China Law Vision : China Insurance & Anti-Trust Lawyer : Dr. Zhan Hao : Grandall Legal Group : Anti-Monopoly & Competition Law : China Law Vision Blog

1. The New Measures has changed the scope of administrative reconsideration. The Old Measures listed six circumstances under which citizens, insurance institutions and other legal persons or organizations may apply administrative reconsideration. The New Measures, however, changes the way of representation, and replaces with a broader concept. It stipulates that “Citizens, legal persons and other organizations may apply to CIRC if they consider that their lawful rights and interest have been infringed upon by a specific administrative act made by CIRC and its dispatched organizations, providing that this specific administrative act meets the requirement of Article 6 of Administrative Reconsideration Law of China.”

2. The New Measures adds specific articles on scope of applicants. If a partnership enterprise applies for administrative reconsideration, the applicant shall be the registered enterprise and the executive partner shall represent the enterprise to participate the application. If the General Shareholders’ Meeting or Board of Directors thinks CIRC or its dispatched organization infringe the legal rights of enterprise, they can apply administrative reconsideration in name of enterprise. Additionally, after approving by CIRC, any citizen, legal person or other organization who has interests with the specific administrative act may participate the administrative reconsideration as the third party.

3. The New Measures adds new contents concerning letters and visit. In recent years, CIRC received many administrative reconsideration applications, but those applications were in fact complaints. Usually, CIRC deals with complaints by letters and visit system which citizens and organizations can write to or call at relevant departments of CIRC to complain. In the past, if CIRC received the application of administrative reconsideration which is in deed a kind of complaint, CIRC had to call applicant to withdraw the application and raise letters and visit proceeding. Now, under the New Measures, CIRC can directly transfer the application to letters and visit dealing department. The new method may use manpower and material resources sparingly.

4. The New Measures adds two circumstances of refusing to accept application. If the applicant applies for administrative reconsideration because the respondent doesn’t perform his/her duty, but after dealing with application, CIRC finds that the respondent does not have such duty or has performed the duty, CIRC may refuse the application. And, if CIRC finds the application does not meet the requirement of Administrative Reconsideration Law of China, Regulation on the Implementation of the Administrative Reconsideration Law of China and this New Measures, CIRC may refuse the application.

5. The New Measures strengthens the supervision on administrative officers. It clarifies that the administrative reconsideration department is entitled to suggest human resources and supervision department to punish on administrative officers who has illegal acts. It is also entitled to directly transfer relevant materials of administrative officer who has illegal acts to relevant supervision departments.

According to the New Measures, citizens, insurance companies and other relevant organization may protect their legal rights efficiently and the CIRC also can establish a better supervision system on insurance industry.

To be frank, as a Chinese insurance lawyer, I always receive questions from foreign clients who misunderstand the Insurance Regulatory System in China. Therefore, and due to the recent email I received, I believe it is necessary for me to write something about the CIRC and its responsibilities.

From the founding of the PRC in 1949, the People’s Bank of China has always been the regulatory authority for the insurance industry in China. The only exception was between 1952 - 1959, when the Ministry of Finance regulated the insurance industry in China. In November 1998, the China Insurance Regulatory Commission (CIRC) was established by the State Council as the regulatory authority for the insurance industry in China. The rationale was to fulfill the management goal of "separating operation and separate regulation” of the banking, securities and insurance industries.

The CIRC was regarded as a semi-ministerial institution of the State Council at its establishment, and was upgrade to ministerial institution in 2003. It currently has 15 internal departments and a nationwide network of delegated offices in various regions (local offices).
According to relevant laws and administrative regulations, the major responsibilities of the CIRC are as follows:

a. The CIRC formulates policies, strategies and plans regarding the development of the insurance industry; drafting relevant provisions, rules regarding insurance supervision, regulations and establishing guidelines for the management of insurance companies.

b. The CIRC examines and approves the establishment of insurance companies and their branches, insurance groups, insurance holding companies and insurance asset management companies in conjunction with other relevant authorities. These task include examination and approval of, the establishment of representative offices by overseas insurance organizations within the territory of the PRC, intermediaries such as insurance agencies, brokers, loss-adjustment companies and their branches; examination and approval of overseas insurance invested by domestic insurance and non-insurance organizations; examination and approval of mergers, divisions, alterations and dissolutions of insurance organizations; and participating in bankruptcy and liquidation process of insurance companies.

c. The CIRC examines and confirms the qualifications of senior managerial personnel in all insurance-related organizations and establishes the basic qualification standards for insurance practitioners.

d. The CIRC examines and approves the clauses and premium rates of insurance products relevant to public interest, statutory insurance products and newly developed life insurance products. This involves accepting for filling the insurance clauses and premium rates of other insurance products.

e. The CIRC supervises the solvency and market conduct of insurance companies according to law; manages the insurance protection fund; monitors the insurance guarantee deposits; formulating rules and regulations on insurance fund managements on the basis of the Insurance Law and relevant polices of the State; and supervises insurance fund management.

f. The CIRC supervises the business operation of public-policy-oriented insurance and statutory insurance; supervises organizational forms and operations such as captive insurance and mutual insurance; and conducts administration of institutions such as the China Insurance Association.

g. The CIRC conducts investigations into the following irregularities and imposes penalties accordingly; unfair competition and other irregularities by insurance organizations and practitioners; direct engagement or disguised engagement in insurance business by non-insurance organizations.

h. The CIRC lays down standards for the information systems of insurance industries, establishes risk-assessment, risk-warning and risk-monitoring system; compiles the statistics and report forms of the insurance industry and discloses them in accordance with relevant regulations of the state.

