November 01, 2011

Temporary Measures Governing the Use Insurance Funds and the Administration of Insurance Group Companies

Temporary Administrative Measures on Insurance Funds Utilization
Issuing Body: China Insurance Regulatory Commission
Issuing Date: February 1, 2010
Effective Date: August 31, 2010

Temporary Measures for the Administration of Insurance Group Companies
Issuing Body: China Insurance Regulatory Commission
Issuing Date: March 12, 2010
Effective Date: March 12, 2010

In the decade since China opened its insurance markets to foreign companies as part of the nation's World Trade Organization commitments, it has become the largest insurance market in Asia and the sixth largest insurance market in the world. Dozens of foreign insurers have established branch offices or subsidiaries in China, and, given the large size of the market and potential for development, significantly more are expected to enter in the hope of acquiring meaningful market shares, especially in niche areas where they have advantages.

According to statistics from the China Insurance Regulatory Commission (CIRC), around RMB2.1 trillion (approximately $325 billion) of insurance capital was available for investment in China as of January 2009, and 84 percent of that money was invested in bank deposits and bonds, mainly because of legal obstacles in China's old (pre-2009) insurance law, which stipulated that insurance capital could only be invested in bank deposits, government bonds, and financial bonds.

With the passage of the Amended Insurance Law of the People's Republic of China in 2009, and the more recent Temporary Administrative Measures on Insurance Funds Utilization (Insurance Fund Utilization Measures), insurance companies established in China (including foreign-invested insurance companies) are now able to invest in corporate bonds, equities, securities-investment funds, immovable assets, infrastructure-backed bonds, and other assets. The Insurance Fund Utilization Measures stipulate asset investment ratios for each investment option. (For example, the cap on equities is no more than 5 percent of the company's total assets at the end of the last quarter, and the limit on investments in immovable assets is 10 percent of total assets.)

These new insurance investments have been warmly welcomed by financial markets and by insurance companies, which have been seeking ways to diversify their investments and achieve higher returns. In this respect, foreign-invested insurance companies may have some advantages over their purely domestic counterparts, as they have more experience in asset management. In addition, the CIRC has relaxed its attitude towards supervision of outward investment by insurance companies.

The Insurance Fund Utilization Measures state that only major equity investments by insurers (defined as equity investments in non-insurance financial enterprises and investments in insurance-related enterprises that result in holding control) require pre-approval from the CIRC, and other investment decisions regarding the use of insurance capital may be made by insurance company boards of directors without prior approval from the CIRC.

An insurance group company, as defined in the Temporary Measures for the Administration of Insurance Group Companies (Insurance Group Measures), is a company approved by the CIRC to exercise control, joint control, or a material influence on constituent companies within its group, with its principal operations being equity investment and management of investees. When the Insurance Group Measures were issued by the CIRC in 2010, there were seven insurance group companies in China.

In addition to that principal business, the Insurance Group Measures also authorize an insurance group to invest in insurance-related businesses and non-insurance financial enterprises (including but not limited to banks, securities companies, fund management companies, insurance companies, and trust companies), albeit with strict restrictions on investment ratios. As a separate license must be obtained to establish and operate a financial enterprise in China—a license that is difficult to obtain—foreign insurers desiring to enter into not only Chinese insurance markets but also multiple financial sectors may want to consider investing in an insurance group to operate those financial investments indirectly, thus avoiding burdensome license application procedures.

Additionally, the Insurance Group Measures contain strict requirements on corporate governance and capital management of insurance groups, which may present a substantial challenge for domestic insurance companies, since financial integration has been allowed only on a trial basis and in limited areas, and the insurance group concept remains a novelty in China. This may create another opportunity for foreign insurers, since many of them are established operators in global financial markets with long-term experience and pools of seasoned professionals. Thus foreign insurers may be invited to partner with local counterparts in the administration of insurance group companies in order to share advanced management concepts and provide operational assistance.

Conclusion

While insurance companies are still ultimately under the control of the Chinese government, many restrictions have been lifted in the past few years. The government has welcomed foreign insurers, especially large companies, to China, and appears to be making an effort to create a more level playing field for foreign and domestic insurers.

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