China: Insurance & Reinsurance

Since China is a continental law country, the sources of law are statutory codes. In China, the sources of insurance law mainly consist of:

a the PRC Insurance Law;
b judicial interpretations issued by the Supreme People’s Court;
c other relevant laws promulgated by the National People’s Congress; and
d regulations and guidelines issued by China Banking and Insurance Regulatory Commission (CBIRC, previously known as China Insurance Regulatory Commission, CIRC) and other relevant government institutions.

Pursuant to the PRC Insurance Law, an insurance contract is defined as an agreement in which an applicant and an insurer set out their respective rights and obligations under the insurance policy. An insurance contract is formed when an insurance applicant applies for insurance and the insurer accepts the application. The insurer shall issue to the insurance applicant an insurance policy or any other insurance certificate in a timely manner.

The marketing admittance, cooperate governance, organization structure of different types of insures, e.g. life insurers, property insurers, reinsurers are separately regulated by the Insurance Law and other PRC laws and regulations.

Besides, the regulations on domestic and foreign-funded insurers are virtually different. For instance, qualification of the shareholders in the foreign-funded insurers is different from the domestic insurers.

In China, insurance intermediaries include insurance brokerage institutions, insurance agencies and insurance adjusters. China has adopted the Regulatory Provisions on Insurance Brokerages, the Regulatory Provisions on Professional Insurance Agencies and the Regulatory Provisions on Insurance Adjusters to regulate insurance brokerages, insurance agencies and insurance adjusters.

In China, insurance brokerages and insurance agencies have to be in the form of either a limited liability company or a joint-stock limited company. Brokers provide intermediary services to insurance applicants and insurance companies to execute insurance contracts based on the interests of insurance applicants and the insured, while insurance agencies are, based on authorizations by insurance companies, authorized to handle insurance business on their behalf. The two regulations on insurance brokerages and insurance agencies respectively provide the requirements on market access, operation rules, market exit, supervision and inspection, and legal liabilities. Further details are also provided regarding the business establishment, qualifications of personnel, scope of business and prohibited acts.

All insurance holdings companies, insurance group companies, insurance companies, reinsurance companies, insurance asset management companies, insurance agencies, insurance brokerages and loss adjuster agencies shall obtain insurance permits before operating their business.

An insurer shall first obtain the approval of preparation from CBIRC before starting to establishing an insurance company. Once the insurer obtains the approval, it shall prepare the documentations required by CBIRC and apply to formally operate the business. CBIRC will grant the insurance permit to the insurer should it meets all requirements of the insurance laws and regulations.

It is hard to predict how long it will take to obtain a permission. Generally speaking, it is relatively strict to establish a new insurance company. Therefore, many investors choose to enter the insurance market by merger or acquisition.

According to Article 6 of the Measures for the Administration of the Equities of Insurance Companies, the following investors meeting the conditions as prescribed in these Measures may become shareholders of the domestic insurance companies:

(1) domestic enterprise legal persons;
(2) domestic limited partnerships;
(3) domestic public institutions and social groups; and
(4) overseas financial institutions.

According to the Detailed Rules for the Implementation of the Regulation of the People’s Republic of China on the Administration of Foreign-Funded Insurance Companies (Consultation Paper), where foreign insurance companies and Chinese companies or enterprises form insurance companies engaging in the personal insurance business within China in the form of equity joint ventures, the foreign stake in such a joint venture shall not exceed 51%. Comparing to the restriction of 50% foreign stake as stipulated in the previous Detailed Rules for Implementation, the restrictions on foreign-funded insurance companies start to be released.

Technically speaking, it is impossible to insure risks on a non-admitted basis. Any insurance without a license or authorization within PRC is illegal and shall be fined by CBIRC.

Any insurance company or insurance asset management company who operates without approval or insurance license shall be subject to the confiscation of illegal gains and a fine between the range of one and five times the amount of the illegal gains; and if there are no unlawful gains or the amount of the illegal gains is less than RMB 200,000, the fine shall be between RMB 200,000 and RMB 1 million.

Any insurance broker, insurance agency who operates without an insurance business or brokerage license shall be subject to the confiscation of the illegal gains and a fine less than the amount of the illegal gains but not more than five times the amount of the illegal gains; and if there are no illegal gains or the amount of the illegal gains is less than RMB 50,000, the fine shall be between RMB 50,000 and RMB 300,000.

