The Measures for the Risk Classification of Insurance Assets are subject to revision: improving the classification standards and strengthening the principle of penetration

CCTV Beijing, August 2 (Reporter Feng Fang) On August 2, the State Administration of Financial Supervision issued an announcement to solicit public opinions on the revised "Measures for the Risk Classification of Insurance Assets (Draft for Comments)", and the deadline for feedback is September 2, 2024. What are the considerations for the risk classification criteria in this revision? How to deal with the impairment of financial assets of insurance companies that implement the relevant accounting standards for new and old financial instruments?

Enhance the binding force of the system and improve the relevant classification standards

In 2014, the former China Insurance Regulatory Commission (CIRC) issued the Guidelines for the Five-Level Classification of Insurance Asset Risk (Bao Jian Fa [2014] No. 82, hereinafter referred to as the "Guidelines") to pilot the five-level classification mechanism of insurance asset risk, which has played a guiding role in truly reflecting the quality of insurance assets and enhancing the risk management capabilities of insurance institutions.

The person in charge of the relevant department of the State Administration of Financial Supervision pointed out: "In recent years, with the continuous expansion of the investment scope of insurance funds and the more complex investment structure, the current rules have exposed in practice the lack of regulatory binding, the scope and classification standards of assets need to be improved, and the lack of third-party supervision mechanism, which cannot meet the risk management and supervision needs of insurance companies, and urgently needs to be revised and improved." ”

According to the person in charge, the investment field of insurance funds is relatively wide, including fixed income, equity, real estate assets and various financial products, which are not only subject to interest rate risk and credit risk, but also face equity price risk and real estate price risk. The international regulatory rules have clear provisions on the risk classification of commercial banks' assets and the application of results, but there is still a lack of common rules for the risk classification of insurance assets.

In this amendment, the Consultation Paper further clarifies the management responsibilities of insurance companies, strengthens comprehensive risk management, and enhances the binding force of the asset risk classification system. At the same time, drawing on the practical experience of commercial banks, the Consultation Paper improves the classification standards for fixed income assets, as well as the risk classification standards for equity assets and real estate assets. The Consultation Paper implements a five-class classification method for the risk classification of fixed income assets, namely, normal, concern, subordinate, doubtful and loss, and the latter three categories are collectively referred to as non-performing assets; At the same time, three classification methods are implemented for equity and real estate assets, namely normal, risk, and loss, and the latter two categories are collectively referred to as risk assets.

Specifically, the subordinated category of fixed income assets is defined as the debtor, guarantor and other relevant parties are unable to repay the principal, interest or income in full, or the assets have been credit impaired; Suspicious is defined as the debtor, guarantor and other relevant parties have been unable to repay the principal, interest or income in full, and the assets have undergone significant credit impairment; The loss category is defined as the recovery of only a very small part of the asset, or the loss of all of the asset, after all possible measures have been taken.

Equity assets and real estate assets are defined as assets that fall in value due to market risks, etc., and even if measures are taken, the assets will incur significant losses; The loss category is defined as a significant decline in the value of the asset due to market risks, etc., and after all possible measures are taken, the asset will lose all or only a small part of the asset.

Strengthen the principle of penetration and require insurance companies to focus on non-performing assets

In terms of classification standards, the Consultation Paper adjusts the standards for the number of overdue days and the proportion of impairment provisions for the principal or interest of fixed income assets, which are consistent with those of commercial banks. The risk management status of stakeholders, the quality of collateral and other contents have been added, and the internal and external factors of risk classification standards have been enriched. It clarifies the qualitative and quantitative standards for equity assets and real estate assets, and requires penetrating and identifying the risk status of the invested enterprise or real estate project related entities, and judging the asset classification grade according to the proportion of risk situations in the underlying assets and the expected loss rate index.

