China’s PICC Property & Casualty (P&C) Company Limited has entered into a reinsurance arrangement with the parent owned PICC Re reinsurance company.
PICC P&C is part of the People’s Insurance Company (Group) of China Limited, which also owns the reinsurer PICC Re.
The paid have entered into an agreement which will see PICC P&C ceding a portion of its property insurance risks to PICC Re, while in return the reinsurer will pay commissions and fees back to the insurer.
PICC Re was established by the Group with a view to becoming a main provider of reinsurance capacity in the country, but it looks like its primary mandate may be in reinsuring the Group itself, which will help it to retain greater profit from the premiums it underwrites.
The reinsurance framework agreement is said to be a “connected transaction” of the company, given the related nature of the two companies. Currently the agreement is valid from 10th March 2017 to the end of the year.
The agreement states that PICC P&C will cede premiums to PICC Re from time to time and the reinsurer will return fees to the insurer in turn. The arrangement covers all lines of property insurance business.
Reinsurance pricing and fees will be market based for each transaction between the pair, and are likely to be transacted alongside PICC’s open market reinsurance arrangements.
For this year, PICC P&C has a maximum cap on the amount of reinsurance it can procure from PICC Re of RMB 50 billion, which is a huge sum and converts to approximately US$7.3 billion of protection.
In return the fees to be paid back to the insurer, including tax, are capped at RMB 16 billion, which converts to roughly US$2.3 billion.
The pair said that prior to this year they have not entered into any reinsurance arrangements, meaning that previously the open market has been used. But with such large numbers quoted in the arrangement documents, it looks like a significant proportion of risk will now be retained within the PICC Group, instead of openly reinsured.
As of today, 16th May 2017, the agreement has ceded almost US$17 million to the reinsurer and received almost US$5.7 million in fees back, according to the documents.
So effectively this agreement will enable PICC Group to retain a significant amount of its property insurance premiums internally within the Group, with the added benefit of fees being paid back and any ceding commissions being retained internally as well.
This will be a capital efficient solution for the insurance and reinsurance group, however it does raise questions about risks being retained within China and not being diversified globally, which could be detrimental to the Group’s financial profile if a major loss occurs.
Reinsurance is designed to be a global market, with risk transferred across borders and company lines in order to reduce risk concentrations and increase risk diversification. By retaining more risk PICC will increase the risk of concentration, but also enhance its efficiency by reducing its costs.
A solution to the risk concentration issue would be to utilise global retrocession markets to protect PICC Re against losses, which with the capital efficiency gained from the self reinsurance arrangement could still be an efficiency enhancement for the firm.