Shanghai Insurance Exchange financing secured, launch nears

Local Chinese news media reports that a launch of the Shanghai Insurance Exchange is edging ever nearer, with a reported 91 companies having agreed to contribute a combined $343 million (2.235bn yuan) of capital to launch the exchange.

Noise of China’s plans to establish the Shanghai Insurance Exchange first circulated back in 2011, with the region expressing a desire to turn Shanghai into an international finance centre for insurance and reinsurance business, areas that continue to lag behind China’s banking and securities industries.

Information about the plans for the Shanghai Insurance Exchange remain limited, but when we first wrote about the plans in 2011 the exchange was aiming to offer catastrophe bonds, insurance derivatives and other forms of risk securitization to spread the risk from the insurance market to the securities market.

The creation of a an exchange platform for insurance and reinsurance risks in China has always featured a desire to diversify risk outside of the insurance market, using the capital markets and the wealth of capital available.

Artemis reported around this time last year that the long-awaited exchange was close to receiving approval from the China Insurance Regulatory Commission (CIRC), and that cat bonds remained a feature, but apart from local media reports, there hasn’t been too much discussion of progress or final plans for the exchange.

However, online Chinese news media ShanghaiDaily.com has reported that approval of the exchange is edging ever closer. This is supported by reports that in April of this year Pei Guang, Head of the Shanghai arm of the CIRC, said that the State Council had approved the exchange, suggesting that the actual launch of the Shanghai Insurance Exchange could be as early as June 2016.

The latest development in the establishment of the exchange, according to reports, is that 91 companies, which are comprised of insurance and non-insurance entities, have jointly agreed to contribute the required $343 million of registered capital that’s required to launch the exchange.

This translates to each firm agreeing to hold between 5 million and 30 million shares in the exchange to meet the overall registered capital requirements, according to local media reports.

China appears focused on turning Shanghai into an international financial hub by the year 2020, for its developed and underdeveloped sectors, with an improved and robust insurance and reinsurance framework seen as key to achieving this goal.

The exchange will be expected to work with local businesses and aligning practices with global insurance guidelines, which should result in the strengthening and development of the region’s insurance infrastructure.

An agreement between the Securitisation Association of China (SAC) and the Insurance Institute of China (IIC) in 2015, which aimed to develop the securitisation of re/insurance risk in China with a focus on cat bonds, was a sign that China was taking the development of its risk transfer landscape seriously.

And, this was followed in July 2015 with the issuance of Panda Re Ltd. (Series 2015-1), the country’s first catastrophe bond that was sponsored by local reinsurer China Re.

As we’ve written previously, it seems likely that plans for the Shanghai Insurance Exchange to target the use of products such as catastrophe bonds, insurance derivatives, and capital markets risk transfer are likely to be in future phases, after a platform for trading insurance or reinsurance risks has been established.

Should this be the case it would make transferring risks for Chinese insurers and reinsurers, as well as Chinese corporations and also government risk pools, much easier, with a more direct route to capital market investors as well as the broader re/insurance market.

It will be interesting to see what the core focus of the Shanghai Insurance Exchange will be when it launches, whether that is in June or later this year.

Read more on China’s ambitions in catastrophe bonds and insurance linked securities (ILS):

– China regulator progressing cat bond & insurance securitisation rules.

– China regulators agree to accelerate use of catastrophe bonds.

– Shanghai Insurance Exchange nears approval, cat bonds a feature.

– Shanghai plans insurance exchange, to include securitization of risks.

– The prospects for catastrophe bonds in China: Willis.

– China catastrophe re/insurance demand rising: Munich Re.

– Chinese insurers could use cat bonds as a capital tool: Moody’s.

– China catastrophe re/insurance system development a ‘difficult project’.

– Swiss Re sponsored research suggests parametric insurance for China.

– China calls for catastrophe bonds in fight against climate change.

– Catastrophe bonds in China, some discussion on their feasibility.

– China now considering issuance of catastrophe bonds.