A reframing of the regulatory rules for the insurance industry promises to bring real benefits for insurance providers and policyholders alike.
Arevised version of China's Insurance Law took effect on January 1, 2003. The amendments to the law – likened to a new year's resolution – received the imprimatur of the National People's Congress Standing Committee on October 28, 2002, reflecting legislators' intention to align national regulations with China's WTO commitments and improve upon the existing legal framework governing the insurance sector.
Foreign investors have welcomed the law as broadening the scope of operations and areas of investment for all insurance providers in China – foreign, domestic and mixed insurance companies and brokerages. China's insurance sector is developing fast, with premiums in 2001 reaching US$25bn, nearly double the amount reported five years previously. The new law is best viewed as an attempt to ensure that the regulatory regime is commensurable with the increasing demands of this burgeoning industry.
More outlets for capital
One big difference is that the revised law provides insurers with a greater variety of outlets for their financial capital. The original law limited the application of funds to bank deposits and treasury and mutual bonds, and insurers lamented that their capital was under-applied and that the permitted investment areas yielded low returns.
The main reason for the original restrictions was the belief that insurance funds, particularly life insurance funds, should be applied in a conservative manner, ensuring that their value was not lost by insurance companies taking on too much risk. Although the restrictions provided a prudential, if heavy-handed, safeguard for the sector, the flow of insurance company funds into deposit accounts and government bonds effectively deprived the Chinese economy of an available source of risk capital that could have been better used to spur growth.
Additionally, the tightly controlled investment areas limited the ability of domestic insurance firms to compete with the everincreasing number of foreign competitors. While the amended version of the law still precludes investment by insurers in securities brokerages, it does allow for investment in insurance-related enterprises.
An important revision, and one which brings China's insurance sector into line with global practice, is the removal of the provision that only life insurers are permitted to offer casualty and short-term health insurance. Although the restriction remains that no single insurance operator can offer both life and non-life insurance concurrently, the law now allows non-life insurers to sell both health and accident insurance. Under the new law, a property insurer seeking to expand its services to include the provision of health or casualty insurance is required to apply to China's Insurance Regulatory Commission (CIRC).
The revised law also promotes greater competition between insurers, which are now allowed to set their own premium rates. Previously, premium rates and insurance clauses were formulated by the regulatory authorities.
In addition, the law allows individual insurance agents to accept entrustments from more than one life insurer concurrently. This means, for instance, that banks and securities houses may act as agents for more than one life insurer. The lifting of this ban could lead to increased commissions for intermediary businesses and a general sharpening of policy packages aimed at potential customers. Overall, these moves represent a shift to a more market-driven system and will undoubtedly engender healthy competition that will benefit the entire insurance sector.
The new law also abolishes the requirement that all non-life insurers reinsure 20 per cent of each insurance contract they underwrite with the state-owned China Reinsurance Company. The elimination of this rule, coupled with the recently promulgated Rules on the Establishment of Reinsurance Companies, should greatly expand the number of reinsurance providers.
The reinsurance rules are much in line with China's WTO commitments. These permit foreign insurers to provide reinsurance services for life and non-life insurance as a branch, joint venture or wholly foreignowned subsidiary, without geographic or quantitative restrictions on the number of licences. The new law and reinsurance rules will facilitate a deepening of the quantity and quality of reinsurance providers in China.
Customers to benefit most
The group that will benefit most from the revised law may not be insurance providers, but rather customers. In the past, some insurance brokers have been over-zealous in trying to woo customers. From now on, they are not allowed to take actions that infringe upon the rights of policyholders. For example, insurance brokers are now prohibited from: deceiving insurers, insurance applicants, the insured or beneficiaries; concealing important conditions of the insurance contract; and from undertaking to provide benefits beyond those prescribed in the regulations of the insurance contract.
In addition, the law increases the potential fines faced by insurance companies, which now range from Yn50,000 to Yn300,000, depending on the violation. In general, the law now places greater emphasis on the ethical conduct of insurance providers when dealing with customers.
In summary, the changes to the law perform three functions: they will put into practice many of China's WTO commitments, while ameliorating the existing regulatory regime; they will foster a competitive, market- driven insurance sector; and simultaneously, they will safeguard the interests of policyholders and consumers. However, the amendments have yet to be tested in reality, and it is still too early to predict if the law has been amended sufficiently to cope with the dynamism of China's insurance sector.
This article was written by Peter Bazos at the Hong Kong office of international law firm Freshfields Bruckhaus Deringer. For more information, contact Lucille Barale, partner in Hong Kong at: email@example.com, or Douglas Markel, partner in Beijing, at: firstname.lastname@example.org