China Captives in the Limelight article from Captive.com provides an excellent summary.
Senior Reinsurance Analyst
EWI Re, Inc.
As the number two global economy in the world, China contributed 15.6 percent of total global economic output in 2015. In comparison, the United States contributed 16.7 percent of the world’s economy in 2015. In contrast, however, China was responsible for a mere 4.1 percent of the world economy in 1970. With the robust economic growth and the resultant growth in insurance penetration, China is very proactively raising the awareness and interest in alternative risk transfer. The potential to retain layers of risk is a natural fit for Chinese risk buyers for the economic accretion it can provide over time. China captives can create opportunities to access global risk markets generally for improved risk syndication.
This article provides insights on most recent captive insurance developments in China (both mainland China and Hong Kong) and proposes both opportunities and challenges for future captive development in China.
Background
China’s insurance industry has sustained a robust and healthy development momentum in recent years. The total of China’s insurance premiums is expected to exceed the total premiums of Japan in 2016, ranking second in the world only to the United States. One major contributing factor is both large state-owned enterprises and small and medium-sized private enterprises are starting to improve internal operations and develop long-term risk management tools that reflect international best practices, and some are ultimately looking at captive solutions.
| 2017 Forecast Growth of Direct Premiums Written in Nonlife Insurance | |||||||
| US | Canada | Japan | Australia | UK | Germany | Advanced Markets* | China |
| 1.3% | 1.7% | 1.2% | 0.6% | 0.3% | 0.9% | 1.3% | 6.5% |
Source: Swiss Re, Economic Research & Consulting
*Advanced markets include North America, Western Europe, Israel, Oceania, Japan, Korea, Hong Kong, Singapore, and Taiwan.
Overview of Captive Insurance Development in China
China Ocean Shipping Group Company (COSCO) will own the most recent captive insurer approved by the China Insurance Regulatory Commission (CIRC), which occurred on December 5, 2016. The captive, COSCO Marine Property Captive Insurance Co. Ltd., is to be set up in Shanghai. As the wholly owned subsidiary of COSCO, the captive insurer has a registered capital of 2 billion RMB (US$289 million) and has 1 year to prepare for establishment of the captive. As of December 2016, China has five captive insurance companies that are already set up to insure their parent companies’ risks. All of their parent companies are state-owned enterprises: China National Petroleum Corporation (CNPC), China Railway Corporation, China Petroleum & Chemical Corporation (Sinopec), China General Nuclear Power Group, and China National Offshore Oil Corporation.
Captive Insurance Companies Domiciled in Mainland China. China National Petroleum Corporation (CNPC) Captive Insurance and China Railway Captive Insurance are two locally incorporated captive insurers domiciled in mainland China.
In 2013, China’s regulatory body gave approval for China’s largest oil and gas producer and supplier, CNPC, to set up the first captive insurer in mainland China. CNPC Captive Insurance was incorporated in western China’s Karamay City, in the Xinjiang Uyghur autonomous region, with registered capital of 5 billion RMB (US$780 million). The top five lines of business CNPC Captive Insurance is writing are property insurance, energy insurance, cargo insurance, marine insurance, and liability insurance.
Beijing-based China Railway Property Captive Insurance is the second captive insurer incorporated in mainland China. The captive began operations in July 2015 and has a registered capital of 2 billion RMB (US$322 million). The captive is responsible for the insurance business of China Railway and its subsidiaries and offers property, liability, credit, short-term health and accident insurance for China Railway, along with reinsurance for these lines and other related business approved by the CIRC.
On December 2, 2013, the Circular on the Supervision of Captive Insurance Companies became effective as soon as the CIRC adopted it and officially introduced the captive insurance concept in China for the first time. It established the supervisory approach to captive insurers.
In addition to general insurance regulations, the following three additional conditions must be met for captive insurers to be formed.
- The registered capital shall match the risks borne by the company.
- Investors shall be large-scale business enterprises with an outstanding main business, profitable performance, and total assets of no less than 100 billion RMB (US$14.5 billion).
- The parent company must face a high concentration of risk, have geographically diversified distribution, face difficult risk transfer challenges, and have stable insurance needs and strong risk management capabilities.
On February 15, 2015, CIRC issued another circular on supervising captive insurance companies. The major additional regulation set forth by this circular is as follows.
- A captive insurance company may set up wholly owned insurance subsidiaries and insurance asset management companies onshore and offshore. One prerequisite for applying to the insurance asset management company is that it must have been operating for 3 years, and the number of total assets of the asset management company in the prior year exceed 5 billion RMB (US$730 million).
Captive Insurance Companies Domiciled in Hong Kong. Sinopec Captive Insurance (founded in 2013), China General Nuclear Power Group Insurance Co. (founded in 2015), and China National Offshore Oil Corporation (founded in 2000) are three captive insurance companies domiciled in Hong Kong with parent companies in mainland China.
Hong Kong has a simple tax regime with a corporate profit tax rate as low as 16.5 percent, while the maximum rate of personal income tax is only 15 percent. To further promote captives in Hong Kong, the Legislative Council of Hong Kong passed the Inland Revenue (Amendment) (No.3) Bill 2013 on March 19, 2014, to provide a tax concession for captive insurers. As a result, captives enjoy a 50 percent reduction in the profits tax on their insurance of offshore risk. The concession took effect from the year of assessment 2013–2014 onward.
