Section 1: China: a super regulator emerges

25 October 2018

On 8 April 2018, the China Banking and Insurance Regulatory Commission (CBIRC) was established to bring banking and insurance regulators under one authority. This act of institutional reform is a clear sign of China’s intention to align fragmented regulations spanning an increasingly large and complex financial sector.

For the insurance market, the second phase of the China Risk-Oriented Solvency System (C-ROSS) will be implemented under this new authority.

JLT Re views the establishment of the CBIRC as a positive development that is particularly appropriate in China, given the entrenched linkages between insurers, banks and other financial institutions. The consolidation of regulations within a single body will help reduce any blurred lines of responsibility, overlapping supervisory areas and exploitation of regulatory loopholes. In particular, the level of scrutiny on both sides of carriers’ balance sheets indicates an industry-wide effort to force insurers to put their houses in order.

The Commission is specifically focused on limiting contagion, enhancing transparency, promoting long-term stability and curtailing unacceptable risk-taking across financial sectors. This focus was on display when the CBIRC took over distressed insurer Anbang in February 2018 (see callout on page 2). More recently, the Commission has stepped in to reduce financial leverage and impose tougher credit conditions across several sectors, particularly those most affected by rapidly rising debt levels.

This report examines some of the more impactful regulatory changes in China, such as new asset-liability regulations and motor insurance pricing reform, alongside market developments, mergers and acquisitions (M&A) activity and technological innovation that are likely to accelerate the pace of change in the market.


The CBIRC has implemented a number of key changes specific to the insurance sector over the last 12 months. At a glance, these changes are broadly aimed at recalibrating the regulatory dial away from uncontrolled yield-chasing and back towards financial prudence. Table 1 below outlines the CBIRC’s focus: risk management, transparency, market discipline and overseas investments whilst simultaneously encouraging greater foreign direct investment (FDI) into China’s financial sector.


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Following the experience of Anbang’s overseas activities, three areas have come under particular scrutiny from the CBIRC, namely asset-liability matching (ALM) risks, the use of insurance funds for overseas purchases and opaque holding structures of insurance companies.

Historically, overseas investments of Chinese insurers have tended to be in shares traded on the Hong Kong stock market and commercial real estate in developed countries. Going forward, however, insurers will need to prove that overseas assets are ‘strategic’ to their core businesses to receive regulatory approval to maintain ownership or make additional investments. The CBIRC also forced insurers to provide more information around their shareholding structures to prevent related parties taking control of insurers’ assets in order to invest in sectors that are deemed to be unsuitable or overly risky.

Whilst this is likely to lead to a fall in the number of acquisitions and new investments in the short term, longer term trends still point towards growth in this area as the Chinese market matures. Focus on prudent and disciplined asset diversification should, over time, result in increased overseas investments. Although Chinese insurers held some USD 70bn in overseas investments at the end of 2017, this represented only 2.7% of total insurance sector assets (see Figure 2), which is well below the stated regulatory limit of 15%. In comparison, overseas asset allocations of insurers in mature markets like the UK and Japan are thought to be as high as 20% of total assets, which are roughly in line with its liabilities.


overseas investments of chinese insurers

SOURCE: Insurance Asset Management Association of China (IAMAC)

We note that there are a number of other areas which are likely to increase rather than decrease the industry’s exposure to systemic risks, particularly as greater controls are placed on overseas investments:

• Increased allocation towards illiquid, higher risk alternative investments with opaque structures (see Figure 3). This is driven by a natural search for higher yields, given thin underwriting margins in a highly competitive market.

• Increased participation in state-linked investments associated with One Belt One Road (OBOR) and other infrastructure projects that are primarily funded with debt. Investments in these projects currently benefit from preferential capital charges under C-ROSS and typically receive superior ratings from domestic rating agencies. The suspension of Dagong Global Credit Rating Company in August 2018 has now called into question many of the ratings for these investments. The recent threat of Yingkou Port Group defaulting on CNY 500mn of debt illustrates the difficulties of assessing the underlying credit quality of these assets and the risk of contagion to the insurance sector.


asset allocation

NOTE: Includes Life & P&C insurance funds SOURCE: China Banking & Insurance Regulatory Commission

Allowing foreign-owned financial institutions (subject to minimum size, operating history and licensing requirements) greater access to China appears to be a calculated move aimed at knowledge transfer, particularly in the areas of client service, advisory and risk management. In a notable development, Hong Kong-based reinsurers now have preferential access to business in China without being subject to heavy counterparty risk charges (see callout opposite).

Foreign insurance brokers, in particular, appear to have been the main beneficiaries of this change. They are now permitted to compete with domestic brokers on an equal footing and engage in full categories of insurance brokerage services. This is perhaps unsurprising as these broking firms bring extensive and much needed brokerage and risk management experience to the table, which China’s indigenous small and medium-sized companies all need.

Market Insight China

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中国市场观察 - 中文版 | 2018年10 月


Market Insight China - English | October 2018

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