CBIRC revises measures to mitigate risks

New changes will optimize stability, improve adequacy of insurance security fund

China has clarified and optimized the fundraising, use and administration of the insurance security fund to strengthen the risk management of insurance companies, guide insurers to establish a better risk prevention mechanism and maintain the steady operation of the insurance sector, experts said.

The China Banking and Insurance Regulatory Commission recently announced it has revised measures for the administration of the insurance security fund together with the Ministry of Finance and the People's Bank of China, the central bank. The new measures will come into effect on Dec 12.

The CBIRC said it will give further play to the role of the insurance security fund in preventing and mitigating financial risks to promote the stable and high-quality development of the insurance sector.

One of the major changes of the measures is that insurance security fundraising mechanisms will be adjusted to ensure that the balance of the fund is sufficient and stable, said Liu Xinqi, an analyst at Guotai Junan Securities Co, in a report.

At present, a property insurance company is allowed to suspend contributions to the insurance security fund if the company's contributions amount to 6 percent of its total assets. A life insurance company is allowed to suspend contributions to the fund if the company's contributions have reached 1 percent of its total assets.

By adopting the new measures, however, the CBIRC has decided to set the bar at 6 percent of the total assets of the property insurance sector and 1 percent of the total assets of the life insurance sector as a whole.

By the end of September, the total assets of China's property insurance companies reached 2.69 trillion yuan ($377.3 billion), and the total assets of the country's life insurance companies amounted to 22.91 trillion yuan, said the CBIRC.

According to the revised measures, the regulator will replace the current flat rate system of the insurance security fund with a risk-oriented rate system, in which the rates are composed of base rates and risk-based rates. Before the revised measures, the risk-based rates are not required.

As the regulator will improve the adequacy of the insurance security fund, it is expected that large insurance companies will benefit more from the revised measures, thanks to their competitive capital strength and operational mechanisms which follow regulatory compliance, whereas small and medium-sized insurers with limited capital adequacy ratios may face pressure to a certain extent, Liu said in the report.

Wang Guojun, a professor at the School of Insurance and Economics at the University of International Business and Economics, said: "The CBIRC assesses each insurer's solvency and risks every year. Under the new measures, those insurers facing higher risks will make greater contributions to the insurance security fund than before. Therefore, the regulator will incentivize insurers to enhance risk management by adopting a risk-oriented rate system."

The upcoming increase in the fund balance will help the insurance sector better deal with risks, especially when major risks broke out at several insurers at the same time. The regulator will establish a mechanism for insurance companies to exit the market, rather than repeating the too-big-to-fail problem, Wang said.

"The revised measures have also clearly defined by law the responsibilities and rights of financial institutions, their shareholders, actual controllers, ultimate beneficiaries and the insurance security fund after troubled insurance companies are taken over due to serious risks," he said.

Guo Shuqing, chairman of the CBIRC, said earlier financial industry protection funds, including the fund for ensuring financial stability, the deposit insurance fund and the insurance security fund, lack clear legal definitions in terms of loss absorbency and loss sharing.

Financial institutions as well as their shareholders, actual controllers and ultimate beneficiaries should strengthen their main responsibility of risk disposal. Financial regulatory authorities should further clarify their responsibilities of risk handling. Local governments must further improve enthusiasm for implementing the responsibility of dealing with risks within their territorial jurisdiction, said Guo in an article published in a reference guide to help better understand the guiding principles of the report to the 20th National Congress of the Communist Party of China.