These days, more and more Chinese people prefer buying policy issued by foreign insurance companies. Compared to the current under-developed situation of Chinese insurance industry, many Chinese Insured think that foreign insurance companies may offer services that more mature and cover more aspects. Driven by the high profit Chinese insurance market may generate, many foreign insurance companies tries to market their insurance products in China. However, there are real barriers and potential legal risks to foreign insurance companies when they are engaging in marketing their products in China.

1. Insurance activities undertaken within China by an institution without a proper insurance license are forbidden under Chinese law.

Article 3 of the 2009 Insurance Law of the Peoples’ Republic of China (hereinafter referred to as the Insurance Law of the PRC) stipulates “All insurance activities carried out within the territory of the People’s Republic of China shall be governed by this Law.” As per the Article, any insurance activities undertaken within China shall be governed and regulated by the Insurance Law.

As there is no explicit definition of “insurance activities”, to the best of our understanding, “insurance activities” refer to all conducts by a commercial insurance business involving parties engaged in insurance business including: the application for the policy; signing the application of the policy; execution of the policy; modification of the policy; payment of the premium; the insurer’s check of the policy; surrendering the policy; claim; assessment of the losses; subrogation and other activities undertaken by insurance companies and intermediaries, including but not limited to operation of the insurance business, advertisement, mailing or sending insurance documentations to the insured, management of the insurance institutions and utilization of the insurance funds.

Selling a policy shall be regarded as an insurance activity and is therefore governed by the Insurance Law of the PRC. Due to a lack of detailed provisions which define this activity clearly, our reply to this question is based on a general interpretation of the principles within Article 3 of the Insurance Law of the PRC.

According to the Insurance Law of the PRC and the Regulation on Administration of Foreign-Funded Insurance Companies, only foreign insurance companies, who set up an operating body within China after the China Insurance Regulatory Commission’s (hereinafter referred to as CIRC) approval and get a license issued by the CIRC, can operate an insurance business in China. The insurance businesses they operate shall be strictly limited to the business scope registered in the license. Foreign insurance companies without an insurance license issued by the CIRC shall not sell policies; shall not operate any other insurance businesses in China; nor shall they authorize any agents to do so within China.

Article 2, section 3 of the Notice of the China Insurance Regulatory Commission on Relevant Issues on Banning Illegal Commercial Insurance Institutions and Illegal Commercial Insurance Business Activities (No. 63 [2008] of the China Insurance Regulatory Commission) states an illegal commercial insurance intermediary business includes the following activities undertaken by an intermediary without the CIRC’s approval: selling a policy issued by a foreign insurance company or other foreign institutions（without license）; facilitating the sale of an illegal foreign insurance policy; arranging or organizing a foreign insurance company to hold a presentation of insurance products; promoting conference of insurance products within China; arranging or organizing the employees of a foreign insurance company to sell a foreign policy within China; arranging or organizing Chinese residents to apply for a foreign policy within China; arranging or organizing Chinese residents to go abroad to apply for a foreign policy.

The Reply of the China Insurance Regulatory Commission on the Issues about Cracking down Illegal Sale of Foreign Insurance Policy within China, (No.223 [2005] of the CIRC) states the mission to crack down on the illegal sale of foreign insurance policies is to prevent the sale and sale activities of foreign insurance policies within China, including the holding of presentations or conferences on insurance products, promoting insurance products, dispatching employees to market or sell policies within China, arranging or organizing Chinese residents to go abroad to apply for a policy. …3, any Chinese enterprise or individual intentionally providing any intermediary services or other services to an institution who sells illegal “underground” policies in China shall be punished. Under such condition, it is required the Chinese enterprise or individual knows the policy is illegal. Subject to 3, the nature of providing intermediary services or other services to the insurer who sells illegal “underground” policies shall be defined as the operation of a commercial insurance business or insurance intermediary business. Therefore, enterprises without an insurance license that are providing the aforesaid services shall be punished on the grounds of illegal operation of an insurance business in China. The same prohibitive provisions are stated in the Notice of the China Insurance Regulatory Commission about Relevant Issues Concerning Banning Assistance to Overseas Insurance Companies in Selling Underground Insurance Policies (No. 29 [2004]), the Circular of China Insurance Regulatory Commission Regarding Sternly Cracking Down on the Illegal Insurance Activities and Insurance Frauds in China of Overseas Insurance Institutions (No.52 [2004]) issued by the CIRC.

