Credit guarantee and credit insurance (collectively “Credit Insurance”) is an increasingly important tool in China for debt and funding purposes. Although it would be wrong to characterise Credit Insurance as “booming” in China, the past few years have seen high rates of growth in Credit Insurance gross written premium. As at the end of quarter three 2018, the premium for Credit Insurance in China was up 44% from the same period in 2017, standing at more than 47 billion RMB. However, due to the intrinsic complexity of Credit Insurance business, together with the challenges posed by such complexities for insurance companies’ risk management ability, the high rate of premium growth of Credit Insurance in China has also brought its own, significant, risks. As just one example of such risks, a China P&C insurer recently incurred a single-claim loss of RMB 4.2 billion from one of its internet peer-to-peer (“P2P”) lender insureds (whose P2P borrowers experienced mass defaults), pushing this insurer into serious and material regulatory insolvency.
Separately, in 2017 another China P&C insurer suffered a single claim loss, stemming from private-debt Credit Insurance exposure, of RMB 1.1 billion, prompting the China Banking & Insurance Regulatory Commission (“CBIRC”) to issue on 11 July 2017 new ‘Regulations Governing Credit Insurance Business’ (the “Regulations”) in order to strengthen macro governance of the Credit Insurance sector.
The Regulations now require that in order to write Credit Insurance business, China insurers must:
- ensure that at any given time, their gross retained liability/exposure to Credit Insurance risk does not exceed ten times such insurer’s net asset value, as measured at the end of the previous quarter, with any retained exposure in excess of this amount to be reinsured off such insurer’s books;
- ensure that the retained exposure to any single Credit Insurance insured (singly or as an affiliated group) does not exceed 5% of such insurer’s net asset value, as measured at the end of the previous quarter, with any retained exposure in excess of this amount to be reinsured off such insurer’s books; and
- not offer or underwrite Credit Insurance for any online lending platform operator, unless such online lending platform operator is duly licenced and fully compliant with all online lending regulations.