China: PLC Insurance and Reinsurance - 2011

MARKET TRENDS AND REGULATORY FRAMEWORK

1. Please give a brief overview of the insurance and reinsurance markets in your jurisdiction, identifying market trends.

Insurance

As of 2010, the insurance market of the People's Republic of China (PRC) was the sixth largest in the world in terms of premium. It is still growing rapidly. The recent global financial crisis did not appear to have any significant negative impact on the strong commitment of foreign insurance companies towards the PRC.

Although the PRC's entry into the World Trade Organization (WTO) has resulted in further economic liberalisation, the PRC insurance market is still largely dominated by domestic players like the People's Insurance Company of China. While recent amendments to the Insurance Law of the People's Republic of China (PRC Insurance Law) (promulgated in 1995 and amended in 2002 and 2009) (see Question 2) have encouraged more foreign insurance companies to operate in China, they currently only represent a small market share, hovering around 5% between 2008 and 2010.

Taking into account the PRC's strong potential for continuous economic development and increasing efforts at legal reforms, the prospects for the Chinese insurance market remain promising.

Reinsurance

The Chinese reinsurance market lags slightly behind its insurance counterpart. Nevertheless, it possesses strong potential: the China Reinsurance (Group) Company is the largest reinsurer in Asia by registered capital and maintains the largest market share in the PRC. As with the direct insurance market, the Chinese reinsurance market received a significant boost of new energy with the PRC's entry into the WTO, diversifying the options available for direct insurers. As a result, the reinsurance market, though still in its initial stages, is now much more competitive.

2. What is the regulatory framework for insurance/reinsurance activities?

The China Insurance Regulatory Commission (CIRC), set up by the State Council (the Central People's Government and the highest executive organ of state power) in 1998, is the primary governmental agency regulating insurance and reinsurance activities in the PRC, which:

  • Examines and approves the establishment of insurance companies.
  • Supervises insurance business operations.
  • Investigates irregularities.
  • Imposes penalties if necessary.

Insurance and reinsurance activities are mainly governed by the PRC Insurance Law. The legislation treats insurance and reinsurance activities as being largely synonymous. Although the CIRC has in recent years promulgated some guidelines and measures solely regulating the reinsurance business, there is no comprehensive statutory framework for the regulation of reinsurance activities in the PRC.

There are also CIRC regulatory guidelines and measures to improve the operational effect of the existing statutory framework, including:

  • Substantive regulations drafted by the CIRC and issued under the authority of the State Council.
  • Administrative regulations and guidelines, which are issued under the authority of the CIRC chairman.

REGULATION OF INSURANCE AND REINSURANCE CONTRACTS

3. What is a contract of insurance for the purposes of the law and regulation in your jurisdiction? How does it differ from a contract of reinsurance?

Contracts of insurance

A Chinese contract of insurance follows the rules of offer and acceptance: the proposer (that is, a person applying for insurance either on his own or another's behalf) and insurer agree on the insurance rights and obligations (Article 10, PRC Insurance Law).

Insurance is specifically defined as a commercial transaction, involving a contractual agreement, where (Article 2, PRC Insurance Law):

  • A proposer pays a certain premium to the insurer.
  • The insurer undertakes liability to pay indemnity or insurance money in accordance with the insurance contract.

However, an insurance contract is not recognised unless (Article 11, PRC Insurance Law):

  • It complies with the principles of fairness and mutual benefit.
  • All points at issue in the contract are mutually agreed and freely negotiated (except for compulsory and statutory insurance).
  • It does not harm the public interest.

Contracts of reinsurance

Reinsurance is the transference of a portion of an insurer's underwritten business to another insurer in the form of a ceded policy (Article 28, PRC Insurance Law).

The PRC Insurance Law does not provide much guidance on reinsurance contracts. It does not appear that the provisions in the PRC Insurance Law regarding the rights and obligations between the insured and insurer under an insurance contract should be automatically applied to the rights and obligations between the reinsured and reinsurer under a reinsurance contract. A reinsurance contract is considered to be more similar to a general commercial contract. As well as the mandatory provisions of the PRC Insurance Law, it is subject to the:

  • General Principles of Civil Law of the PRC.
  • PRC Contract Law.

4. Are all contracts of insurance/reinsurance regulated in your jurisdiction?

No regulatory exemptions exist for contracts of insurance. If an insurance contract as defined under the PRC Insurance Law is properly constituted, it falls under the existing insurance regulatory framework. A reinsurance contract is considered to be more similar to a general commercial contract (see Question 3, Contracts of reinsurance).

