A draft version of Notice on Issues regarding Reinsurance Transactions between Foreign-invested Insurance Companies and their Affiliated Companies ("Draft Notice") was released by the China Insurance Regulatory Commission ("CIRC") on 14 December 2012 for public comment. The Draft Notice provides that it will also apply to the retrocession business.
Under the current regulatory requirements of the CIRC, a foreign-invested insurance company ("Foreign-Invested Insurer") must apply to the CIRC for pre-approval before it engages in any reinsurance business with any of its affiliated companies ("Affiliates"). The Affiliates have to meet various requirements imposed by the CIRC such as the financial strength ratings, paid-up capital etc. The Draft Notice sets out the new rules for Foreign-Invested Insurers to apply for such a pre-approval and imposes new requirements for the Affiliates to qualify.
Under the current rules, an Affiliate who accepts a reinsurance risk is required to have no record of any major violation of law in the previous two years prior to the inception date of the reinsurance contract in question. The Draft Notice has extended this period to three years.
In addition to the specific financial strength ratings required for the Affiliates, the Draft Notice also provides that the Affiliate must have net profit for the prior overall three-year period. The cash flow of the Affiliate shall be stable without any abnormal fluctuation. However, it does not go on to deal with what may constitute an "abnormal fluctuation" situation.
Impact on profits of foreign-invested insurers
The Draft Notice also adds some new requirements such that the underwriting profits and net profits of a Foreign-Invested Insurer shall
not be significantly reduced due to the reason of the reinsurance arrangements with its Affiliates. The CIRC may exert discretion to ask for explanation in the case of drop in profits.
Disclosure of information
The Draft Notice also requires the Foreign-Invested Insurer to post the relevant reports/forms in relation to its affiliated reinsurance arrangements on its official website for at least 5 years as well as newspapers designated by the CIRC.
The Draft Notice is no doubt another effort made by the CIRC to enhance the security of reinsurance business. On the other hand, it also appears to reaffirm the CIRC's position that Foreign-Invested Insurers shall not transfer underwriting profits by way of affiliated reinsurance transactions.
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