contract laws; consumer rights and property protection; China scores relatively highly on World Bank “Doing Business” enforceability and insolvency assessments. ### Accounting, Actuarial, and Audit Infrastructure - Accounting framework: - Accounting Law, Law on Certified Public Accountants, and Accounting Standards for Business Enterprises (ASBE). - ASBEs issued originally in 2006 and based closely on IFRS; IFRS not permitted for domestic reporting. - Professional bodies and human resources: - Chinese Institute of Certified Public Accountant (CICPA) — member of IFAC; formulates codes and supervises implementation; operates under MoF oversight with inspection and disciplinary powers. - China Association of Actuaries (CAA), founded in 2007: - Around 900 fully-qualified members (as at late 2016). - Number growing by around 100 per year. - New mortality table based on 2010–13 data under development (existing table relates to 2000–2003 data). - Audit oversight: - Audit firms licensed; oversight by MoF and provincial finance departments. - MoF inspects companies and can require auditors to provide audit documentation. - CICPA provides additional oversight; CSRC licenses firms auditing listed entities. - China is not currently a member of the International Forum of Independent Audit Regulators. ### Statistics, Consumer Protection, and Financial Markets - Statistics availability: - Economic and financial data published by National Bureau of Statistics, MoF, and PBC. - CAA collates mortality data and publishes mortality tables in conjunction with CIRC. - Consumer protection: - China Insurance Security Fund (CISF) established under the Insurance Law and managed by a state-owned company under regulations jointly issued by CIRC, PBC, and MoF. - CISF provides policyholder compensation in well-defined circumstances of financial stress, including bankruptcy. - Insurance companies required to contribute to the fund. - CISF balance as of end-November 2016: RMB 94 billion; compares with some RBM 14 trillion in insurance sector total assets. - Policyholders may complain to CIRC, IAC mediation, or courts. - Financial markets: - Developed, liquid stock, currency, bond, futures, FX and gold markets. - Longest maturity, actively-traded government bond is only around 10 years; few corporate bonds of similar maturity. - Insurers increasingly able to invest in long-term bonds outside Mainland China, subject to CIRC investment limits and foreign exchange controls. - Interest rate swap market exists but liquidity relatively low. ### Summary of Observance with the Insurance Core Principles (ICP) - ICP assessment totals: - Observed (O): 8 - Largely observed (LO): 14 - Partly observed (PO): 4 - Not observed (NO): 0 - Total: 26 ### Selected Findings on ICPs (high-level) - ICP 1 (Objectives, Powers and Responsibilities): Partly Observed — need for clearer primacy of policyholder protection in Insurance Law and stronger group supervision provisions. - ICP 2 (Supervisor): Partly Observed — CIRC operational independence in practice, but funding and staffing rely on government budget and HR processes; resources stretched. - ICP 7 (Corporate Governance): Largely Observed — increased focus but many standards remain guidance; scope to strengthen group governance and board effectiveness. - ICP 14 (Valuation): Largely Observed — comprehensive valuation requirements, not fully market-consistent; differences in treatment of Hold to Maturity investments and potential valuation simplifications for smaller firms. - ICP 16 (Enterprise Risk Management): Partly Observed — SARMRA framework introduced; lacks full ORSA requirement and explicit group risk coverage. - ICP 17 (Capital Adequacy): Largely Observed — C-ROSS is a major step; framework resource-intensive and excludes operational risks from Pillar 1; questions on treatment of offshore reinsurer credit risk and equity risk. - ICP 24 (Macroprudential Surveillance): Largely Observed — CIRC uses extensive insurer data and stress tests; planned D-SII requirements will strengthen framework. ### Key Recommendations (selected) - Review Insurance Law to give CIRC an explicit mandate to promote a fair, safe and stable insurance sector for the benefit and protection of policyholders. - Equip CIRC with formal and financial independence to set its own budget and recruit staff, subject to accountability. - Complete network of MoUs with key regulators and accelerate joining the IAIS MMoU. - Strengthen corporate governance requirements for groups and develop binding requirements where current material is guidance-based. - Improve requirements on control functions (independence, resourcing) and develop group-level risk management and outsourcing standards. - Develop stronger centralized oversight for group supervision via lead supervision and a more risk-based supervisory plan. - Establish a clear regulatory point at which an insurer may no longer continue business (for example, falling below minimum capital requirement). - Review C-ROSS implementation, including approach to solvency control levels, treatment of credit risk on offshore reinsurers, and equity risk assumptions. - Develop an ORSA requirement within SARMRA and explicitly include group risks in the framework over time. - Finalize the regime for Domestic Systemically Important Insurers (D-SIIs) and enhance crisis management planning, including cross-border preparedness and crisis simulation exercises. ### Authorities’ Response (summary) - CIRC welcomes the assessment, acknowledges progress since 2011, and notes many recommendations are already in progress (e.g., D-SII framework construction; solvency recognition work with EU and Hong Kong; C-ROSS task force). - CIRC emphasizes the Chinese insurance industry’s relatively short history and that regulation is designed to reflect current market characteristics and risk management levels. - CIRC appreciates recommendations and looks forward to continued dialogue. *Document: cr17402 - 1999. Because the pool lacks the legal capacity to issue its own policies, risks are written by* ### 92.3 percent have more than five years of work experience. CIRC believes that it can ### cr17402 - 92.3 percent have more than five years of work experience. CIRC believes that it can ### Human resources and capacity - "92.3 percent have more than five years of work experience." - CIRC believes that it can attract sufficient talent to fill vacancies and to increase its capabilities. - CIRC’s resources are stretched and will be under increasing pressure from the need to analyze and respond to developments in licensed companies within the framework of an appropriately interventionist but not yet fully risk-based supervisory system. ### Transparency of requirements and procedures - Most supervisory requirements and processes are established in laws, regulations and circulars which are publicly available. - CIRC has formal policies and procedures to guide supervisory work and assist in ensuring consistency across all institutions. - Over the last five years CIRC has reviewed and improved requirements in risk-based solvency requirements, reserving practices, group supervision, regulation of intermediaries and reinsurance. ### Information on the insurance sector and CIRC disclosure - CIRC publishes an annual report on the insurance market with information on industry participants, markets and some industry financial information, but gives little information on profitability, governance or risk. - CIRC does not publish an annual report detailing CIRC’s activities and own financials. - CIRC issues special reports and publishes information on enforcement decisions; holds regular industry briefings and news conferences; organizes online interviews; issues press releases; and publishes articles by its leaders in major news media. - CIRC publishes an annual report in Chinese and English on its website, although the English section is limited and the annual report does not include details of CIRC’s own financial position. - A comprehensive annual statistical compendium based on Chinese Generally Accepted Accounting Principles (GAAP) data is published in Chinese. ### Appeal against supervisory decisions - Administrative Reconsideration Law and the Regulations on the Implementation of Administrative Reconsideration Law allow administrative reconsideration of specific administrative actions taken by CIRC. - Under the Administrative Reconsideration Law, appeals may be taken to the Court or to the State Council if the appellant is not satisfied with CIRC’s decision. - CIRC has issued the Measures of CIRC for Administrative Reconsideration to specify scope, application, acceptance, decision, legal liabilities and procedures for administrative reconsiderations. - Purpose of the Measures: regulate administrative reconsideration; prevent and rectify illegal or inappropriate administrative actions; protect lawful rights and interests of citizens, legal persons and other organizations; and ensure CIRC performs its mandate in accordance with the law. ### Confidentiality and legal protection - CIRC staff must not pass on confidential information received in the course of their work where it is possible to identify the individual insurer; confidential information comprises business secrets of insurers and the insured and any information provided on condition of confidentiality. - Under Article 156 of the Insurance Law, CIRC staff shall not divulge relevant entities’ and individuals’ trade secrets that have come to their knowledge. - Article 12 of the Civil Servant Law provides that civil servants have the obligation to keep the secrets of the State and of their work confidential. - In practice, confidential information is identified and safely stored and only utilized for appropriate supervisory purposes by CIRC or related state agencies. - The Law on Civil Servants establishes a right for all civil servants to be protected by law when performing public duties; this has general applicability, including to CIRC. - CIRC adheres to the standards of conduct that apply to all civil servants; it does not have its own Code of conduct nor a formal conflict of interest policy for staff. ### Assessment of independence and recommendations - Assessment: Partly Observed. - Comments: - CIRC is operationally independent