December 23rd, 2015

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

Posted at 1:00 AM ET

eva-zheng-sm1001graham-jones-951Eva Zheng and Graham Jones

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It is anticipated that the China Insurance Regulatory Commission (CIRC) will recognize cash deposits (including premiums withheld), letters of credit (LOC) and certain other forms of collateral. LOCs must be issued by domestic banks with a capital adequacy ratio of no less than 11 percent or by overseas financial institutions with credit ratings equal to or higher than AA-. Cedents will be required to report and re-value their counterparty risk on a quarterly basis and adjust collateral positions accordingly.

Domestic cedents will incur slightly lower credit risk charges on recoverables from offshore parent or affiliates via the K factor adjustment.

Risk charges for retrocession business to offshore companies are considerably lower than charges on reinsurance to offshore companies, with factors ranging from 0.5 percent to 11.5 percent for counterparties rated AAA to BBB-:

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The counterparty charge on retrocession is subject to a K factor of -0.25 with collateral or 0.25 without.

The CIRC has also announced the Reinsurance Registration System (RRS) to coincide with C-ROSS implementation. Domestic and international reinsurers (including Lloyd’s and each syndicate writing reinsurance) and brokers will be required to register in the RRS. Cedents must select companies that are approved on the RRS or potentially face penalties from the CIRC. RRS applicants must be recommended by a China-based affiliate, cedent or broker as well as meet various solvency and rating requirements. Registration is now open and Guy Carpenter is helping reinsurers navigate the RRS process.

It is anticipated that the C-ROSS regime will change market dynamics for onshore versus offshore reinsurers and the next few years will be crucial as companies position themselves to compete. 

Link to Part I>>

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