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

Author

Listed:
  • 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)

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.

Suggested Citation

  • Derrick W. H. Fung & David Jou & Ai Ju Shao & Jason J. H. Yeh, 2018. "The Implications of the China Risk-Oriented Solvency System on the Life Insurance Market," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 43(4), pages 615-632, October.
    • Handle: RePEc:pal:gpprii:v:43:y:2018:i:4:d:10.1057_s41288-017-0066-z
    DOI: 10.1057/s41288-017-0066-z
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    References listed on IDEAS

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    1. Baranoff, Etti G. & Sager, Thomas W., 2002. "The relations among asset risk, product risk, and capital in the life insurance industry," Journal of Banking & Finance, Elsevier, vol. 26(6), pages 1181-1197, June.
    2. Meyricke, Ramona & Sherris, Michael, 2014. "Longevity risk, cost of capital and hedging for life insurers under Solvency II," Insurance: Mathematics and Economics, Elsevier, vol. 55(C), pages 147-155.
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    Cited by:

    1. Tsai-Jyh Chen, 0. "The role of distribution channels in market discipline for the life insurance industry," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 0, pages 1-23.
    2. Tsai-Jyh Chen, 2021. "The role of distribution channels in market discipline for the life insurance industry," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 46(1), pages 107-129, January.

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