Salient regulatory concessions to captive insurers are highlighted in the chart below.
| Hong Kong Captive Insurer Requirements | ||
| Item | General Business Insurer | Captive Insurer |
| Minimum Capital Requirement | HK$10 million (US$1.3 million) | HK$2 million (US$258,000) |
| Solvency Margin | The greatest of
|
The greatest of
|
| Requirement for Assets in Hong Kong | To maintain assets in Hong Kong of an amount not less than 80% of its Hong Kong liabilities plus solvency margin | Exempted |
| Valuation Regulation | Assets and liabilities to be valued on statutory basis as prescribed by Valuation Regulation | Assets and liabilities to be valued on the basis of generally accepted accounting principles |
Source: Office of the Commissioner of Insurance, the Government of the Hong Kong Special Administrative Region
Opportunities for Future Development in the China Market
As an emerging player on the captive insurance scene, the Chinese market presents a number of opportunities, some of which are highlighted below.
More Offshore Captives with Parent Companies in China. In 2016, China National Petroleum Insurance, a captive unit of CNPC, was preparing to establish an offshore captive unit in Singapore in addition to the existing captive in China. This is a milestone for captive insurance companies in China to go globally. Singapore offers a tax benefit of 10-year free income tax for the offshore business, along with a favorable regulatory environment. As of December 2015, Singapore has 68 captive insurance companies.
The Guernsey International Insurance Association (GIIA) recently committed to more development of China’s captive insurance market when it signed an agreement with both the China Captive Alliance and the Kashgar government.
As China’s state-owned enterprises expand overseas, they are showing an interest in achieving standards seen internationally, including risk management through captive insurance programs.
Macro Policies Promoting China’s Overseas Infrastructure Construction Will Encourage Chinese Companies To Create Captives. A few years ago, China launched the $40 billion Silk Road Fund for Belt and Road initiative projects. Current projects are funded by the China Development Bank, the Agricultural Development Bank, and the Export-Import Bank of China. In addition to China, 64 countries in Asia, Africa, and Europe have participated in the initiative. Together, they account for 62.3 percent of the world’s population, 30.0 percent of its gross domestic product (GDP), and 24.0 percent of its household consumption.
China’s development in new rail, roads, and ports in these 64 countries is certainly a boon to China. Since the initiative began in 2015, Belt and Road projects have accounted for more than 40 percent of China’s overseas construction projects. China’s GDP growth fell below 7 percent in 2016 for the second consecutive year, making Silk Road connections more critical for private-sector growth outside of China—especially in further enlarging infrastructure manufacturing capacity, which in turn presents more opportunities for creating captive insurance companies for industrial Chinese parent companies and joint ventures.
Captives could be created both individually for the larger entities and on a group basis for smaller companies with a common nexus (e.g., transportation companies) to allow for the mechanism to provide a customized manuscripted policy of insurance to the company, with support by global reinsurance above the amount of capital in place.
Challenges for Future Development in the China Market
The interest in setting up captive insurance companies in China has become intense, especially with the current process of internationalization of Chinese enterprises and overseas expansion. However, there are major headwinds for captive formation in China, as follows.
High Cost. According to CIRC, investors shall be large-scale business enterprises with an outstanding main business, profitable performance, and total assets of no less than 100 billion RMB (US$14.5 billion). Although the registered capital of the captive insurance company is not clearly defined, according to the existing insurance regulation, the registered capital must be no less than 200 million RMB (US$29 million). Currently, the three mainland China-domiciled captives have registered capital of US$780 million, US$322 million, and US$289 million, respectively. The required capital for captives registered in Bermuda is $120,000 and for the Cayman Islands is $100,000. In comparison, there is a huge cost gap between China and alternative domiciles such as these.
Captive Insurance versus General Insurance. To protect the traditional property and casualty insurers, Chinese regulators treat captive insurance similarly to general P&C companies. Therefore, captives domiciled in the mainland do not enjoy significant tax benefits and must post a high initial amount of registered capital.
Profit Center versus Risk Management Evolution. In China, the captive insurance movement is still in the preliminary development stage but is poised to take off. Captives generally tend to be considered solely as vehicles to retain independent profit, preserve capital, and receive tax benefits. However, the beauty of the risk management concept has not been favorably received when parent companies apply to the CIRC for the approval of establishing captive insurance companies.
Lack of Captive Insurance Talent. China is in great need of people with knowledge and experience in captive insurance operations and management as well as the domestic and international reinsurance markets.
Conclusion
The Asia Pacific is gradually taking center stage in the insurance industry, and it is China that is grabbing the headlines. With the mind-set of developing long-term risk management strategies that reflect international best practices, China’s insurance regulators, captive insurance companies, industrial companies, and various stakeholders are following the United States and other advanced markets’ routes in developing captive insurers in the region. However, it is important to remember that only through “Thinking globally and acting locally” can China’s fledgling captive insurance movement set another milestone in the global insurance industry.
Ms. Wu serves as senior reinsurance analyst at EWI Re, Inc., a Dallas-based reinsurance intermediary with an office in London, focused on the unique needs of captives and RRGs. EWI operates a 30-year A.M. Best-rated Vermont captive with segregated cell capabilities.
Ms. Wu is actively involved in entire reinsurance placement process, keeping abreast of key trends affecting global reinsurance market capacity, pricing, mergers and acquisitions, and operating performance.
Proud to be part of the EWI team, Ms. Wu joined EWI in January 2013 after earning a distinguished graduate award for her master’s degree in international public policy and management from the University of Southern California in December 2012 and bachelor’s degree in accounting, cum laude, from Shanghai University in May 2011.
Ms. Wu earned Chartered Property Casualty Underwriter (CPCU), Associate in Reinsurance (ARe), and Associate in General Insurance (AINS) within 3 years after she joined EWI. She is fluent in English and Chinese.
If you have questions about her article, you may contact Ms. Wu at twu@ewiretx.com.
