Foreign insurers and reinsurers have enjoyed a high degree of success cracking the Asian market – with the noteable exception of China. Jeffrey Kirk looks at the challenges they face 

The Peoples Republic of China (PRC) remains a challenging market to foreign insurers and reinsurers and investors, including those based, held or headquartered in the leading offshore financial centres such as Bermuda, Cayman Islands, the British Virgin Islands (BVI), Guernsey, Jersey, Isle of Man, Mauritius, Seychelles and others.

However, the world's second largest economy with the largest population remains a market that cannot be ignored by international insurers and reinsurers. This has particular resonance in the context of the global financial crisis.

As is the case with other financial services sectors, the (re)insurance industry continues to face challenges emanating from the Eurozone debt crisis, low government yields and slowing growth coupled with increasing inflation.

Notwithstanding the challenges, there are encouraging signs on the horizon for insurers and reinsurers.

While growth is expected to slow, the emerging Asian insurance and reinsurance market is forecast to grow at a rate that will continue to outperform developed markets. AIA's CEO Mark Tucker has remarked that recent studies have revealed a 'protection gap' of $40 trillion (£24.9 trillion) in the life insurance sector in Asia and that this relates only to mortality cover; if health cover is added, that figure could double.

In 2011 the real growth rate of life insurance in the PRC was weak, estimated by Swiss Re at -6%. However, the expectation is that life insurance premiums will grow in the PRC, possibly at real rates of as high as 11% over 2012. The market view is that this growth in the protection-type products, added to the demand for annuities and health products bodes well.

According to a recent PwC study, the projected growth in annual premiums for foreign life insurers in the PRC in 2011 was in the range of 20% to 40% with a number of those insurance companies expecting growth in excess of 100% in 2011. The vast majority of participants of the study anticipate growth in 2014 to surpass 30%.

In the non-life insurance sector, premium growth in the PRC was strong, estimated at 15% in 2011. Increasing demand for car ownership as well as health and personal accident products may continue to drive this growth. The PwC study revealed that in respect of foreign property and casualty companies, only one of nine participants expect growth rate to be below 25% in 2011. Looking to 2014, growth rates are generally expected to be in the 30% to 50% range.

In Hong Kong, the Commissioner of Insurance reported growth in both the life and non-life sectors over the past year. This follows an 11% growth in total gross premium written in 2010. Further, the continuing development of renminbi business is regarded as one of the growth engines for the Hong Kong insurance and reinsurance industry.

Growth in the primary insurance markets would also generally support growth in the reinsurance market. Some may question how these predictions of growth in the sector in China will, in fact, bear out once the final hard 2012 figures are released but the general outlook for 2013 is more optimistic.

The role of foreign insurers and reinsurers

The challenges faced by foreign insurers and reinsurers in the PRC has been highlighted by the PwC study, which noted that the market share of such foreign insurers and reinsurers is at the lowest level in China, when compared with 11 other Asian markets. Market share of these insurers and reinsurers for both life and non-life business in Hong Kong, Philippines and Singapore exceeds 50%. In Taiwan, that figure is over 20%, while in contrast the foreign insurers and reinsurers market share in the PRC is approximately 5% in respect of life business and 1% for non-life business. Due to the legal and licensing requirements most foreign life insurers in the PRC are joint ventures.

It is anticipated that more foreign insurers and reinsurers will enter the PRC market, initially at a modest rate accelerating after a number of years. Examples of new entrants include the recently announced Prudential Financial (US) and Fosun new life joint venture and the JV between Shandong State-owned Asset Holding Company and Ergo Insurance (a subsidiary of Munich Re).

In the Hong Kong market, 18 of the 160 authorised insurers are offshore vehicles, comprising 12 Bermuda vehicles, five Isle of Man and one Guernsey vehicle. As such, Bermuda is in joint second position (with the UK also having 12 domiciled Hong Kong authorised insurers) only behind Hong Kong with 85 domiciled insurers. These Bermuda insurers include subsidiaries from eminent insurance and reinsurance groups such as ING, Sun Life, AXA, HSBC and AIA.

