Foresea Life Evergrande Life Industry implications Comment
The China Insurance Regulatory Commission (CIRC) recently penalised two insurers, Foresea Life Insurance Co and Evergrande Life Insurance Co, for illegal practices with regard to the use of insurance funds. The penalties came just a few days after CIRC Chair Xiang Junbo's statement that speculative and illegal activities by insurers will be penalised as part of the regulator's attempt to prevent the development of systemic risk in the insurance industry.
On February 24 2017 the CIRC imposed a Rmb0.5 million fine on Foresea Life and banned its chair, Yao Zhenhua, from the insurance industry for 10 years due to irregular market operations, including the provision of false information to increase the company's capital. According to the CIRC, Foresea Life stated that in November 2015 its shareholders had used their own funds for capital replenishment. However, an investigation had revealed that the statement did not match the actual capital source. Yao was directly responsible for supplying the false information.
The CIRC also imposed a combined fine of Rmb0.86 million on Foresea Life and six of its senior executives for the company's:
- illegal use of its insurance funds for stock investment in listed companies; and
- failure to meet the regulatory requirements regarding its fund management of equity investments.
A prohibition on accessing the insurance industry is a regulatory measure used by the CIRC to punish persons responsible for the violation of laws and regulations, whereby the punished person cannot be appointed as director, supervisor or senior executive of an insurer for a certain period (10 years in Yao's case) or, in some cases, life. Although Yao and the other Foresea Life senior executives pleaded for mitigation of the penalties and argued that they were not directly responsible for the malpractices, the CIRC, following its investigation, refused their arguments and stated that there were no reasons to exempt them from or mitigate the penalties.
On February 25 2017, one day after the penalties were issued to Foresea Life and its senior executives, the CIRC restricted Evergrande Life from using insurance funds in its stock trading activities for one year and barred two of its senior executives from the insurance industry for five and three years. The CIRC stated that from January to November 2016, Evergrande Life had carried out stock investment activities in violation of the requirements regarding the investment management of insurance funds. During this time, Evergrande had made 2,480 purchases and sales in the stock market, holding the shares for an average of 73 days before selling them. Some of those transactions, particularly those made between late September and early November, were short-term speculative investments that had had "grave social consequences".
In December 2016 a CIRC investigation team visited various insurers, including Foresea Life and Evergrande Life, to review their management, financial reports, insurance product services and capital use. At that point, the CIRC had already suspended Foresea Life from selling universal products and Evergrande Life from engaging in entrusted stock investment.
Since 2016, the CIRC has been clear in its intention to supervise the insurance industry more strictly by issuing a series of regulations relating to the use of insurance funds, including internal control guidelines and regulations regarding information disclosure, asset and debt management and stock investment. Further, the CIRC has increased off-site monitoring and on-site inspection and undertaken a series of regulatory measures with regard to relevant insurers, including:
- issuing risk warnings;
- interviewing management;
- issuing regulatory letters; and
- suspending entrusted stock investment qualification.
The CIRC's increasingly strict supervision is not groundless: the insurance market's rapid development has led to an increasing number of issues in recent years, such as radical and speculative investment and concerted actions in M&A and other cross-industry activities.
Xiang stated that, due to the focus of some companies on radical development and expansion and their continuous challenging of laws and regulations, the CIRC will continue to put significant pressure on companies and maintain close control over disorderly expansion and radical investment in order to eliminate potential risks. Companies that refuse to rectify their actions will be subject to the CIRC's strictest penalties, including:
- a ban on engaging in new business;
- the punishment of senior executives;
- the revocation of licences; and
- other regulatory measures.
Further, Xiang stated that the insurance market will not be regarded as a "club for the rich" that is used to make speculative capital investments.
The penalties imposed on Foresea Life and Evergrande Life emphasise the CIRC's attitude and are expected to have a significant impact on the insurance industry. However, this does not mean that using insurance funds for stock investments is prohibited. The CIRC's main principle for regulating insurers' participation in equity investment is classification, in which shareholders are classified as control, strategy or finance shareholders. While the regulations do not constitute a complete ban on stock investment in listed companies, they will lead to a greater measure of standardisation in future.
For further information on this topic please contact Hao Zhan, Yibin Xia, Pan Xiang or Wang Xuelei at AnJie Law Firm by telephone (+86 10 8567 5988) or email ([email protected], [email protected], [email protected] or [email protected]). The AnJie Law Firm website can be accessed at www.anjielaw.com.?
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