ABIR to the Insurance Association of China: Adverse Impact of C-ROSS on Reinsurance Cessions to International Reinsurers
To: President Zhu Jinyuan
Insurance Association of China
Floor 7, Xinmao Building
No.15, Jinrong Street, Xicheng District
Beijing 100140 China
Date: 30 October 2014
Subject: Adverse Impact of C-ROSS on Reinsurance Cessions to International Reinsurers
Dear President Zhu,
We, the Association of Bermuda Insurers and Reinsurers (ABIR), reach out to the Insurance Association of China to seek guidance on the opportunities for changes in the proposed capital and collateral requirements for cessions by Chinese domestic insurers and reinsurers to international reinsurers. In this letter we would like to provide some background on the global economic contributions of ABIR members, review the international standing of the Bermuda Monetary Authority (BMA) which is our jurisdiction’s independent integrated financial services regulatory authority, and provide some comments on the proposed C-ROSS credit risk charges for international reinsurers.
ABIR members are either headquartered in or conduct underwriting operations in Bermuda. At yearend 2014 ABIR members wrote global gross written premiums of US $70 billion on a capital and surplus base of US $95 billion.[i] Two ABIR members have licenses in China, other ABIR members have joint venture licenses, and still other do business on a cross-border basis with Chinese insurers. ABIR members are widely engaged in global commercial insurance and reinsurance collecting premium income from more than 100 different countries. Fifteen of the top 40 reinsurers in the world are Bermuda-based as reported by Standard and Poor’s. Bermuda is often cited as one of the top four reinsurance domiciles in the world.[ii] Bermuda is also the world’s leading domicile for the alternative capital markets investing in (re)insurance risk through insurance linked securities, “side cars”, and collateralized reinsurance vehicles.
ABIR and Bermuda Global Economic Contribution
Bermuda’s reinsurers are the largest providers of property catastrophe reinsurance to United States’ insurers and also provide 25% of the capital that supports the Lloyd’s of London market. In the European Union, Bermuda’s reinsurers provide 19% of property catastrophe coverage. To further demonstrate our global reach, the loss statistics below document Bermuda’s (re)insurers share of various large loss events:
- 50% of the reported losses for the 2012 Costa Concordia cruise liner sinking
- 16% of the reported liabilities for United States’ 2012 Hurricane Sandy
- 29% of the reported liabilities for the international reinsured share of the 2011 Japanese earthquake
- 37% of the reported liabilities for Europe’s 2010 Windstorm Xynthia
- 38% of the reported liabilities for Chile’s 2010 earthquake
- 51% of the reported liabilities for New Zealand’s aggregated 2010 and 2011 earthquakes
- 22% of the theoretical $1 Billion market loss for the 2009 Air France crash
Bermuda Monetary Authority – Committed to International Regulatory Standards
We appreciate the outreach by the IAC to encourage dialogue with international insurance associations and we hope that this letter will lead to a further dialogue on this important regulatory proposal embedded in C-ROSS. ABIR understands and supports the action by the China Insurance Regulatory Commission (CIRC) to build out a new prudential regulatory framework and to position itself for equivalence to the European Union’s Solvency Two framework. Bermuda is one of three candidates for full equivalence to Solvency Two. As such our members have been fully engaged during the last six years in field testing new regulatory proposals and engaging in more than two dozen consultations with our supervisor – the BMA. In addition Bermuda is one of four jurisdictions that have been identified by the United States’ National Association of Insurance Commissioners as a “qualified jurisdiction” with regard to reinsurance regulation which in turn affords Bermuda’s reinsurers streamlined access to US reinsurance markets under the state-based reinsurance regulatory modernization framework in the United States. The BMA was also one of the first three supervisory authorities to sign on to the International Association of Insurance Supervisors (IAIS) Multilateral Memorandum of Understanding which focused on confidential sharing of insurance regulatory financial information amongst supervisors. These actions by the BMA demonstrate its commitments to meeting international regulatory standards.
We support upgraded prudential standards, but we believe proposed higher capital charges and collateral requirements which limit access to international reinsurers run counter to the goal of improved risk-based supervision. Notably, the two largest trading blocs in the world (the US and the European Union) are in the process of eliminating (Europe) or substantially reducing collateral requirements (United States) for cross-border reinsurance business. ABIR believes that reinsurance cessions to international underwriters do not warrant higher capital charges simply because the reinsurers are not supervised by CIRC. Concerns that CIRC may have about the ratings of international reinsurers can be readily resolved through: IAIS Multilateral Memorandums of Understanding (MMOUs); review of the International Monetary Fund’s Financial Sector Assessment Program (FSAP) review of regulatory domiciles; or the published findings of the US NAIC or Europe’s EIOPA with regard to assessment of reinsurance domiciles.
China’s Risk Management Needs
We believe that the proposal imposes excessive capital charges on Chinese insurers using international reinsurance and inevitably will make local reinsurance markets less competitive, thereby increasing prices for Chinese consumers. The proposed regulations may well lead to a concentration of risk on Chinese domestic reinsurers which in turn will make it difficult to increase insurance penetration in China and thus runs counter to the goals of CIRC in increasing insurance penetration to better manage catastrophic risk.
