Event: on December 30, the China Banking and Insurance Regulatory Commission (CIRC) issued the supervision rules on the solvency of insurance companies (II) (hereinafter referred to as “rule II”), marking the completion of the construction of the second generation phase II project. Rule II shall be implemented from the first quarter of 2022, and the heavily affected insurance enterprises may apply for a transition period, which shall be implemented no later than 2025.
Comments: on the whole, rule II continues the policy guidance of insurance and risk prevention, improves the measurement standard of capital, guides insurance enterprises to focus on their main business, prevent risks and enhance the quality and efficiency of serving the real economy.
Adjustment of actual capital: 1) optimize the measurement standard of long-term equity investment, clarify the impairment provision requirements, ensure that the actual value of long-term equity investment is fully reflected, implement 100% full capital deduction for long-term equity investment (subsidiaries) with control, and guide insurance enterprises to focus on their main business; 2) The investment real estate shall be measured according to the cost model, and the assessed value-added shall not be included in the actual capital after the rule switching; 3) Optimize the quality of core capital, and only policies with a residual period of more than 10 years can be included in core capital. Different from the current rules, which include all future earnings of life insurance policies into core capital, rule II includes them into different capital levels according to the term of future earnings of life insurance policies. If the remaining term of the policy is more than 30 years and [10 years, 30 years], it shall be included in the core tier 1 / Tier 2 capital respectively, and the upper limit of the future surplus of the policy included in the core capital shall be 35% of the core capital; if [5 years, 10 years) and less than 5 years, it shall be included in the subsidiary tier 1 / Tier 2 capital respectively.
Adjustment of minimum capital: 1) according to the principle of “full penetration and penetration to the end”, the minimum capital is measured based on the bottom assets actually invested to accurately reflect its risk essence. The more trading layers, the smaller the contribution of non basic assets to the minimum capital; 2) Adjust the insurance risk impact factors, increase the disease trend risk, and adjust the measurement from the number of pieces to the surrender risk according to the product type; 3) Improve the measurement method of interest rate risk, and optimize the asset range and evaluation curve for hedging interest rate risk.
Rule II continues the guidance of supervision and insurance + risk prevention and control, and is expected to have a relatively limited impact on head insurance companies: 1) the comprehensive solvency adequacy ratio of insurance companies will decline to varying degrees. Comprehensive solvency adequacy ratio = real capital / minimum capital. We believe that rule II will bring great downward pressure on the real capital of insurance enterprises. Head insurance companies benefit from good product structure and risk control. It is expected that after the rule switching, the comprehensive solvency adequacy ratio will remain above 150%, and some insurance companies can still remain above 200%, exceeding the minimum regulatory standard. At the same time, they can fully grasp the equity investment opportunities under the pressure of long-end interest rates; Small and medium-sized insurance enterprises with relatively radical business and investment have a greater decline, and there may be a demand for capital supplement or need to apply for a transition period. 2) Guide the long-term and standardized development of venture capital investment. The “full penetration” principle of minimum capital will guide the orderly pressure drop of insurance capital, the allocation of non-standard and channel assets, and prevent and control investment risks. 3) Guide insurance companies to return to the source of guarantee and increase the proportion of long-term high-value businesses. In September 2017, the cbcirc issued the construction plan for the second generation phase II project. The continuity of the policy is good, rule II is basically in line with expectations, and the competitive advantage of head insurance enterprises is expected to further appear in the future. It is suggested to pay attention to Ping An Insurance (Group) Company Of China Ltd(601318) , China Pacific Insurance (Group) Co.Ltd(601601) .
Risk tips: policy risk, interest rate risk and market fluctuation risk
（ Western Securities Co.Ltd(002673) ）
