Experts insist that although the insurance authorities' plan to support the establishment of new reinsurance companies this year is a welcome one, steps have to be taken to avoid them undercutting existing players.

Senior officials of industry watchdog, the China Insurance Regulatory Commission (CIRC), said earlier this month the body would support the setting up of new reinsurance companies by insurance firms and other investors.

They believe that this would give a much-needed shot in the arm to the domestic reinsurance sector, where China Reinsurance Group (China Re) has long been the sole specialized firm.

Wang Xujin, director of the insurance department at the Beijing Technology and Business University, said that "this is very good news from the perspective of the industry's long-term development.

"More reinsurers will bring in the new capacity that the industry needs, with increased competition helping to improve services," he added.

The insufficient underwriting capacity and lack of expertise in the domestic sector is highlighted by the fact that as much as 90 percent of China's commercial insurance premiums are ceded to foreign reinsurers.

CIRC Chairman Wu Dingfu said last week that 20 applications had so far been received from domestic investors to set up new insurance firms, but failed to reveal if all of them with to conduct reinsurance business.

The sector's liberalization comes as foreign reinsurance companies enter the domestic market as a result of the nation's World Trade Organization commitments, and has prompted concerns over whether China Re can withstand this double whammy.

Late last year, Munich Re and Swiss Re, the world's leading reinsurers, set up their first branches in China after years of business ties with local primary insurers.

The share of premiums that local non-life insurance firms are legally required to cede to China Re, under a years-old policy aimed to help the State-owned reinsurer grow, was reduced to 15 percent last year from 20 percent, and would become zero by 2006, under China's WTO commitments.

China Re's mandatory reinsurance premiums will subsequently drop by an average of 40-50 percent every year, according to Dai Fengju, the company's general manager.

"That will have a sizable impact on the payment capacity of China Re," Dai said late last year.

Although the new reinsurers and foreign firm are expected to grab a growing slice of business from China Re, experts say the rapidly growing market can provide enough room for everyone.

"(The entry of new reinsurers) will certainly have some influence on China Re, but most of this will be positive," said Jiang Shengzhong, dean of the risk management and insurance department of Nankai University.

"China Re has the ability to withstand it, there is no need to worry about that," said Jiang.

Competitive pressure will force China Re to improve its services, while its long-time ties with local primary insurers and the growing insurance market will help it through its toughest year so far.

China's insurance premiums averaged a more than 30 percent growth rate over the past 20 years, hitting 388 billion yuan (US$47 billion) last year.

Jiang said the current worries about China Re are similar to those when the government made its decision in the 1990s to end the monopoly of People's Insurance Company of China, whose successor the PICC Holding Company still holds the lion's share of local non-life market.

But experts cautioned against the possibility of vicious competition, noting that reinsurance companies do not have a direct role in exploring market potential.

(China Daily February 23, 2004)