Page 23 - Digital Edition SIRC Supplement

MARKET REPORT - CHINA
With its more stringent requirements on risk management
and governance, C-ROSS creates strong incentives for all
insurers to improve their Enterprise Risk Management (ERM)
practices. The requirements, specified in Pillar 2, define a
“control risk” for insufficient risk management and governance,
which translates into additional capital requirements. As
a recognised and up-to-date methodology for tracking and
measuring risks and opportunities, ERM is likely to be the
system of choice.
Insurers may also be compelled to reconsider their growth
strategies and business portfolios, for example, writing more
motor/liability business but less property/marine or, in the case
of mono-liners, expanding into other lines to diversify.
Risk management challenges
In response to the different risk charges for different LoBs
under C-ROSS, insurers can be expected to alter their ceded
portfolio mix. There will likely be more cession on high-cost
lines like property and less on motor. There might also be
more demand for Nat CAT relief because of the new Nat CAT
charge in the model. Also, due to the huge difference in credit
risk charge between onshore and offshore reinsurance, insurers
should revisit their programmes to reduce offshore cession.
Strong insurers will be able to further increase their
lead through improved pricing of risks and M&A activities
to diversify or expand. Weaker or subscale insurers who
consistently achieve return below their capital costs might
need to rethink their business models to divest, merge or even
exit the industry.
C-ROSS discourages excessive risk taking on the asset side
by including market and credit risk charges. Insurers with a
large proportion of risky assets might have to restructure their
investment portfolios to de-risk. This would have the biggest
impact on insurers who rely heavily on investment income to
offset underwriting losses.
Positive implications for reinsurers
The new solvency regime should be positive for reinsurance
related to P&C business, as it raises awareness of the need
for property protection to prepare for catastrophes. This will
support insurance penetration and premium growth for primary
insurers, with a knock-on effect on reinsurance. The China
Insurance Regulatory Commission (CIRC) has named promotion
of local Nat CAT insurance plans as one of its key focuses. This
Back to Contents SIRC Supplement • November 2015 • www.asiainsurancereview.com 21
affords reinsurers
opportunities
to partner with
regional insurers,
the CIRC and
local government
authorities, to
develop insurance
schemes and
products to provide
Nat CAT protection
to municipalities.
C-ROSS will
generally reduce
the risk capital
requirement for
motor business,
improving the
capital positions
of large insurance
companies. At the
same time, China’s
top 25 insurers may
need more capital as their assets expand and their
investment appetites become more aggressive in response
to options widened by the regulator in recent years. We
expect more P&C insurers to replenish their capital
through subordinated debt issuance and equity issuances
to increase their regulatory solvency ratios and to support
growth.
The still low penetration in conjunction with ongoing
governmental reforms, which are making certain types of
insurance such as food safety liability and environmental
liability virtually mandatory, will continue to drive the
insurance market. New personal product development
opportunities will open up for Chinese insurers, and those
with access to in-depth knowledge and experience in this
area will benefit most. Accordingly, reinsurers that are
able to provide personal product know-how and adapt it
to local market conditions will be in a strong position.
A further trend shaping the market is multichannel
sales. Online insurance can complement bancassurance
and agency channels, addressing different target groups
with straightforward financial products aimed at the
younger generation. At the same time, the middle-
aged or older consumers who make up the majority of
bancassurance policyholders will continue to expect the
personalised services and products provided by insurance
agents. Here again, reinsurers have an opportunity to
cooperate with primary insurers to develop innovative
solutions and achieve an ideal mix, including tailored
products that fit the emerging online distribution channel.
In property business, recent growth in credit guarantee
insurance is another important trend. As the market
for this type of product expands, competition can be
expected to heat up. Primary insurers that can rely on
their reinsurers for technical and international expertise
in this segment will enjoy a decisive advantage.
To sum up, China’s economy is no longer growing at
the dizzying pace seen over the past two decades, but this
in and of itself is no cause for concern. In fact, there are
good indications that it is entering a period of somewhat
lower yet healthy and sustainable development. This is
good news for the insurance industry as a whole, and in
turn for reinsurers able to serve the market and its unique
needs.