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China Reinsurance Corporation, the nation's largest reinsurance company, is undergoing restructuring that will expand its business into insurance, banking and securities. The move is expected to offset a steep drop in profits due to market deregulation.
The company plans to ultimately reshape itself into a full-service financial holding company that will run insurance, banking and investment units through separate subsidiaries, said China Reinsurance President Dai Fengju in an interview.
The bold move aims to bypass stiff regulations that bar financial institutions from running diversified financial businesses at the same time.
Party General Secretary Jiang Zemin's vow to "continuously push through reforms in financial sectors" last Friday when addressing over 2,000 national congress delegates is good news for Dai's company.
"Cross-investment is an international trend. We are moving toward this end via system reforms," said Dai, who is attending the Party Congress.
Dai is betting the reforms can help increase his company's income, and thus help it shrug off imminent profit decline.
At present, all insurance companies in China must reinsure 20 percent of their businesses with China Reinsurance, as stipulated by law. But starting from next year, the 20 percent "legal reinsurance" will be cut by 5 percent annually and will be completely eliminated by 2006.
In other words, China Reinsurance, which gets 95 percent of its income from legal reinsurance, is expected to lose 4 billion yuan (US$483.6 million) per year from 2003.
"The cuts in legal reinsurance will dramatically reduce our profits," said Dai, adding that profits are predicted to drop to 16 billion yuan (US$1.93 billion) next year, compared to a likely 18 billion yuan (US$2.18 billion) this year.
Dai said the government has already established a panel to study its reform plan in a bid to bail out the ailing company.
The first step in the restructuring, Dai said, is to reshuffle its core business to form a life reinsurance joint venture with a to-be-determined foreign company, plus a property reinsurance shareholding company with domestic insurance companies taking shares.
The two subsidiaries are expected to be launched in the first half of next year, said Dai.
Another avenue it is pursuing is earthquake insurance, which Dai believes will greatly increase the company's cash flow.
The idea is to allow the company to collect additional premiums on insurance policies to put into a special fund to pay losses from earthquakes, flood and other natural disasters.
What may add to the company's woe, however, is that some small insurance companies evade regulations, therefore dampening China Reinsurance's interests. They do not reinsure their business, even though their own equity is inadequate to fend off all the risks.
Dai urged the regulatory commission to better monitor the industry, and better protect the interests of consumers.
(China Daily November 13, 2002)
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