As Chinese enterprises accelerate their internationalisation, market demand for captive insurers is huge, and more and more enterprises will hope to achieve global risk management by establishing captive insurers. However, establishing captive insurers and developing captive business in China still faces many constraints, and industry insiders are calling for a more relaxed development environment for captive insurers.
A captive insurer is an insurance company funded solely by a parent company, or jointly by a parent company and its controlled subsidiaries, that provides property insurance, short-term health insurance and short-term accident insurance only to the parent company and its controlled subsidiaries.
According to the CIRC's "Notice on Matters Concerning the Regulation of Captive Insurers", to establish a captive insurer, in addition to meeting the relevant conditions for insurance companies stipulated by laws and regulations, the following requirements must also be met: the registered capital should match the risks the company undertakes; the investor should be a large industrial or commercial enterprise with a prominent core business and sound profitability, with total assets of no less than RMB 100 billion; and the investor's industry should be characterised by high risk concentration, wide geographic distribution and difficulty in risk transfer, with stable demand for insurance protection and strong risk management and control capabilities.
Characteristics
Compared with ordinary commercial insurers, captive insurers have distinctive features.
First, they can reduce insurance costs. Because ordinary commercial insurers have to bear administrative expenses such as marketing, promotion and operating costs, while captive insurers operate within large enterprises with lower management costs, premiums are lower for the same scope of coverage. In terms of industry levels, multinational corporations pay commercial insurance rates of between 40% and 45%, while the rate for insuring through a captive generally does not exceed 10%, and some are even below 2% - a huge cost gap that reduces insurance costs. Establishing a captive insurer can not only save premiums and taxes, but also allow funds to be operated through reserve provisioning, generating investment income for the parent company.
Second, they can improve risk management and control. As the focal point of a large enterprise, a captive insurer has specialised risk management experience in its industry and can control, coordinate and simplify the large enterprise's risk management through loss control, safety guidelines, risk distribution and other means, making insurance and reinsurance arrangements better suited to its overall needs. It becomes a platform for systematic risk management and is conducive to the overall planning of global insurance arrangements.
Third, they allow tailor-made coverage. For certain risks, especially in specific professional fields, either ordinary insurers do not offer such lines and the risks cannot be insured directly in the insurance market, or the premiums required are prohibitively high. A captive insurer, however, can more flexibly design marketable new lines, underwrite risks that ordinary commercial insurance finds hard to cover, and provide targeted, tailor-made coverage based on the parent company's insurance needs.
Fourth, they facilitate alignment with international practice. As Chinese enterprises "go global", cooperation with international enterprises will increase. By convention, international enterprises require their partners to have corresponding insurance arrangements. If Chinese enterprises buy commercial insurance, they often face constraints such as insufficient market supply or high costs, whereas arranging insurance through a captive insurer not only saves costs but also wins recognition from international companies more easily.
However, captive insurers also have their shortcomings, mainly in the following respects: first, they find it difficult to exchange information, feedback and share resources with other commercial insurers, and cannot obtain ready-made first-hand materials such as loss records, product defects and improvement suggestions in a timely manner and free of charge; second, captives cannot transfer unknown risks and cannot avoid bankruptcy in the event of a catastrophe, which directly affects enterprise development and social stability; third, it is difficult for captive insurers to exercise subrogation rights and conduct litigation on behalf of policyholders - subrogation and litigation involve considerable manpower, financial and material resources, and cannot avoid or reduce entanglement in legal disputes; fourth, many Chinese enterprises have a biased understanding of captive insurers, often regarding the establishment of a captive as a profit-making tool while neglecting its risk management function.
Current Situation
Against the backdrop of Chinese enterprises' accelerating internationalisation and overseas expansion, captive insurers are still unfamiliar to many Chinese people. From a global perspective, establishing captive insurers has become an important means of risk management for large enterprises, especially multinational corporations.
