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China's new reinsurers unlikely to challenge established names in near future

A number of domestic players are looking for entry to China's underdeveloped reinsurance market, though there is unlikely to be an overhaul of the sector any time soon.

Most recently, Shenzhen-based Qianhai Reinsurance Co. Ltd. officially began operations in early December, becoming only the third domestic player in the world's second-largest insurance market. China Reinsurance (Group) Corp. and Taiping Reinsurance (China) Co. Ltd. are the two incumbent local players.

Meanwhile, PICC Reinsurance is expected to open for business soon, after receiving a license in March. Additionally, 25 Chinese companies are applying for reinsurance licenses, the Securities Times reported in August. Two foreign reinsurers, PartnerRe Ltd. and Korean Reinsurance Co., are looking to set up Chinese branches, Caixin reported in September.

China's booming insurance market, which has enjoyed double-digit annual growth since 2013 and became the world's second-largest in 2015, has prompted more companies to pursue a reinsurance license in the country, Wang Xujin, a professor in Beijing Technology and Business University's insurance department, told S&P Global Market Intelligence.

Despite enthusiasm regarding the market, it is unlikely that the insurance regulator will approve 25 licenses within a narrow time window, Wang noted.

Yet even with more players gradually entering the market, competition in the Chinese reinsurance market will not heat up immediately during the startup phase of local reinsurers over the next few years, said Eunice Tan, director of Greater China insurance at S&P Global Ratings.

China Re will likely continue to reign No. 1 among firms in the short term, Tan noted.

"China Re Group's government-related background and history of being a national reinsurer can continue to support its strong brand reputation among domestic primary insurers, and differentiate the group from its competitors in China's reinsurance market over the next two years," she said.

Additionally, big international names with local operations will continue to earn the trust of clients, given their capital strength and risk identification ability, said Jerry Li, a Hong Kong-based analyst at China Merchants Securities.

"The big names' dominant position is unassailable," he said.

China Re; foreign insurers' Chinese branches, including Taiping Re (China); and approximately 200 offshore reinsurance firms, each held about one-third of China's reinsurance market as of August, according to figures reported by the Securities Times. Taiping Re (China) is the Chinese branch of Hong Kong-based Taiping Reinsurance Co. Ltd.

The reinsurance market in China is unlikely to look very different in the short term with the entry of Qianhai Re and PICC Re. The newcomers, including Taiping Re (China), have a combined registered capital of 5 billion yuan. The three could theoretically, in the best-case scenario, write business worth up to 5x their registered capital, or 25 billion yuan, Li estimated.

Even so, this would only make up a small share of the total 165.85 billion yuan of ceded premiums from Chinese life and P&C insurance companies in 2015, according to figures reported by the Securities Times.

Over a longer time horizon, however, domestic players and foreign firms with local Chinese branches may slowly eat up a greater slice of the reinsurance pie currently held by foreign firms due to the country's new solvency system, China Risk Oriented Solvency System, or C-ROSS, which took effect from the beginning of 2016.

Under C-ROSS, insurers that pass their risks on to foreign providers face higher capital charges. Thus Chinese insurers are likely to look to domestic reinsurers should they be under pressure to meet regulatory requirements if they fail to have sufficient capital reserves, S&P Global Ratings noted in a Nov. 23 report.

The adoption of C-ROSS promotes the Chinese government's objective to retain premiums and capital within the country, the report said.

China's State Council in August 2014 said the government would accelerate the development of the reinsurance market, introduce more market participants, encourage regional reinsurance centers and pursue greater innovation in reinsurance products and technology.

However, this goal may make China's insurance market riskier over the long run as risks are retained and concentrated in the country under C-ROSS, Wang said. Insurance companies would become less likely to cede premiums to foreign companies.

"The core issue of reinsurance is for insurance companies to pass risks on, so the more regions insurance companies cede their premiums to, the better," Wang said.

"When the ceded premiums are not much, this is not a big deal," Wang added. "But it is better not to retain all ceded premiums domestically when the total amount becomes too large."

S&P Global Ratings and S&P Global Market Intelligence are divisions of S&P Global Inc.

As of Dec. 20, US$1 was equivalent to 6.95 Chinese yuan.