In 2018, CBIRC focused its supervisory on liquidity risks, solvency risks, corporate governance risks and fund investment risks. Also, in 2018, several new regulations were issued by the CBIRC to press ahead with the reform and development of the insurance industry, e.g. Notice of CBIRC on Liberalizing the Business Scope of Foreign-invested Insurance Brokerage Companies, Guidelines on Developing Individual Tax-deferred Commercial Pension Insurance Products, Notice of the CBIRC on Issues concerning the Establishment of Special Products by Insurance Asset Management Companies.

Based on the idea proposed by the CBIRC that “the main function of the insurance industry is to insure, the main function of CBIRC is to regulate”, 2019 will see the intensifying of insurance regulations, the active and prudent disposal of potential risks, and the promotion of supply-side structural reform, which will in turn give full play to the safeguarding function of insurance, and further ensure that the insurance industry serves the development of the economy and society.

The supervision and enforcement of insurance industry is touring towards a more rigorous end.

Article 90 of the PRC Insurance Law allows insurers to apply for insolvency liquidation. However, Article 92 of the Insurance Law limits the liquidation of life insurers. An insurer must maintain the minimum capital which is equivalent to its insured risks and business scale. An insurer shall also maintain the actual solvency margin based on its assets and debts which are admitted by CBIRC. The insurers are divided into 4 levels, i.e. A, B, C, D, based on their solvency risks. CBIRC will also issue regular reports on solvency of the insurers.

According to Article 63 of the PRC Insurance Law, the minimum registered capital required for the establishment of an insurance company is RMB 200 million, which shall be fully paid-up in monetary form.

The minimum capital is the required capital of an insurer to guarantee the solvency of the insurer for the purpose of regulation. The minimum capital is composed by:

(1) Minimum quantitative risks capital, i.e. the minimum capital equivalent to insurance risks, market risks, and credit risks;
(2) Minimum control risks capital, i.e. the minimum capital equivalent to the control risks; and
(3) Additional capital, including countercyclical additional capital, additional capital of domestic emphasized insurance institution, additional capital of global emphasized insurance institution and other additional capital.

CBIRC could require the insurer to correct or launch penalties if the insurer is not in compliance with the minimum capital requirements

To protect the interests of the policyholder, an insurer shall timely reply to the claims of the insured, perform its obligation of explicitly interpretation and satisfy its obligation of promissory estoppel.

The insurer shall, after receiving a claim for indemnity or payment of the insurance benefits from the insured or the beneficiary, determine the matter within 30 days and pay the indemnity within 10 days after an agreement is reached with the insured or the beneficiary on such indemnity or payment.

For those clauses that exempt the insurer from liability in the insurance contract, the insurer shall make sufficient warning to the policy holder of those clauses, and expressly explain the contents of those clauses to the policy holder in writing or orally.

If a policy holder fails to perform his obligation of making an honest disclosure out of gross negligence, the insurer generally will bear no obligation for indemnification or payment but may return the premiums paid. However, under the principle of promissory estoppel, where an insurer entered the contract knowing that the policy holder fails to perform his obligation of making an honest disclosure, the insurer shall not rescind the contract and shall bear the obligation for indemnification or payment of insurance benefits.

CBIRC issued the Notice of China Insurance Regulatory Commission on Issuing the Measures for the Administration of Insurance Group Companies (For Trial Implementation, currently effective) in March 2010. An insurance group company must have investors controlling a total of more than 50% stake in two or more insurance companies, at least one of which has been engaged in the insurance business for more than six years and has been profitable for the latest three consecutive years, with net assets of no less than RMB1 billion yuan and total assets of no less than RMB10 billion yuan.

An insurance conglomerate shall focus its business on equity investment and management and use its own funds to make outward investments in equities and establish relevant subsidiaries. It may invest in insurance institution such as insurance companies, insurance asset management companies, insurance agencies, insurance brokerage companies, public insurance evaluating institutions. It could also invest in non-insurance institutions such as commercial banks.

