Chinese Insurance Market

The Chinese insurance market is poised to take off. Already, as per data issued by the China Insurance Regulatory Commission (hereinafter the "CIRC"), the government body responsible for insurance regulation in China, the annual premium revenue of insurance companies in China for 2001 (RMB 210.9 billion yuan) doubled as compared with that of 1997. More, in February of 2002, the reported monthly premium income of the insurance companies increased up to RMB 48.5 billion yuan.

The many restrictions on the insurance business in China are not the same as those typically found in other countries' insurance systems. Some of the special characteristics of the Chinese insurance market are noted below.

1.1.2 Choosing between life insurance and property insurance

An insurance company in China is not allowed to conduct property insurance business and life insurance business at the same time. This restriction has been circumvented by establishing two separate insurance companies in China, one for life insurance and one for property insurance. Ping'an Insurance (a large Chinese insurer) has set up a holding company to hold subsidiaries engaging in life insurance and property insurance, respectively. AIG is presently the only foreign insurance company that has different arms engaging in life insurance and property insurance (under different companies, of course) in China.

1.1.3 Limitations on investments

There are limitations on the types of investments insurance companies may invest funds in. More alternatives for investment by insurance companies are under discussion. Insurance companies have been permitted to invest in the inter-bank loan market, negotiated rate bank deposits and securities funds.

Insurance companies have been permitted to form their own asset management companies to manage their own investments in the securities market.

1.2 Geographic restrictions

Upon accession of WTO, foreign life and non-life insurers, and insurance brokers will be permitted to provide services in Shanghai, Guangzhou, Dalian, Shenzhen and Foshan.

Within two years after China's accession, foreign life and non-life insurers, and insurance brokers will be permitted to provide services in the following cities: Beijing, Chengdu, Chongqing, Fuzhou, Suzhou, Xiamen, Ningbo, Shenyang, Wuhan and Tianjin.

Within three years after China's accession, there will be no geographic restrictions.

So far the Chinese government is opening the Chinese cities up more quickly than the WTO schedule requires.

1.2.1 Legislative revisions pending

The Insurance Law of the PRC is out of date and under revision. In general one should not refer to only one law in order to understand the regulatory position for any type of business in China, and here we find a good example of this. The Insurance Law has recently been superseded in part by the Regulations on Foreign Invested Insurance Companies, effective as of February 1, 2002.

For example under the Insurance Law, an insurance company could be in the form of a company limited by shares or wholly state owned limited liability company. However, under the Regulations on Foreign Invested Insurance Companies other forms such as equity sino-foreign joint ventures, wholly foreign owned enterprises, and foreign insurance companies' Chinese branches are permissible.

The CIRC has announced it will promulgate regulations on:

• Corporate governance of insurance companies;
• Administration measures on the use of insurance fund;
• Penalty measures on illegal behaviors in insurance business;
• Administration measures on reinsurance;
• Administrative measures on information disclosure of insurance companies; and
• Administrative regulations for insurance brokers

Apart from these, the CIRC will revise existing legislation which is no longer up to date.

1.2.2 Post WTO legislation

Regulations on Foreign Invested Insurance Companies (effective February 1, 2002) provide that a foreign insurance company may establish in China various previously prohibited investment vehicles such as joint ventures and wholly foreign owned enterprises and branch offices.

Insurance joint ventures (EJVs)

• A few weeks ago, Sino-Italy Insurance was incorporated by Sinopec and its Italian partner.
• Metropolitan Insurance (US), New York Life Insurance Company (US) and Green Insurance (German) have already obtained permits from the CIRC to start EJVs with their Chinese partners.
• So far, there are around twenty insurance EJVs.

1.2.3 Insurance wholly foreign owned enterprises (WFOEs)

AIG has announced that it will incorporate two WFOEs in China, one in Beijing, the other in Suzhou.

Branch offices of a foreign insurance company

AIG will set up two branches in Dongguan and Jiangmen (both in Guangdong Province). There are already a dozen foreign branches operating in China, but their operations have so far been restricted..

Requirements for application:

An insurance company applying to establish a company or branch in China must be able to show that it has been in business as an insurer for at least 30 years, that it has maintained a representative office in China for at least 2 years, and that its total assets for the year before application were not less than USD 5 billion

Capital requirements

For an EJV, the paid in registered capital requirement is RMB 200 million. For a WFOE, the paid in registered capital requirement is also RMB 200 million. For a foreign insurance branch, the foreign insurance company should allocate RMB 200 million to the branch for the branch to use in China only.

Permitted business

An insurance company in China may engage in property insurance or life insurance but not both. Property insurance includes property damage, liability and fiduciary insurance. Life insurance includes old age pension, health and accident insurance.

Reinsurance is also permitted. Foreign insurance companies established in China may reinsure out to other insurers (but not to related parties). Foreign insurance companies established in China may accept risks from other insurers (but not from related parties). The permitted scope of business is the same as for primary insurers, in other words, reinsurance in both property and life insurance at the same time is not permitted.

1.2.4 Prohibited business

Prohibitions stated in the February 2002 regulations include buying and selling of assets, and reinsurance with an associated company. As always in China, business outside the scope of the business stipulated on the business license is also prohibited.

1.2.5 Regulatory compliance

Compliance is required with all relevant Chinese laws and regulations (both those pertaining particularly to foreign insurers or foreign investors generally, and also those pertaining to Chinese parties). Among the laws which must be complied with is the Contract Law. Insurance policy details must comply with this and all other relevant Chinese legislation

Penalties for failure to comply with Chinese laws or regulations include administrative and criminal penalties. Administrative penalties are administered by the China Insurance Regulatory Commission and may include fines form one to five times the amount of unauthorized proceeds, or from RMB10,000 to RMB50,000 if there are no unauthorized proceeds

Criminal liability is also possible. The crime of illegal business operation is sometimes inadvertently perpetrated. Liability for other crimes such as embezzlement, misappropriation, etc., is rough but similar to what might be expected in other countries.

1.2.6 Special feature of insurance business in China

An insurance company has no right to refuse inspections by the authorities. This means that good internal procedures will be needed to assure confidentiality of customer data in the course of official inspections. Although government inspectors cannot be shut out, it is possible to negotiate with them, to explain things, and to ensure that original files (or at least copies thereof) remain with the insurance company

Listing possibilities

A number of insurance companies have readied themselves for listing in China. Pacific Insurance has announced that it has already completed all the necessary procedures for an initial public offering. Tian'an Insurance and Dazhong Insurance have announced that they already passed their incubation period pending a listing. Several other insurance companies including Ping'an Insurance, Xinhua Life Insurance, and Huatai Insurance have expressed an interest in listing.

1.2.7 Exiting the market through other means

Restrictions exist on closure of insurers offering old age pensions. Exit via merger or demerger is permitted. Liquidation or sale of business is permitted in the case of insurers offering property insurance. Assets cannot be repatriated after the exit until all continuing insured risks are provided for,

(i) Reinsurance

An insurer may place 20% of the value of each policy it writes with a reinsurance company. The China Reinsurance Company has taken all the reinsurance businesses in China in the past.

The WTO accession agreement stipulates that foreign reinsurance companies may establish and do business in China. The 20% percentage should be reduced step by step until it disappears finally. The schedule stated in the accession agreement is : 20% on the access; 15% within the first year after access; 10% the second year, 5% the third year; with no further restriction of this sort in the fourth year.

For further information please contact Luke Filei at [email protected] or on +86 10 6590 0389.