Captives set to flourish as part of China’s insurance growth plan

“There are huge opportunities for growing captives in China,” said Paul Owens, chief executive officer, global captive practice, Willis Towers Watson. “One of the key elements and drivers to attain [the CIRC’s stated goal of 20% premium growth] will be the captive sector.” However, there will be a number of challenges for Chinese corporates looking to set up captives. Firstly, current regulation treats captives and mutuals as traditional insurance companies, therefore not providing the kind of flexibility afforded to these vehicles in other domiciles. Secondly, the vast majority of major Chinese corporations are state owned. Twenty percent of the Fortune 500 are public Chinese companies but only five captives are currently in operation. It is likely that small and medium-sized enterprises in China will have to consider captives as a way of retaining their exposures if the growth opportunities are to be realised.hideThe indications are that China’s regulators are prepared to make necessary changes to encourage a more active captive sector. The CIRC has sought advice from a number of industry players – consultants, brokers, insurers and rating agencies – on how to establish a regulatory framework for captives and mutuals. Willis Towers Watson is an official advisor to the CIRC and was asked to convene a panel of experts to this end. “We looked at how you set up a mutual insurance company, from establishing the initial subscribers and policyholders to the amount of capital required,” said Steve Kinion, director of captives, Delaware, AM Best. “The CIRC officials really wanted to know all of this.” While the enthusiasm is to be welcomed, there are still some cultural issues that could create difficulties for the CIRC and its attempt to create a regulatory framework for mutuals and captives that enables it to grow. “China is a country that relies on rules to run the country,” said Mr Owens. “But we all know that regulation should be principles-based – you start with the principles and work back from that. And China is struggling with that difference between rules and principles.” Another cultural challenge relates to the conservatism in China, said Mr Owens. “A lot of the questions that we got were about failure but, interestingly, China does not have a set of insolvency laws for insurance companies, because they are all state-owned companies. So this does create some confusion as to what would happen next in the case of a captive or a mutual failing.” Since that meeting, the CIRC has felt comfortable enough to license three large insurance organisations, including one that will be writing auto insurance based on usage rather than flat premiums. There is a huge growth opportunity for Chinese captives, said Mr Kinion. “The captive market is a growth industry worldwide. In China, there are just five captives at present and they are all state-owned organisations. But this is one of the largest insurance markets in the world. In ten years’ time it is forecast to be the second biggest in the world. That means the captive space will grow as well.” It remains to be seen where these new captives will be domiciled. Companies tend to select offshore jurisdictions with a history of servicing captives but, said Mr Kinion, the conservatism of the CIRC is likely to encourage them to be based in mainland China, at least for any Chinese assets. But for those companies with international portfolios, many of which amount to trillions of dollars in assets, they will be able to select the most suitable place, said Mr Kinion. “We are seeing a growing interest in forming Chinese captives in places like Singapore, Europe, the Caribbean and mainland USA. In Delaware, we are working to make it an attractive venue for Chinese captives and mutuals.” This foreign interest was underlined by a recent agreement struck between the Guernsey International Insurance Association (GIIA) and the China Captive Alliance, to help develop the country’s captives sector. The GIIA also signed a memorandum of understanding (MoU) with the Kashgar government, located in the Xin Jiang autonomous region in northwest China and currently the de facto centre for China’s growing captives sector. “These agreements represent a very positive development in the enhancement of our broader relationship with China,” said Wendy Weng, Guernsey Finance Asia Representative. “China’s developing and evolving captive insurance sector recognises that there is plenty it can learn from Guernsey in this area and we are more than happy to help where we can. There is significant interest in China and Asia generally, in doing business with Guernsey and we hope that this MoU will help to facilitate those business flows.”

Captives set to flourish as part of China’s insurance growth plan

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