Insurance

 

1. Broadened Investment Channels for Insurance Funds

The amended law significantly expands the types of investment vehicles in which insurance companies will be allowed to invest their funds. Until recently, insurance companies were only allowed to channel their funds into severely restricted investment options, choking off sustainable growth. These restrictions have resulted in a significant proportion of insurance premiums being invested in either Chinese treasury bonds or bank savings. In comparison in the West, funds are commonly invested in stocks, which generate the returns necessary to cover pay-outs on premiums, as well as costs and profits.

The amended Insurance Law, for the first time, allows insurance companies to use their funds to invest in 'immovable assets' (which is not defined but presumably includes real estate). Investments by insurance companies in bonds, shares and units in securities investment funds are also permitted. The PRC insurance regulator, the China Insurance Regulatory Commission (CIRC), is authorized to draft implementation rules that are expected to give further details of regulation regarding these investments.

2. Reinsurance Restriction Abolished

The previous Article 103 of the Insurance Law, which provided that 'an insurance company that needs to cede reinsurance business shall give priority to insurance companies established within China has been removed in the amended Law. This step is consistent with China's commitments for entry to the World Trade Organization.

However, the Provisions on the Administration of Reinsurance Business specifically require that a direct insurer, when handling contract reinsurance and temporary reinsurance to reinsurers, must offer to at least two professional reinsurers in China no less than an aggregate of 50 per cent of the risks to be reinsured before it can offer such business to overseas insurers (the 50 per cent Restriction Rule). It remains unclear if and when the CIRC will further liberalize and abolish such 50 per cent Restriction Rule to reflect the spirit of non-discrimination against cross-border reinsurance business under the Amended Insurance Law.

3. Forms of Insurance Companies Expanded

The amended Insurance Law provides that an insurance company can take the form of a limited liability company. According to the existing insurance laws and regulations, a domestic insurance company must be a joint stock company or a wholly state-owned company. A foreign-invested insurance company, on the other hand, can be a limited liability company. The Amended Insurance Law removes such company form restrictions. As such, going forward, now a domestic insurance company is free to be formed as either a limited liability company or a joint stock company.

4. Qualification requirements for major shareholders

The revised Law imposes stricter requirements on an insurance company's 'major shareholders' when establishing new insurance companies. In particular, a major shareholder is required to have: (1) the ability to make sustained profits and have a good reputation; (2) no record of any serious breaches of law or regulations in the last three years; and (3) net assets of at least RMB200 million.

However, there is no definition of a "major shareholder" either under the current Insurance Law or the Amended Insurance Law. It seems that these qualification requirements will apply mainly to major domestic shareholders of insurance companies as the qualification requirements for foreign investors of the foreign-invested insurance companies are set out in the Administrative Regulations on Foreign Invested Insurance Companies (the Insurance FIE Regulations).

5. Regulation of Related Party Transactions Heightened

In recent years, the CIRC has made great efforts in supervising related party transactions (RPTs) in insurance companies. The CIRC has set out the approval and filing requirements for foreign-invested insurance companies and domestic insurance companies respectively with regard to certain RPTs. The Amended Insurance Law gives its recognition of such practice and has elevated the CIRC's power in regulating RPTs to a national law level.

6. Insurer's termination rights limited

One key theme of the amended Insurance Law is greater clarification and protection of the rights and interests of policyholders and the insured. One example of this is the imposition of time limits on an insurer to terminate an insurance contract on the ground that the relevant policyholder has not made full and accurate disclosure – such a termination right is required to be exercised within 30 days after the insurer is aware of the breach or two years from the signing of the relevant insurance contract, whichever is earlier. In addition, if the insurer is aware that the applicant has not made full and accurate disclosure at the time of signing the relevant insurance contract, it may not rely on such grounds to terminate the contract.

Other key changes:
(a) The amended Law permits employers to take out personal insurance (including life insurance) for their employees as insured without their specific consent.
(b) Under the amended Law, CIRC is authorized to take certain measures in relation to insurance companies that do not satisfy certain solvency requirements. Such measures include, among others, placing restrictions on the remuneration of the directors, supervisors and senior management of those companies, restricting those companies' advertising activities and ordering them to stop writing new business.
(c) The amended Law has more detailed rules in relation to penalties and the legal consequences of breaches of the Insurance Law, indicating the authorities' intention to enforce the Insurance Law more proactively.

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