Authored by Mr. Zhan Hao (Partner at Anjie Law Firm), Zhang Xin and Hong Yanjun
The PRC Insurance Law is being amended again to offer the market more flexibility while tightening supervision. The key changes include greater coverage, consumer protection, funding opportunities and corporate governance.
While far less exploited than other financial sectors in China, the insurance business is growing rapidly – with a capital of Rmb11 trillion ($1.73 trillion) now – in an ever-changing regulatory environment.
To meet the increasing requirements of the industry, the China Insurance Regulatory Commission (CIRC) has decided to adopt the approach of opening up access but strengthening control. In early 2015, the PRC Insurance Law abolished the qualification requirements for insurance agency practitioners, as well as the administrative approval process entirely – a significant change. Further amendments, however, are still needed.
On October 14 2015, the Legislative Affairs Office of the State Council published the Decision on Amending the "PRC Insurance Law" (Draft for Comments) (Draft), which contained 24 new articles, deleted one article and revised 54 articles in total. This left nine chapters with 208 articles. The CIRC began working on this in 2014, six years after the last large-scale revision of the Insurance Law. The Draft focuses on regulating the business scope of insurance companies and the use of insurance assets and introduces a new regulatory system for insurance overall. It does not address insurance contracts; the Supreme People's Court will publish judicial interpretation instead.
The aim is to deregulate, promote innovation and exercise the full potential of the insurance market, as well as to provide a comprehensive regulatory mechanism and enforce stricter penalties for wrongdoing.
Expanded coverage and consumer protection
The Draft has included pensions, internet insurance, catastrophe insurance and insurance trading platforms in its coverage of the industry.
It recognizes that this expanded applicability inevitably requires an emphasis on consumer protection. It adds rules for personal information protection and a cooling-off period for life insurance and stipulates administrative punishments for "misleading solicitation" and "unreasonable refusal to claim", both of which are major pains for the Chinese insurance business.
Pursuant to the Draft, insurance companies are subject to a fine between Rmb200,000 and Rmb1 million for misleading solicitation and misrepresentation or refusal to pay indemnities or insurance benefits within the time limit as set out in the insurance policy. Business licenses can even be revoked for serious violations – the industry's strictest provision yet.
Increased use of insurance funds
The Draft further relaxes the operation of insurance-registered capital and offers more financing channels. It specifies that insurance companies no longer need to set aside more capital if their guarantee funds reach Rmb200 million and enables them to offer equity, debt and other financing instruments approved by the CIRC. These changes address the insurance companies' need for operating capital as well as their challenge of having insufficient funds.
The Draft allows for the investment of insurance funds in equity, asset management businesses and derivatives for risk assessment purposes. In fact, several regulations and documents published by the CIRC have already broadened the scope of investment, but this amendment sets in stone the activities tested in practice.
Finally, the Draft increases risk assessment requirements for utilizing these funds. It clarified the measures the CIRC can take if insurance companies or asset management institutions fail to either adhere to the decision-making process or to apply the necessary risk standards. The fine can be up to five times the illegal gains.
Enhanced corporate governance
Article 137 of the 2015 Insurance Law states the CIRC will develop "a sound system for regulation of the solvency of insurance companies" to be fully implemented next year.
Interestingly, the objective of establishing this system was clarified in the Draft, which highlighted capital classification, testing and assessment standards and a capital replenishment mechanism. The Draft enhances insurance companies' corporate governance responsibilities and provides stricter rules for shareholders and actual controllers. It specifies that CIRC approval is required to change an insurer's actual controller that represents over 5% of the capital or equity, in order to prevent unqualified investors in insurance companies from purchasing shares. The CIRC's stricter criteria for the identity of shareholders is in line with past practice and is especially important now, given the dynamic M&A and investment activity regarding insurance companies' equity.
The Draft clarifies the measures to be taken by regulators in circumstances involving risks, insolvency and corporate governance violations. It states that the authorities can inspect shareholders and actual controllers of the insurer, as well as their bank accounts and account information. It also lays down the rules for rectification and takeover of insurers by authorities, and enhances the connection between administrative exit and judicial bankruptcy.
Regretfully, the amendments did not touch upon the association between the Chinese and international insurance markets. The Draft did not contain any provisions for overseas investment of insurance funds or for domestic cooperation by foreign insurers.
Market activity and industry products are growing and diversifying at an extremely fast pace. Hot investment areas in recent years include:
- the establishment of mutual insurance and reinsurance companies;
- the issuance of insurance catastrophe bonds, insurance firms;
- subordinate bonds and capital supplementary bonds;
- employees' stock ownership plan permits; and
- internet insurance.
Under these circumstances, the Draft substantially demonstrates the market-oriented, risk-prevention approach set forth by the State Council's 2015 Opinions on the Reform and Development of the Insurance Industry. The effective implementation of these amendments would significantly boost the insurance industry as well as encourage innovation and investment under the guidance of the new Insurance Law.
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