The C-ROSS solvency system and actuarial valuation in China
WU，Lan（吳嵐） Director of Education & Examination Committee of
China Association of Actuaries School of Mathematical Sciences，Peking University
Premium Growth - China
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Total Premium Non-life Premium Life Premium
Premium annual growth rate 19%
1.7 trillion RMB
Number of Insurance Companies
62
71
7 17
1 10
Non-life
Life
Reinsurance
Asset manager
Mutual rural insurer
Group
Asset Volume Under Management
204 272 337 459 649 912
1185 1522
1973
2900 3342
4064
5047
6014
7350
8300
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Total AuM of China's insurance industry (RMB Billion)
Market-Oriented Reformation
Liberalize
the front end
Entry and Exit
Investment Channel
Premium Rate
Control
the back end
Solvency regulation
Agenda
• Background & History
• Conceptual Framework of C-ross
– Pillar I Quantitative Capital Requirements
– Pillar II Qualitative Supervisory Requirements
• Liability valuation in C-ross: updated 6
Background & History-Time Line
• From 2003 to 2007, CIRC(China Insurance Regulation Committee) build up the first generation of Chinese solvency supervision system——the current one：Solvency I
• In 2012, CIRC started the reform of the solvency supervision system to construct the second generation system ——the new one：C-ROSS
• The new system will be implemented in 2015.
7
Background & History - Role
• In a certain level，reflects the risks of insurance company.
• Based on the conservative assumptions , the capital requirement with real
capital together to cover the both expected and unexpected losses in general .
• On the ground of the rapid development of China insurance market over the
past ten years, the system was capacity for and played a very important role in：
– to unify the concepts of capital management in the industrial,
– the risk prevention,
– promote the strength of the insurance industry
– improve the management level
8
Background & History -adaption of Solvency I • Do not identify the risk profile: operational risk, reputational
risk, strategic risk, liquidity risk and asset liability matching risk .
• Failure to properly recognize the expected and unexpected losses.
• Capital requirements and reserve are linked and adequate
duplicate.
• Do not reflect the effects of internal control, risk
management, business structure and asset portfolio.
• Failed to promote sustainable operation in different of period and
scale companies.
9
Conceptual Framework of C-ROSS • 2013.05.03 issued <China Risk Oriented Solvency System Conceptual
Framework>
– To measure the risks scientifically and comprehensively, to calculate a capital
requirement that aligns with the specific risks.
– To mitigate undesirable or unintended risk exposures and determine
appropriate capital requirements; to establish an effective incentive mechanism
to encourage undertakings to improve the management and control of risks and
to promote the robust development.
– To actively explore an appropriate model for solvency supervision in emerging
markets and to contribute to the development of international solvency
supervision.
10
11
Pillar I —Quantitative Capital Requirements
1. Capital requirement
2. Valuation and admissibility standards of
assets and liabilities
3. Available Capital tier
4. Dynamic solvency testing
5. Supervisory intervention
12
Capital requirement
• insurance risk capital requirements;
• market risk capital requirements;
• credit risk capital requirements;
• macro-prudential capital requirements, i.e. capital
requirements for pro-cyclical risk and systemic
risk in systematically important institutions;
• supervisory capital requirement adjustments,
13
Solvency adequacy ratio
• Three indicators to evaluate the solvency
position of insurance undertakings:
– core solvency adequacy ratio,
– aggregated solvency adequacy ratio
– integrated risk rating.
14
Valuation Principles of Assets and Liabilities in Pillar I
• non-life insurance undertakings and life insurance undertakings
should be as consistent as possible.
• The same insurance business should adopt the same valuation
principles for assets and liabilities, regardless of whether it is carried
out by life or non-life insurance undertakings, direct insurers or
reinsurers.
• The valuation principles of assets and liabilities should be as consistent
as possible, in order to minimize the mismatch between assets and
liabilities caused by the inconsistencies in the valuation principles.
15
Valuation Principles of Assets and Liabilities in Pillar I
• should reflect the actual risk profiles of the assets and liabilities of insurance undertakings in the market environment and their changes timely and appropriately.
• should fully utilize the existing insurance undertakings' financial accounting system. In order to effectively reduce the implementation costs of solvency assessment and management, underlying data, measurement principles and methods and reporting systems should be shared to the extent practical.
• used to calculate the minimum capital requirements under Pillar 1 should be consistent with those used for the calculation of available capital.
• should objectively reflect the actual situation in China and fully consider the impact on the entire insurance industry. The standards should be appropriate and practical.
16
Pillar II ——Qualitative Supervisory Requirements
1. Integrated risk rating, i.e. the supervisor conducts a comprehensive evaluation of the overall solvency of insurance undertakings by integrating the quantitative evaluation of the risks that can be quantified under Pillar 1, and the qualitative evaluation of the risks that are difficult to quantify (including operational risk, strategic risk, reputational risk and liquidity risk) .
