The China Banking and Insurance Regulatory Commission (CBIRC) and the Insurance Authority (IA) of Hong Kong have reached an agreement after more than a year of negotiations to allow preferential treatment for qualified reinsurers in Hong Kong, according to A.M. Best.
The agreement will see mainland Chinese insurance companies that cede business to qualified reinsurers in Hong Kong benefit from a lower reinsurance credit risk charge under the China Risk Oriented Solvency System (C-ROSS) regime.
Hong Kong reinsurers were previously grouped with other offshore reinsurers and assigned baseline risk charge factors for credit risk exposure that were considerably higher than those for onshore reinsurers, A.M. Best explained.
Once the new agreement is implemented, Hong Kong reinsurers that meet specific requirements – such as minimum solvency ratios and credit ratings of A- or higher – will be subject to lower charges in general.
The preferential treatment is expected to encourage mainland insurers to give priority to Hong Kong reinsurers over other offshore reinsurers, which will contribute to the region’s competitive edge as a risk management hub in Asia.
A.M. Best added that the IA also plans to launch a platform to facilitate the provision of reinsurance industry expertise for mainland enterprises engaged in China’s Belt and Road Initiative (BRI) and other global projects.
The rating agency believes that the agreement will enhance Hong Kong reinsurers’ competitiveness in China and promote Hong Kong as a risk management platform for Chinese cedents, particularly in supporting the BRI and other initiatives.
It concluded that reinsurers with strong underwriting capabilities, strong balance sheets, and close relationships with both brokers and cedents are most likely to benefit from the preferential treatment, and the arrangement is also likely to attract new capital to Hong Kong for those interested in tapping into the Chinese reinsurance market.
Nevertheless, A.M. Best warned that underwriting discipline must remain strict if companies are to avoid further intensifying the already very soft reinsurance market in China.
