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21 January 2020
In terms of premium revenue, China is the second largest insurance market in the world. However, regulators and insurers are often frustrated due to the lack of insurance innovation, particularly with regard to insurance products. More specifically, most insurance products that are sold in China have been imported from foreign markets, with so-called 'localisation' meaning only translation in some cases. The China Banking and Insurance Regulatory Commission has criticised Chinese insurers in this regard: some insurers have plagiarised the coverage, structure and actuarial model of foreign products, paying little attention to the Chinese business environment and consumer practice.
However, Chinese insurers are often puzzled when faced with such criticism. In a market with a short insurance history and a shallow-rooted insurance culture, innovation is not easy.
Liability insurance for conservatory measures in civil proceedings – that is, litigation property preservation liability (LPPL) insurance – has changed this practice. LPPL has become a typical insurance solution used to satisfy market demand and address unique Chinese insurance requirements in order to align them with the country's judicial system.
In accordance with civil procedure and arbitration law, before or during the course of civil litigation or arbitration plaintiffs and claimants can apply to the competent court to take conservatory measures against defendants or respondents (ie, to freeze the real assets, bank accounts, creditor's rights against third parties, IP rights, stocks and other assets owned by the opposing parties). The purpose of such measure is to prevent defendants and respondents from transferring assets and facilitate the enforcement of judgments and arbitral awards. Procedure law stipulates that when applying for conservatory measures prior to proceedings, plaintiffs and claimants must provide the guarantee before the proceedings. When applying for conservatory measures during the proceedings, the court will normally request plaintiffs or claimants to also provide the guarantee. Theoretically, such guarantee should be equal to the claim amount. When the proceedings are over, if the instigator of the conservatory measures lost the case and such measures caused damage to the opposing parties, the opposing parties could claim compensation in separate proceedings.
Previously, plaintiffs and claimants intended to rely on banks or guarantee companies to provide such guarantees to the courts in case their own assets were inadequate to provide a full guarantee. However, the banks have become increasingly reluctant to be involved in such business because guarantee obligations are reflected on their balance sheets. With regard to guarantee companies, the courts were reluctant to accept guarantees from guarantee companies due to their limited insolvency capacity and various scandals within the industry. Meanwhile, litigation and arbitration cases have soared in China due to fundamental changes that mean citizens prefer to resolve disputes in the courts rather than in community or working units (ie, traditional Chinese dispute resolution methods). Thus, it is not uncommon for the courts and relevant parties to look for appropriate means to minimise the gap between the demand for guarantees and the insufficient providers of such service.
Taking these conflicts into account, Jintai Property & Casualty Insurance Co Ltd, an insurer located in Yunan, innovated LPPL. LPPL is distinguished from traditional liability products and is a collection of products to satisfy the dual demand from the courts and insureds.
After plaintiffs and claimants (ie, the insurance applicant) and insurers reach an agreement, insurers will issue a guarantee letter (which is similar to a bond in other jurisdictions) to the court to ensure that the court takes the conservatory measures against the opposing parties. In the guarantee letter, insurers must pledge to compensate the loss suffered by the opposing parties if such conservatory measure is proved to be a wrongdoing and causes damages. Following litigation or arbitration, if the opposing parties claim damages from the insured (plaintiffs or claimants) due to a wrongful conservatory measure, insurers must assume the liability in the coverage.
LPPL is a dual-function product which combines guarantee and liability coverage and facilitates litigation and arbitration proceedings. The significant demand for such insurance provides incentives to Chinese insurers to compete in this emerging market, and insurer Ping An has pioneered nationwide. As LPPL is a long-tail product, insurance claims materialise two to three years after a policy has been issued. When opposing parties claim damages based on a wrongful conservatory measure, they must initiate another litigation; thus, this new proceeding prolongs the insurance benefit payment process. For this reason, Ping An's loss ratio was initially low, and this profitable prospect encouraged other competitors to participate in the market.
Following the China Banking and Insurance Regulatory Commission's lobbying, the Supreme People's Court published a judicial interpretation to address LPPL, which has increased competition in this field. Now, the primary Chinese insurers contribute large resources to LPPL, and fierce competition has reduced premiums.
Historically, the China Banking and Insurance Regulatory Commission was concerned that the property and casualty insurance market was hidden in the wider insurance market, in which more than 70% of revenue stems from motor insurance. The commission was also concerned about the immaturity of the liability product line. The emergence of LPPL demonstrates that space exists in China for liability products and demonstrates the necessity of product innovation based on the local market.
For further information on this topic please contact Hao Zhan or Jia Wan at AnJie Law Firm by telephone (+86 10 8567 5988) or email (firstname.lastname@example.org or email@example.com). The AnJie Law Firm website can be accessed at www.anjielaw.com.
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