A.M. Best: China’s Solvency Rules Will Alter Reinsurance Buying Decisions

China’s new solvency regime will encourage direct insurers to revise their reinsurance programs, or panel of insurers, in order to better manage their solvency requirement arising from reinsurance credit risk, according to a new briefing published by A.M. Best.

Titled “China’s Regulator Strengthens Governance and Capitalization of the Reinsurance Sector,” the briefing explores the impact of China’s second-generation solvency regime – known as the China Risk Oriented Solvency System (C-ROSS) – on insurance companies operating in the country.

C-ROSS’ credit risk charge on reinsurance recoverables is expected to bring significant change to the reinsurance marketplace, said A.M. Best, predicting that more reinsurance placements will be diverted to onshore reinsurance companies, with a corresponding reduction of offshore reinsurance.

C-ROSS, which was implemented by the China Insurance Regulatory Commission (CIRC) in February 2015, is effective immediately, the briefing said. However, a transitional period will allow insurance companies to follow the current solvency regime while simultaneously submitting a solvency report based on the new requirements.

“In the near term, C-ROSS likely will trigger higher reinsurance concentration in the local market,” said Jeff Yeung, associate director. “In the longer term, more international or regional reinsurance companies will seek to build a presence in China, which will strengthen the CIRC’s governance on reinsurance companies that aim to take a share of China’s insurance industry as a whole.”

Capital requirements for international reinsurance companies with operations in China that are retroceding large volumes of business offshore also will likely increase under the credit risk factors for retrocession recoverables of C-ROSS.

A.M. Best believes these reinsurers may need to strengthen the capitalization of their China operations to provide the direct insurance companies better security.

Source: A.M. Best Company