30 October 2017Insurance

C-ROSS is reshaping the Chinese reinsurance market

The China Risk Oriented Solvency System (C-ROSS) is driving the primary insurance market to seek more sophisticated reinsurance protection and is changing reinsurance purchasing patterns.

This is according to a Dagong Global report, China’s Reinsurance Market Review, published in September.

C-ROSS took effect from January 1, 2016, and was designed to enhance corporate governance practices, risk management, capital management and reporting, and the overall resilience of the industry.

In Dagong’s view, the impact of this regulation on reinsurers is mostly seen in two areas.

First, there is the change in insurers’ regulatory solvency capital requirements and calculation. The report stated that primary insurers are required to use different, risk related capital charges for different business lines when calculating regulatory solvency ratios.

Dagong expects this to cause a shift in the mix of China’s reinsurance business portfolio, with a lower proportion of motor insurance—historically the largest line—and higher proportions for property, engineering and marine, for example. It also expects non-proportional reinsurance will be more attractive for primary insurers.

The second impact from C-ROSS in Dagong’s view is an increased attractiveness of onshore reinsurers for cedants, due to lower capital charges, compared with offshore reinsurers.

In the solvency ratio calculation, cedants are charged for reinsurance credit based on the reinsurer’s origin of registration. The report stated that for placement with offshore reinsurers, credit risk factors range from 8.7 percent to 86.7 percent, while for placement with onshore reinsurers it rangers from 0.5 percent to 4.7 percent.

The report suggests this new solvency regime encourages insurers to re-examine their reinsurance arrangements and optimise capital allocation. The impact of C-ROSS on reinsurance premiums is mixed, however.

Motor insurance is considered the most impacted business line, which accounted for about 73.8 percent of the total non-life gross premiums written in 2016.

The capital requirement for motor insurance decreased to 8 to 10 percent of net premium retained under C-ROSS, from 15 to 17 percent previously. Dagong suggests this has led to a significant reduction of related reinsurance premiums. An example can be seen with China Re’s reinsurance premiums for domestic motor dropping by 48.1 percent to €1.4 billion ($1.6 billion) in 2016.

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