In China, captive insurers still feel unfamiliar and niche to many people. But globally, establishing captive insurers has become an important risk management tool for large enterprises, especially multinationals—and judging from China's situation, demand for captives is huge. On December 5, following review by the CIRC, COSCO Shipping Property Insurance Captive Co., Ltd. (in preparation) was approved for establishment, marking that China's first shipping captive has officially entered the pre-opening preparation stage.
COSCO Shipping's Advantages in Establishing a Captive
A captive insurance company, that is, a self-owned insurance company, is an insurance company owned by its parent company whose main business targets its parent. The biggest difference between a captive insurer and an ordinary commercial insurer is that it only underwrites the insurance of its own group and its subsidiaries, with lower premium rates and premium income retained in-house.
After COSCO Shipping Group was formally established, it put forward a "6+1" industrial cluster strategic plan, which includes the shipping finance cluster, and designated shipping finance as one of the group's pillar industries. COSCO Shipping Group has a large number of branches and subsidiaries; by establishing a captive, the group's insurance costs can be significantly reduced, and both premium income and insurance profits belong to itself, benefiting performance growth. COSCO Shipping Group can also "customize" exclusive insurance products and solutions according to its own business characteristics, which suit the group better than mass-market commercial insurance.
In addition, captive insurers are no longer new in China, and COSCO Shipping Group has ready-made models to draw on in establishing its captive.
Captives in the Shipping Industry
In 2014, Maersk Group, the world's largest shipping company, established the captive insurer Maersk Insurance A/S to handle its own risk management—the first shipping company in the world to set up a captive. Media reported at the time that this move could save the company one-third of its premiums each year, about 600 million Danish kroner. For the full year of 2015, the Maersk captive recorded a profit of US$14.017 million.
China's Current Captive Insurers
Five Chinese central state-owned enterprises have established captive insurers: China National Petroleum Corporation, China National Offshore Oil Corporation, China Petroleum & Chemical Corporation, China Railway Corporation and China National Nuclear Corporation. CNPC's captive is located in Karamay, Xinjiang; China Railway's captive is in Beijing; and the other three are all in Hong Kong.
In terms of business scope, take China Railway Property Insurance Captive Co., Ltd. as an example: its business scope covers the following insurance business for China Railway Corporation and its affiliated units—property loss insurance, liability insurance, credit insurance and surety insurance; short-term health insurance and accident insurance; reinsurance of the above business; insurance fund utilization business permitted by national laws and regulations; and other business approved by the CIRC.
In terms of operating performance, the two captives established on the mainland have both reported good results. The China Railway captive achieved operating revenue of RMB 28.838 million in 2015, earned premiums of RMB 6.246 million, total profit of RMB 16.562 million and net profit of RMB 12.35 million. Its top five insurance lines by premium income were engineering insurance, accident insurance, motor vehicle insurance, liability insurance and enterprise property insurance.
The CNPC captive's insurance business income in 2015 was RMB 556 million, up 2.57 times year on year; after cessions, its retained premiums increased 115.03% over the previous year. Net profit was RMB 286 million, up 64.7% year on year. Its top five lines by premium income were enterprise property insurance, liability insurance, energy insurance, cargo insurance and hull insurance.
Difficulties of Establishing a Captive in China
Chinese enterprises have strong demand for establishing captive insurers, especially against the backdrop of accelerating internationalization and overseas expansion. But at present, establishing a captive in China faces many restrictions.
First, the cost is high. According to the CIRC's notice on captive regulation, the parent company must be profitable with total assets of no less than RMB 100 billion; although there is no explicit rule on the captive's registered capital, under existing law its registered capital may not be less than RMB 200 million. The registered capital of the only captive currently registered in mainland China—the CNPC captive—is RMB 5 billion. It is revealed that registering a captive in Bermuda requires only US$120,000 and in the Cayman Islands only US$100,000—a huge cost gap. International experience shows that multinational captives are generally registered in countries or regions with tax incentives. In China, in order to protect the interests of traditional commercial insurers, regulators still regulate captives largely by reference to ordinary commercial insurers, and rules on domicile, capital and other aspects are unfavorable to enterprises establishing captives.
Second, many Chinese enterprises misunderstand captive insurers. Establishing a captive can save premiums and taxes and allow fund operations through reserve provisioning, increasing investment income for the parent—but these features are often treated by enterprises planning captives as profit-making tools, while the captive's risk management function is overlooked. For this reason, some enterprises' plans to establish captives have been rejected by regulators.
Third, China generally lacks understanding of the operating and profit models of international captive insurers, is unfamiliar with insurance and international reinsurance markets, and extremely lacks experience and talent in captive operations.
As the internationalization of Chinese enterprises accelerates, market demand for captive insurers is huge. Under these circumstances, the regulatory threshold for captives may be gradually lowered, encouraging enterprises to achieve globalized risk management by establishing genuine captive insurers.
Source: Insurance Culture 2016-12-10