CIRC (CIRC) released two documents outlining a three to five year plan for enhancing its insurance regulatory regime. The publications are significant. Commentators note that when Chinese authorities consult publicly they often have a clear plan and the public announcement is designed to test the market’s reaction.
Second phase, not Solvency II

The framework
The latest documents detail further steps towards achieving a risk-based regulation and outline an ambitious implementation timeline. The CIRC said it is planning to follow a three pillar approach, in line with the Insurance Core Principles published by the International Association of Insurance Supervisors (IAIS) in October 2011. The three pillars closely resemble the structure of Solvency II: Pillar I – capital adequacy, Pillar II – risk management requirement and Pillar III – information disclosure requirement. The regulation will be guided by five objectives: 1. Consumer protection. 2. Risk management and financial stability. 3. Strengthening the Chinese insurance industry. 4. Improving the level of insurance supervision, in line with international standards. 5. Improving international competitiveness of the Chinese insurance industry.Implementation by 2017, if not before
The second phase of the regulation will be implemented over the next three to five years. The stages are outlined as follows:- 2012, an evaluation stage. During the year the CIRC will conduct a comprehensive evaluation (using both qualitative and quantitative measures) of the current and past supervisory regime. This will include lessons learned and next steps for building a scientific and targeted regulation.
- 2012 – 2015, thematic research stage. This stage will include work on capital standards, countercyclical measures and refining pillar II and pillar III.
- 2014, system formation stage. The legislation will be drafted based on the findings of the research stage. The CIRC expects to complete this task by the end of the year.
- 2015 to 2017 (at the most), impact assessment stage. This stage involves testing the proposed rules, including quantitative tests, consultations and relevant revisions.
- 2017, implementation.

A regulatory system fit for China
The publications are the clearest signal yet that China is on a path to create a risk-based regulatory system that focuses on policyholder protection, and is in line with international best practice. At the same time the CIRC insists that the regulation must be adapted to the Chinese insurance industry. It sets out three guiding principles for the regulation: meeting the national condition, risk-based and consistency with international standards. While it will use international standards to design the regulation, the CIRC said it will not simply copy and paste the guidelines. Instead the regulation must be adapted to the national characteristics and the stage of development of the Chinese insurance industry. The insurance industry in China still displays many of the characteristics of a nascent market and much of the regulatory effort is on monitoring of firms. Although there are some international firms operating in the country , four large nationally backed insurers make up the majority of the local market . According to the 2012 Lloyd’s country profile for China, “The [Chinese insurance] market is dominated by state-owned and local players, with foreign insurers only servicing few clients in comparison. There is intense competition amongst domestic rivals, whilst foreign companies have so far made modest inroads, mostly in lines where there is less local expertise.” John Fisher, a Shanghai based insurance specialist working with multiple insurers in China said the regulation will have to fit the market’s development phase. “The Chinese insurance industry is still at a relatively young stage and that would mean that any regulatory regime the CIRC puts in place will have to take account of that.” “The current regime is essentially a form of Solvency I with some calculations around capital adequacy and margins. In areas such as governance, transparency and reporting, for example, there would have to be a gradual step change,” he added.
Practical risk-based regulation
Another principle set out by the CIRC is to create a risk-based regulatory framework that fully reflects the risk profile of individual firms as well as systemic risk. “While the CIRC is looking to create a comprehensive risk based regulation, it is also trying to develop a system that is practical rather than an overly complexed regulation that is costly and difficult to implement,” Jonathan Zhao, Partner, Head of Asia Pacific Actuarial and Insurance Advisory Services, Ernst & Young Hong Kong, said. “The focus is on developing a practical approach that fits the development of the Chinese insurance market, and makes reference to the IAIS Insurance Core Principles, as well as existing standards such as EU Solvency II and the US RBC. Most importantly, a risk-based capital framework that would capture all essential risks of the Chinese insurers.”International standards consistency
As noted above, the CIRC documents make a number of specific references to the IAIS Insurance Core Principles. This appears to reiterate its commitment to closely align insurance regulation in China with international standards, and has been welcomed by the IAIS. “As a membership organisation whose mission is to promote effective and globally consistent supervision of the insurance industry, the IAIS is pleased to see each of its Members, including CIRC, embrace and move towards adopting IAIS supervisory material,” Yoshi Kawai, Secretary General of the IAIS, told Solvency II Wire.China and Solvency II equivalence
While China is looking to create a unique regulatory system for the Chinese insurance market, it is clearly seeking to align it with international standards, and it has already showed an interest in Solvency II equivalence.
Conclusion
The CIRC is currently in discussions with a number of national and international stakeholders on the final design of China’s insurance regulation. Sources close to the matter say a decision on the final structure of the system could be made as early as the end of the year. Along with Insurance Core Principles and Solvency II it is understood the CIRC is also looking at the US Risk Based Capital (RBC) framework. Yet whatever system, or amalgam of systems, the CIRC adopts it will have to balance China’s desire to match international standards with its own growing market. [caption id="attachment_24995" align="aligncenter" width="600"]