2016 is the first year when China Risk-oriented Solvency System (C-ROSS)—the marketised risk-based capital adequacy regime—officially came into effect. Compared to the old system where capital requirements for insurance companies is determined by the size of insurance premium and claim settlements, C-ROSS gauges capital adequacy against companies' offerings, coverage, and asset-side risks. This puts capital management at the core of insurance companies' competitiveness, says Guan Ling 关凌 Funde Insurance Holdings CFO.
Capital management under C-ROSS, notes Guan, means that insurance companies seek to maximise returns on capital through selling insurance products and investing in different assets, subject to the constraint that they have to have adequate capital to fulfill their contingent obligations to insurees and absorb losses incurred in investments.
Under C-ROSS, capital adequacy is measured against a comprehensive array of risks, including insurance risk, market risk, credit risk, operational risk, liquidity risk, strategy risk and reputation risk. In addition, C-ROSS adds greater requirements on regulatory reporting and public information disclosure. Thresholds are set for comprehensive capital adequacy ratio, core adequacy ratio, and liquidity ratios, among others. Companies falling short of these thresholds automatically trigger regulatory actions.
Thus, C-ROSS aims to align the risks insurance companies take on with the capital they have, discouraging aggressive business models, says Guan; to better their capital management, insurance companies should
- establish an effective capital planning system
- formulate capital budgeting based on their own risk tolerance, rigorous forecast on their capital needs, and plan for capital replenishiment
- carrying out insurance policy underwriting and asset management based on capital planning
- establish a sound capital replenishment and capital allocation system
- expand capital replenishment channels, optimise capital structure, minimise the cost of capital, and enhance the ability to raise capital
- establish an effective capital allocation system based on capital needs and required return on capital
- strengthen asset and liability management
- balance the triangular trade-off between capital, risks and value in asset and liability management