China Opens Up Its Insurance Market to Lloyd's of London

During his visit to England this past couple of days, President Hu Jintao of China signed multiple commercial contracts with English businesses, one of which was the first reinsurance contract with Lloyd's of London.

It is believed to be the first time a Western reinsurer has gained entry to China's rapidly expanding market.

Other commercial contracts worth £1.3bn (£783m) were also signed during Mr Hu's state visit.
They included orders for Rolls-Royce and Airbus, and a contract for Arup to develop plans for new cities in China.

Under the deal with China, Lloyd's will be able to reinsure local currency business, which currently comprises nearly 90% of the total Chinese market. It will also provide Chinese insurers with full access to the Lloyd's market.

Reinsurance is the insurance bought by insurers. A reinsurer assumes part of the risk and part of the premium originally taken by the insurer, known as the primary company. Reinsurance effectively increases an insurer's capital and therefore its capacity to sell more coverage. The business is global and some of the largest reinsurers are based abroad. Reinsurers have their own reinsurers, called retrocessionaires. Reinsurers don't pay policyholder claims. Instead, they reimburse insurers for claims paid.

It has not been easy for Lloyd's to establish its presence in China, especially because Lloyd's is viewed as a market rather than a company. This has resulted in negotiations that went on for years. Solution? Have Lloyd's set up a subsidiary company in China.

"An on-shore presence will allow Lloyd's to play a broader role in China, helping to transfer major risks from the balance sheets of local insurers and providing full access, in local currency, to the capacity, knowledge and technical expertise of the Lloyd's market," said Lord Levene.

It is said that China has the potential to become as valuable as the US where Lloyd's conducts $9bn-worth of business a year, although, for now, it is doubtful that Lloyd's will make significant money in China in the next four or five years.

The reinsurance business is facing the challenges of globalization, although many of the brokerage deals are done locally. Insurance companies are under pressure from all sides, such as investors wanting a fair return for their risk, policyholders concerned about exclusions and willingness to pay, regulators demanding compliance disclosure and contract certainty. These issues are local in nature, but increasingly, new risks exposures, whether catastrophic or legal, like tsunami and terrorism, are constantly being identified. In the case of local catastrophes, global reinsurance companies have had to make enormous payment on their policies. Brits Insurance Holding estimated that claims from the hurricanes to be 37.5m pounds.

One of the major issues with reinsurance companies is to manage global capital markets with accute understanding of the local issues involved with the insurance companies that they insure. It seems like China, with its current state of legal infrastructure and market economy, will present quite a challenge to Lloyd's.

From China's perspective, Lloyd's entrance to the Chinese market will be a valuable balance to the once-monopoly of the Chinese reinsurance market by China Re. Also, Lloyd's subsidiary will provide Chinese insurance to Chinese insurance companies in Chinese currency, which will be a significant advantage for future business.

Sources:
BBC
APMC Insurance Services
FT Chinese
AON
Global Reinsurance