KPMG China recently released a report “C-ROSS 2016Q3 Disclosures” which comprehensively analysed the development in the third quarter of 2016 by the whole insurance industry, as well as by life, property & casualty (P&C) and reinsurance sectors, with a focus on C-ROSS Q3 disclosures.
According to data released by the China Insurance Regulatory Commission (CIRC), for the first nine months of 2016, the total life insurance premium income reached RMB 2.9 trillion, up by 55 percent from the same period last year, but its growth rate continued slowdown compared to the previous period; Property & Casualty (P&C) insurance premium income hit RMB 0.6 trillion, up by 7.8 percent from a year ago, its growth continued to rise; health insurance remained the strongest momentum, resulting in premium income of RMB 0.3 trillion, exceeding the newly paid policyholders' investment fund, up by 86.8 percent compared to the same period last year.
In terms of fund operation, by the end of September 2016, the balance of investable funds climbed to RMB 12.8 trillion, up by 14.8 percent since the beginning of the year, the actual capital gains dropped 19.1 percent year-on-year; other investment (e.g. non-standard assets) dropped month-on-month for the first time. In the case of maturity of a large number of non-standard assets, it is increasingly difficult for the insurance fund to invest in high-yield assets, and the insurance companies are facing pressure to allocate its new capital.
The report highlights that in the third quarter of 2016, Integrated Risk Rating (IRR), a key solvency indicator under C-ROSS, was formally implemented. IRR (an A to D four-letter scale), which takes into account both quantitative capital requirements (e.g. solvency adequacy ratio) and an evaluation of the risks that are difficult to quantify, provides the regulator with an innovative and more scientific measure of insurers’ risk status that links to the corresponding regulatory intervention level.
Meanwhile, the unique Solvency Aligned Risk Management Requirements and Assessment (SARMRA) has also been implemented, with the completion of the first regulatory SARMRA review being targeted for the fourth quarter of 2016. The SARMRA score, which ties to a control risk minimum capital add-on or reduction effective at 2016 year end, will encourage insurers to enhance their risk management capabilities.
Walkman Lee, Partner and Head of Insurance, KPMG China, says: “Market risk is still the most important risk type for life insurance companies. Minimum capital structure varies for different types of life insurance companies. Traditional large companies may have more difficulties in managing its assets and liabilities due to its relative large long-term saving business, and their market risk ratio is well over other types of life insurance companies. In addition, these companies also have bigger insurance risk ratio as they have more assurance-type business. Whereas foreign-funded medium and small sized life insurance companies are conservative in their operation strategy, they maintain a balanced minimum capital structure and their insurance risk ratio is well over other types of life insurance companies.”
With the full implementation of commercial automobile insurance pricing reform, premium per vehicle and loss ratio have declined, demonstrating benefits from the market-oriented reform. On the other hand, the increasing expense ratio due to fierce competition brought significant pressures to P&C insurance companies. It is expected that CIRC will continue deepening the reform of commercial auto insurance policy clauses and pricing, while tightening supervision of certain irregular market practices.
With regard to P&C insurance and reinsurance, the report points out that the insurance risk ratio of P&C insurance slightly dropped in the third quarter of 2016 and the market risk ratio went up slightly, and credit risk ratio remained basically unchanged. The insurance risk ratio of reinsurance increased, while both its market risk ratio and credit risk ratio decreased slightly.
Bo Huang, Partner of Actuarial Services of KPMG China, says: “The total net cash flow of the P&C insurance industry has improved in the third quarter of 2016. Some insurers have improved their indicators of net cash flow and comprehensive cash flow ratio due to strengthening their duration management of investments and optimizing insurance product mix. The net cash flow of reinsurers has also improved.”
The report also highlights that compared with the result of the prior quarter, the comprehensive competitiveness of five small or medium-sized life insurers and eight small or medium-sized P&C insurers were downgraded from middle or above middle level, due to volatile premium income (both rising and falling), and dropping of return on equity (ROE) resulted from loss or decrease in net profit. Small and medium-sized insurance companies should balance their business structure and capital adequacy during expansion in order to ensure sustainable growth.
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The KPMG Actuarial Services team has analysed the Q3 solvency, operational performance and competitiveness data disclosed by all insurers and the...