Shanghai plans insurance exchange, to include securitization of risks

The city of Shanghai in China has been slowly establishing itself as an international financial center and wants to reach that goal by 2020. The insurance industry lags behind banking and securities though and so plans are underway to change that. One of the initiatives being worked on is the planning of an insurance exchange for which approval is now being sought from the Chinese central government.

According to a report in the China Daily newspaper, a research group for the proposed insurance exchange and the Shanghai municipal government have submitted a preliminary plan to the State Council for approval. The plan has been worked on since June last year and they want the exchange to become a major market for reinsurance products.

Participants in the proposed insurance exchange may include foreign insurers and reinsurers but that is still up for debate. From the information available so far it seems the exchange would plan to trade liability insurance, reinsurance, property lines and some life insurance products.

Most interestingly the planned insurance exchange would seek to offer catastrophe bonds, insurance derivatives and other forms of risk securitization to spread the risk from the insurance market to the securities market. That is likely to come in a future phase for the Shanghai insurance exchange and unlikely to be a feature at launch.

Xu Wenhu, Director of the Insurance Research Center at Fudan University and head of the research group for the exchange proposals said “The insurance exchange is one of the most important components in the city’s plan to become an international financial center. Innovation in the trading system for insurance products will drive forward the overall development of Shanghai’s insurance industry.”

With the pace of development and the appetite for growth in China, the Shanghai insurance exchange could become reality surprisingly quickly.