in day-to-day supervisory functions and is not subject to intervention by the State Council in relation to supervisory decisions (the State Council can hear appeals but has not done so). - CIRC relies financially on the regular government budget process for funding and central government HR processes for staffing, and on government agreement to its internal structure and organization. - CIRC is subject to the overall direction of the State Council in relation to its mandate and functions. - Recommendation: - In the context of the next review of the Insurance Law, make changes to equip CIRC with the formal and financial independence to administer an increasingly complex regulatory framework, including scope to set its own budget and recruit staff, subject to appropriate accountability. ### ICP 3 — Information Exchange and Confidentiality Requirements (summary) - Description: - Article 86 of the Insurance Law: CIRC can require insurers to submit reports, statements, documents and materials. - Article 157: CIRC to establish an information sharing mechanism with the PBC and other financial regulators under the State Council. - Articles 40 and 41 of the Interim Measures for the Administration of the Non-Insurance Subsidiaries of Insurance Companies: CIRC authority to obtain and exchange regulatory information with other supervisors on insurance legal entities and groups (including non-regulated entities). - Domestic arrangements: - Financial Regulatory Coordination JMC enhances capacity to exchange/share information with PBC, CBRC, CSRC, and SAFE. - MoU between CBRC and CIRC on Strengthening In-Depth Cooperation and Cross-Sectoral Supervisory Cooperation establishes periodic exchange of regulatory information. - June 2004 MoU among CBRC, CSRC, and CIRC on Division of Responsibilities and Cooperation in Financial Supervision and Regulation clarified duties and established periodic information/communication. - A working party of heads of the three regulatory bodies meets quarterly. - Cross-border arrangements: - CIRC has bilateral MOUs and arrangements with overseas supervisors for regulatory cooperation and information sharing (e.g., BaFiN in Germany, Hong Kong authorities, Macao, NAIC, EIOPA, IAIS). - Confidentiality provisions are included in signed agreements. - China is not currently a signatory of the IAIS MMoU but is considering application. - Assessment: Observed. - Comments: - Legislation meets ICP standards; CIRC has strong authority to request and exchange information including on non-regulated related entities and groups. - Information-sharing arrangements function under MoUs or bilateral agreements. - Recommendations: - Complete network of MoUs with key regulators including relevant US states directly, where necessary. - Publish MoUs, where agreed, and accelerate process to join the IAIS MMoU. ### ICP 4 — Licensing (summary) - Description: - Insurance Law defines insurance business and requires all insurers, reinsurers, IAMCs, insurance agents and brokers operating in China to be licensed with CIRC. - Insurers must be either life or non-life and may be shareholding companies, limited liability companies or mutual insurers; may be local or foreign-owned subsidiaries. - If 25 percent or more of a Chinese insurance company's shares are held by foreign entities, it is deemed foreign-funded and regulated under the Regulations on the Administration of Foreign-Invested Insurance Companies; below 25 percent deemed domestic. - Domestic insurers are the only companies allowed to write compulsory classes (apart from motor third party liability). - Licensing requirements cover financial and nonfinancial aspects: minimum capital, form of organization, shareholder eligibility, qualifications of senior management and actuarial staff, adequacy of information systems, and product suitability. - Applications require a credible three-year business plan, IT premises, product outlines, reinsurance plan, marketing strategy, profitability and solvency forecasts, and asset allocation plans. - Two-stage granting process: Legal Person License for Insurance Institutions (preparatory license) and License to Operate an Insurance Business; maximum 12-month gap between the two licenses. - Each branch office and call center requires its own license and is treated as a separate entity for licensing; allowed to write business in a designated geographical area. - CIRC established the Chinese Insurance Entities Access Examination Committee for domestic companies to improve market entry and exit mechanisms. - Minimum capital must be fully paid-in at the time of application and deposited with a commercial bank; may not be used before CIRC license is received. - Corporate shareholders must have net assets of at least RMB 200 million, good credit record and no serious legal violations during the previous three years. - CIRC gives written responses and posts licensing approvals/rejections on its website. - Licensing criteria specifics: - Article 4 of the Administrative Measure on Equity Interests allows shareholders to increase above 20 percent after three years to a maximum of 51 percent subject to: - total assets of at least RMB 10 billion at the end of the previous year; - net asset value of not less than 30 percent of total assets; - the value of long-term equity investments (including insurance investments) being no higher than net asset value; and - having been a shareholder in the insurance company for at least three years. - Shareholders with more than a 20 percent stake may not sell in less than three years without CIRC approval. - The Notice on Relevant Issues Regarding Investment and Shareholding of Limited Partnership Equity Investment Enterprises allows a limited partnership equity investment enterprise to acquire up to 5 percent of a domestic insurer's equity and all such investors to acquire up to 15 percent in total. - Foreign entity licensing criteria: - Foreign companies can enter as branches (if reinsurers), joint ventures with maximum 51 percent shareholding, or wholly owned subsidiaries; in practice most apply for subsidiary status. - Conditions for branch, JV or subsidiary licenses include: - representative office in mainland China for at least two years; - total assets of at least US$5 billion; - any other conditions CIRC deems prudently necessary. - Mutual insurance organizations: shall arrange reinsurance, contribute to policyholders' protection fund, and be authorized and supervised by CIRC similarly to insurance companies. - Assessment: Largely Observed. - Comments: - Insurance Law sets licensing requirements and covers financial and nonfinancial aspects. - CIRC attaches great importance to views of overseas regulatory authorities and requires foreign applicants to provide supervisors’ letter of opinion. - Recommendation: - CIRC consider making increased use of inputs from foreign supervisors as an alternative proof of compliance on some key licensing criteria. ### ICP 5 — Suitability of Persons (summary) - Description: - Measures for the Administration of the Equities of Insurance Companies describe requirements for founders, board members, significant owners, managing directors, general manager, deputy general managers, key persons in control functions (appointed actuary, head of risk and compliance audit), and auditors. - Review/approval focuses on characters, professional knowledge, job performance, and anti-money laundering performance; candidates must pass an exam and attend an interview with a senior CIRC staff member. - Insurers must promptly report changes of directors, supervisors, senior managers or significant owners and any circumstances materially affecting suitability. - Ongoing supervision includes training, off-site supervision and other supervisory means. - CIRC departments conduct regulatory interviews based on resources and risk level of candidates; Property and Casualty Insurance Department interviews most candidates; higher-risk roles interviewed by higher-ranking officials. - CIRC created an IT system to track employment history and job changes of directors, supervisors and senior managers; may suspend subjects for investigation or work with judicial authorities as necessary. - CIRC can request documentation at any time; false, misleading, inaccurate or incomplete information can result in sanctions. - Assessment: Observed. - Comments: - CIRC maintains appropriate requirements for suitability of key personnel. - Growth of the insurance market and demand for highly qualified and experienced management skills should be monitored. - Recommendation: - CIRC increase emphasis over time on competence assessment, in relation to the role of the individual, taking account of the scale and nature of the company’s business. ### ICP 6 — Changes in Control and Portfolio Transfers (summary) - Changes of control: - Requirements found in Article 15 and 84 of the Insurance Law; Company Law Articles 4, 36, 42, and 216 define control and shareholder rights. - Article 86 of the Insurance Law: CIRC to review and approve any transaction involving change of 5 percent or more of equity interest; receive/process filings for transactions involving less than 5 percent. - Acquiring party must notify CIRC; approval required where current shareholding under 5 percent may reach/exceed 5 percent through subscription or transfer. - Assessment criteria align with licensing conditions: sustainable profit-making capability, good credit standing, no major violations in last three years; new board members and senior management of controlling shareholder must meet qualification requirements and be submitted to CIRC for approval. - Special attention to changes affecting foreign-funded insurance companies; for non-life business, foreign-funded insurers must present a Chinese registered company as a partner. - Measures for the Administration of Mergers and Acquisitions: any merger or acquisition subject to CIRC approval; eligibility criteria apply to major shareholders with 15 percent or more equity or who can directly/indirectly control the company. - Administrative Measures on the Merger and Acquisition of Insurance Companies allow an acquiring company to own a maximum of two insurers in the same branch of business (life or non-life) under specified conditions; such acquisitions