2. Risk management requirements and assessment framework, sets out specific supervisory requirements for the risk management practice of insurance undertakings including risk governance structure, internal control, the management structure, risk assessment processes, etc., and assesses insurance undertakings' risk management capabilities and risk profiles.
3. Supervisory inspection and analysis, i.e. conducting on-site inspections and off-site analysis of the solvency of insurance undertakings.
4. Supervisory intervention actions.
17
The result of evaluation will feedback in the MC control risk:
MCcontrol ＝Q×MCquantifiable inherent risks Ｑ=- a*S+b; S is the scores achieved by the insurance company under SARMRA
Pillar II – Solvency Aligned Risk Management Requirement and Assessment (SARMRA)
Risk Management Requirement and Evaluation
Risk Management Requirement Regulator publishes the requirement on risk management
Risk Management Evaluation Regulator evaluates the risk management level of the insurance companies
Liability valuation in C-ROSS
• life insurance liability： – Best Estimation Reserve（BER） + Risk
Margin（RM） – RM = BE(design) - BE(base)
19
BER- Output cash flows
• Insurance Coverage :
– Guarantee
• Death benefit
• Disability
• Mobility
• Survive
• Surrender
• Maturity
– Non guarantee
• Dividends
• Payment on credit rate
20
BER- Output cash flows
• Expense
– Maintain
– Commission
– Claim
– Regulation related
• Tax-pay
21
BER-Discount rate
• Two methodology – Base rate + comprehensive premium – Cash flow matching
• Current interest rates scenario: 2013/12/31 • Assumed low interest rates scenario:
2009/12/31
22
Yield curve(http://www.chinabond.com.cn/d2s/index.html)
23
0
1
2
3
4
5
6
0.00
0.
90
1.81
2.
71
3.62
4.
52
5.42
6.
33
7.23
8.
14
9.04
9.
95
10.8
5
11.7
5
12.6
6
13.5
6
14.4
7
15.3
7
16.2
7
17.1
8
18.0
8
18.9
9
19.8
9
20.7
9
21.7
0
22.6
0
23.5
1
24.4
1
25.3
2
26.2
2
27.1
2
28.0
3
28.9
3
29.8
4
30.7
4
31.6
4
32.5
5
33.4
5
34.3
6
35.2
6
36.1
6
37.0
7
37.9
7
38.8
8
39.7
8
40.6
8
41.5
9
42.4
9
43.4
0
44.3
0
45.2
1
46.1
1
47.0
1
47.9
2
48.8
2
49.7
3
2013 2009 2011 2012 2010
Base rate
• 750-day moving average + ultimate rate adjusted
• Term structure： ü ≤ 15 Year: do not adjust ü (15, 30): extrapolate ü ≥ 30 year: 5%
• The convergence rate of yield up 30
24
25
0
1
2
3
4
5
6 0.
00
0.97
1.
95
2.92
3.
89
4.86
5.
84
6.81
7.
78
8.75
9.
73
10.7
0
11.6
7
12.6
4
13.6
2
14.5
9
15.5
6
16.5
3
17.5
1
18.4
8
19.4
5
20.4
2
21.4
0
22.3
7
23.3
4
24.3
2
25.2
9
26.2
6
27.2
3
28.2
1
29.1
8
30.1
5
31.1
2
32.1
0
33.0
7
34.0
4
35.0
1
35.9
9
36.9
6
37.9
3
38.9
0
39.8
8
40.8
5
41.8
2
42.7
9
43.7
7
44.7
4
45.7
1
46.6
8
47.6
6
48.6
3
49.6
0
2013 31-Dec 2013 250-avg 2013 750-avg
RM = BE(design) - BE(base)
• BE(design):
– Insurance loss rate: ±5%
– Lapse rate: ±10%
– Maintain fee: +10%
• no discount rate effect
26
Timeline of C-ROSS
�
2012 • Launch of the
C-ROSS Project
• Launch the first batch projects
2013 • Publish
conceptual framework
• Launch the second batch projects
2014 • Publish and
refine the consultation paper
• Run IQAs • Finalize
technical standards
2015 • Begin with
transitional arrangements
Industry Quantitative Assessment (IQA)
Publish the consultation paper
Run the IQA
Companies submit IQA results with
feedbacks
Refine the consultation
paper
Until now: Non-Life insurers：Three IQAs Life insurers： Two IQAs Reinsurers： One IQA
Test run quantitative assessment in a few companies
Realistic yield curve- IQA
29
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
realistic scenarios
高档 中档 低档 无溢价 - 适用资产端
Low rates-assumption
30
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
高档 中档 低档 无溢价 - 适用资产端
Liability only- Real
31
3.00%
3.50%
4.00%
4.50%
5.00%
5.50%
6.00%
高档 中档 低档
Q&A
32