REGULATION OF INSURERS AND REINSURERS

5. Are all insurers and reinsurers regulated in the same way in your jurisdiction?

The provisions of the PRC Insurance Law apply to all insurance activities that take place within the PRC (Article 3, PRC Insurance Law). However, regulatory exceptions exist for (Part Eight (Supplementary Provisions)), PRC Insurance Law):

  • The maritime industry (Article 184).
  • The agricultural industry and other mandatory insurances (Article 187).

In those cases, the PRC Insurance Law applies only to the extent that there are no specific relevant sector-specific laws or administrative regulations.

There is no comprehensive statutory framework for reinsurers (see Question 2). The regulatory framework for insurers and reinsurers is generally identical, although:

  • The CIRC has issued specific regulations and rules to regulate the operation of reinsurance business in the PRC.
  • Some insurance regulations and rules issued by the CIRC explicitly provide that they will not apply to reinsurers.

6. Can insurers or reinsurers carry on non-insurance business? Please summarise any restrictions on their business activities.

Non-insurance business

In practice, insurers cannot conduct non-insurance business, although there is no specific provision to this effect. This is because:

  • An insurer can only engage in either (Article 95, PRC Insurance Law):
    • personal insurance business (including life, healthcare and accident insurance);
    • property insurance business (including property loss, liability, credit and surety insurance);
    • other insurance-related business approved by the CIRC.
  • An insurance business must be operated separately from banking, securities or trust businesses (Article 8, PRC Insurance Law).
  • An insurer must carry on insurance business within the scope of business approved by the CIRC (Article 95, PRC Insurance Law).

Business conduct

The PRC Insurance Law contains provisions that govern the general business activities of insurers and reinsurers. This includes conduct forbidden for insurance companies in the course of their insurance business activities, such as (Article 116, PRC Insurance Law):

  • Fraudulent practices.
  • The deliberate concealing of material information.
  • Favouritism.

7. Are there any statutory limits or other restrictions on, or requirements relating to, the transfer of risk by insurance or reinsurance companies?

Insurers

There are requirements relating to the transfer of risk by insurance companies, including:

  • Insurance companies must allocate funds into various (Articles 98, 99 and 100, PRC Insurance Law):
    • liability reserves;
    • common reserve funds;
    • insurance security funds.

The CIRC can set measures for the funding, management, and use of those reserves and funds.

  • The CIRC has significant authority to decide an insurer's risk transfer measures, including the amounts (Articles 101 to 108, PRC Insurance Law):
    • for minimum solvency;
    • for self-retained insurance premiums;
    • of percentage liability born by the insurer per risk unit.

Reinsurers

The Provisions on the Administration of Reinsurance Business (which was issued by the CIRC on 21 May 2010 and came into effect on 1 July 2010) list statutory requirements for the transfer of risk for reinsurers, for example:

  • For direct property insurance business which is ceded by way of proportional reinsurance, the proportion of business ceded to a reinsurer for each risk unit must not exceed 80% of the insured amount or the limit of liability in the direct insurance contract underwritten by the direct insurance.
  • Both the direct insurer and the reinsurer must adopt consistent assessment methods and assumptions when assessing the statutory reserves for the same life insurance business.

OPERATING RESTRICTIONS

Authorisation or licensing

8. D oes the entity or person have to be authorised or licensed in your jurisdiction? If so, please outline the key steps involved in this process and the requirements that must be satisfied.

Insurance/reinsurance providers

Insurance providers must be authorised by the CIRC.

Application procedure. The key steps involved in the application process are:

  • Application in writing to the CIRC. The required materials for the application include:
    • a letter of application for establishment;
    • a feasibility study report;
    • a formation preparatory plan; and
    • the investor's business licence.
  • Completion of the preparatory work within one year from the date of receipt of the notice of approval from the CIRC for preparation of establishment. During the preparatory period, the applicant must not engage in insurance business activities (Article 72, PRC Insurance Law).
  • If the conditions for establishment are met (see below, Conditions for establishment), the applicant can apply to the CIRC for permission to start operations (Article 72, PRC Insurance Law).
  • After receiving an insurance business operation permit from the CIRC, the applicant must register with the PRC Administrative Body for Industry and Commerce to obtain a business licence before commencing its insurance business.

Conditions for establishment. To establish a local insurance company, the applicant must (Article 68, PRC Insurance Law):

  • Have main shareholders that:
    • have the capacity for sustained profitability;
    • are of good repute;
    • do not have a record of a major violation of law or regulation during the previous three years;
    • have net assets of at least CNY200 million (as at 1 April 2011, US$1 was about CNY6.6).
  • Have articles of association that comply with the PRC Insurance Law and the PRC Company Law.
  • Have the registered capital as specified in the PRC Insurance Law.
  • Have directors, supervisors and senior management personnel with sufficient professional knowledge of their positions and work experience in the business.
  • Have a sound organisational structure and management system.
  • Have a place of business and other business-related facilities that meet the CIRC's requirements.
  • Comply with other conditions as specified by law, administrative regulation or the CIRC.

