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 IIFirst, a note of caution on translation. The documents – a press release and a Q&A page (in Chinese) – refer to “China’s second generation of solvency regulation”, which could be misinterpreted to mean Solvency II. This is not the case. China began modernising its insurance regulation between 2003 and 2007, and this is a continuation of that process. In 2010 the CIRC published a set of guidelines on risk management and governance for life and health insurance firms. These included introducing a risk management function and a risk management committee that reports to the Board, as well as placing Board responsibility for the risk management framework.
The frameworkThe 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 beforeThe 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.