It is reported that Sinopec Insurance Limited was authorised by the Hong Kong Office of the Commissioner of Insurance on October 31 to carry on captive insurance business. Sinopec's captive, named "Sinopec Insurance Limited", is registered in Hong Kong with a registered capital of HK$300 million and is wholly owned by China Petrochemical Corporation (Sinopec Group). Its first directors include Liu Yun, Chief Accountant of Sinopec Group; Wen Dongfen, Director of the Finance Department of Sinopec Group; and Geng Xianliang, General Manager of Sinopec International Petroleum Exploration and Production Corporation. According to a regulatory source, Liu Jifeng, Chief Accountant of Sinopec International Petroleum Exploration and Production Corporation, serves as head of the captive.

A captive insurer, also known as a self-insurance company, is an insurance company owned or controlled by a non-insurance enterprise. A captive mainly provides insurance services to its parent company and the parent's subsidiaries. The parent company directly influences and controls the captive's operations, including its underwriting, claims handling policies and investment activities.

Sinopec's 2012 annual report pointed out that petrochemical production is a high-risk industry that is flammable, explosive, prone to environmental pollution and vulnerable to natural disasters. Such contingencies can have a major impact on society, bring significant economic losses to the company and cause serious personal injury. Sinopec has purchased insurance for its main assets and inventories, but still cannot completely avoid the economic losses and adverse effects caused by various contingencies.

Prior to this, Sinopec maintained an internal "Work Safety Guarantee Fund" (hereinafter the "safety fund"). According to the "Administrative Measures for the Work Safety Guarantee Fund of China Petrochemical Corporation" jointly issued by the Ministry of Finance and Sinopec, entities contributing to the safety fund are required to make provisions at a rate of 4 per mille of the original value of fixed assets at period end and the average book balance of inventories.

However, the safety fund has its own limitations: it is only accumulated within the enterprise and cannot rationally transfer operational risks. In addition, the safety fund can hardly cover all business areas. Compared with the safety fund, a captive insurer has a broader coverage, encompassing property insurance, liability insurance, credit insurance and other lines. A captive can also cede business and even spread risks to the international reinsurance market. It can also make use of its funds, thereby enhancing its solvency.

At present, Sinopec operates in 55 countries and regions, with overseas assets accounting for 35.2% of its total assets. Establishing a captive insurer to underwrite overseas business helps meet the risk management needs of overseas projects, balance commercial insurance expenditure and enhance risk response capability. As one of China's largest producers and suppliers of crude oil and natural gas and one of the largest producers and suppliers of refining and chemical products, Sinopec has insured many of its projects with large insurance companies, but some projects could not actually be insured because their risks are too high or they are located overseas.