The only two captive insurers in mainland China recently disclosed their 2015 annual reports one after another. The data show that China Railway Captive achieved profitability in its first year of operation, while CNPC Captive Insurance's business developed rapidly: insurance business revenue grew 2.57-fold year on year, retained premiums more than doubled, and net profit rose 64.7% year on year.
CNPC Captive Insurance Co., Ltd. is mainland China's first captive insurer and had been established for two years by the end of 2015. The company not only achieved profitability in its first year of formal operation, but also maintained a sound operating momentum in 2015, with net profit rising 64.7% year on year.
Annual report data show that in 2015, CNPC Captive Insurance's insurance business revenue was RMB 556 million, a year-on-year increase of 2.57-fold; after ceding business, its retained premiums increased by 115.03% over the previous year. In terms of net profit, CNPC Captive Insurance recorded a net profit of RMB 286 million in 2015, up 64.7% year on year.
As the captive insurer has developed, its business scope has continued to expand. In 2015, the top five lines of CNPC Captive Insurance by premium income were enterprise property insurance, liability insurance, energy insurance, cargo insurance and marine insurance. It is worth noting that four of these five major lines achieved underwriting profits, with only liability insurance recording a negative underwriting profit; the total underwriting profit of the five major lines was RMB 25.706 million.
In addition, CNPC Captive Insurance's fee and commission expenses rose in 2015 to RMB 60.4 million, a year-on-year increase of 2.12-fold, basically in line with the growth of its business scale, while its business and administrative expenses fell to RMB 40.18 million, down 3% year on year.
China Railway Property Insurance Captive Co., Ltd., mainland China's second captive insurer, was established in July 2015 and had actually been operating for less than half a year by the end of last year. It achieved insurance business revenue of RMB 16.097 million, investment income of RMB 19.077 million, and a net profit of RMB 12.35 million in its first year of operation.
China Railway Insurance's top five lines by premium income in 2015 were engineering insurance, accident insurance, motor vehicle insurance, liability insurance and enterprise property insurance.
The biggest risk for captive insurers lies in the high concentration of their business, which makes their operations susceptible to significant fluctuations caused by individual large claims; they therefore also need to diversify risk by ceding part of their business.
The company pointed out in its annual report that, at this stage, its risk management strategy is mainly to enhance the risk management capability of property insurance in the petroleum industry, with operational procedures meeting compliance standards. The insurance business it underwrites from within the CNPC group is characterised by high risk and high concentration; errors in catastrophe loss forecasting, inadequate insurance pricing or unreasonable reinsurance arrangements could lead to temporary solvency shortfalls and underwriting risk; while an abnormal surge in the frequency of large claims, failure to set aside reserves as required, or significant economic, policy or technological changes could expose the company to reserve risk.
At present, establishing captive insurers has become an important means of risk management for large enterprises, especially multinational corporations. As Chinese enterprises accelerate their internationalisation, market demand for captive insurers is huge; at the same time, from a policy perspective, regulators and the relevant government departments strongly support the development of captive insurers. CNPC Captive Insurance disclosed that in 2015 the company received RMB 40 million in government subsidies, recognised as a non-recurring gain or loss item for the period. It is foreseeable that more Chinese enterprises will achieve global risk management by establishing captive insurers in the future.