Introduction
The insurance industry in China has grown rapidly following the introduction of regulatory changes in recent years. However, although the Insurance Law has been amended several times since its enactment in 1995, it remains insufficient in light of the evolving needs of the industry. Under these circumstances, in 2014 the China Insurance Regulatory Commission (CIRC) began work on further amendments, six years after the last large-scale amendment of the law.
On October 14 2015 the Legislative Affairs Office of the State Council published the draft Decision on Revising the Insurance Law for public comment. The draft decision introduces 24 new articles, deletes one article and amends 54 articles. Following implementation of the amendments, the law will contain nine chapters and 208 articles in total. The amendments focus on the regulation of insurance business, including the business scope of insurers and the scope of insurance asset utilisation. With respect to insurance contract law, the Supreme Court will publish judicial interpretations, rather than enacting relevant amendments to the law.
The amendments aim to deregulate certain aspects of the industry, promote innovation and energise the insurance market, and will provide more comprehensive regulatory mechanisms and more severe penalties for wrongdoing.
Expansion of insurance business and consumer protection
Apart from adding annuity products to the scope of insurance business, the amendments also make provision for online insurance, catastrophe insurance and insurance trading platforms. The amendments encourage insurance innovation, enhance insurance business platforms and promote standard products and the sustainability of the industry as a whole.
While encouraging the expansion of insurance business, the draft decision also includes consumer protection mechanisms, introducing provisions on personal information protection and a cooling-off period for life insurance. Further, it establishes administrative penalties for misleading solicitation and unreasonable refusal of claims, which have been the source of many headaches for the industry. Pursuant to the draft decision, insurers will be subject to a fine of Rmb200,000 to Rmb1 million for engaging in misleading solicitation and misrepresentation or refusing to pay indemnities or insurance benefits within the timeframe set out in the insurance policy. For serious infractions, the violator's insurance business licence may even be revoked – a much more stringent penalty than under the existing regulations.
The draft decision further deregulates the operation of insurance registered capital and provides for more channels for financing. It stipulates that insurers need not set aside more capital if their guarantee funds are at least Rmb200 million. It also allows insurers to offer equity instruments, debt instruments and other financing instruments approved by the CIRC. These provisions take into account insurers' capital needs and resolve the common problem of insufficient funds.
The draft decision also expands the acceptable uses of insurance funds, allowing for the investment of insurance funds in equity, asset management businesses and derivatives for the purpose of risk assessment. Although regulations and other documents published by the CIRC have already broadened the scope of insurance fund investment in practice, the draft decision will enshrine these activities in law and lay the groundwork for further promoting insurance innovation and deregulation.
Finally, the draft decision establishes more stringent risk assessment requirements governing the use of insurance funds. It also sets out the regulatory measures that the CIRC may take if insurers or insurance asset management institutions fail to adhere to the applicable decision-making process or implement the risk assessment requirements. In particular, it may impose a maximum fine of five times the amount of the illegal gains. These rules conform to the State Council's instructions and balance the need for both financial innovation and strict supervision.
Second Generation of Solvency Supervision System: enhancing corporate governance
The Second Generation of Solvency Supervision System was developed by the CIRC to gauge the risk orientation in China. The system has passed its provisional period and will be fully implemented next year.
Unexpectedly, the draft decision incorporates the goal of establishing "an insurance company solvency supervision system directed by risk", which clarifies the legal status of the system. The draft decision sets out a capital classification regime, testing and assessment standards and a capital replenishment mechanism, which are the core issues addressed by the system. It increases insurers' corporate governance responsibilities and provides for more stringent rules governing shareholders and actual controllers. In particular, it specifies that a change of actual controller representing more than 5% of the insurer's share capital or equity must obtain prior approval from the CIRC in order to prevent unqualified investors from purchasing equity. This takes into account the fact that transactions and investments regarding equity in insurers are more dynamic following significant M&A activity in the insurance sector. The provision for more stringent rules governing the identity of shareholders also conforms to the previous CIRC practice.
The draft decision establishes measures that the insurance regulators may take to safeguard against risks, insolvency and non-compliant corporate governance. It stipulates that the regulators may investigate shareholders and actual controllers of insurers and inspect their bank accounts. The draft decision also sets out rules for rectification and takeover of insurers by the insurance regulators, and strengthens the link between administrative exit and judicial bankruptcy.
Regrettably, the amendments are silent on the Chinese insurance market's connection to the international market and overseas investment of insurance funds. A further flaw is the lack of provisions governing foreign insurers' domestic compliance.
The draft decision demonstrates the aims of developing a market-oriented industry, implementing comprehensive regulation and preventing risks, as established by the Opinions on the Reform and Development of the Insurance Industry under the State Council that were issued earlier this year. Should the amendments be enacted and implemented, the functioning of the insurance industry will be greatly improved.
For further information on this topic please contact Hao Zhan at AnJie Law Firm by telephone (+86 10 8567 5988) or email ([email protected]). The AnJie Law Firm website can be accessed at www.anjielaw.com.?
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