Plenty has been happening to keep western insurers and reinsurers focussed on the emerging markets in east Asia. Developments in several countries show a continued trend toward liberalisation, the growth of opportunity, and the evolution of insurance cultures.

The rise of Labuan as an Asian offshore reinsurance centre has been a near meteoric one, but it is just a sideshow to the more important task of liberalising Malaysia's local insurance economy. This task is set out in the Insurance Masterplan, a scheme of the regulator, Bank Negra Malaysia, intended to “enhance the capabilities and competitiveness of local insurers.” Published earlier this year, the Masterplan sets out several detailed strategies for achieving the goal, all of them intended to strengthen the local market while offering consumers increased choice from financially strong companies. Once accomplished, the final phase, according to the blueprint, will “stimulate innovation by incumbent insurers and provide Malaysian consumers with access to world-class products and services.” One way to do so will be to “offer additional new licences to foreign entrants for the conduct of professional reinsurance business.” The impact of the decision was clarified in a 16 March news release issued by the Bank. “The removal of the voluntary cession to Malaysian National Reinsurance Berhad (Malaysia Re) as recommended in the Financial Sector Masterplan will be gradually implemented over a period of between seven to ten years,” the statement said. “This should not have an immediate impact on the company.” In fact, it caused an immediate drop of about 35% in Malaysian Re's share price.

The stipulated amount of the ‘voluntary' cession, which contributes about 70% of its income, has been decreased since 1990 from its peak of 16%.

It is due for further review in March 2003; previously when it was reassessed, Malaysian Re's premium income fell about 20% and remains one-third below its peak in 1998. The voluntary cession is achieved through proportional treaties between local insurers and Malaysian Re; it is voluntary insofar as insurers do not have to cede to Malaysian Re. However, if they do choose to cede any business at all, they must first cede the specified percentage to the monopoly.

Voluntary cession also constitutes a national pool, with premiums retroceded back to the insurers by the national reinsurer. However, the winding-down of the system may not be a boon to reinsurers in Malaysia, as it is clear that the government hopes to minimise foreign cessions.

It has floated the idea of setting minimum retentions in specific lines of business which would fluctuate based on the availability of domestic capacity. “This is aimed at ensuring that the goal of optimising national retention capacity is not compromised with the eventual removal of voluntary cessions to MNRB,” the Masterplan admits.

Recent developments
in China may be worrying for some, but overall the news is largely positive. The tried, tested and thoroughly unacceptable practice of discretely writing reinsurance business through representative offices has finally been targeted by the China Insurance Regulatory Commission, as the world's largest untapped market sends a strong message: foreigners can play, but only by the rules. The inspection measure is one of ten which the CIRC has introduced as part of a ‘clean-up' campaign.

Xinhua, the official Chinese news service, warned of the crackdown in late April. It reported that an unnamed official had “blamed some foreign representative offices engaged in property insurance, reinsurance and agency business activities of ignoring China's rules and regulations in the insurance industry.” Xinhua added that strengthening supervision of the management of the 200+ foreign rep offices in China has become a priority. “Many foreign insurance representative offices had conducted business without official permission. Their operation has gone against China's rules, and [against] their original aim of setting up contacts with their Chinese counterparts,” the official told Xinhua.

Such crackdowns should not be treated lightly. In 1999, several international and domestic brokers learned this the hard way when the CIRC announced a ‘purification' campaign for the broker market. About 800 individuals were ‘punished' and eight were prosecuted. The crackdown, according to local reports, led directly to the permanent closure of Jardine Lloyd Thompson's offices in Beijing and Guangzhou, and the barring from the insurance business of JLT's chief representatives, Wang Jia-cong and Chen Jie-hong, after the CIRC reportedly declared that JLT's actions “illegally lowered the underwriting standard of domestic companies, enlarged their insurance obligations, and forced them to reinsure abroad.” In addition, Sedgwick was forced to close its Chinese rep office for three months after being found guilty of operating with inadequate capital, from unauthorised addresses and with unqualified personnel.

