China’s reinsurers face challenges growing abroad

China’s reinsurers are set to grow only hesitantly abroad and to enjoy the safety of home turf instead, helped by a supportive government.

By expanding abroad, China’s reinsurers could increase their geographical diversification and therefore make their business less vulnerable to regional risks. However, challenges to growth outside China are likely to make it a slow process.

“We believe that expansion overseas will be gradual given the limited international exposure and know-how of Chinese reinsurers,” said Eunice Tan, director of insurance ratings at S&P Global Ratings.

Chinese domestic reinsurers, which include China Re, China Taiping Re, PICC Re and Qianhai Re, are likely to take advantage of international brokers to facilitate their overseas expansion, but taking only small shares initially, Tan said.

“In the initial stage of growing abroad they will utilise reciprocal business, but the amount is limited,” added Moungmo Lee, managing director analytics Asia-Pacific at AM Best.

The risk-based capitalisation of Asian reinsurers may not be sufficient for them to take advantage of regulatory policy towards higher domestic retention and, at the same time, adopt an aggressive overseas expansion plan, AM Best noted in a September Global Reinsurance Segment Report.

Instead, China’s reinsurers are likely expand their domestic business, benefitting from the fact that China is making it more difficult for foreign reinsurers to underwrite business in the country.

Many foreign reinsurance branches in China had to increase capital recently and will have to retain much of their profit to support the business going forward, according to the AM Best report.

“China is imposing collateral requirements and capital charges for any business that is being placed outside of China, making it very difficult to underwrite business in the country unless you establish a local entity there,” said Frank Nutter, president of the Reinsurance Association of America.

Domestic re/insurers can count on the support of China’s government which is promoting a rapid development of the country’s insurance and reinsurance sector, Tan said. Local municipal governments of Shenzhen and Shanghai, for example, are planning to develop the cities into reinsurance hubs through establishing free trade zones, she noted.

Tan expects demand for non-motor reinsurance such as property or agriculture to increase, reflecting the higher need to risk manage this portfolio given its higher sensitivities towards large losses and both natural and manmade catastrophe events. She also expects reinsurance demand in China to grow driven by the fact that direct life insurers face more capital pressures following declining interest rate and market volatility.

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