Beijing Review: What's the background of the plan for establishing the second-generation solvency regime?

Chen Wenhui: Solvency is the core component of modern insurance supervision. The CIRC has always attached importance to solvency regulation and has constantly enhanced its solvency regime. We began building the solvency regulatory system in 2003 and set up the first generation of the system at the end of 2007. The system has helped insurance companies foster the concept of capital management and improve their management level, and played an important part in preventing risks and promoting the healthy development of the country's insurance industry. Given domestic and international economic and financial realities, as well as changes in the Chinese insurance market, we find the first-generation solvency regime can't meet the demand of the insurance industry's development.

In recent years, China's insurance industry has grown rapidly. In 2011, insurance premiums totaled 1.43 trillion yuan ($226.27 billion), insurance assets reached 5.9 trillion yuan ($933.54 billion), and the loss settlement amount was 391 billion yuan ($61.87 billion). There were 158 insurance companies, 2.59 times more than in 2003.

Meanwhile, insurance coverage has expanded, and big changes have taken place in the type of business, investment management and sales channel. The insurance market has become more intertwined with the macroeconomy and financial markets. Accordingly, risks in the insurance industry have increased and become more complicated, and risk management has become increasingly difficult. The first-generation solvency regime has shown its inability to identify risks and its inefficiency in risk management.

Globally, international financial reform has been pushed forward since the outbreak of the financial crisis, and international insurance regulation is undergoing a major reform. The International Association of Insurance Supervisors (IAIS) issued new core principles in October 2011, providing the basis for the IMF's Financial Sector Assessment Program's assessment of all countries' insurance supervision. At the same time, IAIS is constructing a framework for group regulation, with solvency becoming a core principle.

The U.S. Solvency Modernization Initiative began in 2008 and is expected to be completed by the end of 2012. The EU is promoting its Solvency II and plans to implement it in 2014. Meanwhile, with the development of integrated operations in the financial sector, financial regulations tend to converge. The EU's Solvency II adopts the same "three-pillar" framework as the Basel Accords used in banking supervision.

Chinese solvency regulation needs to be adapted to the changes in international financial supervision reform, improve its supervisory system, join in the international supervision reform initiatives, and enhance China's influence in creating international insurance regulations.

To follow the international financial reform trend, we must further strengthen solvency regulation and effectively improve the industry's ability to prevent risks. The CIRC released the Plan for Building up China's Second Generation of Solvency Regulatory System in April, kick-starting China's own "Solvency II" program.

What are the highlights of the second-generation solvency regime?

While borrowing on international experiences and drawing lessons from our past solvency regulation, the second-generation solvency regime has taken a leap forward compared with the first-generation one.

First, it adopts the internationally accepted "three-pillar" framework by learning from Basel III, EU's Solvency II and IAIS' core principles.

Pillar I is capital adequacy, which is a quantitative requirement, including an evaluation of assets and liabilities, real assets, minimum assets, capital adequacy ratio and regulatory measures. Pillar II is a risk management requirement, which is a qualitative requirement, including an insurance company's overall risk management, supervision of regulators and an examination of insurers' capital measurement and risk management. Pillar III is an information disclosure requirement, which mainly focuses on solvency transparency and requires insurance companies to disclose information to the public.

Second, it is a risk-based regulatory system.

Capital requirement under the first-generation solvency regime is not closely related to risks. The second generation insists on calculating capital based on risks, including credit risks, insurance risks, market risks and operation risks. The classification of risks is more scientific and the calculation is more precise, so that insurance companies' capital requirement is closely related to their risk conditions, which can raise their sensitivity to risks.