Meanwhile and on the positive side, Chinese trade negotiators have agreed to ease some of their insurance regulations in an effort to move closer to WTO membership, which has now been agreed by the US and the European Union, and could be granted before year-end. Most notable for reinsurers is China's pledge, made on 9 June, to phase out, over five years following WTO accession, the current requirement that all insurers cede 20% of premiums to China Re, the state-owned reinsurer spun off from the People's Insurance Company of China (PICC). The negotiators also offered to lower, over three years, the minimum value of risks eligible to be covered by foreign insurers. Currently, risks must yield aggregate annual premium of about $120,000 or more for foreign companies to have a chance to underwrite them. In the first 12 months of WTO membership, the amount will fall to yuan 800,000 (about $96,640), then annually to yuan 600,000 and yuan 400,000. Minimum investment thresholds also apply to risk eligibility. Foreign companies have less than 1.7% market share, but further concessions could increase penetration as China has agreed to an EU request to permit European brokers into the marine, aviation and transport sector. It has also agreed to loosen the requirements for licensed foreign insurers wishing to open branch operations.

The local market is slowly evolving. About a dozen Chinese insurers have taken public stock quotes, GAB Robins has recently entered the market as China's first foreign loss adjuster, and the expansion of compulsory classes to include such specialities as liability cover for travel agents will boost buying. Premium is growing rapidly: in the first three months of 2001, for example, property insurance premium spending in Beijing increased 43.5% to yuan 1.22bn, and life premium was up by an even higher ratio. Recent news confirms that the local market can carry big risks: the PICC, with its 86,000 staff and three-quarters of the Chinese market, announced recently that it had arranged cover for the three tenors – Luciano Pavarotti, Placido Domingo and Jose Carreras.

For many years following the Vietnam War, the country was a less-than-obvious target for foreign insurers and reinsurers, although the tenacious have been there almost since the day hostilities ceased in 1975. Times have changed, however. Licence-hungry entrants are now practically beating down the door of the Ministry of Finance. Most of the interest is in life insurance, but non-life companies are also seeing growing opportunities. And Vietnam's international relationships are slowly thawing, an evolution symbolised most dramatically by an insurance trade mission dispatched by the US to Japan.

True, the Insurance Business Law, which came into effect in April this year, does not lift the 1998 restriction limiting 100% foreign-owned non-life companies to the insurance of home-foreign risks. In addition, it reaffirms in statute the principle of “market domination by State-owned insurance businesses.” However, within the parameters of local cession regulations, licensed foreign insurers and reinsurers can assume as much reinsurance of local risks as they have appetite for. Those without a local license can actively and openly participate in setting up fronting arrangements, although writing policies from any of the slew of representative offices in the country is prohibited.

Any one foreign reinsurer is limited to accepting 40% of any single risk. Vietnam National Reinsurance Company (VINARE), the state-owned reinsurer, gets 20%. The rest is shopped around, usually resulting in a large part of the balance also leaving the Vietnamese market and landing in the laps of international reinsurers. Of course the role of VINARE, which includes maximising local retention, is critical. The company wrote premiums of VND263.1bn in 2000, of which 47% were non-compulsory. VINARE retroceded VND189.7bn, of which VND43.3bn, or 22.8%, went back to the local market. So nearly VND150bn went to international reinsurers under this single programme. Bearing in mind that one Vietnamese dong was worth $0.00006891 at 31 December 2000, this is not a massive fillip – about $10m.

The Republic of China, better known as Taiwan, had insurance reform legislation before the Yuan, its legislative chamber, at the time of writing. It would introduce risk-based capital provisions and a requirement for companies to engage appointed actuaries in the largely low-retention Taiwanese insurance market, which boasts 18 local and 11 foreign insurers. The reforms come amid growing whispers about possible insolvencies. The regulator has made it clear that he wants Taiwanese insurers to act less like intermediaries, to take a greater share of the risks they underwrite, and to increase their resources accordingly. If the legislation passes, which is by no means certain, rationalisation of the overpopulated sector seems inevitable. Non-life premium reached NT$87bn in 2000, and is expected to grow as insurers enter new product territory with lines such as credit and product liability covers.

Taiwan has experienced the opposite problem when it comes to global catastrophe reinsurers. The government has resolved to provide high-level earthquake reinsurance, having found the international market's appetite for the risk severely curtailed (at prevailing prices) following Taiwan's 1999 earthquake. The Ministry of Finance has proposed a national scheme to fund losses exceeding NT$30bn, financed through catastrophe bonds issued internationally. Planning of the issue is thought to be advanced.