Amended Insurance Law of the People's Republic of China

As China's economy has grown exponentially in recent decades, its insurance industry has expanded and become an increasingly important part of the economy. The laws governing the nation's insurance industry, however, have not kept pace with that rapid change, or with political developments such as China's entrance to the World Trade Organization (WTO). China has, for example, restricted insurance companies' scope of business far more than Western countries, and it has tightly restricted companies' allowable investments. Some of those restrictions on foreign insurance companies conflict with WTO principles. Another commonly cited problem has been the lack of protection of policyholders' rights and interests.

The Insurance Law of the People's Republic of China was first enacted in 1995 and later amended in 2002. The Standing Committee of the National People's Congress completed its first reading of the Draft Amendment to the Insurance Law of the People's Republic of China on August 29, 2008; we summarized that draft in the October 2008 issue of China Law Update. Six months later, after much debate, China's top legislative body promulgated the final version of the Amended Insurance Law of the People's Republic of China (the 2009 Insurance Law). It becomes effective on October 1, 2009, and governs all insurance activity throughout the People's Republic of China.

The major changes wrought by the 2009 Insurance Law fall broadly into four categories:

• Expanded business opportunities for insurance companies.
• More protection for purchasers of insurance.
• Expanded regulatory powers for the China Regulatory Insurance Commission (CIRC).
• More access for foreign insurers to Chinese markets.

Changes that Affect Insurance Companies

At present, insurance companies in China are allowed to provide only personal and property insurance. The 2009 Insurance law expands that scope of business, allowing companies to provide other types of insurance, as approved by the CIRC.

Under existing versions of China's insurance law, the ability of insurance companies to invest premiums and other funds has been severely restricted, with the result being that many assets were invested in Chinese treasury bonds and bank savings accounts—which of course provide very limited returns. Under the 2009 Insurance Law, companies will be allowed for the first time to invest in real estate, bonds, stock and securities investment funds. The CIRC is expected to draft rules governing implementation of this change.

The 2009 Insurance Law for the first time will allow domestic insurance companies to take the form of a limited liability company, while existing law provides that they (but not foreign companies) could only be in the form of a joint stock limited company or a wholly state-owned company.

Another significant change in the 2009 Insurance Law is that it allows insurance companies to choose their reinsurer freely: They no longer have to use PRC reinsurers. This change is consistent with China's obligations as a result of belonging to the WTO.

More Protection for Policyholders

While granting significantly more freedom to insurance companies operating in China, the 2009 Insurance Law also imposes more obligations in terms of how they relate to policyholders and beneficiaries.

New provisions have been added to the amended law to protect policyholders' rights. Article 17, for example, requires insurers to "explain the provisions of the contract" to the applicant before the insurance contract is signed. In the next paragraph, the insurer is told to warn applicants explicitly of clauses that exempt the company from liability.

For insurance policyholders, however, possibly the most significant change in the 2009 Insurance Law is its introduction of limits on the freedom of companies to unilaterally cancel an insurance policy. Like existing versions of China's insurance law, the 2009 Insurance Law still makes it mandatory for applicants to disclose all information relating to the subject matter of the insurance. And if the applicant/purchaser of insurance fails to disclose material facts, the insurance company is entitled to terminate the policy. Under the 2009 Insurance Law, however, the insurer cannot terminate a policy if it "was aware that the applicant failed to provide truthful information" when entering into the agreement. Similarly, the company's right of termination will be extinguished if it is not exercised within 30 days after the date on which the insurer learned of the reason for termination. In addition, the company cannot, under any circumstances, terminate an insurance contract more than two years after the initial agreement was signed.

This last clause most clearly affects life insurance policies, in that it prevents companies from claiming, many years later (and after collecting premiums for many years), that it had been deceived by the applicant: The 2009 Insurance Law says explicitly that "the insurer shall be liable for paying indemnity or insurance money."

Greater Regulatory Oversight by the CIRC

The 2009 Insurance Law also expands government oversight of the insurance industry by the Chin Insurance Regulatory Commission:

• Under the new law, the principal shareholder(s) of a newly formed insurance company must meet certain requirements, such as having a good credit standing, no record of material violations of laws or regulations within the past three years, and net assets of at least RMB200 million.
• The 2009 Insurance Law expands the CIRC's power to oversee related-party transactions within the insurance industry.
• The 2009 Insurance Law authorizes the CIRC to take disciplinary/protective actions against insurance companies that fail to meet certain requirements pertaining to solvency. The CIRC can, for example, restrict compensation to directors and management, restrict advertising, and even prevent such companies from writing new insurance policies.
• The 2009 Insurance Law provides more details concerning penalties and other consequences for violations of the law.