must be held for a minimum of three years before sale. - Portfolio transfers: - Interim Measures for the Administration of the Transfer of Insurance Business by Insurance Companies: any transfer of all or part of business subject to CIRC approval. - Articles 8, 9, and 10 set requirements for financial position of transferee and transferor; Articles 13 and 14 protect policyholders’ rights and interests. - CIRC can arrange voluntary or compulsory portfolio transfer of obligations from a failing insurer to another insurer that accepts the transfer. - Assessment: Observed. - Comments: - Legal framework and CIRC powers ensure changes in control are notified to CIRC and prevent changes that could place policyholders at risk. - CIRC is well-equipped to address increases in merger activity in case of industry consolidation. ### ICP 7 — Corporate Governance (summary) - Description: - Corporate governance is one of three key regulatory focuses alongside solvency and market conduct; approach based on standards, many in the form of guidelines, with plans to transform some guidelines into binding requirements in 2017. - Basic governance requirements set out in Company Law two-tier board system: board of directors and board of supervisors with reporting obligations to CIRC. - CIRC requirements include duties/responsibilities of directors, senior managers and key employees (Articles 23–31 of Board Operation Guidelines); board must oversee senior managers and protect interests of company, shareholders, insured and stakeholders; similar provisions in insurers’ Articles of Association. - Duties/responsibilities of senior management and appointed actuary, chief compliance officer and other key employees addressed in Governance Guidelines. - Board membership and committees: - Insurers must have between 7 and 13 directors composed of executive, non-executive and independent directors (Article 38 of the Board Operation Guidelines). - Insurers must have a minimum of two independent directors and one third must be independent for larger companies (assets over RMB 5 billion). - Independent directors may serve only two three-year terms; CIRC plans to establish a pool of independent director candidates. - Insurers required to establish audit, nomination and remuneration committees and a Risk Committee. - Conflicts of interest and remuneration: - Directors must possess good moral character, owe fiduciary duty, and have obligation of care and diligence. - Remuneration guidance: divide into fixed and variable elements; variable remuneration deferred for three years; key control function personnel's variable remuneration based on own performance measures. - Financial controls and external audit: - Regulations on Accounting of Insurance Companies require duties of Board and management on accounting and financial reporting; Audit Committee oversees external audit. - Groups: - Measures for the Administration of Insurance Group Companies and Guidelines for Consolidated Supervision require governance frameworks covering whole group. - Supervision of governance: - Off-site review via corporate governance self-assessment with prescribed format and ratings (ratings published quarterly). - Targeted on-site inspections under a program established in 2013; by end-2015, 38 companies (including group companies and IAMCs) had undergone inspections. - Inclusion of corporate governance in comprehensive inspections, particularly for problem companies. - CIRC requests board minutes and attends board meetings as observers; relationship generally with executive management and chief executive. - Corporate governance considered in C-ROSS via assessment of operational risk. - Assessment: Largely Observed. - Comments: - Increased focus on corporate governance reflected in standards, self-assessment and ratings, and increased supervision. - Many standards remain guidance rather than binding requirements. - Scope to develop group framework and increase supervisory focus on effectiveness of governance at board level. - Recommendations: - Develop further expectations on corporate governance of groups, recognizing the significance and likely increasing importance of groups, including financial conglomerates, drawing on recent IAIS work. - Develop a set of binding requirements over time to strengthen guidance-based material. - Develop supervisory approach to better assess effectiveness of governance, and integrate corporate governance assessment more completely within the C-ROSS process (recognizing priority of embedding C-ROSS/SARMRA). ### ICP 8 — Risk Management and Internal Controls (summary) - Description: - Extensive requirements and focus on strengthening risk governance within the new C-ROSS solvency framework and SARMRA. - Insurers required to have a risk management system to identify, assess and control risks (CIRC Guidelines on Risk Management of Insurance Companies). - Insurers must establish comprehensive internal control systems and prioritize control of major business matters and high-risk areas (Fundamental Rules for Internal Control of Insurance Companies). - Audit Committee of the Board responsible for reviewing risk assessment reports and proposing improvements. - SARMRA has become the principal comprehensive set of requirements on risk management, covering risk appetite, risk policies, risk monitoring and inputs into solvency assessment. - Control functions: - Insurers must set up a risk management department responsible for examining company risk position and submitting periodic risk assessment reports. - Insurers should set up a compliance management department/position to implement compliance policies and carry out surveillance and training (Guidelines for Compliance Management). - Insurers should set up an appointed (chief) actuary position with responsibilities for pricing, statutory liability reserves assessment, dividend distribution plans, etc. (Measures for the Administration of the Appointed Actuaries). - Insurers should set up an independent internal audit department to inspect internal control and submit periodic internal control assessment reports. - Differing provisions exist on authority, independence and resourcing of control functions. - In internal audit, there must be a direct reporting line to the Audit Committee of the Board; staff of the function must account for no less than [text truncated in source]. *Source: IMF — cr17402 (PDF).* ### 0.5 percent of the insurer’s total staffing. Its budget, human resources and ### Control functions, group requirements, outsourcing, and supervisory assessment ### Control functions and resourcing - CIRC requires the compliance function to represent 0.5 percent of the insurer’s total staffing. Its budget, human resources and operations must be managed separately from the business departments to prevent influence. - For the risk management department, insurers classified as Class I for C-ROSS purposes must maintain a minimum of eight staff. Class I insurers are also required to have a Risk Management Committee of the Board. - There are no quantitative requirements for the actuarial and compliance functions. CIRC relies on ensuring individuals of adequate seniority (senior managers subject to CIRC approval), including a Chief Risk Officer and Chief Compliance Officer. - The Appointed Actuary’s authority derives from CIRC requirements, including submission of actuarial opinions on reports to CIRC. For life insurers, CIRC has issued guidance to strengthen the Appointed Actuary role (Notice on Strengthening the Administration of Appointed Actuaries of Personal Insurance Companies, issued in 2013) covering length of experience, term of service and “lifelong responsibility”. - There are no explicit requirements on control functions in relation to the promotion of good culture; such responsibilities fall to the board and management under the CIRC framework. ### Group-level requirements - C-ROSS contains risk management requirements related to solvency for groups (Solvency Regulatory Standards No 17: Insurance Groups, Articles 31 to 38). - Measures for the Administration of Insurance Groups (Chapter IV on corporate governance) impose broader risk management and internal control requirements on the insurance group holding companies (currently 12) in respect of: - group risk management and internal control systems; - group internal audit (and audit committee); and - compliance. - There are no explicit requirements for a group-level risk management department or actuarial function. ### Outsourcing - Outsourcing by insurers is relatively limited in China. CIRC does not permit outsourcing of claims handling or conferring delegated underwriting authorities on third parties; insurers may use professional services, including loss adjusters. - Actuarial and compliance functions may not be outsourced, even by smaller insurers. - Internal audit and risk management functions may be outsourced, subject to CIRC approval, which in practice would be given only to smaller companies. - Any outsourced function remains subject to internal control requirements. - CIRC has issued outsourcing standards only in relation to call centres (Notice on Promoting Well-Regulated Development of Telephone Marketing of Life Insurance Companies). Use of third party or the insurer’s own separate call centre must be notified to the local CIRC Bureau and there are requirements on IT. ### Supervision and reporting - Insurers are required to submit annual reports to CIRC evaluating their internal controls and annual reports on their compliance (Interim Guiding Opinions on Regulating the Governance Structure of Insurance Companies—Governance Guidelines). - The supervisory approach is similar to that for corporate governance (see ICP 7 and ICP 9), combining off-site monitoring and on-site inspections to evaluate insurers’ condition, risk profile, conduct, corporate governance and compliance. ### Assessment summary - Assessment: Largely Observed - Comments: - Extensive standards exist on risk management, internal controls and control functions, many in the form of guidance. - CIRC’s approach is being enhanced through the implementation of the SARMRA framework. - CIRC tailors expectations to the nature, scale and complexity of insurers in some areas; suitability requirements and reporting