On July 25 2013 the China Insurance Regulatory Commission (CIRC) published a notice on its website regarding the establishment of the Chinese Insurance Entities Access Examination Committee.
According to the notice, the CIRC set up the committee to improve the insurance market's entry and exit mechanisms, and to enhance the quality and transparency of the examination process. The CIRC has also stipulated the committee's working rules.
The committee serves as a means of collective deliberation among the CIRC's departments and is responsible for approving the establishment of new Chinese insurance entities. All valid applications for establishing a Chinese insurance entity will go through the committee's evaluation process. The committee will decide on the application by vote.
The committee will assess the applications of Chinese insurance group (holding) companies and other insurance entities, including:
- property insurers;
- life insurers;
- mutual insurers;
- captive insurers;
- reinsurers; and
- insurance asset management companies.
CIRC Chairman Xiang Junbo recently convened a meeting of insurance company heads to discuss reforming and innovating the insurance market. The establishment of the committee, which is the first step in a market-oriented reform of the insurance industry, constitutes a major achievement in the process of improving market entry and exit mechanisms.
Existing market entry and exit mechanisms
Due to the defective entry and exit mechanisms for the insurance market, resource allocation in the market is inefficient and impedes healthy and orderly market operations.
Since early 2012, improving these entry and exit mechanisms has been the top priority in the CIRC's regulatory work. At the national insurance regulatory work conference, Xiang stressed the need for better entry and exit mechanisms, stating that they are an integral part of the overall operation of the market.
The existing entry and exit mechanisms are flawed in the following ways:
- Most of the newly established insurers hold a nationwide licence.
- Some new companies simply copy the practices of existing market players and reshuffle market share.
- There is no proper exit mechanism in place and a 'too big to fail' mentality persists, preventing weaker insurance companies from being weeded out from among the strongest.
To solve these problems, Xiang considers the establishment of improved market entry and exit mechanisms an important and urgent task. The CIRC should conduct a comprehensive and systematic analysis of its regulatory work and explore the possibility of a new management system to encourage multi-level competition in the market.
Improving market entry mechanisms
The management of insurance entities is one of the CIRC's essential regulatory functions, through which it can adjust the market as needed to ensure its general health and good order. With the allure of promising returns and the scarcity of insurer licences, various investors with abundant financing have sought to set up insurance entities. However, due to the lack of provisions on market entry and an unclear authority structure among the CIRC's departments, its management of insurers has been largely inefficient. With the establishment of the new committee and more transparent working procedures, this inefficiency will undoubtedly be eliminated and there will be a greater opportunity to improve resource allocation in the market.
Improving market exit mechanisms
The new committee is charged with insurance market entry only and does not regulate market exit. At present, the CIRC has few provisions on market exit other than the Measures on Insurance Company Equity, which govern equity transfers. The exit mechanism therefore needs significant improvement.
Fortunately, the CIRC is gradually improving the market exit mechanism. First, the CIRC plans to speed up the merger and reorganisation process for the insurance industry. As a life insurance executive has noted, "the market exit measures will be put out accordingly, thus it can be expected that the insurance industry will usher in a new wave of mergers and acquisitions in future".
Second, the CIRC is considering possible multi-level and multi-channel exit mechanisms for insurers and their shareholders, businesses and branch offices. In other words, market exit criteria and procedures will hopefully become clearer and more precise (eg, the insurer could exit the national or local market, exit the business in whole or in part, or even make a long-term or short-term exit).
Regulations on foreign insurers
The new committee regulates the establishment of Chinese insurance entities only, rather than those with foreign investors. However, a complete lack of regulatory mechanisms for such foreign insurers would be illogical. In light of the gradual implementation of market-oriented mechanisms, the CIRC is likely to stipulate corresponding provisions for foreign-funded insurance entities in near future.
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