On 28th November 2007 the China Insurance Regulatory Commission (CIRC) issued a new regulation, "Circular Concerning Risk Issues in Reinsurance Business" (the "Circular"). The Circular tightens up controls on foreign reinsurers to minimise risks in reinsurance transactions by setting out specific financial rating and capital requirements and further evidences the CIRC's commitment towards the steady and regulated development of the Chinese reinsurance market. The circular has been in force since 1 January 2008. The key requirements of the Circular are listed below.
Requirements for Reinsurers
Previously rating requirements only applied where foreign reinsurers were involved in reinsurance business with affiliated foreign-invested local insurers in China. Now all foreign reinsurers will have to meet minimum requirements.
(a) Minimum Rating Requirements
The leading reinsurer or the reinsurer who accepts the largest quota of treaty reinsurance should be:
1. a wholly state owned insurance company; or
2. an insurance company in which the state holds a controlling interest; or
3. any other insurance companies whose latest financial rating is at least the minimum rating set out in the Circular. For a list of the minimum requirements please click here.
The criteria do not apply to nuclear and aerospace insurance.
(b) Minimum Capital Requirements
Reinsurers must have at least RMB 200million (US$27.1m) in paid up capital. In addition if the leading reinsurer or the reinsurer who accepts the largest quota of treaty reinsurance does not specialise in reinsurance, its paid-up capital contributed in cash should be above RMB1 billion (US$135.5million).
(c) Solvency Standards
A reinsurer's solvency ratio must comply with the solvency standards of its country of incorporation.
(d) Legislative Compliance
Reinsurers must have no previous record of any serious violation of law or regulations occurring within the two accounting years prior to the commencement of a reinsurance agreement.
Requirements for Ceding Companies
Ceding companies are required to put in place a risk management mechanism as well as a risk assessment and control system. They will also have to review and assess their reinsurance plans annually.
Ceding companies must also adopt a cautionary and empirical method in selecting their reinsurance plans. Both plans and treaties should be reviewed by ceding companies on a regular basis.
If the financial rating of the reinsurer falls below the required criteria for three consecutive years, ceding companies will be asked to consider adopting appropriate measures to reduce risk.