Finally, to obtain a branch, joint venture or subsidiary licence, a foreign insurer must:

  • Have been in business for more than 30 years.
  • Have had a representative office in the PRC for at least two years.
  • Have total assets of at least US$5 billion (as at 1 April 2011, US$1 was about EUR0.7).
  • Fulfil any other conditions that the CIRC deems prudently necessary.

Marketing insurance/reinsurance services

Insurance agents. Insurance agents require an insurance agency business operation permit from the CIRC to conduct insurance agency business. Insurance agents are defined as institutions or individuals engaged by an insurer to handle insurance business on its behalf (Article 117, PRC Insurance Law). Insurance agents charge a commission fee to the insurer, and can only conduct business within the scope of the insurer's authorisation, which includes the marketing of insurance or reinsurance services.

Licensing and eligibility to conduct business as an insurance agent are governed by provisions in:

  • Part Five of the PRC Insurance Law.
  • The following provisions, issued by the CIRC:
    • the Provisions on the Supervision and Administration of Insurance Agencies (which sets out the application requirements for the permit); and
    • the Provisions on the Administration of Insurance Salesmen.

There is currently no clear guidance on how a foreign investor should go about setting up an insurance agent in the PRC. This is primarily because insurance agency business was not covered under China's commitments on accession to the WTO on 11 December 2001 (WTO commitments) (see below, Insurance broking institutions). The CIRC, unless it receives express authorisation from the State Council, will usually find it difficult to approve such an insurance agent as there is technically no legal basis or policy reason to do so.

Insurance salesman. For an individual to qualify as an insurance salesman, the applicant must fulfil the requirements set out under Part Five of the PRC Insurance Law and the CIRC's Provisions on the Administration of Insurance Salesmen, including:

  • Passing the qualification examination for insurance agency practitioners organised by the CIRC and acquiring a Qualification Certificate for the Insurance Agency Practitioner.
  • Obtaining a Practice Certificate for the Insurance Salesman issued by the insurance company to which he belongs. (The Practice Certificate is a certificate showing that the insurance salesman accepts the appointment of an insurance company to engage in insurance sales activities on its behalf.)

Insurance broking institutions. Insurance broking institutions must also be authorised. Insurance broking institutions offer intermediary services for the conclusion of an insurance contract between a proposer and the insurer. They charge commission for their services, and are regulated primarily by the Provisions on the Supervision of Insurance Broking Institutions, which set out the main requirements for setting up an insurance broking company in the PRC. For both foreign and domestic insurance broking companies, the minimum paid-up capital must be CNY10 million, which must be made in cash contribution.

A foreign broker must satisfy the following requirements before it can apply to establish an insurance broking company in China (WTO commitments):

  • It must have been engaged in insurance business for more than 30 years.
  • Its representative office must have been established in China for at least two years.
  • Its total assets as at the end of the year before the application must be at least US$200 million.
  • The country where it is situated must have a sound system for the regulation of insurance business and it must already be under the effective supervision of the relevant authority in the country concerned.
  • It must obtain the approval of the relevant authorities in its country of incorporation for the establishment of the proposed brokers' company in China.
  • It must satisfy other requirements stipulated by the CIRC.

Other providers of insurance/reinsurance-related activities

Loss adjusting companies and individuals must be licensed and authorised by the CIRC to carry out loss adjustment activities. Insurance loss adjustment institutions are defined as entities that are specifically engaged in the assessment, survey, authentication, loss estimation and adjustment of the insured subject matter or an event of loss for an agreed fee (Article 2, Supervisory Provisions on Insurance Loss Adjusters Institutions (issued by the CIRC on 25 September 2009, which came into effect on 1 October 2009)). To establish a loss adjusting company, the applicant must (Article 8, Supervisory Provisions on Insurance Loss Adjusters Institutions):

  • Have main shareholders or partners that:
    • are of good repute;
    • do not have a record of a major violation of law or regulation during the previous three years;
  • Have articles of association or a partnership agreement that complies with the relevant laws and regulations.
  • Have registered capital of at least CNY2 million.
  • Have a chairman, executive director and senior management personnel with sufficient professional knowledge of their positions and work experience in the business.
  • Have a sound organisational structure and management system.
  • Have a place of business and other business-related facilities that meet the CIRC's requirements.
  • Comply with other conditions as specified by law, administrative regulation or the CIRC.

9. Please summarise the main exemptions or exclusions from authorisation or licensing that are available in your jurisdiction, if any.