Bermuda is one of the world's leading (re)insurance jurisdictions. A September 2012 AM Best report states that 15 of the world's top 50 reinsurers are based in Bermuda. This figure does not include a number of Bermuda reinsurers whose holding companies are domiciled elsewhere but whom all make the top 50 and have substantial underwriting operations in Bermuda. In addition, Bermuda remains the world's number one captive insurance domicile, with a total of 862 captives registered as at the end of 2011.

Similarly, the Cayman Islands (with 738 captives), Isle of Man (140 captives and 16 life insurance companies) and Guernsey (341 captives) are regarded as leading captive insurance domiciles. Guernsey has been reaffirmed as the home to more captive insurers than anywhere else in Europe.

Notwithstanding the global financial crisis, Bermuda has seen a significant increase (three fold over Q1 2012) in insurer registrations in Q2 2012. This growth was driven predominantly by the increase in special purpose insurers (SPIs), which are popular vehicles employed in the issuance of catastrophe (CAT) bonds. In addition, a number of the new Bermuda and Cayman Islands reinsurance start-ups are backed by US hedge funds, which are a growing source of capital to the reinsurance market.

The vast majority of the Bermuda-domiciled Hong Kong authorised insurers focus on and underwrite long-term business. In light of recent experience, it is also the case that a number of these insurance and reinsurance groups who operate both Bermuda-domiciled Hong Kong authorised life insurers as well as life insurers domiciled elsewhere but also writing business emanating from Hong Kong, are looking to write more of their Hong Kong originating life business through their Bermuda vehicles.

Recent developments

Each of Bermuda, Cayman Islands, the BVI, Guernsey, Jersey, Isle of Man, Mauritius and Seychelles have, within the past few years, entered into Tax Information Exchange Agreements (TIEAs) or Double Taxation Agreements (DTAs) with the PRC. The execution of these TIEAs and DTAs is a further step in the development of positive ties between these jurisdictions and is likely to facilitate (re)insurance operations going forward.

These opportunities have been grasped by, amongst others, the Bermuda-based Catlin Group which has offices in Hong Kong and Shanghai and which, in November 2011, entered into a partnership with PRC state-owned China Reinsurance (Group) Corporation (China Re). Following this partnership China Re has established and supplies capital for a special purpose syndicate at Lloyd's of London. A Catlin subsidiary manages the syndicate. Further, earlier this year Catlin was granted approval by the China Insurance Regulatory Commission to open and operate a wholly owned representative office in Beijing.

With the growth of China corporate groups and the resultant increase in insurance premiums necessary to insure such groups from the myriad of commercial risks they face, not surprisingly there has been much greater interest in the possibility of self-insurance and the setting up of stand-alone-captives or rent-a-captives. Bermuda, Cayman Islands, Guernsey and Isle of Man are well-placed to meet this demand.

The growth in the insurance-linked securities sector also marks an interesting development and one which is likely to appeal to Asian and particularly Chinese investors. The resurgence in the CAT bonds market in Bermuda and the Cayman Islands is a case in point. CAT bonds are risk-linked securities that transfer a specified set of risks from a sponsor to investors. Historically, CAT bonds were used as an alternative risk transfer mechanism (together with the traditional catastrophe reinsurance) to transfer risk faced by insurers and reinsurers from major catastrophes.

From an investor perspective, the attraction of CAT bonds and other insurance-linked securities is that these securities are decoupled from the equities, and particularly listed equities, market. Consequently, insurance-linked securities offer an investment alternative that is not at the mercy of market conditions and macroeconomic fluctuations caused by the global financial crisis, in the same way that is faced by the equities market.

The future

As Asia and China in particular, continues on its upward trajectory, the need for ever more sophisticated services, products and flexible bespoke risk transfer mechanisms will continue to grow. Difficulties in doing business in the PRC due to the regulatory environment, the lack of skills and human resources talent and the growth of competition from the large domestic insurers and reinsurers will continue to make this a challenging market in which to establish operations but it is nonetheless a market that is ignored at one's peril. It is in this context that the offshore insurance environment, vehicles and service providers are well placed to offer the greatest value to industry participants and to grow this sector in Asia as a whole.

Jeffrey Kirk is a corporate & commercial partner of Appleby Hong Kong.