[News Alert] CBIRC announced details of C-ROSS II Phase 2 with new rules in-line with expectation

  • CBIRC announced the long-waited C-ROSS II Phase 2 official documents on Dec 30 2021. This is the comprehensive upgrade to the previous C-ROSS II to better distinguish and define insurers’ solvency capitals and to match the current market status. C-ROSS II Phase 2 will officially implement in 2022 and insurers should incorporate it in 1Q22 solvency report.
  • Overall, the new rules is in-line with expectation with C-ROSS II Phase 2 imposing higher risk factors on both the asset and liability side and setting stricter standard in recognizing core capital. As an impact, insurers’ solvency ratio will see a substantial decline once the new capital regime is implemented. For listed insurers, it should still remain above the regulatory requirement of 50%/100% on core/comprehensive solvency ratio given the sufficient capital buffer. CBIRC also grants 3-year transitional period for insurers who may face greater impact to fully adopt the C-ROSS II Phase 2 by 2025, which is also in-line with expectation.
  • Key points to address regarding the C-ROSS II Phase 2:
    • Rules on the recognition of residual margin as core capital has changed, from previous fully recognition to now, only 10yrs+ policies’ residual margin can account as “core capital” and below 10yrs policies’ residual margin can only be accounted as “sub-capital”. 
    • Regulate the investment on subsidiaries, JVs, and affiliations for the first time. Added risk factors to the investments when calculates capital requirements. Risks factor level is similar to that of equity investments, considered relatively high.
    • Risk factors on equity investments overall increased compared to the previous capital regime. ChiNext and STAR board investments are one exception with slight decrease in risk factor from 0.48 to 0.45 to show encouragement to support SMEs, but the factor still one of the highest among equity investments. Risk factors on fixed-income investments have also seen increase across assets for much prudent purposes.
    • First-time announced risk penetration of asset management portfolio. Requires insurers to breakdown investment portfolios into single assets to measure risk factors and calculate minimum capital, representing the determination of delicacy risk management. 
  • For insurers including CPIC (2601 HK) and Ping An (2318 HK) who have focused more on protection products sales in the past with residual margin accounted for higher percentage of existing core capital, should see a sharper core solvency ratio decline. But given its sufficient capital buffer (Core solvency ratio at 231% and 274% in 1H21 respectively under the previous regime), we believe their core solvency ratio after implemented the new rule to be comfortably above the regulatory requirement of 50%. 
  • Given the new rule is much in-line with market expectation, we see neutral impact to insurers share price. We maintain BUY on Ping An (2318 HK), AIA (1299 HK), and CPIC (2601 HK).