The surety bond market is growing in China

In the past six months the surety bond market has developed significantly for insurers in China, said Richard Chu, specialty lines, financial risks, Asia-Pacific, PartnerRe.

“It’s a new product in China mainly for construction sector,” he said. “Previously most of the construction companies had to go to banks for surety products, but in the last six to eight months it is changing simply because the China Insurance Regulatory Commission (CIRC) and the People’s Republic of China Central Committee and State Council are further opening up this market and strengthening urban planning and construction management.”

As a result of that, a number of insurance companies have started offering this product, and it is very much modelled towards the US surety market, said Chu. A knock on effect is that PartnerRe is now seeing a number of enquiries from insurance companies in China writing these surety bonds.

“At present it is confined mainly to works in municipal government offices, schools and hospitals—it is still quite new in China,” said Chu.

He added that China’s One Belt–One Road initiative will increase demands for medium long-term credit and also political risk insurance cover.

“In fact, we have already seen a number of these projects, for example, China Railway Rolling Stock Co selling some 150 assembled railways cars and components to Egyptian National Railways—and that requires political risk coverage as well.”

He expects to see more of these projects in the near future.

In Korea, Chu said, the market has opened up due to recent changes by the regulator, the Financial Supervisory Service. It has opened up the export trade credit insurance market, which in the past was dominated by two companies: Seoul Guarantee Insurance and K-Sure (the export credit agencies of Korea).

“Property and casualty insurance companies such as Samsung, Hyundai, KB and Dongbu, are now allowed to write this export trade credit insurance,” he said. “This is a new opportunity. They had ability to write the insurance for their own groups which are mainly in the electronic and manufacturing sectors.”

Turning to Japan

Chu anticipates that Japan will continue to invest in infrastructure because the country is facing ageing public infrastructure such as government offices, schools, bridges, roads and sewerage pipes which were built 40 to 50 years ago.

“The Kumamoto earthquake revealed the necessity for such investment because the Kumamoto municipal government office collapsed during the earthquake and they were not able to function to undertake the necessary public service post-earthquake.

“One university professor calculated the cost of maintenance and the construction of existing public infrastructure would be 8.9 trillion yen, ($86 billion) which is far from possible. So Japan has to prioritise projects for the time being,” said Chu.

The upcoming 2020 Summer Olympics is sparking a lot of construction activity in Japan, he added; a recent project supported by PartnerRe was the construction of the Tokyo athletic stadium, with a $450 million surety bond request.

Another key development in Japan is the opening up of the export credit agency: Nippon Export and Investment Insurance (NEXI). It has gone through a broker tender process and the state’s involvement will cease.

“NEXI has been discussing its needs with PartnerRe and other reinsurers who can offer top security and expertise,” said Chu.
South East Asia presents re/insurers with a number of countries at different stages of development. When it comes to trade credit insurance, Chu says cedants are still looking to grow and to open up this business in the market.

“Trade credit insurance is not such a straightforward business, because cedants need to invest in underwriting infrastructure, IT platforms, good risk management techniques and accumulation control; so in these countries, cedants are looking for reinsurance companies that have good track record and can provide them with a partnership.

“What Partner Re can do here is typically to provide technical knowledge transfer and risk management knowhow to further enhancing our cedants in South East Asia so that it supplements underwriting execution,” Chu explained.

In Indonesia, for instance, PartnerRe recently assisted a client on trade credit insurance, providing technical assistance and expertise to guide them towards the writing and the setting up of their trade credit department.

In China, PartnerRe is partnering with an insurance company that has several Chinese construction clients who are mainly in the Engineering News-Record 250 ranking.

“Most of these Chinese companies tend to go to Latin America and Africa. As a global company and with credit and surety expertise in all regions of the world, PartnerRe has the ability to assist them and share with them the best practices for underwriting those lines in these other regions and in that way help our clients succeed.”