On 4th May 2010, a new regulation was in the spotlight, which was seen as the most important regulation published this year. After three rounds of public discussions, the official Measures on Equity of Insurance Company (hereinafter referred to as the “New Measures”) was promulgated and will take effect on 10th June 2010. It will replace the Interim regulation on investing in insurance company (Baojianfa  No. 49) published on 1st April 2000 and the Notice of Regulating Domestic Insurance Company on Attracting Foreign Investment (Baojianfa  No. 126) published on 19th June 2001. This article aims at picking up some representative questions and presenting answers based on our understanding.
Q1: Who can invest in an insurance company?
A1: Except for buying shares of a listed insurance company from stock exchange, the organizations which are allowed to invest in an insurance company are two types: (1) domestic companies and (2) foreign financial organizations.
The thresholds for domestic companies are: (1) having a well-behaved, stable and profitable financial status; (2) having a reputable credit and taxation record; (3) having no criminal or illegal activity record in recent three years; and (4) if investors are financial organizations, they shall be qualified for prudent supervision standard stated by financial supervision authorizations.
The thresholds for foreign financial organizations are: (1) having a well-behaved, stable financial status and having profits in recent three accounting years; (2) having no less than 2 billion US dollars of total asset in the previous year; (3) having been rated as A class by international credit rating agencies in last three years; (4) having no criminal or illegal records in last three years; (5) qualified for prudent supervision standard stated by residential financial supervision authorizations.
Q2: How to define the main shareholder of an insurance company?
A2: A main shareholder of an insurance company shall hold at least 15% shares of the insurance company or control the insurance company directly or indirectly when it holds less then 15% shares.
The New Measure sets high standard for main shareholders of the insurance company by specified three conditions in addition to general requirements for shareholders. A main shareholder of an insurance company should meet the following requirements besides the requirements for shareholders we mentioned above: (1) having capability of consistent investing and having profits in last three accounting years; (2) having strong financial capability and having a net asset of no less than 20 million Renminbi; and (3) having a good reputation and leading status in its own industry.
Q3: Can a shareholder own over 20% shares of an insurance company?
The New Measure states, when a main shareholder of an insurance company meets the requirements provided by the New Measure, its investment or shareholding percentage can exceed 20% of the insurance company’s register capital, subject to the approval of CIRC.
The New Measure also states, when all foreign shareholders’ investment or shareholding percentage exceeds 25%, the insurance company will subject to all the special laws and regulations to foreign-funded insurance companies.
Q4: Can one insurance company purchase the equities of another insurance company who engages in the same type of insurance business or the equities of two insurance companies who engage in the same type of insurance business?
A4: No! If two insurance companies are controlled by the same organization or they have controlling relationships, they should not undertake same type of insurance business, where the conflict of interests or competitive relationships may exist.
For example, XYZ property insurance can not purchase the equities of B property insurance company. Neither can XYZ property insurance company purchase equities of two life insurance companies.
Q5: What are responsibilities of an insurance company’s shareholder?
A5: Shareholders may exert substantial influence on the operation and management of the insurance company. The regulation on the behaviors of the shareholders is the basis to improve the corporate governance of the insurance company. The New Measure provides four main responsibilities for the shareholders:
(1) The shareholder shall make its capital contributions in currency , rather than non-currency property as material objects, intellectual property rights and land-use rights. Such capital must be owned by the shareholder itself; (2) the shareholder shall hold shares of the insurance company directly and dormant shareholders are prohibited by this New Measures; (3) the shareholder or the substantial controller shall not infringe the interests of the insurance company by affiliated transaction; and (4) the shareholder shall disclose its substantial controllers and their alternation, and shall report to the insurance company the information such as shares pledge and name alternation.
Q6: What are the special regulation for transaction of shares？
A6: You should note the following three aspects regarding transaction of shares: (1) any alternation of a shareholder who holds over 5% shares of an insurance company (including purchasing more than 5% shares from the stock exchange) should be approved by CIRC; (2) except for listed insurance company, any alternation of a shareholder who holds less than 5% shares of an insurance company should be filed in CIRC; and (3) the shareholders shall abide by the procedures stated in the New Measures to transfer shares by auction or pledge.
Q7: How can an insurance company go IPO or refinance after being listed?
A7: It should meet the following requirements: (1) having sound company governance structure; (2) having no serious criminal or illegal actions in last three years; (3) having a complete and functioning internal control system with relatively high risk management capability; (4) having been qualified for other conditions stated by laws, regulations and CIRC.
All the IPO and refinance after being listed shall obtain supervisory opinion from CIRC.