China’s logical development into the world’s largest economy will lead to an increasing demand for insurance market capacity. The economic need for insurance coverage will mirror the developments in the United States, where macro-economic needs, coupled with high property values and exposure to large natural and manmade catastrophic risk, demand that insurance buyers search the world for all available (re)insurance supply. ABIR, as a member of the Global Federation of Insurance Associations (GFIA), notes this comment from the Sept. 29 letter to the IAC:
“China needs to increase insurance penetration and insurance capacity, in this instance with particular reference to catastrophe insurance. As Chairman Xiang Junbo stated on March 11 at the National People’s Congress, compensation from catastrophe insurance covers less than 1% of losses in China, leaving it to the government to make up the shortfall. By contrast, as Chairman Xiang stated, that share is 30-40% elsewhere in the world.
Insurance penetration and capacity is increased when primary insurers can cede a substantial portion of the risk through reinsurance. Restrictions through C-ROSS that deterring cession to most reinsurers, i.e., international reinsurers, would reduce the ability of primary insurers to increase penetration and capacity, thereby increasing the burden on the government to compensate people for damages which they have suffered.”
The AM Best News Service reported this year,[iii] that CIRC is recommending creation of a local natural disaster insurance system to increase the utilization of insurance in China. The article noted: “Natural perils such as earthquake, typhoon, flooding and landslide have caused significant economic and human losses. China is prone to such disasters, leading to an increasing loss. Globally, insurance loss generally represented 20% to 30% of economic loss from natural catastrophes during the past 20 years. However, the share is only 2% to 3% for China. The CIRC said there is a need to enhance risk management and insurance plan against natural catastrophe in China in order to protect the country’s stable development.” We concur with the goal of increasing the utilization of insurance in China and believe that private international reinsurers will play a key role in aiding Chinese insurers in managing China’s great earthquake, flooding, typhoon and agricultural risks. In March, CIRC reported that China’s agricultural insurance market is now the world’s second largest.[iv]
Concerns About Proposed C-ROSS Credit Rating Charges
As noted in the GFIA letter, deterring the cession of reinsurance to international insurers will increase concentration risk by increasing the proportionate risk borne by Chinese reinsurers. Such geographic concentrations of risk are imprudent and unnecessary as the global reinsurance market has the proven capacity to absorb “mega events”. Payouts by reinsurers to insurers have occasionally even exceeded premiums paid upfront by insurers. This turns such catastrophes for many insurers into earnings events rather than capital events. Central bankers in New Zealand also cited the benefits of globally diversified reinsurance coverage following the three large earthquake events in 2010 and 2011. The infusion of capital, very similar to Chile’s experience following its 2010 earthquake, contributed to a quicker economic recovery since local financial resources could be devoted to other infrastructure and humanitarian needs following the earthquake.
Statistics on global catastrophic losses documented by the Global Reinsurance Forum indicate that reinsurance has absorbed between 40% and 65% of the insured losses from large disasters.[v] More specifically, for example, global insured catastrophic losses in 2011, some US $105 billion, were the highest ever recorded in a single year. The bulk of such losses were incurred in Asia and Oceania (flooding and windstorms in Australia, earthquakes in Japan and New Zealand, flooding in Thailand, etc.). And yet, insurance capital remained ample. This was because some US $48 to US $50 billion (62%) were covered by reinsurers rather than borne by primary insurers, and much of the reinsured share was ceded to international rather than domestic reinsurers.[vi] In Latin America, more than 90% of the 2010 Chilean earthquake losses were ceded to international reinsurers, and early indications are that of the Cabo San Lucas, Mexico, US $1.5 billion in hurricane losses in 2014, some 95% will be ceded to international reinsurers. In a research paper entitled “Unmitigated Disasters” a Bank of International Settlements team has documented that economic growth, quicker recovery and hazard mitigation incentives are all tied to increased insurance penetration and the use of reinsurance to protect against natural disaster events.[vii]
In sum we believe that higher capital charges and collateral requirements for international reinsurance will:
- Lead to concentrations of risk within China that eventually will undermine the financial standing of some local insurers;
- Lessen competition in local markets which in turn will lead to higher prices for China’s insurance buyers;
- Deprive local reinsurers of the benefit of diversification of risk which in turn will lower their own capital costs;
- Deny China the benefit of infusion of foreign capital post-event;
- Impede the development of joint venture partnerships between the government and foreign (re)insurers which may be desirable.
We welcome the opportunity to further discuss the ongoing field testing on the C-ROSS Minimum Credit Risk Charges and on further changes to the proposed requirements for collateral and capital charges.
Very best wishes,
Bradley L. Kading
President and Executive Director
Association of Bermuda Insurers and Reinsurers
[i]Association of Bermuda Insurers and Reinsurers, www.ABIR.bm
[ii]Global Reinsurance Highlights 2014, Standard and Poor’s, page 76
[iii]Best’s News Service, Jan. 8, 2014, China’s Regulator To Promote Establishment of Natural Catastrophe Program
[iv]China Daily Asia, March 11, 2014, China Now has the World’s Second Largest Agricultural Insurance Market
[v]Global Reinsurance Forum, Global reinsurance: strengthening disaster risk resilience, September 2014, page 10
[vi] Association of Bermuda Insurers and Reinsurers, Insurance Europe, Reinsurance Association of America, Letter to IAIS Reinsurance Subcommittee, March 22, 2012
[vii]Bank of International Settlements, Working Paper, No. 394, Unmitigated Disasters? New Evidence of the Macroeconomic Impact of Natural Disasters, Dec. 2012