Actuarial Notes

The Standard Formula: Encyclopaedia of Prudential Solvency – Chapter 7: The Prudential Solvency Regime of China

By Robert A. Chaplin, Feargal Ryan, Caroline C. Jaffer and Maximilian Willis · Skadden, Arps, Slate, Meagher & Flom LLP · 2025

Study guide: Exam 6I

A chapter of Skadden's Encyclopaedia of Prudential Solvency examining the prudential solvency regime of China and the historical context of its (re)insurance framework. It covers the market's development, the legal and regulatory framework and its regulators, market access and licensing, the China Risk-Oriented Solvency System (C-ROSS) and its three pillars, the requirements for reinsurance, reserves and investments, and recent initiatives such as the development of Shanghai as an international reinsurance hub.

On the syllabus

  • Exam 6I — objectives A1–A2, A5; the whole chapter.

Introduction

1 Background and Development of the Chinese Insurance Market

  • After 1949 the insurance industry was centralised under the state-owned People's Insurance Company of China (PICC); the "reform and opening up" policy from 1978 resumed the insurance business, and PICC's monopoly was broken in 1988 with the approval of Ping An.
  • China's accession to the WTO in 2001 further liberalised the market, letting foreign reinsurers operate through joint ventures, branches and subsidiaries.
  • China is the second-largest insurance market by total premium volume, after the United States.

2 Regulatory Framework

  • Regulatory Authorities
    • The National Financial Regulatory Administration (NFRA), established in March 2023 and a member of the IAIS, oversees the financial industry except the securities sector; insurance was previously supervised by the CIRC and its successor, the CBIRC.
    • The People's Bank of China coordinates with the NFRA on macroprudential policy, and a listed insurer may also be supervised by the China Securities Regulatory Commission.
  • Primary Sources of Insurance Law
    • The Insurance Law of the People's Republic of China, first enacted in June 1995; for foreign investors, the Regulations on the Administration of Foreign-Invested Insurance Companies.

3 Market Access and Licensing Requirements

  • General Restrictions
    • Insurance Business
    • Reinsurance Business
  • Formation and Licensing of Insurance and Reinsurance Companies
  • Foreign Investment and Market Access
    • The market is now fully open to foreign investment, with no cap on foreign ownership in life, non-life or reinsurance companies.

4 The China Risk-Oriented Solvency System (C-ROSS)

  • Overview and Structure
    • The CIRC launched C-ROSS, a risk-based capital solvency regime, in 2016; C-ROSS II was launched in the first quarter of 2022, with the transition period extended to the end of 2025.
    • Pillar 1: Quantitative Capital Requirements — quantitative capital requirements (insurance, market and credit risk, macroprudential and regulatory capital requirements), actual capital assessment standards, capital classification, dynamic solvency testing and regulatory measures.
    • Pillar 2: Qualitative Supervisory Requirements — for the uncapitalised risks that are difficult to quantify (operational, strategic, reputational and liquidity risk): integrated risk rating, risk management requirements and assessment, supervisory inspections and analysis, and supervisory measures.
    • Pillar 3: Market Discipline Mechanism — public disclosure of solvency information, two-way communication between the regulator and market participants, and credit ratings of insurers.
  • Solvency Assessment and Regulatory Measures
    • The NFRA gives each insurer a quarterly solvency risk rating of A, B, C or D, and takes regulatory measures against an insurer with a core solvency ratio below 50%, a comprehensive solvency ratio below 100% or a rating below B.
  • Key Features and Innovations of C-ROSS II
    • A look-through approach for complex structured products, and a morbidity trend risk factor.

5 Regulatory Requirements for Reinsurance

  • Overarching Principles
  • Life and Non-Life Split
  • Reinsurance Contractual Freedom and Mandatory Restrictions
    • In proportional reinsurance of property business, the share ceded to a single reinsurer for each risk unit cannot exceed 80% of the cedant's insured amount or liability limit, except for aviation and spaceflight, nuclear, oil and credit insurance.
  • Registration and Qualification of Reinsurers
    • Any reinsurer transacting with a Chinese cedant must first register in a dedicated system, administered by the Shanghai Insurance Exchange since February 2018, and renew every three months.
    • (1) The initial qualification requirements
    • (2) Preparation of supporting documents
    • (3) Ongoing compliance obligations
    • Effective Lists
  • Collateral Requirements
    • Chinese law does not require collateral, but under C-ROSS a cedant receives reduced solvency credit for business ceded to an overseas reinsurer not licensed in China unless the reinsurer provides collateral, by bank deposit or standby letter of credit.

6 Reserves

  • Liability reserves (unearned premium, outstanding claims and others mandated by the NFRA), a guarantee fund and an insurance protection fund.

7 Investments

8 Recent Developments and Market Initiatives

  • Shanghai as an international reinsurance hub; the Shanghai International Reinsurance Registration and Trading Centre; market openness and new entrants.

Conclusion

Related readings

  • Chinese Insurance Markets - Developments and Prospects (Fang and Xu - 2023) — cited in the chapter's first footnote, for China's rise to the second-largest insurance market in the world

Sources