In May 2017, China and Hong Kong entered into a framework agreement aimed at establishing mutual recognition of their solvency regimes within four years. This came into force a year later after Hong Kong qualified that professional reinsurers who are rated at least A- and with at least a 200% solvency ratio (150% for life insurers) on the Hong Kong Insurance Authority’s standard are subject to more favourable counterparty credit risk charges than ordinary offshore reinsurers (see Table 2).
TABLE 2: COUNTERPARTY RISK CHARGES BETWEEN HONG KONG AND OFFSHORE REINSURERS
1 Examples of acceptable collateral would include premium reserve or letters of credit (LoC)
This arrangement will be run on a one-year trial period and reflects preferential treatment rather than full equivalence for Hong Kong domiciled reinsurers. However, JLT Re believes that the overall impact is likely to be modest and will depend on a few competing factors:
2 SOURCE: A.M. Best, JLT Re
- The Chinese P&C reinsurance sector is dominated by two onshore reinsurers (China Re, Taiping Re), both of which account for about 60% of the market share2 and already benefit from the most favourable terms. The remaining 40% is spread amongst four major foreign reinsurers (Swiss Re, Munich Re, Hannover Re and SCOR) each of whom has offices in both China and Hong Kong.
- This therefore presents an opportunity for cedents in China to diversify their reinsurance panels and benefit from potentially slightly lower counterparty credit charges. Hong Kong-based reinsurers will also have greater access to domestic Chinese business on terms that are comparable to their onshore peers.
- Nevertheless, the Chinese reinsurance market remains in a general state of capital oversupply despite recent tightening credit conditions. With industry C-ROSS solvency ratios at healthy levels (i.e. in excess of expected requirements), cedents have not needed to consider the impact of reinsurance counterparty charges.