There are no exemptions or exclusions from authorisation or licensing for insurance business or related activities in the PRC, except that a foreign insurer is permitted to underwrite the following risks without requiring specific authorisation (WTO commitments):

  • Reinsurance.
  • International marine, aviation and transportation insurance.

Restrictions on ownership or control

10. Are there any restrictions on the ownership or control of insurance-related entities in your jurisdiction (for example, age, nationality, qualification or other restrictions)?

Insurance/reinsurance providers

Professional conduct. A person must not hold the post of director, supervisor or senior manager in an insurance company if that person is (Article 82, PRC Insurance Law):

  • A former director, supervisor or senior manager of a financial institution who has had his authorisation cancelled by the financial regulatory body for any lawbreaking or disciplinary violation for less than five years.
  • A former lawyer, certified public accountant or professional of an institution (such as an asset assessment or verification institution), whose right to practice has been revoked for any lawbreaking or disciplinary violation for at least five years.

The PRC Insurance Law also provides that a person must not hold the post of director, supervisor or senior manager in an insurance company if one of various circumstances set out in Article 147 of the PRC Company Law is met, for example, if this person:

  • Has no civil capacity or only limited civil capacity.
  • Is a former director, factory director or manager of a company or enterprise which went bankrupt and liquidated, and:
    • this person was personally liable for the bankruptcy of the company or enterprise; and
    • three years have not elapsed since the date of completion of the bankruptcy and liquidation of the company or enterprise.

Nationality.

Where a foreign insurance company establishes a joint equity insurance company with a Chinese company or enterprise for engaging in a personal insurance business, the shares held directly or indirectly by the foreign insurance company cannot exceed 50% of the joint equity insurance company (Detailed Rules for the Implementation of the Administrative Regulation of the People's Republic of China on Foreign-funded Insurance Companies).

Marketing insurance/reinsurance services

There are no statutory restrictions on the ownership or control of marketing insurance/reinsurance services in China.

Employees of an insurance company cannot generally invest in an insurance broking company unless the insurance company is informed in writing and gives approval. A director or senior manager of an insurance company or insurance intermediary institution intending to invest in an insurance broking company must obtain the consent of the shareholders of its company or institution at a general meeting (Article 9, Supervisory Provisions on Insurance Broking Institutions (issued by the CIRC on 25 September 2009, which came into effect on 1 October 2009)).

Other providers of insurance/reinsurance-related activities

Not applicable.

11. Do owners or controllers have to be pre-approved by or notified to the relevant authorities before taking, increasing or reducing their control or ownership of the entity?

Insurance/reinsurance providers

The CIRC's approval is needed if there is a change in a shareholder whose capital contribution accounts for at least 5% of the total capital of a limited liability insurance company, or who holds at least 5% of the shares of a joint stock insurance company (Article 84(7), PRC Insurance Law).

Marketing insurance/reinsurance services

In relation to insurance agencies and insurance broking institutions, the CIRC must be notified in writing within five days of the occurrence of any of the following (Article 17, Provisions on the Supervision and Administration of Insurance Agencies and Article 18, Provisions on the Supervision of Insurance Broking Institutions):

  • A change of the principal shareholder.
  • A change in the registered capital.
  • A material change in the equity structure.

Other providers of insurance/reinsurance-related activities The CIRC must be notified in writing within five days of a change of the principal shareholder of a loss adjuster institution (Article 18, Supervisory Provisions on Insurance Loss Adjusters Institutions).

Ongoing requirements for the authorised or licensed entity

12. Please summarise the key ongoing requirements that the authorised or licensed entity must comply with.

Insurance/reinsurance providers

The key ongoing requirements that a licensed insurance or reinsurance company must comply with are (Articles 86 to 88, PRC Insurance Law):

  • Submitting relevant reports, statements, documents and information in accordance with the CIRC's provisions (see below).
  • Keeping accounts, records, books, original vouchers and relevant information relating to its business activities in accordance with the CIRC's provisions.
  • Keeping the CIRC informed if the insurance company engages or dismisses an accounting firm, asset appraisal firm, credit rating agency or other such intermediary firm.

The CIRC issued about 700 new regulations during the period from 2009 to 2010. The primary CIRC provisions that detail ongoing requirements are the:

  • Provisions for the Administration of Insurance Companies 2009.
  • Regulations on Administration of Foreign-Invested Insurance Companies 2001.
  • Provisional Regulations for the Administration of Reinsurance Business 2010.
  • Measures for the Administration of Insurance Clauses and Premium Rates of Property Insurance Companies 2010.
  • Administrative Measures for Equities of Insurance Companies 2010.
  • Notice Concerning Large-Scale Commercial Risk Insurance and Master Policy Insurance Business 2002.
  • Circular on Issues relevant to Reinsurance Business Safety 2007.
  • Notice concerning clarifications on Administration of Branches of Insurance Companies 2010.

