China and Hong Kong are one country. They remain, however, subject to different legal systems and regulatory regimes. The market in Hong Kong is established, open and lightly regulated. Hong Kong is often seen as the gateway into the Chinese market. The market in China is heavily regulated. It imposes stringent controls on primary insurers and has greater barriers to entry. These restrict cross-border reinsurance.
By contrast, in the European Economic Area (EEA) once a reinsurer is authorised to carry out reinsurance business in one member state, it can conduct reinsurance in all member states. The Reinsurance Directive does not prevent primary insurers in EEA member states using non-admitted reinsurers from outside the EEA. The position of third country non-admitted reinsurers in any particular member state is determined by the law of that state.
What is non-admitted reinsurance?
Non-admitted reinsurance is reinsurance written in relation to a jurisdiction by an underwriting insurer that is not licensed or authorised by the local insurance regulator. The non-admitted reinsurer must not operate in a way that amounts to conducting business within that jurisdiction.
It is for the local regime of each jurisdiction to determine what activities will be classed as conducting business within that jurisdiction. In some countries (such as the UK) such business is considered to be carried on where there is a local business activity through, for instance, an establishment. In others (such as France) it is the location of the risk rather than of the business activity that is crucial.
As an alternative to non-admitted reinsurance an offshore reinsurer may enter into a fronting arrangement with a locally authorised branch or subsidiary. Depending on the local regime of the relevant jurisdiction, other requirements may apply to such a situation. The regulatory regime in China
An insurer must obtain a licence from the China Insurance Regulatory Commission (CIRC) before it can write insurance from within China.
‘Non-admittance reinsurance’ usually refers to the reinsurance of Chinese risks by a reinsurer operating from outside the jurisdiction. It is strictly controlled by the Regulations on the Administration of Reinsurance Business (the Reinsurance Regulations) and by the China Insurance Law. In particular, the legislative and regulatory regime places various restrictions on locally authorised ceding primary insurers. The effect of these arrangements is to:
- encourage risk to be underwritten ?? by local reinsurers in preference to non-admitted reinsurers and restrict the proportion of risk that can be underwritten by non-admitted reinsurers;
- restrict the proportion of risk that may be underwritten by any one reinsurer or related company (whether locally authorised or otherwise); and
- prohibit foreign-funded insurers ( ie locally licensed branches or subsidiaries of foreign insurers) from engaging in any reinsurance transaction with a related company, unless approval is obtained from the CIRC. Where such approval is obtained foreignfunded insurers are subject to various reporting requirements.
These rules constrain non-admitted reinsurance. They also may have the practical effect of preventing foreign insurance groups from extracting group premium income from a China branch or subsidiary to its foreign parent. Fronting arrangements cannot be put in place without violating Chinese exchange controls.
The China reinsurance regulatory regime also imposes strict annual reporting requirements on locally authorised primary insurers. These require them to disclose cases where a certain proportion of risk was ceded to a reinsurer. Where the reinsurer is nonadmitted the criteria adopted for the selection of that reinsurer must be disclosed.
Apart from these restrictions, the CIRC has what appears to be a largely unrestricted discretion to take administrative action. The effect of this may be to prohibit or restrict a China insurance company from ceding risks to non-admitted reinsurers when the CIRC sees fit.
The regulatory regime in Hong Kong
The legal and regulatory regime applicable to the insurance market and reinsurance market in Hong Kong is significantly less onerous. Both non-admitted insurance and reinsurance is permitted. In accordance, however, with the Insurance Companies Ordinance, no person may carry on any class of insurance business from within Hong Kong without being authorised by the Hong Kong Insurance Authority. If an insurer holds itself out as carrying out a class of insurance business from within Hong Kong, it will be deemed to be doing so.
In contrast to insurers, a non-admitted reinsurer is not subject to any authorisation requirement when carrying on business in Hong Kong. This is subject to the following conditions:
- it only carries on reinsurance business (and no direct business) in relation to Hong Kong risks;
- it is not a Hong Kong incorporated company and does not have a place of business in Hong Kong; and
- it is not represented in Hong Kong by an agent.
As long as these requirements are complied with, a nonadmitted reinsurer is generally permitted to engage in any reinsurance activities within Hong Kong, including fronting programmes.
A comparison with Europe
As outlined above, within Europe the cross-border regime applies differently:
- to firms authorised within the EEA; as compared with ?
- those authorised elsewhere who operate in Europe through branches or by reinsuring local risks.
Once a reinsurer with a head office in the EEA is authorised to carry out reinsurance business in one member state, it can conduct reinsurance in all member states. This ‘passport’ does not apply to non-EEA insurers with branches in an EEA state. They must obtain distinct authorisations for each such branch.
The European regime does not address the position of non-admitted reinsurers based outside of the EEA who reinsure EEA risks from their home jurisdiction. The position of such third country non-admitted reinsurers is determined by the local laws of the relevant member state.
The Reinsurance Directive does, however, contain a provision that may allow third country non-admitted reinsurers more favourable treatment. It allows the European Commission to enter into agreements with third countries whose prudential regime is considered to be equivalent.
In Germany, for instance, as with many (but by no means all) other jurisdictions in Europe, non-admitted reinsurers reinsuring local risks from outside Germany are generally unregulated in Germany. This is subject to such reinsurers being satisfactorily regulated in their home jurisdiction and subject to any local activities not amounting to an establishment.
The demand for insurance and cross-border reinsurance continues to grow in China. This may in time lead to greater opportunities for non-admitted reinsurers. Thus far, however, there is no sign of any relaxation in the regime.