To reinforce the system that safeguards financial stability, strengthen the regulation of systemically important financial institutions, and establish a mechanism for assessing and identifying systemically important insurers, the People’s Bank of China (PBOC), in collaboration with the National Administration of Financial Regulation (NAFR), has formulated the Measures for the Assessment of Systemically Important Insurers (hereinafter referred to as the Measures) in accordance with the rules on improving the regulation of systemically important financial institutions. The Measures is hereby formally released.
China is the world’s second largest insurance market, with an insurance sector featuring a high degree of concentration. Given their large size, structural and business complexity, and extensive connectedness with the public, it is highly significant that large insurance company groups pursue sound operation in order to duly play their important roles in supporting economic and social development. Based on China’s insurance development practices and international experience, the Measures sets out the methodology, procedures, and criteria for identifying systemically important insurers. With its release and implementation, the Measures expands the assessment of systemically important financial institutions to cover not only banks but also insurance companies and lays the groundwork for the conduct of regulation on a differentiated basis. It will help enhance the regulation of systemically important insurers, improve the macro-prudential policy framework, and strengthen the robustness of the financial system.
The Measures consists of 20 articles under four sections, i.e. General Principles, Assessment Procedures and Methodology, Assessment Indicators, and Ancillary Provisions. Its main contents are the following. First, the scope of the insurance companies subject to assessment, which covers China’s top ten insurance company groups, life insurers, property insurers, and reinsurers by asset size, as well as the insurers identified as systemically important in the preceding year. Second, assessment indicators and their weights. The 13 indicators are grouped by four dimensions, i.e. size, interconnectedness, asset liquidity, and substitutability, which are weighted 20%, 30%, 30%, and 20%, respectively. Third, assessment procedures. Every two years, the PBOC and the NAFR will calculate the weighted average score of each assessed insurance company based on the indicator data. Those with a score of 1,000 or higher will be identified as systemically important insurers, the list of which will be jointly published by the PBOC and the NAFR.
Going forward, the PBOC and the NAFR will work together to conduct assessment and identification of China’s systemically important insurers in accordance with the Measures, formulate additional regulatory rules, and give play to the joint effect of macro-prudential management and micro-prudential oversight. These efforts are aimed at promoting the sound operation and high-quality development of systemically important insurers, consolidating the foundations for the stability of the financial system, and better supporting economic and social development.
Annex:
Measures for the Assessment of Systemically Important Insurers
For the purposes of improving the regulatory framework for China’s systemically important financial institutions (SIFIs) and establishing a mechanism for assessing and identifying systemically important insurers (SIIs), the Measures has been formulated in accordance with the relevant laws and regulations, including the Law of the People’s Republic of China on the People’s Bank of China and the Insurance Law of the People’s Republic of China, and the Guiding Opinions of the People’s Bank of China, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission on Improving the Regulation of Systemically Important Financial Institutions (Yinfa No.301 [2018]).
I. General Principles
1. Purposes of assessment. China’s SIIs shall be identified through assessment of the systemic importance of participating insurers. Accordingly, the list of SIIs shall be published every two years so that the regulation and supervision of SIIs shall be conducted on a differentiated basis to reduce the likelihood of material risks arising from SIIs and to prevent systemic financial risks.
2. Scope of application. The Measures applies to lawfully established insurance company groups, life insurers, property insurers, and reinsurers. Where two or more insurers form an insurance company group, the group shall be the participating entity in the assessment.
The assessment shall be based on the consolidated data of the group, with the scope of consolidation set according to that required of a company’s consolidated financial statements and excluding the systemically important banks if any are involved.
3. Definition of systemic importance. “Systemic importance” in the Measures refers to the severity of the impact that a financial institution may have on the financial system or the real economy due to its size, structural and business complexity, interconnectedness with other financial institutions, and provision of key services that cannot be easily substituted in the financial system, should the occurrence of a material risk event make it unable to maintain operation.
II. Assessment Procedures and Methodology
4. Assessment procedures. The assessment of SIIs shall be conducted every two years according to the following procedures:
(1) Set the scope of participating insurers.
(2) Aggregate data from participating insurers for the assessment.
(3) Calculate the systemic importance scores of participating insurers and produce a preliminary list of SIIs.
(4) Take other quantitative and qualitative analyses into consideration to make regulatory judgments and adjustments to the preliminary list.
(5) Determine and publish the final list of SIIs.
5. Assessment methodology. Comprehensive assessments shall be conducted on the systemic importance of a participating insurer based on its systemic importance score, which is calculated using quantitative assessment indicators, and the regulatory judgments, which shall take other quantitative and qualitative information into consideration.
6. Scope of participating insurers. An insurer shall be subjected to the SII assessment provided that it meets either of the following two conditions:
(1) It is among the top ten insurers by total period-end assets as shown on the annual consolidated balance sheet.
(2) It has been designated as a SII in the preceding assessment period.