to CIRC reinforce the system. - Solvency-related risk management requirements apply to groups in C-ROSS, but coverage of controls or control functions at the group level is less comprehensive. - There is scope to strengthen requirements on the authority, independence and resourcing of control functions, including access to the Board. - Standards on outsourcing are limited, reflecting regulatory restrictions, although some outsourcing of control functions is permitted. ### Recommendations - CIRC should: - continue to strengthen its expectations of control functions (other than internal audit) regarding independence and resourcing and the scope of their responsibilities; - review the need for more guidance or other material on group level risk management and develop standards on outsourcing that would apply to any outsourced activities; and - develop a set of binding requirements in due course to strengthen existing mainly guidance-based material on risk management, etc. *PEOPLE’S REPUBLIC OF CHINA* ### Chapter VI (Insurance Supervision and Regulation) of the Insurance Law provides ### Chapter VI (Insurance Supervision and Regulation) of the Insurance Law provides ### Supervisory framework - CIRC has broad-based powers to supervise insurance and reinsurance companies, insurance and reinsurance intermediaries, loss-adjusting activities, actuaries and other persons operating in the insurance sector. - A cooperation mechanism between the head office and the local offices has been established; the head office and local offices of CIRC participated in the C-ROSS supervision together. - 36 insurance regulatory bureaus and related sub-bureaus fully participated in the SARMRA on-site assessment work of insurance companies. - 36 local bureaus directly are involved in IRR and are responsible for the insurance branch company data submission and evaluation. - CIRC adopts a classification-based supervision system based on integrated risk ratings (IRR) assessed each quarter on the previous 12 months' data. Companies are classified into categories A, B, C, and D: - Category A companies meet the required solvency standard and present no problems in corporate governance, asset utilization or market behavior. - Category B companies meet the required solvency standard and present certain problems in corporate governance, asset utilization or market behavior. - Category C companies do not meet the required solvency standard or present comparatively serious problems in corporate governance, asset utilization or market behavior. - Category D companies fall seriously below the required solvency standard or present serious problems in corporate governance, asset utilization or market behavior. - Depending on categorization, supervisory actions vary: - Category A: not subject to any special regulatory measures. - Category B: required to submit and comply with a rectification plan and may be subject to increased on-site inspections. - Category C: may be subject to a wider range of requirements, including increase in capital; restriction of dividend payments; reduction in management remuneration; restrictions on branch expansion; restrictions on business scope or new business activity; portfolio transfer or increased reinsurance cessions; sale of assets; restriction on investments; changes of senior management. - Category D: may be subject to a wider range of requirements, including forced takeover. - CIRC has a Solvency Regulation Committee and a risk surveillance and analysis mechanism; the Solvency Regulation Committee has held 35 quarterly meetings. ### Regulatory reporting - Most information needs are met through an electronic filing system that collects and maintains quarterly and audited annual financial statements in formats determined by CIRC and includes indicators to identify and correct inaccurate reporting. - Currently, CIRC does not have reports specifically designed for off-balance sheet exposures and material outsourced functions and activities. - Solvency Regulatory Standard No. 16: Solvency Report: - Articles 74 and 75: if an insurance company becomes insolvent or any event has a material adverse impact on its solvency, the company shall report the situation to CIRC within five working days upon such detection. - Article 76: if exposed to major liquidity risks, it shall report the situation to CIRC within two working days upon such detection. - CIRC requires insurance companies to promptly report changes and events which may have a material impact on their business, operations, or solvency; Off-balance sheet exposures and material outsourced functions and activities are included in the scope of matters tracked on a day-to-day basis. - CIRC requires insurers to provide statements and explanations on issues which warrant attention according to CIRC. ### Off-site monitoring - Off-site supervision relies on collecting, analyzing and processing information to monitor and evaluate insurer risks and to facilitate early warnings and classification-based supervision. - CIRC collects data from insurers on over 100 indicators and classifies risks as very high, high, low or very low; combination of solvency ratio and assessed unquantifiable risks, with weightings, drives the IRR (A to D), assessed quarterly and communicated to insurers. - The Statistics and IT Department compiles national insurance industry data, prepares statistical analysis reports and provides support for Off-site supervision and risk monitoring (OSSRM); conducts OSSRM on insurers with regard to their IT security. - Departmental OSSRM responsibilities: - Property Insurance Regulatory Department and Life Insurance Regulatory Department: OSSRM on businesses of property insurers/reinsurers and life insurers; consolidate data from other departments to monitor overall risk. - DRD: OSSRM on corporate governance of insurers and on insurance group (holding) companies from a group-wide perspective. - Investigation Bureau: off-site supervision to prevent case risks. - Insurance Intermediary Regulatory Department: OSSRM on insurance intermediaries and consolidates data to determine overall intermediary risk. - Findings from risk monitoring and off-site supervision are shared among relevant departments. - C-ROSS (Pillar 3) reporting from January 2016 enhances reporting: more detailed public disclosure and Regular Supervisory Report (RSR); CIRC receives detailed quantitative information quarterly and annually; reporting of group information based on C-ROSS will be extended. - CIRC was in the first year of implementation C-ROSS at the time of the FSAP. ### On-site inspection - Scope of on-site inspections is determined as part of the annual planning process; the Inspection Bureau provides for planned and unplanned supervision activities. - Working Procedures of China Insurance Regulatory Commission on On-Site Inspections require inspection teams to prepare an on-site inspection plan including entity, ground, purpose, scope, content, method, schedule, procedures, distribution of responsibilities and disciplinary requirements. - Inspection Bureau responsibilities: - day-to-day work of the Inspection Committee; - organizing and coordinating major inspections including the annual on-site inspection plan; - organizing investigation and handling of major risks and cases; - working with relevant authorities on illegal activities and misconduct. - Insurance Consumer Interests Protection Bureau conducts targeted inspections on consumer protection matters and investigates general consumer rights violations. - Departments transfer major cases to the Investigation Bureau; findings forwarded to the appropriate department. - Transition from dominance of on-site supervision to targeted on-site inspections driven by off-site supervision information to conserve resources and increase efficiency. - Supervision of groups relies on coordination within CIRC and a small coordination team; five staff in DRD are responsible for CIRC’s oversight of insurance groups. - On-site inspection outputs: - inspection reports sent in a confirmation letter to senior management emphasizing facts, problems and rectification suggestions; - inspected company required to comment on the confirmation letter in 10 days; - CIRC decides on the final correction plan and informs the inspected company; - normally, 12 months is given to implement the agreed rectification plan; - a second report referring to sanctions and fines is reviewed by the Administrative Penalties Committee. - CIRC uses only its own staff for on-site inspections, not outsourced experts. - CIRC reviews corporate governance as a normal part of on-site inspections; targeted inspections on corporate governance conducted annually since 2013; as of the end of 2015, 38 companies had gone through such inspections covering equity structure; shareholders’ general meeting; board of directors; management structure and operations; performance of directors, supervisors and key employees; related-party transactions; remuneration management; internal audit and internal control. - Recent on-site work examples include inspections on products and sales practices. ### Organization and resourcing of supervision - Supervision undertaken by various institutional and functional/specialist units within CIRC; core supervisory team consists of a legal expert, an economist and a mathematician or actuary. - Three-layer organizational structure: CIRC headquarters, provincial local offices and prefecture-city Insurance Sub-Bureaus. - Assessment: Largely Observed. - Comments: Evolution toward international best practice; challenged by limited resources and technical capacity amid fast sector growth; prerequisites for effective risk-based supervision include adequate resources, insurance knowledge and judgment by staff, and strong institutional governance and internal controls. - Recommendations: - CIRC should focus on transition to a more risk based approach, increase level of resources, and institute stronger governance and internal control requirements. - CIRC should develop a risk based supervisory plan which addresses these issues. - CIRC develop stronger centralized oversight of the supervision of groups, by a system of lead supervision with adequate staffing to ensure close and continuous oversight of significant