China has set up an offshore reinsurance credit risk deposit scheme, requiring offshore reinsurers to hold credit with a domestic company to protect against what it sees as high offshore credit risk.
The Chinese insurance and reinsurance industry regulator, the CIRC, introduced the scheme in a statement released yesterday after labelling international credit ratings for foreign reinsurers insufficient and saying it believed greater measures were needed to protect the local industry.
The regulator said it believed risk from foreign company’s offshore credit ratings had grown along with the rapid expansion of international players into the Chinese market in the last couple of years.
Under the scheme, local insurers using international reinsurance can request the offshore reinsurer to store credit with an unaffiliated local credit holding entity.
The capital adequacy ratio is set at a required minimum of 11%, and the domestic credit holder must have an AA credit rating.
The credit deposit requirements are set to be implemented with immediate effect for international reinsurers.
This move is designed to provide local insurers with credit security, protecting the interests of insurance within China in the case of failure of a foreign company or even the repetition of a 2008 crisis that could threaten global finance markets.
However, for international reinsurers, some of whom have recently chosen to withdraw operations from China after becoming disillusioned with profitability declines and unfavourable market conditions caused by heightening protectionism, this increased regulation could be yet another blow to already sluggish business in China.
