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In order to reduce the pressure on insurance companies to increase their authorized capital and enlarge the scope for their application of funds, on 30 January 2002 the MOF promulgated Key Points for Operation of Financial Re-insurance Business By Insurance Companies, and announced that local life and non-life in-surance companies will be allowed to obtain fi-nancial reinsurance from 1 April 2002.
An insurance company may use financial rein-surance both to transfer the risk it incurs by pro-viding insurance, and as a source of finance. A reinsurance company must assess the worth of an insurance company's contracts and assets, and on this basis determine the amount of credit it is prepared to advance, and the reinsurance pre-miums and processing fees it will charge. By providing such reinsurance, a reinsurance com-pany accepts liability for financial losses in-curred by the insurance company. Therefore, to avoid reinsurance losses, when underwriting such business a reinsurance company will make a detailed assessment of risks. But in order to avoid abuse of financial reinsurance for purposes other than risk transfer, the Department of In-surance has also drawn up the new rules to regulate financial reinsurance. The main points are as follows:
Article 2 defines financial reinsurance as an agreement between an insurer and a reinsurer whereby one party pays reinsurance premiums to another party, and the other party provides loan finance and undertakes to reimburse fi-nancial losses incurred by the insurer through reasonable and significant risk. "Reasonable and significant risk" means that the possibility of a loss occurring on the risk transferred by the insurer is greater than 10%, and the abso-lute value of the ratio of the current value of the cash flow received from the reinsurer to the current value of the cash flow paid to the reinsurer is greater than 10%.
If an insurance company obtains financial re-insurance, it must disclose the purpose, grounds and expected benefit of obtaining such reinsurance in its financial statements or in their notes.
An insurance company may obtain financial reinsurance only from a specialist reinsurance company registered as a business in Taiwan, or a foreign specialist reinsurance company given a credit rating of twA by China Credit Rating or a credit rating equivalent to twA by Standard and Poor's, Moody's Investors Ser-vice, A.M. Best, Fitch IBCA or any other credit rating organization approved by the competent authority.
For an insurance company to enter into, re-scind or terminate a financial reinsurance contract, it requires the prior approval of its board of directors on a case-by-case basis. If an insurance company breaches the provisions of these new rules, the MOF may restrict or cease its financial reinsurance business in whole or in part.