groups. - CIRC develop its supervisory framework to include more emphasis on a risk-based supervisory plan to bring together all issues and actions on an insurer, including market conduct. ### Preventive and Corrective Measures (ICP 10) - Description: - Article 158 and 159 of the Insurance Law empower CIRC to “apply necessary measures to ensure that insurance companies, IAMCs, insurance agents and brokers meet the legal requirements and commitments to policy holders.” - Regulatory and supervisory reporting is analyzed automatically and generates forecasts and trends for supervisors; includes monitoring technical performance through reserving levels and performance ratios and solvency levels. - Trigger for preventive and corrective action is breach of regulatory requirements; usual practice for minor contraventions: regulatory letter, second notice, then administrative penalties if necessary. - For more serious breaches: monetary penalties, suspension of individuals and activities, revocation of licenses permitted. - CIRC may shorten timetables in emergencies at its discretion. - Typical rectification program measures CIRC may order: - ordering an increase of capital or reinsurance; - limiting the scope of business; - restricting the payment of dividends to shareholders; - restricting the purchase of fixed assets or the scale of operation costs; - restricting the forms and proportion of use of funds; - restricting the formation of additional branch offices; - ordering an auction of non-performing assets or transfer of insurance business; - restricting the level of salaries of directors, supervisors and senior managers; - restricting commercial advertisements; - ordering a stop of accepting new business. - Each administrative breach is subject to only one penalty; penalty levels escalate with the nature and seriousness of the offence and there is a general two year statute of limitations from the date of commission of the offence. - CIRC can take action against unlicensed activity and escalate corrective action where a breach has occurred; can communicate directly with board and senior management. - Escalation: where an insurer fails to make correction within prescribed time, CIRC may send in insurance professionals and appoint persons to form a rectification team; a rectification decision letter lists reasons, members and period of rectification and will be made public; an insurance company will be governed by CIRC when seriously insolvent or when it damages public interests in violation of the Insurance Law. - Assessment: Observed. - Comments: CIRC has power to escalate corrective action but limited tools to take preventative action before an administrative breach other than through discussion and agreement to inspection/examination findings. ### Enforcement (ICP 11) - CIRC has formal authority to issue directions and guidance; where companies do not comply it has the right to apply administrative sanctions and must transfer criminal violations to judicial prosecutors. - Insurance Law powers include adopting regulatory measures for problems relating to premium rates, solvency, liability reserves, use of funds; conduct on-site inspections; obtain evidence; request a freezing or sealing-up order from a court; and punitive measures against illegal acts. - Measures available when an insurance company poses material risk include issuing warnings, imposing fines, restricting scope of business, ordering cessation of new business, revoking license, and imposing sanctions on responsible persons (warnings, fines, disqualification, barring from insurance industry). - Administrative sanctions are imposed pursuant to Provisions on the Administrative Punishment Procedures of the China Insurance Regulatory Commission to ensure fair, just and open enforcement. - Persons refusing to submit required information or obstructing investigations can be subject to administrative penalty or criminal prosecution. - CIRC checks corrective action through its supervisory framework and direct monitoring of files. - The Insurance Law’s chapter on Legal Liability provides for administrative sanctions; Administrative Punishment Law requires proportionality of sanctions. - The 2015 revision of the Insurance Law did not update Chapter VII Legal Responsibility; penalty levels for some contraventions appear to be quite low. - Assessment: Largely Observed. - Comments: Administrative penalty powers include preventive and escalatory actions, actions against individuals and corporate entities, and conservatorship in case of solvency failure. A major revision of the Insurance Law (started drafting in 2015) will revise and upgrade penalty provisions; draft submitted to the State Council intends to upgrade both lower and upper limits of penalties. - Recommendation: CIRC should review the general level of penalties to ensure they are an effective deterrent. ### Winding-up and Exit from the Market (ICP 12) - Legislative framework for insolvency set out in the Insurance Law and Enterprise Bankruptcy Law; other requirements in CIRC measures such as Measures on the Administration of Insurance Companies. - Framework has not been fully tested by an actual liquidation; one life and one non-life company received extensive assistance, including injections of capital, from the CISF in 2008 to 2010; CIRC has not yet withdrawn an insurance company’s license. - Voluntary winding-up: - Article 89: CIRC approval required before dissolution; insurer sets up liquidation team and proceeds according to Insurance Law; Provisions on the Administration of Insurance Companies (Articles 28 to 33) set processes including requirement for liabilities to be met before assets distributed. - Winding-up in case of bankruptcy: - Article 90: if insurer fails to pay debts as they become due and has insufficient assets or becomes apparently insolvent (as defined in Article 2 of the Enterprise Bankruptcy Law), insurer or creditors may, after seeking CIRC approval, apply to court for reorganization, composition or winding-up proceedings; CIRC may also seek to institute winding-up proceedings with a court. - Cancellation and liquidation by CIRC in case of non-compliance: - Article 149: where CIRC revokes license owing to violation of law or solvency below threshold and continued operation would seriously damage market and public interest, CIRC shall cancel company, announce cancellation and set up liquidation team. - Specific criteria for license removal set out in law for particular offences (Articles 161, 164, 165, 166, 168, and 170). - Article 93 provides for voluntary termination of an insurer’s license. - Policyholder protection mechanisms in liquidation: - Claims representing insurance benefits attract high priority in bankruptcy liquidation under the Insurance Law (Article 91), although they rank behind claims of employees under the Provisions on the Administration of Insurance Companies. - For life insurance, policyholders’ contracts must (where possible) be transferred to other life insurers (Article 92 and Interim Measures for the Administration of the Transfer of Insurance Business by Insurance Companies); if the insurer fails to agree a transfer, CIRC may designate a transferee. - CISF will provide compensation directly to policyholders (and beneficiaries) or to a life insurer to which a portfolio has been transferred (Article 100 and Measures for the Administration of the CISF). - China Insurance Security Fund (CISF): - CISF is the only guarantee scheme in China; managed by a state-owned company subject to oversight and regulations by CIRC, PBC and the MoF. - Insurers required to contribute to CISF in proportion to their business volume (contributions are not yet risk-based). - CISF’s funds currently total RMB 94 billion. - CISF may draw on liquidity support from the PBC. - Compensation limits under Measures for the Administration of the CISF: - life: for individual policyholders, no more than 90 percent of the policy benefits prior to the transfer; and for a company, no more than 80 percent of the policy benefits. - non-life: full coverage on losses up to RMB 50,000 and of any further loss, 90 percent for individual policyholders, and 80 percent for corporates. - Policyholders may surrender their policy to CISF when its involvement is triggered. Policies written directly for policyholders overseas are excluded as is reinsurance. - CISF may provide assistance to companies judged to have major risks endangering public interest or financial stability; CISF was authorized to acquire shares in New China Life and China United Insurance; after managing companies back to profitability and solvency, CISF has disposed of almost all interests with a net gain to CISF funds. - Gap identified: - No provision in legislation for a clear point at which it is no longer permissible for an insurer to continue its business (e.g., falling below a clearly-defined minimum capital requirement). CIRC’s solvency requirements have a minimum capital requirement, but it is not sufficiently clearly such a point as yet. - Assessment: Largely Observed. - Comments: Legislative framework provides triggers and mechanisms for orderly exit and policyholder protection; flexibility in practice, including CISF recapitalization (with State Council agreement) as occurred since 2008; framework not fully tested in nearly 20 years of CIRC’s existence. - Recommendations: - ensure the regulatory framework specifies a clear point at which it is no longer permissible for an insurer to continue its business, for example where the insurer falls below its minimum capital requirement (see also ICP 17); - consider whether, given policyholder compensation is available via CISF (although it is not an ICP requirement), the level of protection should be increased to 100 percent in case of compulsory lines of insurance (motor third party liability). ### Reinsurance and Other Forms of Risk Transfer (ICP 13) - CIRC permits insurers broad discretion in structuring reinsurance programs, subject to risk management and solvency standards; Insurance Law limits include: - overall size of retained annual premium income relative to capital: four times; - liability undertaking for each risk unit: maximum 10 percent of capital, any excess to be ceded through reinsurance; - proportion of reinsurance