In addition to the CIRC, a number of other regulatory authorities are involved in the regulation of the insurance industry in China. Nearly all the government department and institutions are, to some extent, related to the regulation of the insurance industry. Comparatively speaking, the following authorities exert more influence on the insurance industry; The State Administration of Industry and Commerce (SAIC) and its local offices, particularly in respect of organizational registration, alteration and deregistration; the China Banking Regulatory Commission (CBRC) and China Securities Regulatory Commission (CSRC) and their local offices, particularly in respect of insurance funds utilization; the State Administration of Taxation (SAT) and its local offices, particularly in the respect of tax collection; the Ministry of Finance (MOFCOM) and its local offices, particularly in respect of accounting systems and standards; the State Administration of Foreign Exchange(SAFE) and its local offices, particularly in respect of business related to foreign exchange; and the Ministry of Labor and Social Securities(MOLSS) and local offices, particularly in respect of human resources
 

Article 2 of Insurance Law of the People’s Republic of China defines the scope of insurance under Chinese law. According to leading Chinese scholars an insurance transactions should incur a large number of policy holders, an insurable unexpected risk which is identical to each policy holder within the grouping and the payment of a premium. On this basis an extended warranty may then be classified within the scope of article 2 of the Insurance Law and subject to increased regulation and scrutiny. Though, this is simply academic opinion and the true position of extended warranties (extended service contract) in China is uncertain.

Interestingly, some light has been shed on the issue after the CIRC recently published (January 5th, 2009) formal reply No. (2008)36. The reply was published for SIAC and provides clarity on the position of extended warranties (extended service contract) in China as they relate to appliances sold at Chinese supermarkets. In short and as per the formal reply, extended warranties sold in conjunction with appliances at supermarkets in China are not subject to increased regulation as a conventional Chinese insurance contract would.

The basis of the decision was premised on the fact that traditional forms of insurance cover damage caused by accidents. In this case, the extended warranty would cover natural wear and tear. Therefore, it seems the two are inherently different under Chinese law. Furthermore, it has been suggested an insurable risk must be “unexpected” and there exists sound argument stating an extended warranty does not protect against “unexpected risk” as accident insurance would. The foundation of such argument is premised upon an extended warranty being linked with the normal wear and tear of a consumer product and not an unexpected accident resulting in damage.

However, the decision does not mean all forms of extended warranties and service contracts will be freed from the hold of conventional Chinese insurance regulation; domestic and foreign investors must proceed with caution. Leading Chinese lawyers and experts lack consensus as to the appropriate regulatory place of an extended warranty in China and the same question regarding a different consumer product, for example an extended warranty covering car radios, will likely be required to go before the CIRC in the future.

What will the future hold? Leading experts and Chinese lawyers remain divided. However, in the purest form, an extended warranty for the purchase of a Chinese supermarket appliance is not inherently different from an extended warranty purchased for any other standard consumer product. Thus, there is tremendous potential for extended warranty contracts to be freed from the regulatory burden of Chinese insurance contracts.

Regardless, the legal position of an extended warranty remains largely uncertain under Chinese law. Strong argument exists stating the CIRC will not classify an extended warranty as an insurance contract. Though, due to the ever changing nature of Chinese law, real potential exists for an extended warranty, outside the realm of conventional household appliances, to be subject to the regulatory requirements of conventional insurance contracts in the future. As in any business transaction, risk is inherent. However, market entrants may take steps to reduce potential risk and presently the establishment of a venture whose primary focus concerns extended warranties not subject to insurance regulation remains real. Regardless, due to the absence of legislation and the emerging nature of these questions within China, domestic and foreign investors should proceed with prudence.
 

One of example of this is in Article 12 of the Insurance Law. This provision mandates that a party seeking insurance must have an insurable interest in the insured object. No differentiation is made in Article 12 between life and property insurance. This is problematic .In the real process of life insurance, when signing the insurance contract, insured must have insurable interest in the insured life or health. Meanwhile, in the practical process of property insurance, the insured must have insurable interest in the insured property when the prescribed accident occurs. Professionals often criticize this article which gives distortion to the interpretation of Insurance law.

There has also been an absence of regulation in regard to bonds and a dispute over whether this field should be covered under the Guarantee Law or Insurance Law. This confusion has reached its way to the Supreme People’s Court of China. Conflicting decisions have been made by this body as which law covers bonds.

Many questions also remain on how to best regulate insurance services and effectively account for frequent changes. Many companies are moving quickly in creating business structures for which there is little or no regulation. PICC, China Life, Ping An, Pacific Insurance, and Sunshine Insurance as well as other companies have already established largely unregulated holding companies. Asset management companies, life and property insurance companies, annuity companies, broker companies, agency companies, and loss adjustor companies have already been incorporated within some of these groups. Notable equity purchases by insurance companies include China Life purchasing stock in Guangdong Development Bank and Zhongxin Security Company (a CITIC holding company), and Ping An Group acquiring control of Shenzhen Commercial Bank and naming it Ping An Bank. 

The challenge is for different regulatory bodies such as the China Insurance Regulatory Commission (CIRC), China Securities Regulatory Commission (CSRS) and China Banking Regulatory Commission (CBRC) to properly separate their respective responsibilities in the governance of integrated financial institutions.