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China: CIRC Publishes Final Requirements for Collateral in Cross-border Reinsurance Transactions

On 9 August 2016, the China Insurance Regulatory Commission (“CIRC“) issued the Notice on Matters Relating to Collateral Provided by Offshore Reinsurers (Draft) (the “Draft Notice“) for public consultation. On 13 March 2017, CIRC released on its official website the final version of the notice (the “Final Version“), which has been effective since 23 February 2017. The Final Version sets out the requirements that collateral provided by offshore reinsurers must meet in order for a lower risk factor to be applied by the ceding company to the reinsurance under China’s risk-based solvency regime, C-ROSS.  The key features summarized in our previous blog post (please see full text here) remain the same in the Final Version, except for the following points:

For qualifying deposits:

  • the minimum time period for the deposit to be held in the bank account of the Chinese ceding company has been shortened from one year to one quarter; and
  • the requirement under the Draft Notice that the aggregate amount of liabilities treated as collateralised for multiple reinsurance contracts entered into by a single Chinese ceding company must not exceed the total amount of the deposit (the “Aggregation Rule“) has been removed.

For qualifying stand-by letters of credit, the requirement that PRC laws must prevail in the event of a conflict with international model rules and the corresponding Aggregation Rule for multiple reinsurance contracts have been removed in the Final Version.

In short, the Final Version, compared to the Draft Notice, has relaxed some of the requirements relating to collateral provided by offshore reinsurers. It is also worth noting that there is no requirement for reinsurance treaties with offshore reinsurers to be collateralized.  However, non-collateralized treaties are subject to a punitive capital charge under C-ROSS.