How international is China's reinsurance market becoming? ask Andreas Lauffs, Kit Kwok and Davina Ho
The rapid growth of the reinsurance market in China in recent years has been a major attraction to foreign reinsurance companies. According to the regulatory body of China's insurance market, the China Insurance Regulatory Commission (CIRC), the reinsurance market had risen to RMB305.3bn in 2002 from RMB194bn in 2001 ("Eurobiz" November 2003). However, with the market previously comprising only one state-owned reinsurance company, China's reinsurance market is relatively undeveloped.
Prior to China's accession to the WTO, the reinsurance market was monopolised by the state-owned China Reinsurance (Group) Company (China Re). All domestic insurance companies were required under the PRC Insurance Law (The old law promulgated on 30 June 1995) to reinsure a minimum of 20% of their non-life insurance policies with China Re. As part of its accession, China committed to a gradual reduction of 5% of statutory reinsurance each year until the statutory reinsurance is phased out in 2006. The PRC Insurance Law was also amended in 2002 and the statutory reinsurance requirement was removed in order to implement China's WTO commitment.
Restrictions on offshore reinsurers
The law imposes restrictions on domestic insurance companies conducting reinsurance business with offshore insurance companies in China. The PRC Insurance Law (Article 104) provides that the insurance regulators can restrict or prohibit insurance companies from reinsuring with offshore reinsurers or accepting reinsurance business from offshore insurers. Such restriction is in line with CIRC's current policy to encourage offshore reinsurance companies to set up entities in China to conduct reinsurance business in China. Furthermore, the PRC Insurance Law (Article 103) requires that where an insurance company needs to reinsure its policies, priority should be given to insurance companies established in China. Foreign reinsurance companies that have no presence in China can only write reinsurance policies with domestic insurance companies in foreign currency. Foreign reinsurance companies wishing to write Renminbi policies with domestic insurers would have to obtain operating licenses in China in order to conduct Renminbi reinsurance business.
Market entry for foreign investors
Under the FIIC Regulations three types of foreign-invested reinsurance companies may be established in China: equity joint ventures between foreign reinsurance companies and Chinese companies (joint ventures), wholly foreign-owned reinsurance companies (WFOEs), and branches of foreign reinsurance companies.
Strangely, it is CIRC's position that, as with direct life insurance companies, the Implementing Rules require that the proportion of foreign equity in joint ventures conducting life reinsurance business shall be no more than 50%. However, unlike direct life insurance companies, WFOEs engaging in life reinsurance business and WFOEs engaging in life and non-life reinsurance business are allowed. It is presumably CIRC's intention to protect the interests of Chinese joint venture partners.
In implementing its commitment to the WTO, China has not set any official limits on the number of licenses to be granted to foreign-invested reinsurance companies. Although the Reinsurance Regulations do not address qualifications for foreign investors in reinsurance companies, specific reference is made to the requirements in the WTO commitments (Article 7). Under these commitments, foreign investors in reinsurance companies must have been running reinsurance business in a WTO member country continuously for more than 30 years; they must have been operating a representative office in China for two consecutive years; and they must have total assets of at least $5bn by the end of the previous year. Under the FIIC Regulations, there are also other prudent requirements (Article 8) that foreign-invested reinsurance companies must meet.
Establishment of branches
All foreign-invested reinsurance companies to date have been established in China in the form of branches. Under the Reinsurance Regulations, the working capital and establishment requirements for reinsurance companies shall also apply to foreign reinsurance companies setting up branches in China (Article 8). But there are also other requirements that apply to branches of foreign reinsurance companies.
Under the FIIC Regulations, where a branch of a foreign reinsurance company is to be established, a guarantee providing that its head office will assume liability for taxes and debts of the branch must be submitted to CIRC for approval upon application for establishment.
The Implementing Rules further provide that where a foreign reinsurance company, joint venture, or WFOE applies for the establishment of a branch, its solvency margin shall comply with relevant regulations specified by CIRC; its internal control system must be reliable, there must be no record of punishment in the last two years of operation, and the qualifications of the senior managerial personnel of the branch must comply with those specified by CIRC.
The Implementing Rules have also set out the time within which CIRC shall decide whether or not to grant approval. It is provided that CIRC shall determine approval within 20 days after receiving application documents for the opening of a branch business. The setting of a timeframe is presumably to streamline CIRC's licensing approval process and executives at Swiss Reinsurance, one of the first international reinsurers to enter into China's reinsurance market, had commented that CIRC had been open to dialogue throughout their branch application process ("A reinsurer's perspective", Asia Insurance Review, January 2004).
The market ahead
After China's accession to the WTO, CIRC issued several insurance regulations which implemented China's WTO commitments. But these regulations have also created problems for foreign insurance companies (US Trade Representative's 2005 National Trade Estimate Report on Foreign Trade Barriers) which CIRC has attempted to address through the Implementing Rules. The rules have increased transparency in CIRC's approval process and reflect China's intention to take further steps in meeting its WTO commitment. The Implementing Rules have lowered the capital requirements for life and non-life insurance companies from RMB500m to RMB200m and for branch licenses from RMB50m to RMB20m.
China has taken significant steps in opening its door to foreign reinsurance investors and three top international reinsurers have been granted branch licenses to operate business in Renminbi while a forth is awaiting the green light to establish a branch in China. Furthermore, CIRC is reportedly drafting regulations governing the operation of reinsurance companies.
These regulations will provide specific guidance and requirements on capital, financial, and administrative aspects applicable to domestic and foreign-invested reinsurance companies.
- Andreas Lauffs, Kit Kwok and Davina Ho of Baker & McKenzie, Beijing, Shanghai and Hong Kong.
China Regulatory framework
The Regulations on the Establishment of Reinsurance Companies (Reinsurance Regulations) issued by CIRC in September 2002 were the first set of regulations governing Chinese and foreign-invested reinsurance companies in China.
The regulations made foreign investment in reinsurance companies in China legal for the first time. The Reinsurance Regulations make no distinction between Chinese domestic reinsurance companies and foreign-invested reinsurance companies as they generally apply to reinsurance companies.
In addition, the PRC Insurance Law promulgated in October 2002, the Regulations on the Administration of Foreign-Invested Insurance Companies promulgated in December 2001 (FIIC Regulations), and the Implementing Rules of the Regulations on the Administration of Foreign-Invested Insurance Companies promulgated in May 2004 (Implementing Rules) are also generally applicable to foreign-invested reinsurance companies in China.
Source: Authors' own.