At the end of February 2009, the legislative institution in Beijing promulgated the revised insurance law of People’s Republic of China. This new insurance law will be enforced in October 2009.
When the first insurance law was promulgated in 1995, the Chinese insurance market was largely monopolized, controlled by one state-owned insurer. In regard to public opinion, most Chinese considered insurance as something novel. Today, although far from mature, the Chinese insurance market is too large to neglect. For example, the market is composed of 100 insurance companies and over 2000 intermediate insurance companies, including domestic companies, subsidiaries of foreign companies and joint ventures.
The old insurance law was criticized by insurers, insured, judges and insurance lawyers as lacking practicality. A result of the criticism, five years ago, the topic of revision was placed on the agenda of legislative institutions and the CIRC (China Insurance Regulatory Commission).
Comparing the old law with the new China insurance law reveals many improvement achievements which cover many aspects.
First, the new PRC insurance law updated some outdated provisions which will be beneficial for both the insurer and insured. For example, in terms of insurable interest, the former provision simply stated the insurant should have an insurable interest in the insured target. This was criticized as there is no differential treatment between life insurance and property insurance. The new insurance law modifies the insurable interest requirement, requiring that the property insurance holder should have an insurable interest in the insured target when an accident occurs. In regard to life insurance, the insurant should have an insurable interest in the insured’s target when insurant applies for insurance coverage.
Secondly, some unpractical provisions were modified dramatically by the new PRC insurance law. In insurance practice, the in policy exclusion clause has always been viewed as a headache by both the insured and insurer. Based on the old law, the insurer was obliged to make an accurate explanation for the presence of an exclusion clause, otherwise the exclusion clause would be invalid to the insured. Additionally the old law did not provide the insurer with a detailed answer on how to make an accurate explanation. Hence, most of China’s insurers were troubled by the degree, contents and means of explanation. Bold-faced clauses, an independent sheet explaining the exclusion clause separate from the policy, even video equipment was used by the agent or salesmen of insurers as a means of explanation. Meanwhile, as the legal provision regarding the explanation obligation is too abstract, different courts in China took different views toward validity of such explanatory means. This obstacle made most insurers confused of the burden of proof in an insurance dispute. Fortunately, the new PRC insurance law tremendously improves this issue. The scope of explanation is stipulated, as are the consideration of object and degree of liability for insurer.
Thirdly, the new China insurance law adopts some conventions popular in foreign insurance markets. For example, the incontestable clause is regulated under the new China insurance law. However, before the enforcement of the new law, most policies sold in China have not adopted an incontestable clause. For reasons concerning good faith in the Chinese insurance market, the insured and beneficiary remain unsatisfied with the attitude of the insurer to the incontestable clause. Some insurers detect misrepresentations, non-disclosure and fraud of insurants in the application of insurance coverage. However, insures prefer to let the problems go unnoticed as they would rather collect premiums and tolerate fraud. The end result is misrepresentations are taken advantage of; non-disclosure and fraud are then used as a defense when claims are refused. The new revised China insurance law corrects the unfair advantage of insurer, and stipulates incontestable clause for the first time.
Fourthly, the new China insurance law softens the restrictions for the usage and investment of insurance capital. It states insurance capital could be used within the stock market, stock funds, infrastructure and bonds. Taking future development into account, the new PRC insurance law stipulates insurance capital could be invested into other fields with permission of the China Insurance Regulatory Commission (CIRC). This is good news for domestic insurance companies, and also a test for their ability to control investment risk.
Lastly, the new China insurance law stresses CIRC regulation. Compared with the old law, the new law provides the CIRC with increased power and the ability to regulate the insurance market, insurance behaviors, compliance management, governance structure of insurance companies and risk control. In Accordance to the new China insurance law, the CIRC is also capable of investigating the bank accounts of the insurer and may freeze relevant documentation, interview related parties and terminate the business if necessary.
Shortly after the promulgation of the newly revised China insurance law, insurance circles in China stated the new law will dramatically improve insurance legislation. This is especially true as far as foreign insurance companies and JV insurance companies are concerned. Such parties have stated the new law reflects international norms and is practical and transparent.
In the meantime, some proposals from insurance experts are not found in the law, such as the principle of utmost good faith, the principle of proximate cause and warranty clause in non-marine insurance, all remain absent.