China: A Comparison Of Solvency II And Chinese Solvency Regulation

The introduction of Solvency II – an updated version of Solvency I – by the European Union is bound to cause more than a ripple across insurance industry in Europe once it comes into effect on 1 January 2014. Following from this new Regulation, supervisory bodies will now shift their focus from compliance monitoring and capital, to evaluation of the risk profiles of insurers as well as the quality of their risk management and governance systems.

This article looks at some of the similarities and differences between the current Chinese solvency regulations and Solvency II.

Solvency II

Briefly, the European Commission adopted a three-pillar approach to the structure of Solvency II:

Pillar 1 stipulates that capital adequacy is calculated by reference to the solvency capital requirement (SCR) – the capital's target level – and the minimum capital requirement (MCR), which lays down a minimum threshold insurers must be met to be allowed to trade;

Pillar 2 outlines the components essential to a risk management system, i.e. risk management strategy, policies, processes and internal reporting procedures;

Pillar 3 reinforces market discipline through disclosure. Insurers will be required to publish their Solvency and Financial Condition Reports (SFCR) and confidential Reports to Supervisors (RTS). These will be publicly available.

Comparison with Chinese Insurance Regulation

(1) Solvency Capital Calculation

This is one of the key differences between the Chinese and EU regulatory systems. In China, solvency capital is currently calculated using a fixed formula – ratio factors are used for reserves and sum at risk for life insurers while premium income and claims reserves are used for non-life insurers. This is a simplified version of the EU-Directives 73/239/EEC for non-life insurance and the 79/267/EEC for life insurance.

The calculation method under Solvency II is far more complicated. To comply with SCR, an insurer must hold capital to cover a 1/200 event (99.5% confidence level) for the next 12 months. Insurers may calculate it using the standard formula provided in the Regulation, or they may demonstrate to the supervisory body that their internally developed model meet the requirements under Solvency II. Most are adapting the latter approach.

(2) Risk Governance Process

Under Solvency II, insurers are liable to attract a capital charge if their governance process is deemed inadequate. They are required to establish the following four functions – risk management, actuarial, compliance and internal audit –and also demonstrate that they have an adequate and transparent organisational structure, an effective information transmission system and documented roles and responsibilities.

In China, the CIRC issued a risk management circular in 2007, which provides guidance to insurers on issues with respect to the principles of a sound risk management framework, the risk categories to be assessed and the composition of effective risk controls, and in 2008, it released an updated solvency regulation that requires the establishment of a risk-based solvency monitoring framework. Furthermore, the Basic Standard for Enterprise Internal Control requires all Mainland China listed companies to establish and later evaluate the effectiveness of their internal control.

(3) Regulatory Action

Under the European regime, a possible regulatory action results when insurers breach the SCR; the MCR meanwhile sets the limit which insurers must abide by, failing which, regulatory intervention will ensue. Possible sanctions include closure of the company's new line of business or even revocation of business licence.

On the other hand, the Chinese regime assesses the need for regulatory action on a simpler three-tier structure: insurers that fall within the "Adequate II", i.e. with a solvency ratio greater than 150%, attract the lightest regulatory attention; insurers with a solvency ratio between 100% to 150% are categorised as "Adequate I", and the CIRC can request them to come up with a insolvency-prevention plan; delinquent insurers with a solvency ratio below 100% attract the harshest sanction as they are deemed to be "Inadequate".

(4) Disclosures

As in Europe, Chinese insurers are also required to submit various reports - annual, quarterly and interim – to the CIRC on a regular basis. There is also the requirement that if an insurer suffers a downturn that severely affects its solvency, it is required file a report to the CIRC within 5 working days of the occurrence. Insurers are also expected to disclose their solvency condition to the public.

Can China adopt Solvency II?

The CIRC is moving apace with reforming the insurance industry in China. It has come up with a slew of regulations and guidelines in recent years, which show signs of gravitating towards risk management – a core principle of Solvency II – as the cornerstone of Chinese insurance business. The new draft "Guidelines on Implementation of Risk Management for Life and Health Insurance Companies" released in 2010 is one such example.

Despite this apparent shift towards a direction closer to Solvency II, a wholesale adoption of the new regulation is not likely to occur in the near future, as pointed out by some commentators, for the following reasons:

(1) There is a large gap between China and its European counterpart in terms of the procedure and technique

Risk management is on its infancy in Chinese insurance industry, and therefore it is still beset by a host of problems, such as a weak foundation, a lack of experienced professionals in this area, outdated techniques and underdeveloped risk management system, the CIRC is likely to wait and learn from the lessons of other foreign countries and push for insurance companies to enhance their risk management and governance systems before considering adopting the European model.

(2) The Chinese insurance market is still exhibiting the behaviour typical of a nascent market.

In Europe and America, monitoring market behaviour is not the focus of their supervisory bodies. However, in China, this remains top on the CIRC's agenda because delinquent behaviour, such as lax management, widespread infringements, bad customer service, and especially fraud remain a serious problem. Moreover, insurers are still not subscribing to the idea of fair play. And, there is no quick solution to all these problems. This shows that the CIRC is facing a different set of problems from the supervisory bodies in Europe and America. Thus, from a pragmatic point of view, the CIRC should not lose its grip on monitoring market behaviour; on the contrary, it has to put more effort in this area for a long time to come.

(3) The capital adequacy calculation method is far more dynamic and complicated under Solvency II

Although it is conceded that the current calculation method utilised in China is ineffective since and in dire need of reform, it is not practical to import the method of calculation under Solvency II since it is more complicated and demands a higher level of expertise on solvency management. The method used in China should be clearer and simpler so that it can be audited. Moreover, the fundamental realities in China and practical conditions, e.g. distribution of social capital, training of risk management professionals and the risks insurers are facing, should be considered when reforming the current methodology.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.