The expansion currently underway in the Asia Pacific captive market is down in large part to China, where insurance is taking hold at a healthy pace.
The expansion currently underway in the Asia Pacific captive market is down in large part to China, where insurance is taking hold at a healthy pace.
One contributing factor is the overall trend of not only the large state-owned enterprises but also the small- and medium-sized enterprises starting to develop their risk management and retention strategies and ultimately looking to captive solutions.
Problems exist, though. Rob Geraghty, vice president and business development leader at Marsh, claims that in China, a captive is still regarded as a regular insurance company, suggesting that this is “inflexible” compared to other captive environments.
However, China is looking to change its attitude towards captive insurance companies. Geraghty says: “China has a positive philosophy in encouraging Chinese companies to look at the captive environment and potentially set up a captive in China.”
Those setting up captives are coming from a wide variety of sectors. Tracy Stopford, senior vice president and managing director of the Willis Hong Kong captive practice, suggests that China has seen interest from the energy and transportation sectors, and from other industries with significant risks and operational assets.
There has also been interest in insurance-linked securities and catastrophe bonds from some organisations—interest that has only increased after China Property and Casualty Reinsurance launched its $50 million catastrophe bond Panda Re, last year.
Stopford says this transaction could open up the market for asset managers looking to diversify risk in China.
China has also attracted foreign interest, particularly from the Guernsey International Insurance Association (GIIA). The association recently signed an agreement with both the China Captive Alliance and the Kashgar government, committing to further development of China’s captive insurance market.
The agreement means that the parties will cooperate on captive insurance market development, on financial innovation, to promote the viability of the Chinese captive market, and on developing more communication between China and the international captive industry.
Charles Scott, managing director of independent insurance manager Alternative Risk Management, signed the agreement on behalf of the GIIA, alongside Yongjie Liu, general manager of the China Captive Alliance.
Scott says: “[The agreement] establishes a very important framework for the cooperation and development of our two jurisdictions in the area of insurance, specifically captives.”
“It also means that Guernsey is now well positioned to benefit from captive opportunities in the international arena that emerge from Chinese corporates.”
Fenglin Xu, deputy director of the Kashgar Trade Development Zone, adds: “The signing of the [agreement] between ourselves and Guernsey is an important step to enhance the captive insurance market in China.”
Private captive enterprise is positioning itself for an influx of Chinese business, too. Marsh recently appointed Ariel Kou to its Beijing office, to focus on developing and implementing captive insurance programmes for its clients in China.
Geraghty explains: “We are investing in Chinese captive solutions, and now that Ariel Kou in based in China we have got someone on the ground that is the main point of contact for Chinese captives.”
Although the Chinese captive insurance market has made significant progress, regulation is still cited as an issue that’s holding it back from further development.
Chinese regulators have adopted a risk-based solvency system similar to Europe’s Solvency II and, according to Geraghty, the country still maintains a strict approval process for captive insurance.
China implemented its own risk-based capital regulation at the beginning of 2016, the China Risk Oriented Solvency System (C-ROSS), which requires Chinese insurance companies to be transparent in their recording and reporting of risk.
According to Stopford, for companies to meet the requirements of C-ROSS, it is essential for them to define and measure the risk, in order to report in a logical and meaningful way.
By adopting robust risk management standards and practices, Chinese multinationals are at the same time implementing the necessary practices to report solvency to the regulators, in line with global best practice.
Outside of China, there has been little movement from the rest of Asia on the captives front. Stopford adds: “While we are not necessarily seeing innovative movement for captives, we have seen in Hong Kong the complete overhaul of the insurance regime.”
She suggests that the existing regulatory set-up in Hong Kong was not considered to be in line with the requirements of the International Association of Insurance Supervisors (IAIS), including the requirement that insurance regulators should be financially and operationally independent of the government and the industry.
In July 2015, the legislative council passed the ordinance that would align Hong Kong’s insurance standards with the rest of the world. Stopford claims that this was seen as the “most important” regulatory reform in the insurance sector since the original ordinance first passed in 1983.
She says: “It is unclear how the new Independent Insurance Authority will affect current captive legislation, but we are paying close attention to the implementation as it progresses.”
“[Elsewhere] the established domicile of Singapore, a favourite of Australian organisations, has remained fairly static.”
Geraghty expects the mainstay of Asian companies using captives to continue to be Japanese, Malaysian and Korean. However, he suggests that in the future, this could potentially expand to companies in the like of the Philippines and Thailand.
He explains that some of the larger companies in these areas have sophisticated risk management processes that compare to their international peers.
Looking ahead, Geraghty expects that once specific captive legislation is implemented in China, the captive market will continue to develop.
While currently there is a set criteria to follow when setting up a captive, for example, firms need to be a certain size, Geraghty suggests that as China develops those regulations, it could see an increase in the use of captives.
He notes that further improvements are being created to put appropriate regulation in place, and to allow Chinese entities to set up captives, adding that, typically, the Asia Pacific captive market mirrors the Latin American market.
“We have seen an increase in Latin America in recent years, especially in Bermuda, where entities have been set up by Latin American companies. We have also seen companies from Chile, Peru, Mexico and Columbia look at, and establish, captives,” says Geraghty.
“It’s about education and understanding of qualitative and quantitative benefits, the desire to retain risk in a captive, and then finding the right domicile to do that.”
With the Chinese captive insurance market closely following the Latin American route, Geraghty concludes that as more companies talk about it, and make decisions around it, the more the market will continue to grow.
He says: “The only way is up. Once the market gains momentum, it will start with traditional risks, in the same way as a lot of captives have started, such as regular property and casualty risks.”
