As Chinese financial integration progress intensifies, increasing number of Chinese insurance companies are not content with limiting themselves to insurance business only. Rather, they have started to diversify their range of operations. By the end of 31 March 2010, China already has seven insurance group companies as well as one insurance holding company, with their combined total assets, net assets and premiums constituting 75% plus of the whole industry.

I. What are provided in the Measures?

According to the Measures, insurance group companies are defined as those that are approved by CIRC to exist, legally registered, contain such terms as “insurance group” or “insurance holding” in names and exercise controls, joint controls or material influences on other constituent companies within the group.

The Measures impose high standard on the set-up of insurance group companies. To be specific, one or more insurance companies that are controlled by the investors shall meet the following requirements: (1) they have continuously operated for no less than six years; (2) they have been profitable in the last three years; (3) they have total assets no less than 1 billion RMB; (4) they have net assets no less than 10 billion RMB. All insurance companies that are controlled by the investors shall meet the following requirements: (1) its solvency conditions are consistent with regulatory requirements; (6) they have sound corporate governance structure and internal control system; (7) they have no record of serious violations of laws and regulations in the last three years.

Insurance group companies’ principle operations shall be equity investment and management. They may utilize self-owned capitals to invest in insurance companies, insurance asset management companies, specialized insurance agencies, insurance brokerage agencies, insurance assessment institutions and other insurance related businesses. Furthermore, within strict confinement of investment ratio, insurance group companies may also invest in non-insurance financial enterprises, insurance-related non-financial enterprises and overseas entities.

Investment Targets

Investment Ratio

Non-insurance financial enterprises, such as commercial banks

No more than 30% of consolidated net assets of insurance group company. Furthermore, in principle, the insurance group company shall not control two or more than two companies with identical main business within a single financial sector.

Insurance-related, non-financial enterprises

● No more than 25% of actually received capitals of the investee enterprises;

● No more than 10% of the consolidated net assets of insurance group company

Overseas entities

● No more than 10% of the consolidated net assets of insurance group company

● The investment in an individual overseas entity shall not exceed 5% of the consolidated net assets of insurance group company

It is explained by CIRC’s officials that the strict restrictions on investment ratio are designed to “highlight insurance as major business and police investment”. CIRC also stressed that the Measures regulate equity investment of insurance group companies only. The Measures are not applicable to insurance group companies’ financial investments, such as investment with insurance capitals.

In regards to corporate governance, the Measures clarify the functions of insurance group companies in managing and controlling strategic planning, human resource, financial accounting, information system, brand culture and operation coordinationwith special emphasis on the responsibilities of insurance group companies in managing and controlling compliance and risk management. In terms of capital management, the Measures require insurance group companies to set appropriate goal of capital adequacy ratio in order to ensure that subordinate insurance companies comply with regulatory requirement on solvency.

II Impact of the Measures on Foreign Investment

China’s burgeoning insurance market has consistently attracted the attention of foreign capitals. The Measures will have impacts on foreign capitals seeking to enter Chinese insurance business and existing foreign capitals in Chinese market alike.

A Impact on foreign capitals seeking to enter Chinese insurance market

First, foreign capitals may establish presence in multiple financial sectors by investing in insurance group companies. It’s exceedingly difficult to acquire a license of financial operation in China. Because of their natures, insurance group companies are holders of more than one financial license. Therefore, foreign capitals may operate in multiple financial sectors by virtue of making equity investments in insurance group companies.

Second, foreign capitals may pick up investment opportunities in the set-up process of insurance group companies. According to the Measures, setting up insurance group companies can be effectuated by incorporating newly created insurance group companies or converting existing insurance companies into insurance group companies. These processes present opportunities for foreign capitals to make equity investments. However, it should be heeded that CIRC will not allow foreign capitals to invest in two or more than two insurance companies that have identical scope of business. Differently put, once foreign capitals invest in insurance group companies, they are barred from investing in other insurance companies that compete with the insurance companies within the group. Therefore, foreign capitals need to take their growth strategies in the calculus of investing in insurance group companies.

Third, foreign capitals are in good position to share experiences in corporate governance and capital management with Chinese insurance group companies. Financial integration and insurance group operation are still of novelty in China. For Chinese insurance companies, the Measures’ requirements on corporate governance and capital management of insurance group companies constitute big challenge. In contrast, foreign financial groups have accumulated extensive experiences in these regards. They can provide valuable experiences and technical assistances to Chinese insurance groups in terms of corporate governance, capital management and public listing.

B Impact on existing foreign capitals in Chinese insurance market

Currently, several foreign companies have already entered Chinese insurance market by virtue of setting up foreign insurance companies (including Sino-Foreign joint venture insurance companies, foreign funded insurance companies and branches of foreign insurance companies). The Measures may have the following implications on existing foreign capitals:

Enhanced market concentration increases the difficulty of foreign insurance companies’ operations in China. As insurance group companies are taking shape, the concentration rate in Chinese insurance market is going up rapidly. That will create more competitive pressure on foreign insurance companies.

Second, foreign capitals should take care to protect their own interests in investing in insurance group companies. There are currently several foreign-invested Chinese insurance companies which are eligible for being converted into group companies. The conversions necessarily involve key legal issues, i.e., converting current shareholdings into shareholdings in the group companies, replenishing capitals, corporate restructuring and amending articles of associations. These issues are relevant to corporate law, insurance law, contract law and regulation policies. Therefore, foreign capitals are advised to seek counseling from professional insurance lawyers and accountants.

To strengthen regulations on insurance group companies, CIRC has recently published the Administrative Measures on Insurance Group Companies (Provisional) (the “Measures”), setting forth provisions on market entry, corporate governance, capital management, information disclosure and supervisions for insurance group companies.