What Is Finite Reinsurance?

Due to the limited history of limited risk reinsurance, and its complexity and continuous development, people have not formed a unified understanding of what is limited risk reinsurance. In a research report, Swiss Re even said, "In a way, it is difficult for us to provide a comprehensive definition of limited risk reinsurance. According to the definition of the International Association of Insurance Supervisors, the so-called limited risk reinsurance refers to that A type of reinsurance arrangement that obtains limited risk transfer at the expense of limited premium payments.

Limited risk reinsurance

Due to the limited history of limited risk reinsurance, and its complexity and continuous development, people have not formed a unified understanding of what is limited risk reinsurance. In a research report, Swiss Re even said, "In a way, it is difficult for us to provide a comprehensive definition of limited risk reinsurance. According to the definition of the International Association of Insurance Supervisors, the so-called limited risk reinsurance refers to that Limited

Limited Risk Reinsurance and Traditional Reinsurance

(traditional reinsur-ante)

Limited risk reinsurance is a type of non-traditional risk insurance, which is very different from traditional reinsurance. The main differences between them are: the former has a very low ratio of risk transfer to the splitter, and the latter

Limited risk reinsurance was born in the 1960s

Combining risk transfer with risk financing

Traditional reinsurance

From the perspective of laws and regulations, China's "Insurance Law" and "Regulations on the Management of Reinsurance Business" do not make any provisions on limited risk reinsurance, and the "Accounting System for Insurance Companies" does not make special provisions on the accounting treatment of limited risk reinsurance. In addition, the 2005 "Accounting Standards for Business Enterprises No. XX-Reinsurance Contracts (Draft for Solicitation of Comments)" by the Ministry of Finance did not specify the accounting treatment of limited risk reinsurance contracts.

In China, there is little research in the field of limited risk reinsurance, and it is not known whether there is limited risk reinsurance in practice. However, based on the following factors, we believe that the possibility that an insurance company will use this product to improve its financial situation is not ruled out: First, it should deal with the pressure of the regulator's solvency supervision. In recent years, the CIRC has continuously strengthened the solvency supervision of insurance companies. Under regulatory pressure, insurance companies may use limited risk reinsurance to falsely improve solvency. The second is to expand underwriting capacity. Article 99 of the "Insurance Law" stipulates that "the insurance premiums retained by insurance companies operating property insurance in the current year must not exceed four times the sum of the actual capital plus the provident fund." Many insurance companies in China have lower capital and are growing larger. Under strong pressure, limited risk reinsurance may be used to expand underwriting capacity. For example, a property insurance company has a registered capital of only 200 million yuan. According to media reports, its annual self-retained insurance premium should not exceed 1.4 billion yuan, but from January to November 2005, the company's premium income was as high as more than 9 billion yuan. For the company, if the insurance law is strictly implemented, it must reinsurance the vast majority of the underwriting business. If the quality of these services is not high, it should be difficult to obtain reinsurance; if the quality of the services is good, it is tantamount to an outflow of farmland. By using limited risk reinsurance products, the insurer is able to increase its underwriting capacity while in fact retaining most of the premiums. The third is to whitewash the financial accounting statements in order to achieve the listing target. According to the provisions of the "Company Law" before the amendment, companies to issue new shares need to "continuously make profits in the past three years." To raise funds through the securities market, insurance companies have the incentive to abuse limited risk reinsurance to whitewash financial accounting statements.

Due to the danger of abuse of limited risk reinsurance, although there have been no major incidents involving limited risk reinsurance in China, it is still necessary to learn from foreign experience and take measures to strictly supervise this insurance product to prevent it before it happens. We believe that such regulatory measures should include:

The first is to clearly define the accounting treatment rules for limited risk reinsurance. For limited risk reinsurance that transfers too little risk, it is recommended that the relevant accounting system require it to be treated as deposit or financing, or that the insurance part and financing part should be separated, and treated as insurance contracts and deposits or financing, respectively, to eliminate insurance on the accounting system. The motivation for companies to abuse limited risk reinsurance.

The second is to require insurance companies to disclose in detail their use of limited risk reinsurance. Such disclosures include disclosures to insurance regulators, public investors, external auditors, etc. Mandatory information disclosure is not only beneficial for the stakeholders of an insurance company to correctly evaluate the financial status of the insurance company, but also for the supervisory authority to implement supervision.

The third is to require the chairman, general manager and chief financial officer of the insurance company to ensure that there is no re-insurance that abuses limited risks such as unilateral contracts. The existence of unilateral contracts makes it difficult for external audit institutions and insurance regulators to truly grasp the use of limited risk reinsurance by insurance companies. Therefore, it is necessary to require the company's senior management personnel to personally guarantee that there is no unilateral contract.

Fourth, clear and severe penalties are imposed on insurance companies and their principals and direct responsible personnel who abuse the limited risk reinsurance in violation of regulations.