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Impact of new Chinese Bussiness Insurance Legislation

New insurance business legislation has recently been enacted in China that has implications for clients of the EOS RISQ network and other partner brokers.

Effective 1 december 2005, the new legislation governs the way in which domestic insurance companies may reinsure and seeks to restrict the outflow of reinsurance premiums abroad. Through this the Chinese insurance regulator, CIRC, aims to assist the development of the local reinsurance industry.

The new rules apply equally to local Chinese direct writers, Sino-foreign joint ventures and subsidiaries and branches of foreign insurance companies. All modes of reinsurance business fall within its scope, including facultative placements and treaty reinsurance arrangements.

New legislation governs the way in which domestic insurance companies may reinsure and seeks to restrict the outflow of reinsurance premiums abroad.

The salient features of the new legislation are as follows:

Directinsurers are instructed to give priority to China-domiciled reinsurers when entering into reinsurance arrangements.
At least two domestic companies must be invited to participate in any reinsurance offering.
At least 50% of any reinsurance placement should be effected with China-domiciled reinsurers.
No more than 80% of any reinsurance placement may be effected with the same reinsurer.
No more than 20% of any reinsurance placement may be effected with a reinsurer that is affiliated to the cedant.

What this means for the China-based operations of clients of the EOS RiSQ network is that they will now have less flexibility over the design and control of their risk financing arrangements. For example, cessions to captive insurance companies through fronting agreements will henceforth come under close scrutiny and may well be restricted. There may also be security (rating) issues, which we are evaluating.

The penalties for non-compliance with the new directive include, in extreme cases, withdrawal of licence and suspension of business activities and as a result domestic insurers have initially indicated to EOS RISQ that they intend to fully comply with the legislation.

However, we have yet to see in practice how Chinese insurers will react in relation to their future handling of global insurance programmes and will keep our network partners informed of developments in the coming months.