The Implications of the China Risk-Oriented Solvency System on the Life Insurance Market

Derrick W. H. Fung (), David Jou (), Ai Ju Shao () and Jason J. H. Yeh ()
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Derrick W. H. Fung: The Chinese University of Hong Kong
David Jou: Taikang Life Insurance Company
Ai Ju Shao: Ming Chuan University
Jason J. H. Yeh: The Chinese University of Hong Kong

The Geneva Papers on Risk and Insurance - Issues and Practice, 2018, vol. 43, issue 4, No 3, 615-632

Abstract: Abstract The China Risk-Oriented Solvency System (C-ROSS) was fully implemented in 2016. We analyse the effects of C-ROSS on the financial position, product mix and asset allocation of life insurers in the Chinese insurance market. Based on a data set of 66 life insurers, we find that the solvency position of life insurers specialising in writing long-term traditional life products with heavy protection elements improves under C-ROSS, but that the insurers are more vulnerable to decreases in interest rates. In contrast, the solvency position of life insurers specialising in writing short-term endowments and high cash value products deteriorates. C-ROSS also incentivises life insurers to consider asset–liability duration matching, accounting classification of fixed-income assets and underlying risks of equity investments when formulating their investment strategies. Life insurers may find it difficult to manage interest rate risk under C-ROSS due to the lack of available long-term bonds in the Chinese financial market. A stock market boom has a slightly negative effect on life insurers’ solvency ratios, and most life insurers can survive a severe market crash due to the pro-cyclical component embedded in the minimum capital requirements.

Keywords: China Risk-Oriented Solvency System; risk-based supervision; insurance industry (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1057/s41288-017-0066-z

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