Authors: Zhan Hao、Wan Jia
Regarding the premium revenue, now China is the second biggest insurance market in this world, but regulators and insurance undertakings always feel cross due to the lack of insurance innovation, especially for the insurance product. More specifically, most of sold insurance products in China were transplanted from the foreign markets, and the so-called localization only means translation in some cases. China insurance regulator, the former CIRC and now CBIRC, occasionally criticized PRC insurers in this regard: some insurers plagiarized the coverage, structure and actuarial model from the foreign products, yet cast the least weight to the Chinese business environment and consumer practice.
In the meantime, PRC insurers feel puzzled when facing such criticism. In a market with short insurance history and shallow-rooted insurance culture, the innovation is not an easy piece.
Finally, the occurrence of the liability insurance for the conservatory measure in civil proceedings, a.k.a., Litigation Property Preservation Liability Insurance (hereinafter referred to as “LPPL”) changed such practice and it has become a typical insurance innovation to satisfy the market demand and address PRC insurance specialty that well tallies with its judicial system.
In accordance to PRC civil procedure law and arbitration law, before or in the course of the civil litigation or arbitration, plaintiffs or claimants could apply the competent court to take the conservatory measures against defendants or respondents, i.e., to freeze the real asset, banking account, creditor’s right against third party, IPR, stock and other assets owned by the opposing parties. The purpose of such measure is to prevent defendants and respondents from transferring assets, and to facilitate the coming enforcement of judgment and arbitral award. PRC procedure law stipulates that, when applying for the conservatory measure prior to the proceedings, plaintiffs or claimants shall provide the guarantee before the proceedings. When applying for the conservatory measure in the proceedings, the court would normally request plaintiffs or claimants to provide the guarantee as well. Theoretically speaking, such guarantee should be equal to the claim amount. When the proceeding is over, if plaintiffs or claimants lost the case and such conservatory measures caused damage to the opposing parties, the opposing parties could claim the compensation in another proceeding.
Previously, plaintiffs and claimants intended to rely on the banks or the guarantee companies to provide such guarantee to courts in case their own asset is not adequate to provide a full guarantee. After some years, banks were reluctant to be involved in such business because this guarantee obligation would be reflected on its balance sheet. As to the guarantee companies, the court were to reluctant to accept guarantee from the guarantee companies due to its limited insolvency capacity and some scandals for this industry. Meanwhile, the litigation and arbitration cases soar in China because China society faces fundamental changes that citizens would prefer to resort to court rather than community or working unit (Chinese traditional dispute resolution means), to resolve disputes. Thus, it is not unnatural for courts and relevant parties to look for the appropriate means to minimize the giant gap between the fierce demand for guarantee and insufficient provider for such service.
Taking those conflicts into account, Jintai P&C insurer located in Yunan, the hinterland of China, innovated LPPL, which distinguished itself from the traditional liability products and is collective products to satisfy the dual demand from court and insured.
After plaintiffs and claimants (insurance applicant. also insured) and insurer reach an agreement, insurer will give the guarantee letter (similar to bond in other jurisdictions) to court, to ensure court to take the conservatory measures against the opposing parties. In the guarantee letter, insurer shall pledge to compensate the loss suffered by the opposing parties if such conservatory measure is proved to be wrongdoing and cause damages. After the end of litigation or arbitration, if the opposing parties claim damages from insured (plaintiffs or claimants) due to the wrongful conservatory measure, insurer shall assume the liability within the coverage.
Precisely speaking, LPPL is dual-function product, which combines the guarantee and liability coverage, and facilitate the litigation and arbitration proceedings. The giant demand gap gives incentive to China insurers to compete in this emerging market, and Ping An pioneered nationwide. Since LPPL is a long-tail product, the occurrence of insurance claim would materialize after the two or three years, even longer, since the issuance of policy. When the opposing parties claim the damages based on the wrongful conservatory measure, the opposing parties have to initiate another litigation, thus this new proceeding would dramatically prolong the insurance benefit payment process. For this reason, loss ratio for Ping An was quite low during the beginning years, and this profitable prospect stimulated other competitors to participate in the competition soon.
For the lobby from CIRC, China Supreme Court published a judicial interpretation to intentionally address LPPL, and this act encouraged the competition for this new product. Now the main PRC insurers contribute huge resources to this product, and fierce competition makes the premium rate decrease a lot.
During the past, China insurance authority was concerned that P&C market is homochromy, in which over 70% of revenue is from motor insurance, and liability product line is not mature at all. The emergence of LPPL demonstrates the space for the growing of liability product in China, and shows the necessity for the product innovation based on the local market.