Marketing insurance/reinsurance services

The primary CIRC provisions that detail ongoing requirements for insurance intermediaries are the:

  • Provisions for the Administration of Insurance Broking Institutions 2009.
  • Provisions for the Administration of Insurance Agency Institutions 2009.
  • Provisions for the Administration of Insurance Loss Adjusting Institutions 2009.

These provisions set out various regulatory requirements as how insurance intermediaries shall conduct their business. For example, an insurance broking institution must:

  • Have separate accounts for its customers' funds. ]
  • Keep a complete business file to record the relevant information of the insurance policies it placed, the amount of commission and other important business information.
  • Keep effective professional indemnity insurance with sum insured no less than CNY5 million for any accident and CNY10 million in aggregate.
  • Deposit 5% of their paid-up capital with banks as a guarantee of funds against insolvency.

Other providers of insurance/reinsurance-related activities

Not applicable.

Penalties for non-compliance with legal and regulatory requirements

13. Please outline the possible consequences of an entity failing to comply with applicable legal and regulatory requirements (including the disciplinary powers any relevant regulators have, as well as possible customer remedies). What recourse do policyholders have if they have done business with a nonapproved entity?

Insurance/reinsurance providers

The CIRC can impose a number of penalties under Part Seven (Legal Liability) of the PRC Insurance Law, including a fine of up to CNY1 million for certain acts of non-compliance. When a law or administrative regulation is violated and the consequences are serious, the CIRC can ban the relevant responsible persons from the Chinese insurance industry for a certain period of time (lifetime bans are possible) (Article 179, PRC Insurance Law).

An insurance provider can incur civil liability if any loss is caused to a third party due to breach of the PRC Insurance Law (Article 177, PRC Insurance Law).

Marketing insurance/reinsurance services

Part Seven also gives the CIRC power to impose fines in the context of marketing insurance/reinsurance services, including a fine of up to CNY300,000 for an insurance agent's noncompliance. Articles 177 and 179 also apply, enabling the CIRC to ban responsible persons from the insurance industry and civil liability to be incurred for loss caused to third parties (see above, Insurance/reinsurance providers).

Other providers of insurance/reinsurance-related activities

See above, Marketing insurance/reinsurance services.

Restrictions on persons to whom services can be marketed or sold

14. Are there any restrictions on the persons to whom insurance/ reinsurance services and contracts can be marketed or sold?

Insurable interest

The PRC Insurance Law contains certain rules concerning insurable interest. Only entities that have an insurable interest in either the insured (for personal insurance contracts) or the subject matter of insurance (for property insurance contracts) can conclude valid insurance contracts (Article 12). Insurable interest is defined as the legally recognised interest that the proposer or insured has in the subject matter of insurance (Article 12). For personal insurance contracts, the persons in which a proposer can have an insurable interest include family members, close relatives and employees (Article 31). In addition, a proposer has an insurable interest in the insured if the insured consents to the conclusion of the contract by the proposer on his behalf.

For an insurance contract to be valid, the proposer or insured must have an insurable interest:

  • At the time the personal insurance was concluded (for a personal insurance contract) (Article 31).
  • At the time of the occurrence of the insured event (for a property insurance contract) (Article 48).

Reinsurance requirements

A ceding company must ensure, among other things, that each reinsurer meets specific requirements (CIRC Circular on Issues Concerning Security of Reinsurance Business of 28 November 2007, which came into effect on 1 January 2008) (Circular):

  • Financial rating. Rating requirements only apply to treaty and not to facultative reinsurance (see Question 21). The Circular sets out different rating requirements for treaty leaders and treaty followers:
    • Leader: the most recent financial rating must meet at least one of the following:
    • Standard & Poor's: at least A-;
    • A.M. Best: at least A-;
    • Moodys: at least A3; or
    • Fitch: at least A-.

    • Follower: the most recent financial rating must meet at least one of the following:
    • Standard & Poor's: at least BBB;
    • A.M. Best: at least B++;
    • Moodys: at least Baa; or
    • Fitch: at least BBB.

  • Paid-up capital. Other than for nuclear and aerospace insurance, the paid-up capital of reinsurers must be at least CNY200 million or its equivalent in other currencies. If the treaty reinsurance leader is not a professional reinsurance company, its actual paid-up capital must be at least CNY1 billion (or its equivalent).
  • Solvency ratio. The reinsurers' solvency ratio must satisfy the solvency standard set by the local supervisory authority.
  • Compliance. The reinsurers must have no previous record of any serious violation of laws and regulations in the two accounting years before the inception of the reinsurance agreements.