With regard to the penetration requirements for the risk classification of financial products, the Consultation Paper clarifies that the risk classification of fixed-income financial products should be based on the principle of penetration, focusing on assessing the risk profile of the ultimate debtor, and taking into account factors such as the characteristics of the product structure, credit enhancement measures, and the situation of the product manager. For the risk classification of equity financial products, the risk classification should be carried out in accordance with the principle of penetration, focusing on the assessment of the quality and risk status of the enterprise to which the equity is directed, and at the same time considering factors such as the situation of the product manager, risk control measures, investment rights and interests protection mechanism, and product exit mechanism arrangement. For the risk classification of real estate financial products, the risk classification should be carried out in accordance with the principle of penetration, focusing on assessing the quality and risk status of the real estate project to which it is ultimately invested, and at the same time taking into account factors such as the situation of the product manager, risk control measures, investment rights and interests protection mechanism, and product exit mechanism arrangement. In addition, among the above three types of financial products, if the underlying assets are multiple targets and it is difficult to penetrate the assessment, the risk of the product can be classified according to the expected loss rate.

"The Consultation Paper determines the classification scope of assets according to the essence of asset risks, which is conducive to comprehensively assessing the investment risks of insurance companies and truly reflecting the quality of assets." said the above-mentioned person in charge.

With regard to how to use the risk classification results, the Consultation Paper clearly requires insurance companies to focus on assets such as non-performing assets or risk assets, assets that are frequently downgraded, and long-term equity investments whose fair value is lower than the book value for a long time, dynamically monitor the trend of risk changes, conduct in-depth analysis of risk causes, make full provision for asset impairment, and take timely risk prevention and disposal measures. In practice, most insurance companies incorporate asset classification into their performance appraisals. At the same time, the regulator regularly monitors indicators such as the non-performing rate of fixed income assets, the proportion of risky assets, and the proportion of loss-making assets, carries out targeted risk warnings, carries out early intervention, and gradually incorporates the results of risk classification into institutional classification supervision and off-site monitoring, so as to improve the coordination of the regulatory system.

Optimize the three-level working mechanism for risk classification, and make arrangements for connecting the old and the new

The revision further improves the organization and implementation management, optimizes the three-level working mechanism of "initial classification, review and approval" of risk classification, and clarifies the work responsibilities of the board of directors, senior management and relevant functional departments. At the same time, external constraints have been added, and new audit clauses have been added to require insurance companies to conduct internal and external audits, so as to consolidate the audit responsibilities of accounting firms.

Regarding the division of responsibilities between insurance companies and insurance asset management companies in the classification of asset risks, the above-mentioned person in charge introduced that at present, insurance companies entrust insurance asset management companies to invest is the main mode of insurance fund use. According to the Measures for the Administration of Entrusted Investment of Insurance Funds (CBIRC Gui [2022] No. 9), an insurance asset management company shall independently conduct risk assessment and perform a complete investment decision-making process, implement active management of investment targets, investment timing selection and post-investment management, and assume compliance management responsibilities for investment operations.

Therefore, insurance asset management companies should classify the risks of entrusted assets and assume compliance responsibilities. Insurance companies should strengthen the coordination of asset risk classification, ensure the comprehensiveness of asset classification, monitor and supervise the disposal of non-performing assets and risk assets, and timely exchange information with insurance asset management companies.

The amendment also makes relevant arrangements for the impairment treatment of financial assets of insurance companies that implement the relevant accounting standards for new and old financial instruments. Specifically, the identification and treatment of impairment of financial assets of insurance companies should be consistent with the accounting standards applicable to insurance companies, that is, the credit impairment of insurance companies that have implemented the relevant accounting standards for new financial instruments shall be implemented in accordance with Article 40 of the Accounting Standards for Business Enterprises No. 22 - Recognition and Measurement of Financial Instruments (Cai Hui [2017] No. 7), and the credit impairment of insurance companies that have not yet implemented the relevant accounting standards for new financial instruments shall be subject to the Accounting Standards for Business Enterprises No. 22 - Recognition and Measurement of Financial Instruments (Cai Hui [2006]) No. 3) Article 41 is enforced.

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