Identification Standards For The Financial Reinsurance Contracts

Financial reinsurance, as a new risk transfer instrument, has four decades of development history. Financial reinsurance has a prominent role when primary insurers could pass on part of the risk to re-insurers, recognizing related expenses as transaction costs under re-insurance, which effectively spread the risk. Taking advantage of financial insurance, primary insurers can shift to re-insurers the Non-performing loans that virtually carry no risks, thus lowering the debt ratio, improving reporting as well as financial composite index. What's more, primary insurers, by making use of financial reinsurance, could reduce losses through rapid withdrawal of some businesses that are tricky to deal with or suffers heavy losses. Thus, the corresponding funds and personnel transferred could be actively applied into new prospective business areas, facilitating strategic shift to expand its business volume. Also, the reinsurance assignee could utilize their professional strengths in employment of funds, create and share value with the primary insurer, achieving a win-win situation.However, due to the abuse of this risk transferring tool, financial reinsurance contracts are mistakenly recognized, resulting in hidden risks with lowering liability reserve funds. And it is too late when when the problems brought to light, eventually leading to many companies go bankrupt.This also raises attention of a number of regulatory agencies who have, one after another, introduced policy specifying the application of financial reinsurance. The supervision of financial reinsurance mainly stress on normative identification, in other words, financial reinsurance that fails to transfer or transfers little risk should be recognized as other financing tools. Thus, primary insurance companies will not suffer inadequate solvency for its inability to reduce the withdrawal of liability reserve funds.The purpose of this study is to construct identification standards for financial reinsurance based on the status quo of insurance market in china, specifying the identification standard. Domestic research into financial reinsurance is still in its infancy, but foreign research has become mature.Starting from general theories, this paper interprets the definition of financial reinsurance, introduces its birth and development, characteristics as well as functions. This paper also makes an analysis of the differences and connections against the traditional reinsurance. It also discusses from two aspects on the reasons why determining criterion of financial re-insurance is to be established:the essential reason lies in that people have a misinterpretation of the nature of the financial reinsurance; the external factor lies in the abuse conducted by insurance companies attributed to the functions of financial insurance. Based on the comparative analysis of foreign and Taiwan recognized standards of financial reinsurance contracts, this paper puts forward ideas and suggestions on the establishment of the determining criterion in line with China's specific situation.Section 1:"Introduction."This section chiefly introduces the following points:the purpose and significance of this study, Literature Review; status quo of research into financial reinsurance; the framework of this article and innovative points.ChapterⅠ:"an overview of financial reinsurance." This chapter introduces the concept of financial reinsurance, background as well as its characteristics, classification and function.Chapter 2:"Motivation Analysis for the identification of financial reinsurance"This chapter discussed the reason why there is necessity to indentify financial reinsurance from the internal and external aspects.Chapter3:"Identification Standards for offshore financial reinsurance contracts and their comparisons" This chapter chiefly introduces the Identification Standards for financial reinsurance contracts in the United States, Britain, Japan, Singapore and Taiwan. A Comparison of the recognized standards in these countries has highlighted regulation of risk transferring.Chapter4:"Development of Financial Reinsurance in China and the constru ction of contract identification standard". This chapter mainly-talks about the devel opment and regulation of Financial Reinsurance in China, expounding suggestion and thoughts on the construction of financial reinsurance contract identification standard. Financial reinsurance has seen its application in China by the turn of this century.The Formulation principles for actuarial report has for the first time stipulated in. In the Financial Reinsurance Report that" Specifi-cations on reinsurance is supposed to be made if it is involved in financial reinsurance"However, statistical reports of financial reinsurance submitted fail to include contents concerning financial reinsurance. There are also no other regulations and laws stipulating that financial reinsurance contracts are to be indentified first.This paper proposes some thoughts on the identification of financial reinsurance. Firstly, Risk Transferring" is a prerequisite condition for financial reinsurance contracts.The risk transferred must include either-underwriting risk or time risk or bot h of them. Secondly, whether there is risk transferring should be based on commercial substantiality. In determining whether a Financial reinsurance contracts has commercial substance, the insurance companies should stress on the fluctuation of future cash flow brought by the very business transaction. And with the comparison, cash flow and present value generated could be expected with financial reinsurance, thus determining if the signing of financial reinsurance contract is of commercial substantiality.Third, the re-insurers are supposed to bear significant losses, in other words, reinsurers are likely to suffer losses which must be significant; there must be reasonable probabilities of loss. Fourth, the financial reinsurance contract must stipulate clearly the liabilities covered by the reinsurer, benefit contents and the termination conditions for financial reinsurance contract.The innovation of this article:Firstly, this paper systematically discusses, for the first time, the identification standards for financial reinsurance contract.Secondly, this paper analyzes the reason and motivation why financial reinsurance contract is abused from the perspective of legal nature of financial reinsurance contracts.Third, starting from the very point of contracts identification, this paper systematically analyzes the similarities and differences between domestic and foreign identification standards of financial reinsurance contracts in offshore financial reinsurance supervision.