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CHINA’S RISK CAPITAL SYSTEM POSES A THREAT TO FOREIGN INSURERS

17 May 2016

Axco Insurance Information Services (Axco) has updated its China report to reflect important developments in the world's second largest non-life market, including the implementation of a Solvency II equivalent risk-based capital system known as the China Risk-Oriented Solvency System (C-ROSS). This has the potential to create significant adverse consequences for foreign insurers.

C-ROSS is a liberalisation project inspired by the State Council's national policy of decentralisation and "marketisation", and is mainly manifested in the progressive liberalisation of voluntary motor rates.

It is intended not only to make sure that insurers are adequately capitalised for a wider range of risk exposures, but also to give the China Insurance Regulatory Commission (CIRC) a broader and more sophisticated range of control levers. The motivation is to encourage innovation and to help deliver lower premiums, better services and more responsive insurance products for the benefit of consumers.

The financial effects of C-ROSS are significant. The large domestic insurers, which derive around 70% of their premiums from motor, will enjoy significant solvency relief, whereas foreign companies, which derive most of their premiums from property and are heavily reliant on offshore reinsurance, will have to increase their capital.

This provides an additional obstacle to foreign insurers on top of historical restrictions and systemic disadvantages.

Tim Yeates, Managing Director at Axco commented: "Foreign insurers already faced considerable challenges when it comes to operating in China and this is reflected in their incredibly low market share.

"C-ROSS further exacerbates the problem as most foreign insurers participate in global reinsurance arrangements and therefore lack the flexibility to use onshore reinsurance solutions to mitigate the worst effects of the new system."