REINSURANCE MONITORING AND DISCLOSURE REQUIREMENTS

15. T o what extent can/must a reinsurance company monitor the claims, settlements and underwriting of the cedant company?

The reinsurance contract will decide the extent to which the reinsurance company can monitor the claims, settlements and underwriting of the cedant company, as there are no specific legal provisions concerning this matter. In practice, it is not uncommon to see underwriting, claim control and/or claim cooperation clauses in reinsurance agreements. However, these clauses do not usually restrict the control and management of the ceding company's business and operations.

16. W hat disclosure/notification obligations does the cedant company have to the reinsurance company?

A reinsurance company can request information from the cedant company concerning its retained liability and other relevant circumstances of the original insurance policy (Article 28, PRC Insurance Law). The cedant company must present this information in a written form.

A cedant must inform a reinsurer, in writing and in a timely manner, of any information which may have a significant impact on the level of reserving needed and claims likely to be payable by the reinsurer (Provisions on the Administration of Reinsurance Business). This includes, but is not limited to, information regarding major claims and indemnity reserves.

POLICIES - CONTENT REQUIREMENTS AND IMPLIED TERMS

17. Please outline the main general form and content requirements for insurance policies in your jurisdiction, including a description of the most commonly found clauses.

The general standard form of a Chinese insurance contract consists of the (Article 18, PRC Insurance Law):

  • Name and legal address of the insurer.
  • Name and legal address of the proposer, insured and the beneficiary (in case of personal insurance).
  • Subject matter of insurance.
  • Insurance liability and exclusions.
  • Insurance period and inception of the insurance cover.
  • Sum insured.
  • Insurance premium and the payment method.
  • Method for payment of indemnities or insurance benefits.
  • Liability for breach of contract and dispute resolution.
  • Date of conclusion of the contract.

18. Please identify any terms found in insurance policies in your jurisdiction that are implied by law or regulation (identifying the applicable laws or regulations and any mandatory provisions).

The PRC Insurance Law was amended in 2009 to, among others, protect the interests of the insured and the beneficiaries. As a result:

  • All insurers were requested to review and amend their policies to simplify obscure wordings.
  • The Insurance Association of China (IAC) issued new policy model clauses designed to comply with the amendments to the PRC Insurance Law, which are effectively pre-approved by the CIRC (see Question 20).

The principle of utmost good faith does not exist under the PRC Insurance Law. The IAC has included provisions in its model wording which, in summary, provide:

  • In concluding the policy, the proposer must make truthful representations concerning the insurer's enquiries on the relevant circumstances of the subject matter of the insurance or the insured (proposer's duty of disclosure).
  • The insurer has the right to terminate the policy if the proposer deliberately, or due to gross negligence, fails to perform its duty of disclosure and that failure is sufficient to significantly affect the insurer's decision on whether to:
    • accept the risk;
    • increase the level of premium.

This right of termination must be exercised within 30 days from the date on which the insurer is aware of a reason for termination.

  • Where the proposer fails to perform its duty of disclosure, the insurer is not liable to pay an indemnity for any insured event which occurred before the termination of the insurance policy. If that failure was deliberate, the insurer will not refund the premium. If the failure was through gross negligence, the insurer will refund the premium.
  • The insurer cannot terminate and must pay indemnities for any insured event if it was aware of the failure of the proposer to perform its duty of disclosure before the conclusion of the policy. These provisions in the model wording basically reflect the provisions in the PRC Insurance Law.

19. Please identify customer protections which are generally included in insurance policies to supplement relief available under general law.

The insurer must draw the attention of the proposer to clauses in the insurance contract that exempt the insurer from liability, and expressly explain the contents of such clauses to the proposer in writing or orally, otherwise these clauses will not enter into effect (Article 17, PRC Insurance Law).

20. Please identify examples of standard policies or terms produced by trade associations or relevant authorities, if any, and explain how these can be obtained.

Since the amendments to the PRC Insurance Law in 2009, the IAC has issued new standard model policy wordings. These wordings are designed to comply with the amended PRC Insurance Law and are effectively pre-approved by the CIRC. Most insurers in the PRC have incorporated the IAC's model policy wordings into their own policies. These standard policy wordings include, for example, information relating to the proposer's duty of disclosure (see Question 18).

21. Please identify common clauses in reinsurance policies, including follow the form and follow the fortune reinsurance, and standard provisions concerning choice of law, arbitration, and right to take part in the underlying adjustment. Is facultative or treaty reinsurance more common in your jurisdiction?

Common clauses in reinsurance policies are very similar to those found in more mature reinsurance markets, including:

  • Claims notification and settlement.
  • Follow the fortune.
  • Term and termination.
  • Inspection of records.

