The China Insurance Regulatory Commission ("CIRC") released a draft version of Tentative Administrative Measures on Insurance Business Transfer of Insurance Companies ("Draft Measures") on 22 March 2011 for public comment. Comment is invited before11 April 2011.
The present Insurance Law of the People's Republic of China ("PRC Insurance Law") does not contain any provisions regarding the transfer of all or part of the primary risks forming the business of one insurance company to another insurance company.
Under the present PRC Insurance Law, a transfer of the business portfolio of an insurance company can only be conducted by way of reinsurance or when a life insurance company becomes insolvent. The Draft Measures have for the first time under the PRC law imported the concept of a "transfer of insurance business" – this will be of interest to many insurance companies and companies involved in the run-off business. We have reviewed the Draft Measures and set out the key features of the same below, with references to the Part VII FiSMA transfer mechanism under UK legislation where appropriate:-
According to the CIRC, the Draft Measures aim to regulate the transfer of insurance business and to protect the interests of the policyholders and insured.
According to the Draft Measures, an insurance company wishing to transfer all or part of its insurance business will require the approval of the CIRC only. Unlike a Part VII transfer, a Court will not be engaged under the Draft Measures.
Qualifications of the transferee
The Draft Measures specified the necessary qualifications for the transferee to be as follows:
- The business being transferred is within the scope of the existing business of the transferee ie it does not need to extend its licences;
- It must possess good corporate governance and sound internal controls;
- It must have adequate solvency such that, after taking on the business to be transferred, it will meet the relevant solvency requirements set by the CIRC;
- It must be of good repute with no major violation of any law or regulation in the past two years;
- It shall have branch offices in each of the places where the insurance policies to be transferred were initially issued – this is especially important where the transferee is an overseas insurer licenced in China. Many will not have the necessary branches for this purpose.
- It has carried out a feasibility study in relation to the future management and acceptance of the business to be transferred;
- It complies with such other conditions as may be prescribed by the CIRC.
In accordance with the Draft Measures, both the transferor and the transferee shall submit the following materials to the CIRC for approval: -
- The basic corporate information of both parties involved in the transfer;
- The insurance business transfer agreement;
- The planned arrangements for transfer of the insurance business;
- A feasibility study relating to the future management of the business to be transferred;
- Assessment reports issued by professional intermediaries;
- An assessment report on the liability reserves of the insurance business to be transferred – these will presumably be similar to the Independent Expert Reports required in a Part VII transfer (see below);
- An analysis on the solvency of the transferee, as of last year, and an analysis of the impact the transfer will have on company solvency- again this will presumably be in the independent expert report (see below);
- A document from the board of directors or the shareholders' meeting of both companies which approves the insurance business transfer agreement; and
- Such other materials as required by the provisions of the CIRC.
Appointment of Independent Experts
In the UK, the current legislation requires an independent expert to assess the solvency of both the transferor and the transferee, and report to the Court.
As explained earlier, no Court approval is proposed under the Draft Measures. However, the Draft Measures require both parties involved in the transfer of insurance business to engage professional intermediaries such as law firms and accounting firms to assess various aspects (e.g. value of the business, compliance with relevant regulations) of the insurance business to be transferred. Assessment reports from the professional intermediaries will constitute part of the submission to the CIRC for approval.
The Draft Measures do not contain any provisions regarding the qualifications or criteria for selection of professional intermediaries. It is currently unclear whether the selection of professional intermediaries will require pre-approval by the CIRC as it does under UK law.
Consultation with the policyholder/insureds
The Draft Measures provide that, after the CIRC has approved an insurance business transfer agreement in principle, the transferor shall promptly notify the policyholders and insureds in writing of basic information about the transferee, an outline of the transfer programme and assumption of insurance liability and other related matters, and obtain the consent of policyholders and the insured. The Draft Measures do not go on to deal with circumstances where the policyholders and insured oppose the transfer. The Draft Measures also fail to elaborate upon how any communications with the policyholders/insureds shall be dealt with if the relevant business is placed by brokers ie can notification be to the broker only which would be administratively easier. However, unlike the UK, the broker market in China is less developed, and this may be of lesser benefit.
The Draft Measures require that after the CIRC has approved the transfer agreement, both companies involved in the transfer shall jointly announce the proposed transfer in the newspapers not less than three times, and also post a notice of the transfer on their respective official websites for a minimum of one month.
Effect of the transfer
The Draft Measures do not specify the effects of the transfer, but imply that all of the business included in the transfer will be transferred to the transferee. and it will be as if the insurance contracts had been originally entered into by the transferee. It is hoped that this will be clarified during Consultation.
An insurance company which has transferred all of its business and intends to terminate its business activities should, within 15 working days from the completion of the performance of the transfer agreement, apply to the CIRC to cancel its insurance permit licence.
Other outstanding issues
There are also no special provisions in the Draft Measures relating to transfer of compulsory insurance business (i.e. Compulsory Motor Vehicle Traffic Accident Liability Insurance).
The Draft Measures are also silent on whether the outwards reinsurances will automatically transfer with the underlying business, and how this will be dealt with.
The Draft Measures do not allow insurance business to be transferred to any insurance companies based outside of the PRC. Transfers can only occur between companies authorised by CIRC. This may result in companies engaged in run-off business seeking to set up in the PRC.
We anticipate that the Draft Measures on the insurance business transfers, once formally issued, will undoubtedly elevate the PRC's insurance industry to a level closer to international standards.
We would hope that many of the above issues will be resolved during consultation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.