Shanghai's role key as supplier of institutional innovation

As Chinese companies expand their reach amid the advancement of strategies like the Belt and Road Initiative, demand for new financial services has risen, including reinsurance, or, insurance provided to insurers.

According to Chang Ming, assistant to the general manager of the Shanghai International Reinsurance Exchange, reinsurance is the risk buffer for companies' overseas operations. When enterprises face higher risks such as natural disasters and legal risks in overseas markets, the policy limits are often large, making it difficult for a single insurer to bear all the risks alone. In that case, reinsurance is important to diversify risk, he said.

Against that backdrop, the Shanghai International Reinsurance Exchange went operational in eastern Shanghai's Lin-gang Special Area in late December 2024.

Prior to the establishment of the exchange, Chinese insurance companies could only deal with reinsurance businesses via the international reinsurance centers based in London, Bermuda or Singapore. But now, direct trading can be done in the Chinese market, where premiums can often be lower and security higher.

"One transaction, which would have taken three days in the past, can now be completed in just a few hours here, as we can achieve automatic identification and speed confirmation via a unified billing template, a digital platform and standardized trading rules," said Chang.

"When Chinese companies build new factories or undertake infrastructure projects, many countries require companies to purchase local insurance. However, many local insurers either have insufficient underwriting capacity or set excessively high premium pricing. Chinese domestic insurance companies are more capable in these aspects," he added.

Feng Xiao, deputy general manager of the reinsurance department of PICC Property and Casualty Co Ltd, said such reinsurance capacity can facilitate the export of Chinese new energy vehicles.

Local insurance companies are less willing to serve outbound Chinese NEV companies, as the former have not formed a good understanding of the battery and electric control unit technologies grasped by Chinese companies, Feng said.

"Reinsurance companies can play a crucial role under such circumstances. While the local insurer comes up with a policy, 50 to 90 percent of the risks can be transferred to the Chinese reinsurance company. Local insurance companies are thus willing to make the move, which is conducive to Chinese NEVs' expansion in overseas markets," he said.

The establishment of the exchange has also addressed the great potential of the Chinese market.

According to the National Financial Regulatory Administration, China accounted for 11 percent of the world's direct insurance premium value in 2024, while that for reinsurance premiums was only 3.5 percent.

The size of the Chinese reinsurance market is not on par with China's economic size or that of the direct insurance market, said Yin Jiang'ao, director-general of NFRA's property and casualty insurance supervision department.

To look on the bright side, quick progress has been made at the Shanghai International Reinsurance Exchange.

In the first eight months of the year, the exchange traded nearly 4.4 billion yuan ($618.52 million) of insurance premiums. The exchange has so far seen 118 institutions registered with trading rights, among which 90 are domestic and the rest from overseas.

Such rapid development in less than a year can be largely attributed to the institutional innovation first attempted there, with the trading seats introduced at the exchange being one of them.

According to Chang, overseas institutions are allowed to provide offshore reinsurance services to Chinese clients even if they have not acquired official operational approval from the Chinese central regulators. Under such circumstances, the overseas reinsurance companies cannot set up fixed operation venues in China.

The trading seats at the exchange can help those institutions reach their Chinese clients more conveniently, while significantly reducing the costs of conducting China-related business, he said.

Currently, six overseas institutions from the United Kingdom, Barbados and the Democratic Republic of the Congo, among others, have obtained trading seats at the exchange.

The exchange has also jointly explored an overseas fleet insurance service mechanism with Commercial Aircraft Corp of China, PICC and Air Union Insurance Brokers, which is aimed at facilitating the export of domestically produced commercial aircraft while securing Chinese companies' interests in overseas markets, Chang said.

The exchange has helped to attract 26 domestic and international reinsurance institutions to settle down in Lin-gang, including operation centers of 21 reinsurance companies, one branch of a reinsurance company, and branches of four insurance brokerages.

France's AXA Global Reinsurance officially opened its reinsurance operation center in Lin-gang in January, the first foreign firm of its kind to make such a move.

According to Xue Fei, general manager of AXA International Reinsurance (Shanghai) Co Ltd, the collective financial infrastructure and policies introduced at the exchange — as well as the gathering of registration, clearance and information disclosure functions there — can largely improve trading efficiency and lower costs. This is conducive to improving companies' operational efficiency and competitiveness, he said.

The fact that more and more industry players are gathering in Lin-gang helps AXA talk to its peers more conveniently about the most up-to-date trends regarding health insurance, travel insurance and even businesses related to new energy vehicles, he said.

Shanghai has always served as the first stop for foreign financial service providers to enter the Chinese market.

By the end of June, Shanghai was home to 1,796 licensed financial institutions, among which 556 were foreign-invested. About 80 percent of China's foreign asset management companies are based in Shanghai, while the ratio for foreign banks is 40 percent.

China's first wholly foreign-owned securities firm and the first wholly foreign-owned mutual fund companies are based in Lujiazui of Pudong New Area.

Lujiazui is home to 70 percent of the country's foreign asset managers, 40 percent of foreign-owned banks, and 40 percent of foreign securities brokerages.

The various financial infrastructures built in Shanghai have better linked the Chinese and overseas markets. The Shanghai-based China Foreign Exchange Trade System is one of them.

The Bond Connect program launched by the CFETS has served as a flexible channel for overseas institutions' access to the Chinese interbank market. The Swap Connect program and offshore buyback services have met overseas institutions' needs for liquidity management and risk hedging, said Dong Yiwei, vice-president of the CFETS.

To date, over 1,100 overseas legal entities have been participating in the Chinese interbank market, holding about 4 trillion yuan of Chinese onshore bonds.

"The Chinese interbank market has a complete product system and high liquidity. The appeal of the yuan-denominated financial assets has continued to grow," she said.

All these are inseparable from various policy support. During this year's Lujiazui Forum — the annually held industry event gathering officials, experts and top executives in Shanghai — an action plan to consolidate Shanghai's role as an international financial center was released.

The action plan stated that more financial institutions, international financial organizations and commercial banks' headquarters should be attracted to the city. Institutional opening-up should be expanded, among which the Shanghai International Reinsurance Exchange should play a bigger role.

Another eight financial opening-up measures for the country were announced at the same forum. Financial infrastructure such as an interbank market trading report database and a personal credit institution will be set up in Shanghai.

"These are not isolated reforms, but rather building a new system connecting finance, trade and supervision. Almost all the eight measures have set Shanghai as the pioneering zone, reflecting the city's core function as a supplier of institutional innovation. New rules are first experimented here and promoted nationwide," said Liu Dian, an associate researcher at the China Institute of Fudan University.