As the PRC Insurance Law provides that the insured of the primary insurance cannot claim indemnity directly from the reinsurer, cut-through clauses may not be effective (see Question 25).

Reinsurance contracts between two PRC entities must be subject to PRC law. For reinsurance contracts between Chinese cedants and foreign reinsurers, the parties are theoretically free to choose a foreign law to be the governing law of the reinsurance contract is foreign related. In practice, the Chinese cedant are likely to insist on PRC law as the governing law of the reinsurance contract. Parties to such a reinsurance contract are more likely to submit disputes to arbitration instead of litigation (see Question 29).

Treaty reinsurance and facultative reinsurance are specifically defined (Article 2, The Provisions on the Administration of Reinsurance Business):

  • Treaty reinsurance: an insurer concludes a contract with another insurer beforehand to agree to reinsure part of its underwritten insurance business within a certain period with another insurer.
  • Facultative reinsurance: an insurer temporarily agrees with another insurer to reinsure part of its underwritten insurance business with another insurer.

Treaty reinsurance is more popular in the PRC market, mainly because:

  • It is common for large risk in the Chinese market to be placed by way of co-insurance (instead of facultative reinsurance).
  • There is substantial treaty capacity in the market.

INSURANCE AND REINSURANCE POLICY CLAIM S

22. W hat must be established to trigger a claim under an insurance policy?

A claim under an insurance policy is triggered on the occurrence of an insured event. An insured event is defined as one falling within the scope of insurance liability as specified in the insurance contract (Article 16, PRC Insurance Law).

After the insured event occurs, the proposer, insured or beneficiary must:

  • Notify the insurer in a timely manner (Article 21, PRC Insurance Law). "Timely manner" is not further explained in the legislation, but its meaning is based on the principles imposed on the parties under Article 5 (that is, that the parties to insurance activities must follow the principle of good faith when exercising their rights and performing their obligations).
  • Provide all proof or information that it has, to determine (Article 22, PRC Insurance Law):
    • the nature or cause of the insured event;
    • the extent of the losses due to the insured event;
    • other circumstances surrounding the event.

23. Please provide brief circumstances in which third parties can claim under an insurance policy.

Third parties can claim under an insurance policy in two circumstances:

  • An insurer can, at the insured's request, pay indemnities to a third party if the insured had caused damage to the third party under a liability insurance policy. The payment must, of course, be in accordance with the law or relevant contractual terms. If the insured fails to request the insurer to pay compensation directly to the damaged third party, the third party can make a claim directly against the insurer for payment (Article 65, PRC Insurance Law). Liability insurance policy is defined as insurance the subject matter of which is the liability of the insured to compensate a third party in accordance with the law (Article 65). The most common example is the compulsory traffic accident liability insurance which must cover all motor vehicles under which a third party can claim against the insured or insurer.
  • A third party can claim against a party (such as an insured or insurer) who breached the PRC Insurance Law where the third party has suffered damages as a result of that breach (Article 177, PRC Insurance Law) (see Question 13, Insurance/reinsurance providers).

24. Is there a time limit outside of which the insured/reinsured is barred from making a claim?

Insurance contracts

The usual limitation period for claims under an insurance contract is two years, except for claims under life insurance contracts, which have a longer limitation period of five years (PRC Insurance Law). The limitation period will start running from the date on which the insured knows or ought to have known of the occurrence of the insured event. For claims under marine insurance contracts (cargo or hull), the limitation period starts from the date of occurrence of the insured event.

Reinsurance contracts

There are no specific limitation periods for reinsurance contracts, which are considered more similar to a general commercial contract (see Question 3, Contracts of reinsurance). Therefore, the general limitation period of two years will apply (General Principles of Civil Law of the PRC).

The prevailing view is that the limitation period commences from the date on which the reinsured is aware or should be aware of the fact that its liability under the primary insurance contract has been ascertained by a valid document or other evidence, including a:

  • Settlement agreement.
  • Court judgment.
  • Arbitration award.

25. Can the original policyholder or other third party enforce the reinsurance contract against a reinsurer?

An original policyholder or other third party cannot enforce a reinsurance contract against a reinsurer (PRC Insurance Law) (see Question 21).

There are a number of protections available to policyholders in the event that the original insurer becomes insolvent. Insurance companies must deposit 20% of their paid-up capital with banks as a guarantee of funds against insolvency (PRC Insurance Law). In addition, the CIRC has established an insurance protection fund which formally commenced operation on 11 September 2008. In the case of bankruptcy, insurance protection will cover:

  • 100% of all unpaid claims under CNY50,000.
  • 90% of unpaid claims over CNY50,000 for personal lines policyholders.
  • 80% of unpaid claims over CNY50,000 for corporate policyholders.

