December 22nd, 2015

Update on China Counterparty Risk Charges for Offshore Reinsurers: Part I

Posted at 1:00 AM ET

eva-zheng-sm100graham-jones-95Eva Zheng and Graham Jones

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China’s developing insurance market is a potential bright spot for growth in an otherwise challenging landscape for global reinsurers. Driven by a maturing economy and expected increases in household penetration ratios, property/casualty insurance premium, totaling USD 121.6 billion in 2014 (1), is projected to increase to roughly USD 300 billion by 2030 (2).  

Beginning January 1, 2016, the China-Risk Orientated Solvency System (C-ROSS) will strengthen capital requirements, risk management and transparency disclosures - bringing China’s insurance solvency regulations in line with global standards. Changes in the treatment of counterparty credit risk to be introduced under C-ROSS have sparked much debate as local cedents could face significantly higher charges for offshore reinsurance cessions compared to cessions to local markets, particularly for proportional coverage. Overseas reinsurers will undoubtedly continue to play an important role in China’s market. However, C-ROSS will include additional requirements and regulations reinsurers will need to consider.

 china-counterpart-tables-1-web

Under C-ROSS, domestic cedents who use offshore reinsurers face credit risk factors ranging from 8.7 percent to 86.7 percent, depending on reinsurer approval in domiciled countries and collateral positions:

china-counterpart-tables-2-web 

Cessions to onshore companies, by contrast, will carry charges of 0.5 percent to 4.7 percent when reinsurers’ solvency ratio exceeds 100 percent. Offshore companies that establish - and capitalize - a local branch/subsidiary will be considered onshore reinsurers. At present, this option is available to only the largest international players as costs and regulatory approval hurdles are high. Known as the 5-3-2 rule, requirements include:

  • USD 5 billion in total assets
  • Three decades of operating history
  • A representative office in China for at least two years.

Link to Part II>>

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Notes:

1. Based on the China Insurance Regulatory Commission’s statistics and exchange rate as of December 31, 2014 provided by XE.com

2. Guy Carpenter analysis

3. Net position for reinsurance recoverables means the admitted value of reinsurance recoverables with the same counterparty. Net position for reinsurance receivables means the rights and obligations with the same counterparty can be offset if it is stipulated in the reinsurance contract; reinsurance recoverables includes ceded loss reserves and ceded unearned premium reserves.

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