China’s implementation of the China Risk Oriented Solvency System (C-ROSS) in 2016 reshaped the domestic reinsurance space, leading to insurers choosing reinsurance arrangements with greater risk-based capital efficiency and becoming more wary of offshore cedance due to increased risk charges, said Fitch Ratings in a report.
C-ROSS caused insurers throughout the country to reexamine reinsurance arrangements, and optimise capital to ensure capacity is in line with the new solvency framework.
One of the biggest resulting disruptions was felt in the motor insurance industry, where for many motor insurers, this resulted in changes to ceding structure and cession rates due to the previously required capital for underwriting motor lines being much lower than for property insurance.
Fitch said, China Re, China’s most active reinsurer, saw its reinsurance premiums from the domestic motor market drop by 48% to CNY9.4 billion in 2016.
Under the new regulatory framework, differences between onshore and offshore capital charges and tightening offshore premium ceding credit risks have pushed local cedents towards greater caution in offshore reinsurance cedance, over concerns of its additional associated costs.
In March this year the regulation of cross-border reinsurance credit risks was finalised, with the added proposition that insurers should have to put up collateral against offshore reinsurance contracts.
Fitch, explained; “the requirement would not be mandatory, but non-compliance would increase risk charges for affected transactions. Chinese insurers will therefore need to consider their ceding arrangements and weigh the business advantages against capital efficiency under C-ROSS.”
For global reinsurers, some of whom have chosen to pull-back from China earlier this year due to the unlevel playing field, this could mean further difficulty in establishing connections with one of the world’s biggest, emerging re/insurance markets.
