Although China's financial reforms are sometimes regarded as too cautious, the nation is taking firm action when it comes to laying the foundations for the opening of its capital markets in line with its commitment to the World Trade Organization (WTO), according to Franz-Josef Hahn, the head of Swiss Re in China.

Swiss Re, one of the world's largest re-insurance firms, opened an office in Beijing in December to strengthen its operations in China at a time when insurance industry reform is gathering pace.

In a phone interview with China Daily, Hong Kong-based Hahn says that the insurance industry is seen as a pivotal part of financial reform because it is essential for the development of a mature capital market. Insurance companies are a major source of long-term stable investments in any capital market, he says.

Re-insurance companies, he says, can help allow insurance companies a more flexible deployment of capital by sharing part of their risks. As such, "we can contribute to the building up of the capital market," Hahn says.

The insurance industry's development will have far reaching consequences for the economic and social development of China, Hahn says. "For example, risk exposures to natural catastrophes, such as earthquakes, floods and typhoons, are not adequately covered," he says.

The insurance industry is also being urged to play a much larger role in China's reform of its pension and health-care systems, according to Hahn. Greater private-sector involvement in those social functions will have to be adequately supported by a well-developed insurance industry, he says.

Swiss Re, which has had a representative office in Shanghai for almost a decade, has obtained approval to open a branch in Beijing, but it pledged that its Shanghai office will remain open.

"We believe the insurance market in Beijing and Shanghai will grow together," Hahn says.

The WTO is the "catalyst" to the opening of the insurance market, says Hahn, who expects China's insurance market to grow at an annual average of 20 percent until 2010.

"We are looking at becoming one of the leading re-insurance companies in China," he says.

The business is currently dominated by China Re. And for many years, it was required that at least 20 percent of each policy was reinsured by China Re. Now, the requirement has been lowered to 10 percent, and will be reduced by 5 percentage points every year. By 2006, the reinsuring companies will be free to compete for business.

Hahn says that there will always be just a handful of big players in the reinsurance market. There should be enough business for everyone because insurance companies usually try to reinsure their risks at more than one firm, he says.

Although deregulation of the insurance market is proceeding as planned, the regulatory authority is seen as being too cautious in lifting investment controls. The revised Insurance Law has relaxed some of the restrictions, but the stock market has remained largely out-of-bounds to insurance companies.

At this time, insurers are limited to investment categories that include bank deposits, government bonds, financial debt securities and corporate bonds with a credit rating of AA or better. Insurers are also allowed to invest no more than 15 percent of their assets in securities funds.

The Chinese Insurance Regulatory Commission (CIRC) approved the establishment of insurance asset management companies by insurers in January 2003. But the new Insurance Law continues to forbid the use of insurance funds to establish non-insurance or securities investment companies.

The treatment of foreign insurers is slightly less restrictive. They are allowed to invest in China's domestic stock market through the Qualified Foreign Institutional Investors (QFIIs) scheme.

To qualify for that scheme, foreign insurers must have been in the insurance business for at least 30 years and have minimum assets of US$10 billion.

The CIRC is obviously concerned about the risks of the highly volatile Chinese stock market.

But the volatility has been widely attributed to the high proportion of short-term speculative funds.

Many analysts say that the government should try to encourage insurers to invest in shares to help stabilize the market. Barring them from doing so would only inhibit the maturity of the capital market, they say.

Hahn agrees: "I believe that the opening of the capital market to insurers will be the next step (of the industry reform process)."

(China Daily February 26, 2004)