that can be transacted with individual reinsurers (to address reinsurance credit concentration risk). - CIRC does not require prior approval for reinsurance contracts (including with related parties) but insurers must file their catastrophe risk reinsurance plan (Insurance Law, Article 104); prior approvals were removed in 2015. - Since start of 2016, cedant insurers required to select reinsurers only from a register maintained by CIRC (Reinsurance Registration System); registration automatic if objective criteria (such as rating) are met. Reinsurers are classified by roles (lead reinsurer, participant reinsurer, reinsurer in facultative business) according to financial strength. - Foreign reinsurers need not have offices in China to be registered, but must be introduced by a domestic insurer or domestic reinsurance broker registered in the system. - C-ROSS solvency requirements create incentives to source reinsurance from reinsurers operating in China and to require collateral when ceding to reinsurers based outside China. - CIRC maintains relationships with some home supervisory authorities of foreign reinsurers (including UK and German regulators) and has an overview of their regimes. - Risk management requirements on reinsurance (Measures for the Administration of Reinsurance Business of Property and Casualty Insurance Companies and Provisions on the Administration of Reinsurance Business): - Insurers must include reinsurance in strategic planning and set objectives for reinsurance management. - Non-life insurers shall set up an independent reinsurance management department and define procedures and powers. - All insurers must conduct periodic overall assessments of reinsurance business, improve sophistication of arrangements, and audit reinsurance business annually. - Insurers must provide reinsurers with information affecting pricing, ceding requirements, provisioning of reserves and expected claim payments. - Liquidity risk management strategies required for solvency and related risk management must include reinsurance liquidity risk; insurers required to enhance cash flow management for reinsurance business (Solvency Regulatory Standard No. 12: Liquidity Risks). - Contract certainty: for treaty reinsurance, principal clauses must be agreed before effectiveness and formal contract signed within three months; for facultative reinsurance, reinsurance arrangements must be completed before the policy becomes effective. - Supervision of reinsurance: - Oversight mainly by Property Insurance Department, which has two staff in its Reinsurance Regulation Division. - Off-site supervision based on reported information includes changes in reinsurance arrangements, summaries of renewed contracts, related party reinsurance transactions and statistical information. - CIRC requires insurers to justify reinsurance contracts that appear not to transfer risk. - On-site supervision may be triggered by off-site concerns; five on-site inspections focused on (non-life) reinsurance in the last two years. - Alternative risk transfer: - CIRC clarified insurers may use financial instruments to develop new risk transfer products subject to reporting requirements. CIRC has approved a reinsurer to carry out pilot catastrophe bonds issued on a limited scale. - Assessment: Observed. - Comments: - CIRC has comprehensive requirements focusing on non-life reinsurance, with general requirements applying to life reinsurance. - Regulatory approach relies on risk management requirements, reporting and oversight rather than prior approval. - C-ROSS addresses risks in reinsurance, including liquidity, and rewards use of reinsurance for catastrophe risk. - Reinsurer register system and solvency incentives should ensure insurers deal with high quality reinsurers. - Number of domestic reinsurers increased in 2016 to three - out of nine reinsurers operating in China in total; CIRC needs to keep approach and supervisory resources under review as number increases. - Recommendations: - strengthen requirements on documentation of reinsurance arrangements to ensure documentation is signed promptly as far as possible (noting faculty: facultative reinsurance contracts must be signed before becoming effective); - review approach to life reinsurance recognizing significant recent growth in use of reinsurance by primary insurers. *Source: cr17402 - Chapter VI (Insurance Supervision and Regulation) of the Insurance Law provides* ### introduction of the new solvency requirements (C-ROSS). ### introduction of the new solvency requirements (C-ROSS) ### ICP 14 Valuation — framework and key provisions - Valuation standards for solvency are those applying to financial statements prepared using ASBEs. - ASBEs have been based on IFRS since 2006 and since 2009 included provisions on accounting for insurance liabilities based on the then draft IFRS4 (Phase 2) (Insurance Contracts) (now renamed IFRS17). - CIRC made adjustments to ASBEs for solvency purposes and prescribes valuation approaches where no market price exists (including investments in subsidiaries: equity basis rather than cost). - Valuation approach features: - valuation interest rate for best estimate valuation of life insurance liabilities is based on a 750 day moving average of the government bond yield; prescribed premiums may be added to the risk-free rate, including a liquidity premium, that vary based on the product type; - in absence of reliable government bond yield curve beyond 10 years, insurers must use an Ultimate Forward Rate for liabilities over 40 years (4.5 percent at present) and an extrapolation basis is set out for the 10 to 40 years period; - insurers must use a prescribed factor-based approach to the TVOG. - The valuation framework does not allow adjustments for the insurer’s own credit standing. - Valuation simplifications exist for more complex products to ensure smaller insurers can comply (i.e., not dependent on modelling). ### ICP 14 — Life insurers’ liabilities (valuation components and assumptions) - Life insurers must value liabilities as the sum of: - a best estimate valuation, based on all cash flows and using appropriate assumptions; - a risk margin over current estimate (MOCE) based on a scenario comparison approach using CIRC-prescribed scenarios (a cost of capital approach may also be used); - an amount for TVOG (Solvency Regulatory Standard No. 3: Valuation of Liabilities of Life Insurance Contracts). - Non-guaranteed benefits must be included in liability valuation (an adjustment may be made in the solvency calculation for their loss-absorbing capacity). - Caps on valuation interest rate for premium reserves: - ordinary and universal products: 3.5 percent; - participating products: the lower of the pricing interest rate and 3.0 percent. - Pricing rates recently liberalized; companies must seek CIRC approval for products using a rate above 3.5 percent. - Mortality/longevity assumptions: - insurers required to use a prescribed table based on 2000–2003 data developed by the CAA with oversight from CIRC; - a new table based on 2010–13 data is under development by the CAA with support from the IAA; - no guidance on treatment of future improvements in longevity risk. - Lapse and expense assumptions must be based on insurer experience subject to CIRC-set boundaries. - Total value of life insurers’ liabilities for solvency purposes is subject to a floor calculated as the total cash value of the life business. ### ICP 14 — Non-life insurers’ liabilities - Non-life insurers (including reinsurance companies) must establish reserves per detailed CIRC requirements and value according to ASBE standards. - Reserving basis (Measures for the Administration of Non-Life Insurance Reserves): - unearned premium reserve based on CIRC-prescribed methods; - incurred and reported claims reserve using case estimate/case reserve or other CIRC-recognized methods; - incurred but not reported reserve (IBNR) reflecting the nature, distribution and experience of risks by business line using CIRC-prescribed methods. - Specific catastrophe reserve requirements: - agricultural insurance catastrophe reserves set by MoF, taking local conditions into account; insurers must add to reserves when underwriting profit reaches a certain level; - MoF preparing measures for earthquake catastrophe reserves; CIRC developing measures for nuclear insurance. - Non-life reserves are not discounted; liabilities reported gross with receivables against reinsurance. ### ICP 14 — Assets and valuation alignment - Assets must be valued using ASBEs, which follow IFRS classification: Fair Value, Available for Sale and Hold to Maturity. - Hold to Maturity assets account for around one third of aggregate insurance company assets. - Comment: comprehensive valuation requirements combine alignment to accounting standards with insurance-specific requirements, but valuation bases for assets and liabilities are not fully consistent. ### ICP 14 — Recommendations - CIRC should establish an objective and a plan to improve consistency of valuation requirements across assets and liabilities and, longer term, move valuation to a more market consistent basis while accounting for Chinese market characteristics. - CIRC should develop elements allowing large insurers (for example, Class I under C-ROSS) or those with proven financial controls to use more sophisticated techniques, such as stochastic valuation of TVOG. - CIRC, in cooperation with other authorities, should complete implementation of reserving for catastrophe risks. --- ### ICP 15 Investment — objectives and framework - CIRC has been reforming requirements to give insurers increased scope to invest and to accommodate rapid insurance business growth, while ensuring diversification and risk management. - Investment rules are set at multiple levels: - Article 106 of the Insurance Law: principles of security, liquidity and diversification; restricts insurance funds to bank deposits; traded bonds, stocks, shares of securities investment funds and other negotiable securities; investments in real estate; and other uses “prescribed by the State Council.” - Interim Measures for the Administration of Utilization of Insurance Funds and Interim Measures for the Administration of Insurance Asset Allocation provide further