Authored by Dr. Zhan Hao (firstname.lastname@example.org); Tong Kun (email@example.com); Cheng Yanan (firstname.lastname@example.org)
On July 25, 2013, China Insurance Regulatory Commission (“CIRC”) revealed on its official website a notice related to the establishment of the Chinese Insurance Entities Access Examination Committee (the “Committee”).
According to this notice, CIRC has set up the Committee as its internal committee for the purpose of improving the insurance market’s entry and exit mechanisms and enhancing the quality and transparence of the examination process. The CIRC has also stipulated the working rules of the Committee.
The Committee is considered a mechanism of collective deliberation among the departments of CIRC, and is responsible for approving the establishment of Chinese insurance entities. Except for those applications not accepted, suspended or withdrawn by applicants, all of the valid applications for establishing a Chinese insurance entity shall go through the Committee’s deliberation process. The Committee will decide on the fate of the application through a vote, which will express an opinion on whether to approve the application or not.
The Committee will examine entities related to Chinese insurance group (holding) companies and other Chinese insurance entities, including property insurance companies, life insurance companies, mutual insurance companies, captive insurance companies, reinsurance companies and insurance asset management companies.
Four days ago, Mr. Xiang Junbo, chairman of CIRC, called together the heads of the insurance companies to hold a meeting related to reforming and innovating the insurance market. The establishment of the Committee, which is the first step of a market-oriented reform of the insurance industry, shall be a major achievement to improve market entry and exit mechanisms.
Current Entry and Exit Mechanisms in the Insurance Market
Due to the entry and exit mechanisms of the insurance market, which have long been defective, resource allocation in the insurance market currently is conducted with low efficiency, and prevents the overall healthy and orderly operation of the insurance market.
Since the beginning of 2012, improving the insurance market’s entry and exit mechanisms has become the top priority of insurance regulatory work for CIRC. In the national insurance regulatory work conference, Mr. Xiang stressed the need for the establishment of improved insurance market entry and exit mechanisms. According to his speech, market entry and exit mechanisms are an integral part of the overall insurance market’s operation.
Presently, Chinese insurance market entry and exit mechanisms are flawed in the following three aspects: (1) most of the newly established insurance companies hold a nationwide license; (2) part of the new companies just simply copy existing market players and reshuffle market share; (3) an exit mechanism is absent, and the phenomenon of “too big fail” exists, which prevents weaker insurance companies from being weeded out from amongst the strongest.
To solve the above problems, Mr. Xiang thought that the establishment of improved market entry and exit mechanisms was an important and urgent task. CIRC should conduct a comprehensive and systematical analysis of its regulation work, and explore a new management system to encourage multi-level competition in the insurance market.
The Committee Improving Market Entry Mechanisms
The management of insurance entities is one of essential regulatory functions that will be undertaken by CIRC. Through such management, CIRC can adjust the insurance market to be healthy and orderly.
With the allure of promising returns and the scarcity of insurance entity licenses, various investors with abundant financing always express the desire to set up insurance entities. However, due to the lack of provisions about market entry and unclear authority among departments of CIRC, the management of insurance entities is always inefficient.
Following the establishment of the Committee and with a more transparent working procedure, current insufficient situation would be undoubtedly changed and there is a greater chance to improve resource allocation in the insurance market.
Market Exit Mechanisms Which Needs to be Improved
We should note that the Committee is charged with insurance market entry, and has nothing to do with regulations related to market exit.
Currently, CIRC barely has any relevant provisions to market exit other than “Measures on Insurance Company Equity” which provides the provisions of the equity transfer. The market exit mechanism still needs to be improved.
It is understood that the CIRC is gradually improving the market exit mechanism. First, CIRC will speed up the merger and reorganization process in the insurance industry. Quoted from an executive of a life insurance company, "the market exit measures will be put out accordingly, thus it can be expected that the insurance industry will usher in a new wave of mergers and acquisitions in future."
Second, CIRC is in the process of studying multi-level and multi-channel exit mechanisms established for the insurance entities and their shareholders, business, and branch offices. In other words, market exit criteria and procedures will be clear, i.e. it could be an exit from the national market or from the local market, be exit from the business in whole or in part, or even be exit with a long-term or a short-term.
Regulations on Foreign Insurance Entities
It is also worth noting that the Committee only regulates the establishment of Chinese insurance entities rather than insurance entities with foreign investors. However, in the situation of foreign insurance company growing increasingly, it is inappropriate to be lack of regulatory mechanisms for insurance entities with foreign investors. In the light of market-oriented mechanism to be set up gradually, we believe that the CIRC will stipulate corresponding provisions for foreign-funded insurance entities in the near future as well.