First, international growth is fast. Data show that the number of captive insurers worldwide grew from 4,951 in 2006 to 6,342 in 2013, an increase of about 200 per year. At present, captive insurers worldwide underwrite annual premiums exceeding US$50 billion and hold capital of US$150 billion. McDonald's, BMW, BP, Vodafone, Citibank and MTR Corporation have all established captive insurers. In the United States, where captive insurers are most developed, 90% of the 500 largest companies own captives, and 80% of the UK's 200 largest companies have also established captives.
Second, domestic development is slow. China currently has few captive insurers: only three single-parent captives (those of CNPC, Sinopec and CNOOC) and one industry captive (the China Shipowners Mutual Assurance Association). Judging from China's situation, market demand for captives is huge, but establishing captive insurers and developing captive business in China still faces many constraints, and industry insiders are calling for a more relaxed development environment for captive insurers.
Third, domestic thresholds are high. Establishing a captive insurer in China faces many restrictions. At present, the only captive insurer registered in mainland China - CNPC's captive - has a registered capital of RMB 5 billion. By contrast, registering a captive in Bermuda requires only US$120,000, and in the Cayman Islands only US$100,000 - a huge cost gap.
Countermeasures
It goes without saying that the industries served by captives are mostly high-quality, low-claim "golden clients". Before differentiated terms and rates can be realised, the most direct and visible impact on commercial insurers is losing market share, business and premiums, causing business fluctuations, increasing operational risk, reducing underwriting profits and affecting solvency. Commercial insurers should attach great importance to this, understand it deeply, take multiple measures and respond head-on.
First, understanding must be in place. With the development and popularisation of risk management in China, more and more large enterprises will retain risk or establish captives - this is a development trend that will have a certain impact on commercial insurers' market share and business income. We should understand this rationally, face it correctly, and actively take countermeasures, "making up outside the embankment for losses inside it", striving to make the insurance "cake" bigger and better, giving full play to the advantages of commercial insurers, and reducing the adverse effects brought by captive insurers.
Second, insurance products must be innovated. According to customers' different circumstances and insurance needs, insurers should promptly develop, design and launch targeted, tailor-made insurance products, customised for customers, to meet their needs to the greatest extent.
Third, service quality must be improved. Customers are God; policyholders are our bread and butter. Although enterprises pursue profit maximisation, the source of profit is the broad customer base, and the satisfaction of social needs is the yardstick for testing all the work of an insurance company. Only by gaining social recognition can the operating efficiency of insurance be improved.
Insurers should adhere to a correct view of business development, placing growth points in the broad market of "grasping the big without letting go of the small"; intensify brand promotion, focusing publicity on product and terms disclosure; adjust insurance business development strategies, setting the high ground of work on improving service quality; and improve the insurance service system, centring services on claims settlement and catastrophe prevention and loss mitigation.
Fourth, insurance regulation must be strict. As Chinese enterprises accelerate their internationalisation, market demand for captive insurers is huge. In this situation, the regulatory threshold for captive insurers will gradually be lowered to encourage enterprises to go global and achieve global risk management by establishing genuine captive insurers. Because captive insurers only operate the insurance business of their parent companies and outsiders have limited knowledge of their internal business, captive insurers' operations and management are, to a certain extent, opaque, which makes external regulation all the more important.
The "Notice on Matters Concerning the Regulation of Captive Insurers" issued in December 2013 is China's first regulatory document specifically governing captive insurers, and also the specific measure for the application, opening and regulation of captive insurers, providing a legal basis for large enterprises to establish captives. Establishing captive insurers, placing them under standardised management and bringing them within the CIRC's regulatory scope is also a specific requirement of the State Council's Document No. 23 of 2006, "Several Opinions on the Reform and Development of the Insurance Industry". In this regard, the insurance regulator must strictly follow regulatory requirements, practise the core values of insurance regulation - "regulation for the people, law-based and impartial, scientific and prudent, pragmatic and efficient" - and run "grasping services, strict regulation, preventing risks and promoting development" through every aspect of insurance regulation, ensuring that the insurance market is standardised and orderly.