Research on Reinsurance Supervision Issues

Author: Luo Shirui
Publisher:
Publish Date: 2006-07-01
Features:
In China, due to historical reasons, the issue of commercial reinsurance regulation has not received sufficient attention. With the rapid development of China's insurance industry and the gradual withdrawal of mandatory reinsurance from the market, the importance of commercial reinsurance and its regulation is gradually becoming evident. This objectively prompts the author to conduct theoretical research on the regulatory system of commercial reinsurance. This book innovates in the following aspects:
First, it redefines the regulatory objectives for reinsurance regulation in China. With the abolition of mandatory reinsurance, the regulatory objective of protecting the domestic insurance and reinsurance markets no longer exists. Considering China's market characteristics and international trends, this book proposes that the new regulatory objectives for reinsurance in China should be "ensuring the solvency of primary insurers under reinsurance arrangements" and "promoting the liberalization and fair competition of reinsurance business." Only by defining the regulatory objectives can targeted regulatory systems and measures be formulated.
Second, it constructs a basic framework for commercial reinsurance regulation in China. Based on an in-depth analysis of direct and indirect regulatory methods, and through a comparison and reference of the two leading models of the United States and the United Kingdom, the book proposes that China's reinsurance regulatory framework should primarily rely on indirect regulation with direct regulation as a supplement. In other words, the focus of regulation should be on the reinsurance arrangements of primary insurers rather than on reinsurers. The success of this framework hinges on whether the safety of reinsurance transactions for primary insurers can be guaranteed. Regarding the issue of reinsurance transaction safety, the book introduces the regulatory concept of controlling reinsurance deductibles. Only when the quality and safety of reinsurance business meet the requirements of the regulatory authorities can primary insurers be allowed to use reinsurance credit to offset liability reserves. To obtain reinsurance deductibles, primary insurers must choose reinsurers that meet the safety standards set by the regulators, thereby effectively ensuring the safety of their reinsurance transactions.
Third, it explores the regulatory issues of innovative reinsurance business (financial reinsurance and insurance risk securitization). The first step in regulating financial reinsurance is to determine its contractual nature. Most countries stipulate that the risk transfer standard of reinsurance contracts should be used as the principle. By comparing the principles of the United States and the United Kingdom, the book suggests that China should adopt the following standards: financial reinsurance can only be recognized as a reinsurance contract if it meets both the conditions of "significant transfer of timing risk or underwriting risk by the insurer" and "reasonable possibility of the reinsurer suffering significant losses." Moreover, regardless of whether financial reinsurance contracts are legally classified as reinsurance contracts, insurance regulators should impose additional regulatory requirements such as disclosure and special reserve extraction to mitigate the risks of such transactions. Regarding insurance risk securitization, the book identifies three key regulatory issues: the issuance of insurance-linked securities, the corporate structure of special purpose reinsurers, and the solvency of special purpose reinsurers. Through a comparative analysis of Western regulatory frameworks, it tentatively proposes several regulatory points, including eliminating legal uncertainties, providing legislative protection for the establishment and operation of special purpose reinsurers, and more.
P18-19