As China's reinsurance market gradually opens to foreign participation, several international reinsurers are lining up for an opportunity to provide capacity and cultivate the growth of risk management in the country.

Upon China's accession to the World Trade Organization in December 2001, the Chinese government committed to the further liberalization of the country's insurance market by passing legislation last year governing the establishment of foreign reinsurance companies in China.

Currently, China Reinsurance Corp., the sole state-run reinsurer, dominates the Chinese reinsurance market. Domestic insurers must cede 15% of their premiums into China Re, which makes up nearly 90% of the entire reinsurance market.

As a condition of China's entry to the WTO, however, the statutory reinsurance requirement will be gradually reduced, ending completely in 2006. That change will create more market-share opportunities for foreign reinsurers, many of which have been serving Chinese insurers for decades on a limited basis, including providing some offshore reinsurance capacity.

That offshore capacity, however, is underwritten only in the currency of the underlying policy--typically U.S. dollars or British pounds--and represents only a little more than 10% of China's reinsurance market.

Since 2002, several international reinsurers have applied for licenses to conduct full reinsurance business in China. To date, Munich Reinsurance Co. is the only international reinsurer to have received such a license.

By obtaining a reinsurance license and operating in renminbi yuan-denominated reinsurance business, foreign reinsurers say they will have access to more domestic insurers, for which they can help reduce exposures by spreading risk to the international marketplace.

At the same time, reinsurers say they also can contribute by bringing intellectual capital to a developing and growing insurance market.

According to the China Insurance Regulatory Commission, which was formed in 1998 to oversee the insurance industry, China's insurance market is growing at a double-digit pace. In 2002, domestic insurers in China generated $37 billion in direct premiums, a 44% increase over 2001, the CIRC reported.

Based on the CIRC's figures, Swiss Reinsurance Co. estimates that by 2011, China's insurance market will generate $136.7 billion in insurance premiums.

"Everybody looks at China as the final frontier where you have a large population and an underdeveloped insurance market," said David Greenfield, a partner in KPMG L.L.P.'s insurance practice in New York.

"I think it's going to present good opportunity for insurers and reinsurers to expand their business," he said.

But with these opportunities come risks, observers warn.

"The Chinese insurance market has great potential, but at the same time, it has a lot of pitfalls," said Simon Hu, head of the Asia Pacific region for A.M. Best Co. in Oldwick, N.J. In addition to changing market conditions and a restrictive regulatory environment, China has a judicial system that is not fully developed, and "corporate risk management as a concept doesn't exist," Mr. Hu said. "There's got to be a lot of education that has to be conducted at the corporate level."

"There are opportunities for foreign reinsurance companies, yet there also are many challenges," said Andreas Lauffs, an attorney in the China practice group of Baker & McKenzie in Hong Kong. "From a regulatory perspective, it is apparent that the CIRC is genuinely serious about market reform, but the actual industry reforms are very slow."

One of the major challenges for reinsurers, Mr. Lauffs said, is that few primary insurers in China currently purchase reinsurance beyond what is required. Citing statistics from a recent speech by a senior CIRC official, Mr. Lauffs said that mandatory reinsurance into China Re accounts for 88% of the total reinsurance market in the country.

As a result, foreign reinsurers look at China's fledgling insurance market as an opportunity not only to provide capacity, but also to help shape the market.

"The main challenge of doing business in China is also the main opportunity," said Franz Hahn, head of property/casualty operations in greater China for Swiss Re in Hong Kong. And that "is to help China's insurance industry raise underwriting standards and build overall risk management expertise," he said.

Zurich, Switzerland-based Swiss Re is awaiting approval for its reinsurance license in China, which it applied for in July 2002.

Entering an emerging market such as China is "a push-pull scenario between market growth and proper pricing," said Ulrich Trumpp, chief executive officer of greater China and Southeast Asia for Munich Re. The Munich, Germany-based reinsurer received its license to operate in China in July.

"This is something professional reinsurers, by virtue of historical experience, have always been confronted with. We always went into markets and (helped) the markets with their growth and, at the same time, faced the challenge that we need to make sure the market is doing the proper risk selection and professional underwriting," he said.

Although Munich Re has had business connections in China since 1956 and has offices in Beijing, Shanghai and Hong Kong, its license will allow the reinsurer to operate in China without limitations, Mr. Trumpp said.

"It gives us the opportunity to consider reinsurance in any segment of any market where Chinese insurance companies need reinsurance. And there are a lot," he said.

The direct insurance industry in China needs to grow and expand its market share, Mr. Trumpp said. To do that, they need capital, "and to grow capital in China you can either go to the stock market and generate capital or you can buy reinsurance to substitute capital," he said.

In addition to Swiss Re and Munich Re, several other international reinsurers also are poised to take part in the developing Chinese market.

In July, Lloyd's of London filed for an onshore reinsurance license from the Chinese government.

"We had some very encouraging meetings," said Julian James, director of worldwide markets for Lloyd's. Lloyd's Chairman Lord Peter Levene visited China in July as part of a British business delegation accompanying Prime Minister Tony Blair. "They are looking very seriously at our application," Mr. James said.

"Lloyd's has a long history with China," he said. "We currently provide a lot of offshore reinsurance capacity and have done so for the last 30 to 40 years. The license will enable us to write onshore business in local currency," he said.

"Clearly, with some of the catastrophic risks that that market is exposed to, they would benefit by being able to cede business to the global reinsurance industry," Mr. James said.

In addition, Overland Park, Kan.-based Employers Reinsurance Corp. formally applied for an operating license in China in May 2002 and is awaiting approval.

"It's the sort of thing where you have to let the authorities take the proper steps and do things in their own time," an ERC spokesman said. "We're looking at this as a marathon, not a sprint."

"The whole financial services sector there is still emerging," he said. "What we want to be is a positive supporter of change to help that sector grow profitably."

Although ERC has been developing relationships and providing some services to several Chinese insurers since 1976, the license will enable ERC to provide reinsurance services to clients. At the same time, ERC also "can bring a lot of expertise to the market and provide access to a lot of our professional and management development programs," he said.