A new way to get into China's Insurance market?

China Insurance Regulatory Commission (CIRC) recently issued New Provisions on Investment and Purchasing Shares in Insurance Companies (New Provisions) to domestic insurance companies. The New Provisions comprise only 17 articles. However, it covers a number of issues that are of great interest to foreign investors, Chinese insurance companies, and/or both.

The New Provisions allow eligible foreign companies or their wholly owned subsidiaries in China to invest in joint stock insurance companies, subject to CIRC approval and two restrictions: 1) shares held by any single foreign shareholder shall not exceed 5 percent of the total share capital of the insurance company, unless special approval has been given by the State Council; and, 2) shares held by all foreign shareholders in total shall not exceed 25 percent of the company's total share capital.

When shares held by foreign shareholders directly or through its wholly owned subsidiaries in China do exceed 25 percent of the share capital of the company, according to the New Measures, the PRC regulations on the administration of foreign invested insurance companies apply. Currently, the relevant regulations in place was issued by the People's Bank of China in 1992, Provisional Administration Measures on Foreign Invested Insurance Companies in Shanghai (Shanghai Measures), which has been applied mutatis muntandis across the country.

In this sense, the New Measures create a new channel for the inflow of foreign funds into China's insurance industry in addition to the traditional channel built up by the Shanghai Measures, which require that foreign investment can only be made by setting up an equity joint venture or a branch office.

A comparison between the provisions of the two sets of rules on certain issues will assist highlighting the characteristics of the new channel.

Qualification requirements for investors

The New Measures require that, a) the foreign investor is incorporated; b) the investment has been approved by the Board of Directors of the investor; c) the investor is in a healthy state of operation and makes profit; d) the net assets of the investor reaches 30 percent of its total assets; and e) the funds intended to be invested are owned by the investor and come from a legitimate source.

Under the Shanghai Measures, the foreign investor has to be, a) an insurance company, which has been in the insurance business for more than 30 years; b) the total assets of the investor at the end of the year immediately prior to the year making application for establishing in China exceeds US$ 5 billion; and c) the investor has maintained a representative office in China for more than two years.

In comparison, requirements under the New Measures focus more on the finance strength of the investor, while the Shanghai Measures look more at the experience of the investor in the insurance business.

Forms of investment

Within the Shanghai Measures regime, foreign contribution can be made in different forms, including cash (currency), intangible assets (such as know how), and goods, etc.

In contrast, under the New Measures, contribution by the foreign investor can only be in cash (currency) and investment through intangible assets or goods are expressly prohibited.

In addition, as mentioned above, under the New Measures, funds to be invested by the foreign investor must be owned by it and cannot be borrowed from banks, while there is no such restrictions under the old regime.

These differences are not difficult to understand if we look at the objective of the two sets of regulations. The New Measures aim at enlarging the capital of the insurance company and improving their capacity to pay out; while the Shanghai Measures were originally introduced mainly to attract foreign expertise as well as foreign funds into the insurance industry, a new industry in China. On the basis of the Shanghai Measures, a new national level regulation has been drafted and submitted to the State Council for approval and is expected to come out shortly.

Qualification restrictions on domestic investors

It is clearly provided that certain entities are prohibited from investing in insurance companies, including army, organisations, party or administrative organs, banks and securities companies.

Further requirements are imposed upon banks and securities companies. It is provided that where banks or securities companies receive shares, for instance, in the case of forfeiting a mortgage, shall transfer them on within 6 months.

This ban on the involvement of banks or securities involvement in insurance businesses is in line with the practice of separating the three industries widely adopted in western countries like the U.S.

It is also provided in the New Measures that joint stock insurance companies meeting listing requirements may, upon the approval of both CIRC and China Securities Regulatory Commission, raise funds publicly. This leaves the door open for the listing of insurance company on the stock exchanges, which so far has never taken place. For individual investors in China, this means that their funds may also find a way into the insurance industry in the future.

Concluding note

The New Measures are in fact a re-issue of the provisional measures issued last year, with minor amendments. However, they seem to have attracted attention far less than they should have, probably because they are issued by CIRC only within the industry and are generally not publicly accessible.

In practice, however, what these measures put in place may appeal to foreign investors that cannot meet the requirements set out in the Shanghai Measures, for instance, investors in businesses other than insurance, or investors that do not want too much involvement (in a foreign invested equity joint venture, the foreign shareholding are generally required to be more than 25 percent).