26. W hat remedies are available for breach of an insurance policy?

A valid insurance contract in the PRC must contain provisions detailing the remedies for breach of contract (Article 18(9), PRC Insurance Law). However, the PRC Insurance Law also provides for specific remedies for the following breaches:

  • False claims made concerning an insured event and circumstances where the insured deliberately causes an insured event (Article 27). In these cases, the insurer has the right to terminate the contract and retain all insurance premiums.
  • Where the parties to a life insurance contract have agreed that premium is to be paid in instalments but the insured has defaulted in making premium payments for (Article 36):
    • more than 30 days after the date of a reminder from the insurer; or
    • more than 60 days after the contractually specified time limit.

In those cases, the validity of the life insurance policy will either be suspended or the insured amount will be reduced in accordance with the contractual terms. This Article, however, is only valid if (as is commonly the case) it is expressly included.

INSOLVENCY OF INSURANCE AND REINSURANCE PROVIDERS

27. Please outline the regulatory framework for dealing with distressed or insolvent insurance or reinsurance companies, or other persons or entities providing insurance or reinsurance related services. Can excess coverage "drop down" to provide coverage at levels concerning which the existing coverage is insolvent?

As with most other insurance-related activities, the CIRC remains the main regulatory body dealing with distressed insurancerelated business. The primary laws prescribing the relevant regulatory framework are the PRC Insurance Law, the PRC Enterprise Bankruptcy Law, and the PRC Company Law.

The CIRC can take any of the following actions to intervene in the affairs of potentially insolvent insurance companies:

  • Demand a capital injection.
  • Restrict a company's business scope.
  • Restrict the distribution of profits to shareholders.
  • Limit the purchase of assets or the scale of operational costs.
  • Change allocation of assets.
  • Order the sale of assets or the transfer of insurance portfolios.
  • Limit the remuneration of directors and managers.
  • Prohibit the company from accepting new business.

If a company running an insurance-related business becomes insolvent as specified in Article 2 of the PRC Enterprise Bankruptcy Law, the company or its creditors can approach the CIRC for consent to apply to a People's Court for restructuring, settlement, or bankruptcy liquidation (Article 90, PRC Insurance Law). The CIRC can directly file insolvency proceedings at the People's Court if it deems this necessary in the circumstances.

Article 91 of the PRC Insurance Law details how the property in a bankrupt insurance company must be applied after the discharge of bankruptcy expenses and debts of common interest. Companies formerly dealing in the life-insurance business that are either declared bankrupt or in the process of closing down must transfer their life insurance contracts and liability reserves to another insurance company that engages in the same business (Article 92). Where such companies fail to reach a transfer agreement, the CIRC can designate an insurance company that engages in life insurance business to accept the transfer (Article 92).

Unless the PRC Insurance Law provides otherwise, the relevant substantive rules and procedural requirements of the PRC Company Law apply to insurance companies, including the relevant provisions under Part Ten (Dissolution and Liquidation of Companies) (Article 94, PRC Insurance Law).

TAXATION OF INSURANCE AND REINSURANCE PROVIDERS

28. Briefly describe the tax treatment for insurers, reinsurers, and other persons or entities providing insurance and reinsurance-related services in your jurisdiction.

Insurers must pay:

  • Business tax of 5%, payable on direct gross written premium and capital gains arising from the trading of securities.
  • Stamp duty (about 0.1% of the premium).
  • Municipal tax surcharges (about 0.5%), which help fund building maintenance, education and water resource management, and which may vary with the tax district where the insurer is located.

There are no value added tax (VAT) or insurance premium taxes on insurance premiums.

INSURANCE AND REINSURANCE DISPUTE RESOLUTION

29. Are there special procedures or venues for dealing with insurance or reinsurance complaints or disputes in your jurisdiction?

The CIRC has a special department to deal with consumer complaints, though its main concern is violations of the PRC Insurance Law. Insurers usually try to avoid having disputes referred to the CIRC, as this may result in the CIRC's investigation of their business practices

30. Please give a brief overview of the main dispute resolution methods used to settle reinsurance claims.

A cedant and a reinsurer are free to agree on either litigation or arbitration as the dispute resolution mechanism in the reinsurance contract. However, in practice, arbitration has become the main dispute resolution method used to settle reinsurance claims.

REFORM

31. Please summarise any proposals for reform of the law, regulation or rules in your jurisdiction relating to the provision of insurance or reinsurance services.

It is anticipated that the CIRC will continue to strengthen the supervision and regulation of the insurance industry. This will include improvement of the supervisory rules concerning corporate governance, solvency margin, insurance funds usage and the risk prevention system.

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.

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