Considering the above, insurance activities undertaken by a foreign insurance company without a license within China are forbidden by Chinese laws，these activities include selling life insurance policy by foreign insurance company without license within China. The main point in answering the question of whether the purchase of a foreign life insurance policy is legal or not shall be subject to whether the insurance activities were undertaken within China or not.

2. The insurance intermediary should also possess a valid insurance license if it sells foreign life insurance in China.

In order to sell a foreign life insurance policy in China, not only the intermediary, but also the insurance company who issues policy should hold a valid licence in China.

Article 119 of the Insurance Law of the PRC stipulates “insurance agencies and insurance brokers shall satisfy the requirements prescribed by the insurance regulatory body under the State Council, and have obtained the insurance agency business license or brokerage business license issued by the competent insurance regulatory body. A professional insurance agency or an insurance broker shall conduct the registration formalities at the administrative body for industry and commerce on the basis of the permit issued by the competent insurance regulatory body, and obtains a business license. A concurrent-business insurance agency shall conduct the modification registration formalities at the administrative body for industry and commerce on the basis of the permit issued by the competent insurance regulatory body.”

The Administrative Measures for Insurance Licenses also stipulates that an insurance intermediary should obtain the said insurance agency business license or brokerage business license, license for engaging in insurance adjustment business or license for concurrent-business insurance agencies, otherwise they shall not engage in the intermediary business.

3. The issue of purchasing a policy in foreign countries.

In practice, the most popular form is: the transaction was done overseas. Generally speaking, Chinese laws or regulations neither explicitly permit nor prohibit Chinese residents from purchasing a life insurance policy overseas. Unless going abroad is organized or arranged by a foreign insurance company or intermediary, the reason why Chinese nationals go abroad to purchase foreign insurance policy shall not be considered by CIRC and have no impact as to the legality of the purchase of the policy. However, if there is a causal link between the purchases of a foreign life insurance policy overseas and the marketing or promotion undertaken by the insurer or the intermediary in China. Under this condition, it is possible for the CIRC to believe that the insurer has undertaken insurance activities within China. As stipulated in the Reply of the China Insurance Regulatory Commission on the Issues about Cracking down Illegal Sale of Foreign Insurance Policy within China, (No.223 [2005]), illegal insurance activities relating to foreign life insurance policies in China, those include holding a presentation or conference on insurance products; promoting insurance products; dispatching employees to market or sell policies within China; and arranging or organizing Chinese residents to go abroad to apply for policy, are all prohibited by the CIRC.

4. The potential sanctions on the insurer and the intermediary without valid license

If foreign insurers or the intermediaries sell foreign life insurance policies within China without a valid license, administrative or criminal punishment will be imposed and the insurance policy may be void.

According to the circumstances of violation, the punishment will vary.

(1) If foreign insurers or the intermediaries sell foreign life insurance policies within China without a valid license, administrative punishment will be imposed by the CIRC.

There are some specific articles in the Insurance Law of the PRC which deal with this question.

Article 159 of the Insurance Law of the PRC stipulates “where anyone, in violation of this Law, establishes an insurance company or insurance asset management company without approval or illegally operates the commercial insurance business, the competent insurance regulatory body shall ban it, confiscate the illegal gains and impose a fine of not less than the amount of but not more than five times the illegal gains upon it. If there are no illegal gains or the amount of illegal gains is less than RMB 200,000, a fine of RMB 200,000 up to RMB 1 million shall be imposed upon it.” Article 160 stipulates: “Where anyone, in violation of this Law, forms a professional insurance agency or an insurance broker without approval or carries out the insurance agency or brokerage business without an insurance agency or brokerage business operation permit, the competent insurance regulatory body shall ban it, confiscate the illegal gains and impose a fine of not less than the amount of but not more than five times the illegal gains upon it. If there are no illegal gains or the amount of illegal gains is less than RMB 50,000, a fine of RMB 50,000 up to RMB 300,000 shall be imposed upon it.”

(2). Foreign insurance companies and insurance intermediary institutions, if they sell a life insurance policy within the territory of China without a valid license, shall be responsible for criminal liability if a crime is constituted.

Article 181 of the Insurance Law of the PRC stipulates “whoever violates this Law shall be responsible for criminal liability if a crime is constituted.”

