Chinese cities eager to launch insurance exchanges

(Ecns.cn) -- Shanghai's pilot plan for an insurance exchange has gone through the research phase and is now preparing for its official launch, spurring cities such as Beijing, Shenzhen and Chengdu into competition for their own exchanges, notes the China Economic Weekly.

In early May, the China Insurance Regulatory Commission (CIRC) confirmed that it had sent a working group to push ahead Shanghai's insurance exchange plan, including drawing up rules and regulations, setting a proper flow of operations and formulating other details.

The news arrived as the CIRC announced a loosening of controls on insurers, allowing them more flexibility in investment decision-making. Under such circumstances, the desires of other big cities to build insurance exchanges have also grown stronger. According to an industry watcher, Shenzhen submitted its application to the CIRC for and insurance exchange earlier this year.

Progress impeded

Shanghai's plan to build an insurance exchange was first brought up in 2010 with support from the city's former deputy-mayor Tu Guangshao, but was later bogged down for unexpected reasons, revealed an official from the Shanghai Finance Office.

At a forum held in May 2010, Wu Dingfu, head of the CIRC, said that setting up an insurance exchange is part of Shanghai's plan to become an international financial center, something the CIRC, as a financial regulator, strongly supports.

After a few months, Shanghai released its "Outline of the Twelfth Five-year Plan for the Development of the Insurance Sector," in which it said the city will set up a China Insurance Exchange to boost insurer investment in public rental housing construction and local state-owned enterprise reforms.

The exchange was originally conceived as a platform to trade liability insurance, reinsurance, and property and group life insurance products, as well as offer risk securitization products, catastrophe bonds and insurance derivatives to spread risk from the insurance market to the securities market.

According to the China Economic Weekly, the exchange was also designed for assignment services of insurance policies, which will greatly facilitate insurance holders.

However, all of those ideas were dashed after a fire destroyed a 28-story high-rise apartment building on November 15, 2010, and the plan was shelved till earlier this year.

Shenzhen seeks edge

More than a year has passed and Shenzhen has smelled the opportunity. The southern city has given top priority to the task and says that multiple innovative policies will be introduced for the city's insurance industry.

As a city where one of the Chinese mainland's only two stock exchanges – the Shanghai Stock Exchange and the Shenzhen Stock Exchange – is based, Shenzhen hopes to maintain a similar position in the insurance sector, said the China Economic Weekly.

Currently, only Shanghai's insurance exchange plan is approved by the State Council, and there is a slim chance of setting up another one since other cities' exchange plans are more or less the same, said an industry watcher.

To add special characteristics, Shenzhen has put forward the idea of adding Hong Kong elements to its insurance exchange plan and create a close connection with the sector in its neighbor to the south.

However, since Shanghai is home to more than 30 insurance company headquarters, its market advantage and convenience of services are still unparalleled in China.

Although Shenzhen has submitted its application, the CIRC has not yet responded because everything about insurance exchange is still in the exploration stage, the industry watcher added.

Apart from Shanghai and Shenzhen, Beijing and Chengdu are also eager to set up insurance exchanges, but for now they must remain patient.

British or American style?

The Shanghai Insurance Exchange will adopt the principle of price and time preference in financial transactions, but the trading pattern is still under consideration, noted the China Economic Weekly.

Two typical models are Lloyd's of London and the Catastrophe Risk Exchange (Catax) in New York. The former is a British insurance and reinsurance market, which allows individuals and corporations to come together to pool and spread risk. The latter is a specialized developer and provider of Web-based insurance and reinsurance systems.

Worries about the first model come from a Lloyd's-type case in US history involving the infrequency of transactions, which caused it to close down.

In 1980, the New York Insurance Exchange opened to great fanfare and expectation as a Lloyd's type market in the reinsurance style, but seven years later the exchange ceased to operate.

Now, experts are still comparing the two trading patterns, and a final decision will come out by the end of this year, according to the China Economic Weekly.

As one of the three pillars of the modern financial industry, Shanghai's insurance sector lags behind the banking and securities industries, an obstacle that must be overcome in order for the city to become an international financial center by 2020. With government support, the pilot insurance exchange could bring about great changes.