Pilot measure has dedicated investment quota of $1 billion

A new measure that allows insurers to invest directly overseas with their foreign-exchange earnings generated from cross-border reinsurance business will bridge Chinese insurance capital with more international asset allocation channels, which is conducive to the insurers' international competitiveness and Chinese companies' overseas expansion, said experts.

Their comments follow a new pilot program released in Shanghai in late October that mainly targets the cross-border reinsurance inward business, under which domestic insurers collect foreign-exchange premiums by assuming risks from overseas insurers.

PICC Property and Casualty, Ping An Property and Casualty, China Property and Casualty Reinsurance, and CPIC's subsidiary specializing in property and casualty, will be the first batch of insurers taking part in the pilot program.

Previously, reinsurance premiums denominated in foreign currencies could not be invested in corresponding overseas foreign currency-denominated assets due to China's foreign exchange regulation and the annual cap on qualified domestic institutional investors mechanism, explained Robert Curtis, CEO of credit rating agency AM Best in Asia Pacific.

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This means that risks taken by insurance companies could not be effectively distributed out, resulting in a structural contradiction in the Chinese reinsurance industry, said Curtis.

The new program has set a dedicated investment quota of $1 billion, which is separate from the insurers' annual QDII quota.

According to Curtis, cross-border reinsurance inward funds bear the attributes of liability to a reinsurance company. Their duration and foreign exchange risks should be carefully managed via international investment channels.

With the new measure, Chinese insurance companies can more comprehensively manage the risks that they have assumed from the global market, rather than letting the funds sit idle domestically and passively bearing currency and return mismatches, he said.

Domestic institutions' interest and competitiveness in the global market will rise significantly as they have now more ways of investing their income from a global perspective, said Zhu Xiaoyun, president of China Re Group.

The global market has faced multiple challenges over the past few years, including escalated geopolitical tensions and drastic climate change. The ambition of Chinese companies going global, however, has not been dampened. On the contrary, they have accelerated their outbound steps, leading to higher demand for cross-border risk management, Zhu said.

In a complex risk environment, reinsurance serves as a global shock absorber, enhancing the economy's resilience and capability of recovery by allocating capital across regions and across cycles, according to Andreas Berger, CEO of Swiss Re.

Jin Penghui, deputy secretary-general of the Shanghai Municipal Government, said that the new pilot program has strengthened the reinsurance industry's support for Chinese companies' overseas expansion, especially those engaged in the Belt and Road Initiative.

This is also part of Shanghai's efforts to consolidate its role as an international reinsurance center, he said.

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According to the action plan released in June to develop offshore finance in Shanghai, offshore reinsurance has been designated as one of the six business scenarios for development priority.

The comprehensive reinsurance functional zone in Lin-gang Special Area, which is part of the China (Shanghai) Pilot Free Trade Zone, will attract more overseas reinsurance institutions to land their inward business as the new policy takes effect. Domestic companies can accumulate their global asset allocation and risk management experiences within the controllable yet pioneering framework in Lingang, said Curtis.

Data from the public domain show that cross-border reinsurance inward business income came at 738 million yuan ($110.48 million) in Lin-gang during the first six months, up 131 percent year-on-year.

Contact the writers at shijing@chinadaily.com.cn