Article 225 of the Criminal Law of the PRC stipulates “any of the following categories of persons who, in violation of the state’s stipulations, engages in illegal business activities and disturbs the market order shall, if the circumstances are serious, be sentenced to fixed-term imprisonment of not more than five years or criminal detention, and concurrently or independently be sentenced to a fine of not less than the amount of illegal gains and not more than five times of the sum. If the circumstances are especially serious, the offender shall be sentenced to fixed-term imprisonment of not less than five years, and concurrently be sentenced to a fine of not less than the amount of illegal gains and not more than five times of the sum or confiscation of property:

(1) without authorization, buying or selling monopolized articles or other articles of exclusive sale as prescribed by laws or regulations;

(2) buying or selling import or export licenses, import or export origin certificates or other business licenses or approval documents as prescribed by laws or regulations; or

(3) illegally engaged in securities, futures or insurance business without the approval of the relevant state department in charge， or illegally engaged in cash and cash balance business; or

(4) Other illegal business activities which disturb the market order seriously.”

Article 31 of the Regulation of the People’s Republic of China on the Administration of Foreign-funded Insurance Companies stipulates “ those who, in violation of these Regulations, establish a foreign-funded insurance company or illegally engage in insurance activities shall be banned by the CIRC and be investigated for criminal liability in accordance with the provisions of the Criminal Law on the crime of illegally establishing financial institutions, the crime of illegal operation or other crimes. Where such violation is not serious enough for criminal punishment, the CIRC shall confiscate the illegal gains and concurrently impose a fine of not less than one time nor more than five times the illegal gains, or a fine of not less than RMB 200,000 nor more than RMB 1 million if there is no illegal gains or the illegal gains is less than RMB 200,000.”

As Article 122 of the Provisions on the Administration of Insurance Agencies (2004 No. 14.) stipulates “if an insurance agency undertakes an insurance agency business without a valid license, the insurance agency should be clamped down and investigated for criminal liability in accordance with the provisions of the Criminal Law. Where such violation is not serious enough for criminal punishment, the CIRC shall confiscate the illegal gains and concurrently impose a fine of not less than one time nor more than five times the illegal gains, or a fine of not less than RMB 100,000 nor more than RMB 500,000 if there is no illegal gains or the illegal gains is less than 100,000 Yuan.”

Article 115 of the Provisions on the Administration of Insurance Brokering Institutions (2004 No. 15) stipulates “where an insurance brokerage is illegally engaged in an insurance brokerage business without obtaining the License, the CIRC shall clamp it down. If a crime is constituted, it shall be investigated for criminal liability in accordance with the law. If no crime is constituted, the CIRC shall confiscate its illegal gains and impose a fine of 1 to 5 times the amount of the illegal gains upon it. Where there are no illegal gains or illegal gains are less than RMB 100,000, it shall be given a fine of RMB 100,000 to 500,000.”

Article 58 of Administrative Provisions on Insurance Adjustment Institutions stipulates “establishing an insurance adjustment institution in violation of this provision shall be clamped down. A fine of RMB 100,000 to RMB 500,000 should be imposed. Where there are illegal gains, it should be confiscated.”

(3). The sale of a life insurance policy by the insurance companies and intermediaries without valid licenses in China will invalidate the insurance contract.

Insurance contract, as a specific kind of contract, will be bound by both insurance law and contract law. Article 52 of the Contract Law of the PRC stipulates “a contract is invalid in any of the following circumstances: (see above) (v) the contract violates a mandatory provision of any law or administrative regulation.……”Article 14 of the Judicial Interpretation of the Supreme People’s Court on Some Issues about the Application of the Contract Law of the People’s Republic of China (II) (Judicial interpretation〔2009〕No. 5) issued by the Supreme Court of PRC stipulates: “Article 52 (v) mandatory provision of any law or administrative regulation refers to those mandatory provisions in the laws and regulations that will affect the validity of the contract.” Article 3 of the Insurance Law of the PRC stipulates “all insurance activities carried out within the territory of the People’s Republic of China shall be governed by this Law.” Article 7 stipulates “legal persons and other organizations within the territory of the People’s Republic of China which need domestic insurance shall take out insurance from insurance companies within the territory of the People’s Republic of China.”

The above mentioned provision in the Insurance Law of the PRC falls within the scope of mandatory provisions that will affect the validity of the contract. That is to say, when an insurance company or intermediary without a valid license sells a foreign life insurance policy in China, it violates the mandatory regulation and leads to the contract becoming void.

In sum, for foreign insurance companies who are interested in marketing their products in China mainland, keep well informed of the Chinese laws is necessary.