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Chinese regulator to classify insurers' asset-liability management ability

The China Insurance Regulatory Commission plans to categorize insurers into four classes based on their asset-liability management performance.

The new rules cover quantitative and competency assessments on both life and nonlife insurers' asset-liability management as well as a set of rules to guide insurers on preparing such reports.

The competency assessment would evaluate whether an insurer has a sound and effective asset-liability management system, which insurers' boards of directors are ultimately responsible for.

Besides surveying an insurer's fundamental financials, the quantitative assessment would examine if an insurer's assets match its liabilities in terms of duration and structure. The quantitative assessment would also test whether an insurer has the capability to make profits and ensure that its returns on assets cover its liabilities, as well as the ability to prevent liquidity risks in the short to mid term.

The new rules are another important regulatory tool following the China Risk Oriented Solvency System, the country's solvency regime, the CIRC said in a March 1 press release. The regulator said the new rules will guide insurers to manage their funds prudently.

The CIRC ordered insurers to submit quarterly and annual asset-liability management reports. In their quarterly reports, insurers should discuss changes and major risks to their asset-liability management, while in annual reports, insurers should list business development plans for at least the next three years, including expected premium income and strategic plans for their asset allocation. The annual reports should also be audited by third parties.

The insurance watchdog said a trial period for these new rules is effective immediately, and insurers should submit reports by Aug. 31 based on their financials ending June 30. During the pilot period, no regulatory action will be taken on insurers' assessment results. However, after the pilot of the rules, the CIRC said it will classify insurers into A, B, C and D categories, based on their assessment results.

The regulator will provide supportive measures for A-class companies that perform better in asset-liability management and take action on insurers categorized under classes C and D.

With the new rules, the regulator aims to prevent aggressive takeover bids in the equity markets by insurers and mismatch in assets and liabilities in the insurance industry, said Grace Zhou, vice president and head of financials at ICBC International Research.