requirements. - Around 40 risk management requirements cover investment capability, related-party transactions, internal controls and disclosure. ### ICP 15 — Insurance Asset Management Companies (IAMCs) - Article 107 of the Insurance Law permits insurers to establish IAMCs, which must be at least 75 percent owned by insurance companies and focus on insurance fund management. - IAMCs may provide asset management services to third parties, including other insurers. - Majority of insurance funds now managed by IAMCs; insurers may still manage funds in-house. ### ICP 15 — Investment limits, thresholds and liquidity - CIRC Notice on Enhancing the Supervision of the Investment Ratios of Insurance Funds sets limits: - equity: 30 percent; - real estate, excluding own-use property: 30 percent; - other financial assets: 25 percent; - overseas investments: 15 percent. - For real estate, investment in own-use physical property may not exceed 50 percent of net assets. - Liquidity risk monitoring thresholds: - no less than 5 percent of assets being liquid for life insurers; - 7 percent for non-life insurers. - (Liquid assets defined as cash on hand and deposits readily available, and short-term highly liquid assets readily convertible into cash.) - Concentration limits: - investments in a single fixed income asset, equity asset, real estate asset and other financial assets: 5 percent of total assets; - investments in venture capital funds: 2 percent of total assets; - investments in a single fund: 20 percent of the fund’s offering size. - Risk monitoring thresholds (not hard limits) trigger CIRC investigation (e.g., stock investments exceeding 20 percent of total investment). ### ICP 15 — Restrictions and operational requirements - Insurers may not make or acquire loans as part of investment portfolios; CIRC open to allowing such investment but considers views of PBC and CBRC. - Derivatives may not be used to take on investment risk; simpler derivatives permitted for hedging. - Insurers must have appropriate investment management capabilities; requirements to put in place custody arrangements for equity holdings. - Higher-risk investments permitted only with specific expertise and subject to reporting and supervisory scrutiny (e.g., infrastructure investments via vehicles, not direct). ### ICP 15 — Assessment and recommendation - Assessment: Largely Observed. - Comments: CIRC has liberalized investment rules; sector diversification increased but higher-risk investments remain limited sector-wide (7 percent in alternative investments broadly defined, and just over 2 percent overseas), though some insurers pursue aggressive strategies attracting CIRC focus. - Recommendation: CIRC should review its approach, including the balance between regulatory limits and supervisory activity, to higher risk investments including equities, taking account of the 30 percent limit on equity investments and recent insurer stock market activity. --- ### ICP 16 Enterprise Risk Management (SARMRA and ERM requirements) - CIRC introduced extensive risk management requirements as part of C-ROSS, in particular SARMRA (Solvency-Aligned Risk Management Requirements and Assessment). - SARMRA requires insurers to establish organizational structures, management systems, risk evaluation mechanisms and a risk appetite system covering insurance, market, credit, operational, strategic, reputation, liquidity and other risks. - Insurer classification for SARMRA application: - Class I companies: established > five years and, if non-life, written premiums > RMB 5 billion or total assets > RMB 20 billion; if life, written premiums > RMB 20 billion or total assets > RMB 30 billion in the most recent financial year; or >15 provincial branches. - Class II companies: branches of foreign insurers and any insurer not meeting Class I criteria. - At assessment time: 62 Class I companies and 100 Class II companies. - Expectations: - Higher expectations for Class I firms including use of multiple capital management tools (e.g., economic capital model aligned with C-ROSS principles) and stronger risk governance and CRO role. - Class II may use their choice of approaches; all insurers must prepare a three-year rolling capital plan annually. - ALM and underwriting: - Insurers required to improve ALM mechanisms; explicit ALM risk management requirements in Interim Measures for the Administration of Utilization of Insurance Funds (Article 43). - Full requirements on underwriting risk (C-ROSS Standard 11, Articles 41–51). - Group risk: - Framework does not explicitly capture group risks (ICP 16.1.18); requirements on IGT and related-party transactions exist but group risk management not explicitly required in SARMRA. - ORSA: - Under C-ROSS insurers must self-assess operational, strategic, reputation and liquidity risks each quarter and risk management at least annually; results and proposed actions must be included in a quarterly report to CIRC approved by Board and senior management. - No explicit requirement for a comprehensive ORSA as described in the ICP; Class I insurers required to develop relatively advanced capital management approaches which are not yet well-developed and not reviewed by CIRC as input into SARMRA. - Assessment: Partly Observed. - Recommendations: - CIRC should develop an approach to include group risks explicitly in SARMRA. - CIRC should extend SARMRA in due course to require insurers to develop ORSAs agreed by Boards and submitted to CIRC as input into SARMRA. - After completion of the first year of SARMRA assessments, CIRC should consider making the process more risk-based (e.g., more frequent assessments of Class I or larger insurers and less frequent reviews of smaller companies with strong SARMRA performance). --- ### ICP 17 Capital Adequacy — C-ROSS structure and application - C-ROSS effective January 1, 2016; comprises 17 standards addressing valuation (ICP 14), a three-pillar approach to solvency requirements and group application. - Development began in 2012, drew on international standards (especially EU Solvency II), but excludes internal modelling and insurers’ own methodologies. - Calibration target: 99.5 percent over one year (same as EU Solvency II); CIRC aimed for solvency requirements that would not restrict insurance sector growth. - Pillar 1 (quantitative): - addresses insurance, market and credit risks only (countercyclical requirement and add-ons for systemically important insurers to be added later); - prescribed factors applied to exposures or scenarios deliver minimum capital requirements with diversification allowances and deduction of loss absorption capacity for relevant life insurers; - available capital defined: equity and preference shares up to 30 percent of total eligible as core capital; supplementary capital includes subordinated loans (limited to 25 percent of total where under 5 years); - minimum solvency ratios: 100 percent (comprehensive ratio) and 50 percent (core ratio) must be met at all times. - Pillar 2 (qualitative/assessment): - process for evaluating extent of inherent risks not captured in Pillar 1 (four “unquantifiable risks”: operational, strategic, reputation and liquidity). CIRC collects data on over 100 indicators, classifies these risks as very high, high, low or very low; combined with solvency ratio and weightings drives an IRR (A to D) assessed quarterly and communicated to insurers. - SARMRA evaluates control risks across nine areas; SARMRA results weighted to inform an adjustment to Pillar 1 minimum solvency requirement bounded by a maximum increase of 40 percent and a low level of minus 10 percent (i.e., Pillar 1 minimum requirement may be reduced by this amount). - Pillar 3 (disclosure): - insurers must disclose quarterly solvency ratio (adjusted by SARMRA), IRR rating (A to D) and highlights of quarterly solvency report submitted to CIRC; IRR must be disclosed in documentation given to policyholders. - Implementation status: - Pillar 1 requirements apply in full; IRRs assigned and disclosed; first round of SARMRA to complete by end of 2016 with onsite evaluations underway. - Additional capital rules: - Measures on Administration of Insurance Companies set minimum capital requirement of RMB 200 million; additional RMB 20 million required for every new branch (province level), capped at RMB 500 million total minimum required capital. - Application to groups and branches: - Framework applies on a group basis; Solvency Standard 17 details application to insurance groups including where there is a bank or non-insurance component. - C-ROSS applies to insurers established in Mainland China as branches (restricted to reinsurers generally and one life company incorporated in Hong Kong SAR). - Solvency control levels and intervention: - CIRC views minimum solvency requirements as an MCR in ICP terms; strong action would be taken for failure to meet minimum, though not immediate receivership; Insurance Law allows receivership where insurer is “seriously” below solvency requirement. - CIRC deliberating intervention points above minimum; under previous system, 150 percent of minimum was trigger for intervention. - Assessment: Largely Observed. - Comments/concerns: - Framework is a major step to risk-based supervision and links Pillar 1 and Pillar 2; excludes internal models and full ORSA; relies on extensive CIRC interventions and is resource-intensive. - Operational risks excluded from Pillar 1 even where quantifiable; credit risk treatment for offshore reinsurers and equity risk treatment may not be fully risk-based. - Recommendations: - CIRC should review its approach to intervention in terms of ICP framework providing for two solvency control levels (PCR and MCR), establish levels for intervention and publish its approach. - CIRC should review treatment in solvency requirements of credit risk on offshore reinsurers and equity risk (in light of recent market volatility). *Source: cr17402 - introduction of the new solvency requirements (C-ROSS).