The increasing presence of foreign reinsurers will benefit the Chinese market with greater underwriting capacity, better competitive environment and faster technical improvements, the insurance watchdog says.

An official with the China Insurance Regulatory Commission (CIRC) also said a widely-watched regulation on reinsurance companies, which encourages insurers to cede premiums domestically, is expected to come out by the end of this year. The ceding of premiums means that the insurers will give part of the premiums to a reinsurance firm, which will share part of losses when they occur.

"An appropriate level of competition will only do good to the market as prices and terms will be more fair and services will be better," said Wang Simiao, deputy director of the CIRC's Reinsurance Regulatory Division, in an interview.

"But we will prevent excessive competition, or the operational costs will be too high and endanger the solvency of insurance companies," she said.

The remarks come days after General Re Corporation, a subsidiary of Berkshire Hathaway Inc, opened its Chinese branch in the nation's financial hub of Shanghai, following the precedent of Munich Re and Swiss Re six months ago.

The Chinese reinsurance market, with China Reinsurance Group as the only current local player, badly needs new underwriting capacity from global players such as General Re, as the rapidly-growing primary insurance industry keeps generating huge demand for reinsurance arrangements, analysts say.

China's insurance industry has boasted an impressive 30 percent average growth rate during the past 20 years. Property insurance premiums surged by 23 percent in the first half of this year, although the life sector reported its first decline in a few years as major players trimmed unprofitable operations.

And although the CIRC has expressed support for local companies setting up reinsurance businesses earlier this year, they seem to be balking at the high technical complexity of the business and a lack of expertise and reinsurance professionals.

"We have not yet received any applications," Wang said.

Instead, foreign reinsurers are currently applying for licences in China, she said, without elaborating.

Analysts have expressed concern about the impact of growing foreign competition on China Re, which lags far behind its foreign rivals in terms of expertise and capital strength.

With its lifeline protective policy, which requires local insurers to cede 20 percent of their non-life business to the state-owned firm, being dismantled gradually under China's WTO commitments, China Re's mandatory premium income is expected to decline sharply.

Yet Wang said: "I'm not too worried," citing China Re's "deep roots" in the market.

Although the percentage of mandatory reinsurance is being reduced by 5 percentage points each year, fast growth in primary insurance premiums in the market has bolstered China Re's premiums income, she said.

And the company is demonstrating fresh vitality after a joint-stock restructuring last year. Its property reinsurance subsidiary reported a 190 percent annualized growth for the first half of this year, while the life reinsurance arm continued to achieve rising premiums despite a sector-wide drop.

"The potential in the domestic reinsurance market is tremendous," Wang said. "It's just not being exploited well."

Unlike many developed markets, Chinese primary insurers ceded the majority of their business to reinsurers overseas in recent years. In 2002, they gave 90 percent of their commercial business, or US$6.7 billion, to foreign reinsurance companies, statistics indicate.

"That itself shows the gap between the huge demand and inadequate supply of reinsurance," Wang said.

With their local branches up and running, foreign competitors are now in an even stronger position, as their personnel will be better able to learn from the market and understand how best to adapt expertise and resources to China's specific needs, analysts said.

But foreign reinsurers have yet to fully demonstrate their competitiveness, Wang said, as both Munich Re and Swiss Re have just obtained their foreign currency licences, while General Re has a few months to receive its own. Such a licence is a precondition to selling foreign currency-denominated policies, an area foreign players are believed to be most competitive in.

"There hasn't been too much new business, as they are just getting started," Wang said.

According to data which the official said were incomplete and not fully accurate, foreign reinsurers held a 10 percent upward share of the local reinsurance market in the first quarter of this year.

"That is an appropriate pace," she said. "But it's more important to look at growth after they get foreign currency licences."

Wang said the commission is currently drafting a reinsurance regulation which seeks to, through "technical measures," ensure the preference of domestic business cessions over overseas ones, a principle stipulated in China's Insurance Law.

"We want to implement that to promote the development of the domestic reinsurance market," she said. "We will try to finish it (the drafting work) by the end of the year."

(China Daily August 10, 2004)