In the Chinese insurance market, it is common practice for a company to try to strengthen its supervision capabilities. In the past, special emphasis has been placed on supervision within departments – however, this is often inefficient. Therefore, financial regulatory institutions are beginning to focus on preventing risk by promoting internal supervisory mechanisms and the principle of compliance management.
Since Ping An Insurance Group initiated the establishment of the “Law & Compliance Department” in 2004 and theChina Insurance Regulatory Commission (CIRC) issued the Guidelines of Standardizing Governance Structure of Insurance Companies in January 2006 which state that insurance companies are required to establish a mechanism of compliance management to strengthen the inspection and evaluation of compliance, other domestic insurance companies have followed suit. In 2007, CIRC issued the formal Guidelines for the Compliance Management of Insurance Companies (hereafter Compliance Guidelines) which provide direct policy guidelines for the establishment of departments of compliance.
The Compliance Guidelines clarify the definitions of compliance, risk of compliance, and compliance management as follows:
- Compliance: the activity of an insurance company’s operation management and its employees should conform to regulations, self-enforced rules of the industry and with the corporate and moral code of good faith established between internal management institutions.
- Risk of Compliance: the potential legal liability, supervisory penalties and financial loss caused by any noncompliance.
- Compliance Management: the activity by which the insurance company formulates and enforces policies via a department of compliance management.
The Compliance Guidelines explicitly provide that an insurance company shall establish its own system of compliance management, train its employees, clarify the division of tasks, etc. to implement compliance management and internal supervision effectively, and shall annually submit the previous year’s compliance report to the CIRC to evaluate its operation risk.
The Compliance Guidelines also address the daily operation of insurance companies as well as the related legal issues. Therefore, many insurance companies choose to hire staff with legal backgrounds to work in the compliance management department. A Chinese Insurance lawyer can issue legal a opinion for an insurance company regarding potential risk and then help the insurer to reconstruct its compliance system; this would allow the operation of insurance companies to become standardized.