As a full-ledged industry in most western countries, the insurance business is in rapid growth in nowadays China accompanying with transformation going on in the environment and regulation mechanisms of the insurance industry during recent years. Since the enactment of the Insurance Law of the People’s Republic of China (hereinafter referred to as Insurance Law) in 1995, though it has experienced several amendments, the Insurance Law is crippled to some degree facing with the growing needs of the developing insurance industry. Under these circumstances, the China Insurance Regulatory Commission (hereinafter referred to as CIRC) had started working on the amendment from last year, which was six years after the last large-scale amendment towards Insurance Law.
On the 14th of October 2015, the Legislative Affairs Office of the State Council published the “Decision on Revising the Insurance Law of the People’s Republic of China (Draft for Comments)” (hereinafter referred to as Draft for Comments), seeking public opinions towards the amendments.
Pursuant to the Draft for Comments, the amendment added 24 articles, deleted 1 article and amended 54 articles in total. There are 9 chapters with 208 articles after the amendment. The amendment focuses on the regulation over insurance business, including the business scope of insurance companies, the scope of insurance assets utilization and a new insurance regulation system. With respect to the contents of insurance contract law, the Supreme Court would publish judicial interpretations, instead of enacting amendments to the law.
Following the principle of “let the front, rear the end”, the amendments aim to deregulate, promote innovation and release energy of the insurance market, and will provide with the more complete regulation mechanisms and more severe punishments for wrong-doings at the meantime. The highlights of the amendments are as follows:
1. Expansion of insurance business and consumer protection.
Apart from adding the annuity product to the insurance business, the amendments included the Internet insurance, catastrophe insurance and insurance trading platforms. The amendments are significant in encouraging insurance innovation, enhancing insurance business platform, promoting standard products and the sustainability of the whole insurance industry.
While encouraging the expansion of insurance business, the Draft for Comments includes consumer protection mechanisms as one of its focus. Apart from the concept of consumer protection, adding rules such as personal information protection and cooling-off period for life insurance, the Draft for Comments provides for administrative punishments for “misleading solicitation” and “unreasonable refusal to claim”, which are headaches to the insurance business in China. Pursuant to the Draft for Comments, insurance companies would be subject to a fine between the range of RMB 200,000 and RMB 1,000,000, should they engage in misleading solicitation and misrepresentation, or refuse to pay indemnities or insurance benefits in accordance with the time limit as set out in the insurance policy.If the violations are serious, their insurance business license would be revoked, which is the most stringent regulation than ever before.
2. The utilization of insurance funds.The amendments with respect to the utilization of insurance funds are as follows:
First, the Draft for Comments further deregulates the operation of insurance registered capital, and provides with more channels for financing. It specifies that insurance companies need not set aside more capital, if their guarantee funds reach the level of RMB 200 million. At the meanwhile, it allows the insurance companies to offer equity instruments, debt instruments and other financing instruments approved by the CIRC. These provisions take into account the insurance companies’ capital need in their business operation, and solve the common problem of insufficient funds.
Second, the Draft for Comments broadens the methods for the utilization of insurance funds, allows the investment of insurance funds in equity, asset management business and derivatives for the purpose of risk assessment. In fact, the regulations and other documents published by the CIRC had already broadened the scope of insurance funds investment in practice. The amendment this time brings those activities tested in practice to the level of law regulation and specifies the direction of promoting insurance innovation and deregulation.
At last, the Draft for Comments provides more requirements for the risk assessment in the utilization of insurance funds. Apart from this, it added the regulatory measures the CIRC could take if insurance companies or insurance asset management institutions, in the utilization of insurance funds, fail to conform to the decision-making process, or fail to implement the requirements of risk assessment. The fine would be 5 times in maximum of the illegal gains. These rules are in conformity with the State Council’s regulation instruction, and put finance innovation and strict supervision in good combination.
3. Bringing in the “Second Generation of Solvency Supervision System”, enhancing corporate governance.
The “Second Generation of Solvency Supervision System” (hereinafter referred to as the System) is a system developed by the CIRC representing the risk orientation in PRC. The System has passed the interim period, and would be fully implemented within the whole industry next year.
Unexpectedly, the Draft for Comments included the principle of “forming the insurance company solvency supervision system directed by risk”, which clarifies the status of the System in PRC insurance law. The Draft for Comments provides for the capital classification regime, testing and assessment standards and capital replenishment mechanism, which are the core issues of the System. It enhances the insurance companies’ responsibility in corporate governance, provides for a more stringent rule for shareholder and actual controller, and specifies that changing the actual controller of insurer representing more than 5% of capital or equity shall obtain approval from the CIRC in order to prevent unqualified investors in insurance companies through purchasing equities. Now transactions and investments regarding equities of insurance companies are quite dynamic accompanying with quite a lot mergers and acquisitions in this sector. The law provides for a more stringent rule regarding the identity of shareholders conforms to the past practice of CIRC.
Correspondingly, the Draft for Comments provides for measures the insurance regulation institutions could take if there are huge potential of risks, insolvency and non-conforming corporate governance. It states that regulatory institution could inspect shareholders and actual controllers of insurer, and their bank account and account information. The Draft for Comments specifies the rule for rectification and taking-over of insurers by insurance regulatory institutions, and enhances the connection between the administrative exit and judicial bankruptcy.
Regretfully, the amendments did not touch the connection of Chinese insurance market and international market, or the insurance funds overseas investment, with no provision with respect to foreign insurers’ domestic cooperation, which is a flaw in the amendments of insurance law.
To conclude, the Draft for Comments demonstrates substantially the instruction of “oriented by the market, completing regulation and preventing risks” established by the “Opinions on the Reform and Development of the Insurance Industry under the State Council” in 2015. Should the amendments be enacted and implemented, the insurance industry would be largely boosted and promoted under the guidance of the new Insurance Law.
First published by LexisNexis.