According to Moody’s, the new China Risk Oriented Solvency System (C-ROSS) Phase II will improve measurement of insurers’ loss-absorbing capacity and better align capital charges with actual product and asset risks.
The rating agency also noted that credit focus will be on insurers’ ability to moderate business growth and reduce investments that attract high capital charges, whilst retaining sufficient earnings to support core capital.
C-ROSS Phase II is expected to tighten capital recognition in its treatment of Chinese insurers’ future profit, investments and capital sourcing practices. This will ultimately reduce most insurers’ reported core solvency ratios.
The revised insurance regime will take effect in the first quarter of 2022.
In addition, C-ROSS Phase II expands its adoption of market-consistent valuation to more components of its capital treatments, such as the measurement of interest rate risk and equity risk, which will better capture insurers’ underlying economic risks and be less distorted by accounting rules.
Nevertheless, differences with Europe’s Solvency II remain in areas such as regulatory approach on qualitative assessments on non-quantifiable risks and the capital recognition of insurers’ future profit.
Most insurers will face immediate declines in reported solvency ratios after implementing C-ROSS Phase II, but the resultant capital pressure will be mitigated by their current strong solvency ratios.
For life insurers, key drivers of lower solvency will come from lower recognition of long-term policies’ profit as core capital and higher capital charges on their high-risk or opaque assets. Nevertheless, lower capital charges for interest-rate risk will largely offset this pressure.
Among P&C insurers, those with substantial financial credit and surety insurance will face larger drops in solvency ratios.
Qian Zhu, a Moody’s Vice President and Senior Credit Officer commented: “C-ROSS Phase II will raise insurance risk capital charges on credit and surety insurance, a high-growth property and casualty (P&C) business in recent years.
“Insurers will also face tighter investment rules and higher capital charges on high-risk or opaque assets, including alternative investments, property investments and long-term equities. These three asset types account for close to half of the insurance industry’s investment mix.”
