China is the world's biggest market and, in some ways, one of its least developed. But its government is out to change that. The announcement this spring that the newly confident Lloyd's was to open a reinsurance operation there was a sign that both the huge nation and the big reinsurer were making progress.
The establishment of Lloyd's Reinsurance Company (China) Ltd. enables Lloyd's syndicates to underwrite onshore reinsurance business throughout China. It gives Lloyd's improved access to the rapidly developing Chinese reinsurance market and, quid pro quo, also provides Chinese insurers with full access to the Lloyd's market.
Lloyd's has had a long relationship with the Chinese insurance market and has supported Chinese insurers by providing offshore reinsurance capacity in areas such as marine and aviation for more than three decades.
In April, the chairman of Lloyd's, Lord Peter Levene, hosted a special ceremony in which he and Shanghai Executive Vice Mayor Feng Guogin completed the painting of a dragon by dotting its eyes to officially declare LRCCL open at its office in the Azia Centre in the Pudong district of Shanghai.
The "Painting of the Eyes of the Dragon" is a traditional Chinese custom. When a master painter works on a painting, the final touch is the painting of the two pupils of the dragon's eyes. The final dot makes the dragon come alive; it is complete and can fly. For the opening of a company or a building, this is an auspicious symbolic moment, signifying that all the preparatory work is complete and business can begin.
The ceremony was attended by Sir William Ehrman, British ambassador in Beijing; Andrew Cahn, chief executive of U.K. Trade & Investment; and representatives from British and Chinese business and government.
With a drop of paint, Lloyd's was in business.
OUR MAN IN SHANGHAI ...
In an interview with Risk & Insurance® earlier this year in London, Ian Faragher, an experienced China hand and managing director of LRCCL, says China is more advanced than it was a decade ago in its approach to risk management.
"Along with an increasing recognition of risk, there is a growing understanding among the Chinese of their exposure to the U.S. market," he says.
Developments such as these do not occur without a great deal of background discussions, and the establishment of LRCCL was no exception.
"The British government was very supportive," Faragher says. "During a state visit by President Hu Jin Tao to the United Kingdom, he advised Tony Blair that Lloyd's would be granted approval to establish a reinsurance company. It took a year to get the office up and running."
A portion of the debate centered on the nature of the proposed Lloyd's operation. "Distribution is the critical issue," Faragher explains. "China is not a homogeneous market. What works in Shanghai might not automatically work in Beijing or other large cities."
Lloyd's obtained the necessary licenses and capitalized LRCCL. Any Lloyd's syndicate can participate in its activities, its contribution based on its business levels. That participation can be achieved in one of two ways: setting up an underwriting shop in Shanghai, or by reviewing opportunities posted on the Lloyd's system in London.
The latter choice clearly works but is not as desirable as an on-the-ground presence.
AND OUR MAN TOO
"We have chosen to site one of our people, Bo (Boris) Zheng, as an employee of LRCCL, although, practically speaking, he's our underwriter, following our underwriting guidelines," said Jacques Bonneau, president and CEO of ACE Tempest Re Group in Hamilton, Bermuda. "He'll work mostly with our people in the United Kingdom, or for property-catastrophe with us here in Bermuda."
ACE Tempest Re plans to write both facultative and treaty reinsurance across all lines of business, expecting the greater opportunities, at least initially, on the facultative side for large projects, energy, utilities and for risks with an international element, such as U.S. casualty or exported products.
"We'll also be working with companies in China to bring solutions and products to market for their insureds," Bonneau said. "That would be a way to stimulate demand for them and to differentiate ourselves from those companies that are just writing treaty business. The reality is that the larger opportunities for us will be in the medium to longer term, as the market continues to grow."
The Chinese market is competitive, dominated by automobile coverage, which accounts for half or more of the market at present. China has allowed a number of new companies to enter its market, tightening competition. One estimate suggests that no more than 30 percent of buildings in China are insured, so, as the economy modernizes and expands, opportunities should abound.
Other early entrants include Munich Re, Swiss Re and General Re. ACE has a strategic interest in a Chinese insurance company, and AIG, of course, had its origins in life insurance in Shanghai more than 80 years ago.
"There is a dramatic need, presenting a dramatic growth potential," Bonneau said, "so this is a market that you really can't ignore."
OURS IS ALSO IN HONG KONG
The Catlin Group's Syndicate 2003 at Lloyd's was another of the inaugural participants in LRCCL. Paul Swain, the now retired deputy chairman of the syndicate who speaks fluent Mandarin, has been visiting China for 15 years, and he and CEO Stephen Catlin have been traveling to China in preparation for doing business there.
"There are challenges," Catlin said. "The legal system is government-controlled. They have environmental impairment, second to none. One of my concerns is to ensure that the non-Chinese insurance industry doesn't have to pick up the cost of cleanup."
Against that, Catlin also said, "Pudong, the financial center of Shanghai, was virtually all marshlands 10 years ago. Today, there's a good infrastructure, (and it's) better-planned and cleaner than New York City."
Seven years ago, the Catlin Group decided to employ a graduate from Beijing University, Li Linmao, who is now part of the Hong Kong office Catlin Group opened earlier this year. Seconded to LRCCL, he has been spending time in China "watching and observing because the economic climate is changing apace," Catlin said. "The picture is gradually becoming clearer."
Gross domestic product per capita has grown from $1,500 to $7,000 in the past five years, with the middle class growing exponentially. "Five years ago, insurance was seen by most people as just another tax," Catlin said. "There's been a tremendous mindset change in the last five years. I view it as a place of great opportunity and also great risk."
For his part, on his first visit to Shanghai earlier this year, "I was amazed at how fast the city is growing, and how affluent it appeared," said Bonneau, who visited Shanghai for the first time earlier this year. "A colleague, who has been going there for 15 years, told me that, when he first visited, it was very much a city of bikes. Now, it is completely the opposite, cars and relatively few people on bikes. There's a great deal of building going on."
Next year's Olympic Games, including a rather different kind of cycling, will show the new face of China to the world. Behind the scenes, as usual, will be the forces of global insurance and reinsurance.
ROGER CROMBIE is a Bermuda-based columnist for Risk & Insurance®.
October 15, 2007
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