7. Data aggregation. The NAFR shall set the templates and provide instructions for data reporting every two years in accordance with the Measures. The instructions shall include, among others, all the indicators, their definitions, and changes to the templates for the preceding assessment. By the end of June in the year the assessment takes place, participating insurers shall complete the templates and submit their data on the last accounting year. After conducting quality checks of the data, providing supplements, and making corrections, the NAFR shall share with the PBOC in a timely manner the regulatory reporting statements, data submissions, and other relevant information of participating insurers.
8. Systemic importance score. After completing data collection, the PBOC and NAFR will calculate the systemic importance cores of assessed insurance companies. For each assessed insurance company, its score for a particular indicator is expressed in basis points, equaling the insurer’s value for that indicator divided by the total value of all insurers for that indicator and then multiplied by 10,000. The sum of the product of each indicator score and the corresponding weight is the systemic importance score of the assessed insurance company.
9. Cut-off scores. Insurers with a score of 1,000 or higher are to be included in the preliminary list of SIIs.
10. Supervisory judgment. The PBOC and NAFR put forward supervisory judgment recommendations on adding an assessed insurance company with a systemic importance score of less than 1,000 to the list of SIIs in accordance with ancillary quantitative or qualitative factors such as speed of business expansion, business concentration, and corporate governance..
Conducting the supervisory judgment should be in high conditions, as the preliminary list of SIIs as established by the systemic importance score is adjusted in exceptional circumstances only.
11. Finalization and disclosure of the list. The preliminary list of SIIs, their systemic importance scores, and supervisory judgment-based recommendations and the basis therefor are determined before the end of August of each assessment year. After a due review and approval process, the final list of SIIs is jointly published by the PBOC and NAFR.
12. Information reporting and disclosure. SIIs should implement the statistical systems for SIFIs led by the PBOC and submit statistical data to the PBOC as required. A SII on the list is required to disclose all indicators specified in Articles 15–18 of the Measures for the preceding fiscal year through public channels within one month after the list is announced.
13. Review and adjustment of assessment procedures and methodology. If the insurance industry undergoes significant changes and the existing assessment procedures and methodology can no longer satisfy the practical needs of preventing systemic financial risks, the PBOC and NAFR may make necessary adjustments and improvements to the procedures and methodology in the Measures.
III. Assessment Indicators
14. Tier-1 indicators. The PBOC and NAFR assess the systemic importance and changing conditions of assessed insurance companies in accordance with Tier-1 indicators, such as size, interconnectedness, asset liquidation, and substitutability.
15. Size. The size of an assessed insurance company is evaluated through the following quantitative indicators:
(1) Total assets, referring to the closing combined assets shown on the annual consolidated balance sheet of the insurance company. This indicator has a weight of 10%.
(2) Total revenues, referring to the closing combined operating revenue shown on the annual consolidated income statement of the insurance company. This indicator has a weight of 10%.
Size indicators have a total weight of 20%.
16. Interconnectedness. The interconnectedness of an assessed insurance company is evaluated through the following quantitative indicators:
(1) Intra-financial assets, referring to the balance of assets created by transactions between the insurance company and other financial institutions. This indicator has a weight of 7%.
(2) Intra-financial liabilities, referring to the balance of liabilities created by transactions between the insurance company and other financial institutions. This indicator has a weight of 7%.
(3) Third-party assets under management, referring to the size of assets managed by the insurance company entrusted by a party other than its group companies. This indicator has a weight of 7%.
(4) Non-insurance affiliate assets, referring to total assets of domestic and overseas non-insurance companies over whom the insurance company exercises significant influence, control, or de facto control. This indicator has a weight of 7%.
(5) Derivative financial assets, referring to the size of derivative financial assets of the insurance company. This indicator has a weight of 2%.
Interconnectedness indicators have a total weight of 30%.
17. Asset liquidation. The asset liquidity of an assessed insurance company is evaluated through the following quantitative indicators:
(1) Short-term funding, referring to short-term borrowings, derivative financial liabilities, and sell/buy-back financial assets of the insurance company. This indicator has a weight of 10%.
(2) Complexity of funds utilization, referring to the sum of the balance of equity assets, real estate assets and overseas assets of the insurer. This indicator has a weight of 10%.
(3) Level 3 assets, referring to the size of assets of the insurance company at level 3 of the liquidity hierarchy. This indicator has a weight of 10%.
Asset liquidation indicators have a total weight of 30%.
18. Substitutability. The substitutability of an assessed insurance company is evaluated through the following quantitative indicators:
(1) Branch and policyholder numbers, respectively referring to the number of branches, central sub-branches, sub-branches, and outlets duly established by the insurance company and the number of policyholders. This indicator has a weight of 6.67%.
(2) Insurance compensation, referring to the annual insurance recovery amount reported on the insurance company’s income statement. This indicator has a weight of 6.67%.
(3) Premiums from specific business lines, referring to the direct premiums written by the insurer from such business lines as agricultural insurance, catastrophe insurance, critical illness insurance, export credit insurance, aerospace and aviation insurance, marine insurance, electric power insurance, and nuclear insurance. This indicator has a weight of 6.67%.
Substitutability indicators have a total weight of 20%.
IV. Ancillary Provisions
19. The PBOC and NAFR reserve the right to interpret the Measures.
20. The Measures will take effect on January 1, 2024.
