The world's oldest insurance market took a dive into one of the world's oldest cultures earlier this month when Lloyd's China officially opened its reinsurance operation in Shanghai.

The chairman of Lloyd's, Lord Peter Levene, told a crowd of dignitaries–including the Shanghai vice mayor–during the April 16 opening day ceremony that “we greatly appreciate the opportunity to become a small part, at least initially, in China's huge success story.”

Instead of the ribbon-cutting, Lord Levene and Vice Mayor Feng painted the eyes of the dragon in a traditional custom in which the drawing of the eyes represents the building coming alive and ready to house business activities.

The recent Chinese regulatory approval of Lloyd's to underwrite onshore reinsurance business throughout the country marked the culmination of a nearly seven-year effort to gain a toehold in one of the world's fastest-growing economies.

The market opened its representative office in Beijing in 2000, recalled Julian James, in his last hurrah as Lloyd's director of worldwide markets. (He is leaving this week to join Lockton International later this year as executive chair of international operations at the global brokerage.)

“It has been a long process because of Lloyd's market structure,” he told National Underwriter.

Lloyd's is no stranger to this market, as the London icon has been supporting Chinese insurers with specialist reinsurance capacity and expertise for over 30 years in areas such as marine, aviation and nuclear power risk, according to Mr. James.

However, the new license broadens Lloyd's capabilities considerably in a fast-growing market.

“This license will provide Chinese insurers with full access to the capacity and expertise of the Lloyd's market, and give us improved access to the rapidly developing Chinese insurance market,” he said.

Lord Levene noted that the process took longer than expected due to Lloyd's unique corporate structure–the fact that it is a market, rather than a company.

Indeed, he said, Chinese regulators “spent a considerable amount of time with me and my colleagues to find a way in which the unique structure of Lloyd's–which is over 300 years old–could be used in a form which was acceptable within the law relating to insurance in China.”

The rating agencies responded favorably to the new initiative. Fitch, Standard & Poor's and A.M. Best have blessed the new China operations with “A” ratings or higher.

S&P London-based credit analyst Rob Jones said their “A” rating was predicated upon “the explicit support provided to [Lloyd's China] from the Lloyd's market via the full quota-share retrocession of all business underwritten by it exclusively to syndicates trading at Lloyd's.”

While the London-based operation has been criticized for its slow-to-change business practices and technology, market officials contend the China operation will be handled by a state-of-the-art infrastructure.

Lloyd's will use the back-office service provider Xchanging's processing software “Genius” as its core reinsurance system in China. Users will be able to log on as either an English or Chinese speaker, and view screens and develop reports in the appropriate language.

In addition, Lloyd's has purchased a global license from technology hub RI3K for business placement. Its paperless marketplace environment will enable underwriters in Lloyd's reinsurance operation in China to exchange information electronically with underwriters in London.

China has come a long way since 1979, when the country started its major industrialization drive that today has created the world's fourth-largest economy.

Nonetheless, A.M. Best has maintained a Tier III rating due to a limited gross domestic product on a per-capita basis and extensive government involvement in the economy.

As for the insurance industry, the country suffers from a low spending per-capita on the product and a relatively concentrated market.

American International Group gained the first toehold in China, starting in 1919. In fact, the country's entry into the World Trade Organization six years ago was almost jettisoned by a dispute over its joint venture rule in place at the time, from which the company had long been exempt.

But those rules evolved to the point that earlier this year Marsh became the first foreign broker to be granted a wholly foreign-owned enterprise license. The other large international brokers, including Aon and Willis, have been present in the country for a number of years as part of joint ventures.

Chinese non-life premium has quadrupled over the past decade, according to Lloyd's. In 2006 alone, China's overall annual insurance premium grew by 19 percent to $24.4 billion.

The overall economy grew by 10.5 percent in purchasing power parity terms, which is twice as fast as the world's average of 5.1 percent, Lloyd's noted.

Lloyd's credits “dramatic” inflows of direct foreign investment in driving this growth. In 2005 alone, over 44,000 new foreign-invested enterprises were established in China–7,500 of those in the financial services sector.

Mr. James declined to speculate on what kind of premium volume the Lloyd's China operation might generate, but was optimistic about its prospects.

“China is forecast to become the world's largest economy in real terms by 2040,” he said. “As the economy develops, the demand for specialist insurance will follow suit.”

But for the insurance industry to prosper to the fullest extent, the Chinese still have a long way to go, observers contend.

“Restrictions on foreign insurers are significant, but have been reduced since China was granted membership in the WTO in 2001,” according to a recent A.M. Best report.

While foreign participation is on the rise, domestic insurers continue to dominate the market, the report noted. Insurers are required to retain a minimum of 40 percent of a particular risk, with reinsurers able to assume up to 60 percent.

And in a development that should please the Lloyd's operation, the Chinese government has liberalized the reinsurance sector to allow competition, and eliminated the mandatory cession to the China Re Group.

Special Reports /

Lloyd's Opens China Reinsurance Venture

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