China’s reinsurers face challenges growing abroad

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,” says 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 says.

The key competitive advantages of Asian reinsurers such as local market knowledge or same language are not applicable when expanding abroad, AM Best notes in a September Global Reinsurance Segment Report.

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

“In many cases, overseas business is on the priority list but generating the return on risk taken is not easy,” Lee notes.

“As you don’t need to worry about accumulation risk in the beginning, you theoretically have better pricing capability, or given the same pricing better profitability, but there is the downside of the understanding of the overseas risk.”

In addition, 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, according to the AM Best report.

Overseas business, as well as increased retention of domestic business, will exhibit higher volatility. This volatility is difficult to accept for management as well as shareholders who are used to stable performance, not least because many Asian reinsurers show even better earnings stability compared to local direct companies, according to AM Best.

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China is making it more difficult for foreign reinsurers to underwrite business in the country in a move that is set to benefit domestic players.

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 AM Best.

“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,” says Frank Nutter, president of the Reinsurance Association of America.

There is a trend towards more protectionism in China in reinsurance which is intended to control capital outflow, Lee says. The regulator is trying to keep a balance between capital outflow and risk protection, he notes.

“Higher risk charges applied to offshore reinsurers will likely prompt the direct insurers to rely more on Chinese reinsurers or China-based subsidiaries of foreign reinsurers,” Tan says. “We consider that domestic Chinese reinsurers have a comparative advantage to offshore reinsurers,” she adds.

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 says. Local municipal governments of Shenzhen and Shanghai, for example, are planning to develop the cities into reinsurance hubs through establishing free trade zones, she notes.

A supportive environment is also helping the creation of new players. Since 2016, three new Chinese reinsurers have been granted licences by CIRC, the insurance regulator, Tan notes.

“We expect the number of reinsurance players to increase through the establishment of more new reinsurance start-ups. In addition, we believe foreign players who do not have a presence in China yet will set up their operations within the country,” she says.

The Chinese re/insurance market, which is seen as having strong growth potential due to a comparatively low insurance penetration, is therefore becoming even more attractive for local reinsurers.

“Domestic reinsurance businesses will remain the key focus for Chinese reinsurers,” Tan says. “The still low insurance penetration within the direct insurance space will potentially facilitate demand for greater reinsurance protection,” she adds.

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.

“Higher capital risk charges for these lines of businesses will likely imply that insurers with lower capital buffers rely more on reinsurance arrangements in order to manage their solvency efficiently,” Tan says.

Tan also expects reinsurance demand to grow driven by the fact that direct life insurers face more capital pressures following declining interest rate and market volatility.

The development of health and protection insurance within China, supported by the government, will also create growth opportunities for Chinese reinsurers, she adds.