* ### 3.96 trillion out of around RMB 12 trillion in total) and could lead to contagion ### 3.96 trillion out of around RMB 12 trillion in total) and could lead to contagion ### Insurers’ products and systemic risk - Insurers have experimented with products sometimes associated with systemic risk, including variable annuities, which CIRC approved for a small numbers of insurers in 2009 on a pilot basis. - The product was not successful, partly because of the limited scope for effective hedging given the absence of deep and liquid derivative markets. - CIRC identified and has responded to the increased credit insurance (mostly loan insurance and performance guarantees) being written by non-life insurers. - CIRC uses the extensive data reported by insurers as well as other information and targeted stress tests to monitor the insurance market for significant trends. - CIRC draws on macroeconomic data and analysis to identify risks to the sector. - The focus is mainly domestic, reflecting the limited international dimension to the insurance sector. - CIRC also monitors for systemic risk in insurance products, taking into account the predominance of traditional and otherwise standard products in the market and the influence of distribution channels such as bancassurance. ### Systemic risk frameworks for insurers (D-SIIs / G-SII) - CIRC is developing its own process for evaluating D-SIIs and expects to finalize and implement the framework in 2017. - The D-SII proposals on which CIRC has been consulting are based on the framework for G-SIIs. - CIRC proposes to take into account corporate governance as well as scale, external interconnectedness, assets liquidation and substitutability. - The D-SII framework will also take account of non-traditional business, broadly-defined. - A list of D-SIIs has not yet been published. - The CIRC has been applying the G-SII framework to the Ping An Group. - It has worked with the group to develop a Systemic Risk Management Plan and Liquidity Management Plan and worked with the group on a RRP—see ICP 26. - CIRC has no explicit powers or requirements in this regard, drawing instead on the FSB framework and cooperation with the G-SII. - CIRC will have powers, under its measures on the regulation of D-SIIs currently under development, to impose requirements on D-SIIs, including in due course to require higher loss absorbency under the framework being developed by the IAIS. - Assessment: Largely Observed ### Cooperation and coordination with domestic authorities - Cooperation arrangements have been developing based on clearly-defined responsibilities for each agency (CIRC, CSRC, CBRC, and PBC). - An MoU establishes responsibilities for groupwide supervision of groups with activities in different sectors. - Ping An Group is the only Chinese group with significant cross-sector interests; groupwide supervision is clearly allocated to the CIRC as the group is headed by an insurance holding company. - CIRC has identified increasing interest in the development of financial conglomerates. Cross-sector holdings are permitted under law, but in the case of linkages between banks and insurers, only with the agreement of the State Council. - Under Article 157 of the Insurance Law, CIRC must establish a supervision and administration information-sharing mechanism with the PBC and other financial regulators. - In 2008, CIRC and CBRC signed a bilateral MoU on cooperation with regard to groups containing both banks and insurers (MoU between CBRC and CIRC on Strengthening In-Depth Cooperation and Cross-Sectoral Supervisory Cooperation). - In 2013, with State Council agreement, the agencies and the SAFE established the Financial Regulatory Coordination JMC. The secretariat is provided by the PBC. - JMC remit includes: - financial regulatory policies, laws and regulations; - financial stability and preventing regional or systemic financial risks; - cross-sector financial products and cross-market financial innovations; and - financial information sharing and the establishment of an integrated financial statistical system. - The JMC, chaired by the PBC, meets quarterly at ministerial level, has sub-groups at working level, and provides an expectation of day-to-day cooperation between the agencies. - The JMC process focuses mainly on policy issues, but may also discuss supervision of individual entities as required. The JMC is not a decision-taking body. - CIRC has established a Crisis Management Group (CMG), comprising CIRC, CBRC, and the CISF (insurance guarantee scheme) to work in recovery and resolution issues with regard to the G-SII, Ping An Group. ### Cooperation with foreign regulators and internationalization - Chinese insurance groups have relatively limited international business. - While CIRC has not determined a final list of Internationally Active Insurance Groups (IAIGs) as defined by the IAIS, only a small number of groups are likely to meet the definition. - Even the G-SII, Ping An Group, has foreign operations only in Hong Kong. - 12 Chinese insurers have some foreign business (branches or subsidiaries) in Hong Kong, Singapore, UK and other countries. - Insurers have been increasingly investing their insurance funds in foreign assets, from a low base (less than 3 percent of total insurance sector assets are invested abroad at present). - Around 70 foreign insurance groups have operations in Mainland China. - Market access limitations: - For life insurance, insurers from outside China may operate only as joint ventures, with the foreign shareholding limited to 51 percent of the total. - In non-life insurance, foreign insurers may own up to 100 percent of a subsidiary in China. - Foreign reinsurance companies may operate as branches in China as well as on a cross-border basis directly into China from abroad. - One life insurance group, AIA, which is based in Hong Kong, has been allowed to operate in branch form in Mainland China. - Foreign insurers’ market share of primary insurance is around 6 percent of total premium income in life and 5 percent in non-life. - In relation to cooperation, CIRC has: - signed MoUs with a number of regulators and is open to the exchange of information; MoUs vary by jurisdiction and focus on exchange in information rather than joint working or cooperation on supervisory assessment; - established active bilateral relationships with key regulators outside Mainland China, particularly Hong Kong (Office of the Commissioner of Insurance) and more recently the Iowa Insurance Division (the state regulator) in respect to the acquisition by the Anbang Group; and is in the process of establishing other relationships, including with the regulator in France; - held occasional meetings bringing together the regulators of Hong Kong, Macao and the CIRC bureaus in Guangdong and Shenzhen to discuss regional issues; and - attended meetings of colleges of supervisors established by foreign regulators for some of the groups of which CIRC has host state responsibilities (AIG, AIA, and AXA Insurance Group). - CIRC has arranged meetings of foreign supervisory agencies to discuss enhanced cooperation and cross-border supervisory risks but has not established a college of supervisors. - CIRC does not carry out an assessment of the equivalence of the foreign regulator’s requirements with its own (“supervisory recognition” in terms of ICP25). - Discussions are taking place with EIOPA on the equivalence of the European Union and Chinese frameworks. - Assessment: Partly Observed ### Recommendations on cooperation and supervisory recognition - continue to deepen supervisory cooperation within the JMC framework and bilaterally, including with the CSRC in relation to areas of shared interest; - establish a framework for assessing the equivalence of foreign regulators (particularly in relation to their consolidated supervision), where significant in relation to foreign-funded insurers, and in case of future expansion of domestic insurers outside China; and - review, update and extend its network of MoUs with foreign regulators to incorporate provisions on supervisory cooperation to supplement provisions on exchange of information. ### Cross-border crisis management and resolution - The CIRC’s work on cross-border crisis management is limited, reflecting the low level of cross-border business of Chinese domestic insurers, the limited scale of foreign insurers’ operations in China and the lack of experience of an actual crisis. - Two Chinese life insurance companies suffered financial strain in 2008 and were supported by the CISF, but had no foreign business. - CIRC has focused on RRP for G-SIIs, as established by the Financial Stability Board (FSB) and the IAIS. - A CMG was established in 2014 for the only G-SII for which CIRC is the groupwide supervisor, Ping An Group. CMG members are CIRC, which chairs the work as groupwide supervisor and resolution authority, CBRC and CISF. - CIRC has worked with the group management on the development of the RRP, which has been developed by Ping An itself, and carried out a resolvability assessment, the first version of which was completed in June 2016. - Foreign supervisors have not been involved in the CMG; the supervisory authority in Hong Kong SAR has been informed of progress and implications for Hong Kong operations. - The experience of the RRP work on the G-SII will be reflected in due course in developing the recovery and resolution framework for D-SIIs. - For insurers whose groupwide supervisor is located outside Mainland China, CIRC’s approach takes account of their significance in China. For those which are G-SIIs, the CIRC would not expect to be included in a CMG but is open to cooperation on crisis management with home supervisors via other mechanisms, including participation in supervisory colleges. - Assessment: Largely Observed ### Recommendations on crisis preparedness and simulations - In addition to completing its planned development of its D-SII framework, which will capture cross-border business, CIRC should review the scope of its crisis management planning for all insurers with foreign operations to ensure that there is adequate focus on crisis preparedness in supervisory work. - CIRC should develop a framework for crisis simulation involving an insurance group, to test how it would react in case of a crisis. Such an exercise would help test communications, information availability, and whether the authorities have the right tools to deal with the crisis. *People’s Republic of China — IMF Financial Sector Assessment (excerpt)* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17402.pdf_