The senior managers under PRC laws and regulations including general manager, deputy general managers, and assistant general managers of the head office; secretary for the board of directors, chief compliance officer, chief actuary, chief financial officer, and chief auditor of the head office; general manager, deputy general managers, and assistant general managers of a branch or a central sub-branch; manager of a sub-branch or a business department and any other executive who has the same power as any of the aforesaid senior executives.

The senior managers shall be approved by CBIRC. The senior managers shall be honest and trustworthy, have a good awareness of regulatory compliance in operations, and have the business management ability required for performing their respective functions. They are required to pass the examinations on insurance laws and regulations and related knowledge as recognized by CBIRC.

There are some other working experience, education background and procedural requirements for senior managers. For instance, the secretary for the board of directors of an insurance company shall have a university diploma at or above the undergraduate course level and have five or more years of work experience appropriate for performing his or her functions. For other detailed regulations, please see Provisions on the Administration of the Office Qualifications for the Directors, Supervisors and Senior Executives of Insurance Companies (2018 Amendment).

An insurer could outsource its assessment business to insurance adjusters and their selling business to insurance brokers and agents. Otherwise, insurers must not outsource any critical or core part of the business. The insurer shall be liable for the activities of the insurance adjusters, brokers or agents performed on the behalf of the insurer.

The sales of insurance are mainly supervised and controlled by CBIRC according to the Insurance Law and other laws and regulations.

Insurance companies and insurance intermediaries shall enforce the management of sales promotion contents to prevent one-sided and false promotions and shall strictly manage and control the activities of insurance marketing and promotion on self-media by itself and its insurance practitioners to eliminate illegalities, irregularities and improper promotions. The insurance institution shall use plain and accurate language on promotion and sales pages to describe the main functions and features of insurance products, highlight contents that are likely to trigger ambiguity or easily overlooked by consumers, and refrain from using misleading words, etc.

An insurance institution who fails to be in compliance with the above requirements could be fined by CBIRC.

The consumer policy holder enjoys all rights compared with institutional policy holders. Besides, to protect the interest of consumer policyholders, the validity of a contract that has been suspended because the policy holder fails to pay the premiums by installments after a lapse of over 30 days upon a reminder of the insurer or over 60 days from the scheduled date of payment, can be reinstated upon agreement reached between the insurer and the policy holder via negotiations and after the making of the outstanding premium payment by the policy holder. However, the insurer is entitled to terminate the contract if no agreement has been reached upon by both parties within two years after the day when the validity of the contract is suspended.

For the territorial jurisdiction, an insurance dispute will fall under the jurisdiction of the people’s court where the domicile of the defendant or the insured object is located. For the subject matter jurisdiction, the primary court will act as the first instance court in most insurance cases. If the amount in dispute of a case reaches a certain level or if the case is very influential for society, the intermediate courts or even the high courts shall have the jurisdiction to hear the case. It is rare for the Supreme People’s Court to hear a case in the first instance.

In some provinces, the insurance disputes will be collectively heard by special courts. For instance, the Shanghai Financial Court established in April 2018 shall exercise jurisdiction over the first-instance insurance disputes within the jurisdiction of Shanghai Municipality that shall be accepted by intermediate people’s courts. And the maritime courts shall hear cases regarding marine insurance claims and related subrogation litigations.

Generally, a higher-level courts or courts that collectively hear the insurance disputes are more experienced in the complex commercial claims.

In addition to litigation or arbitration, parties could settle the dispute via negotiation or mediation throughout the whole procedures of litigation and arbitration. PRC Courts also encourage parties to mediate.

Since 2012, the Supreme People’s Court has cooperated with CBIRC in exploring alternation dispute resolution of insurance disputes. According to data of the Supreme People’s Court, China has established over 166 specialized alternative insurance dispute resolution institutions around the country and has solved over 126 thousand disputes.

In the meantime, arbitration is always a choice for the insurance disputes resolution in China.

In the past few years, due to the reform of CBIRC, the establishment of new insurers has step into a sluggish.

From January 2017 to March 2019, no approval on preparation of insurers are newly granted. 2018 has seen 7 entrants including Yellow Rive Property & Casualty Insurance Co., Ltd., Taiping Science and Technology Insurance Co., Ltd., Beijing Life Insurance Co., Ltd., Panda Life Insurance Co., Ltd., Ruihua Health Insurance Co., Ltd., Haibao Life Insurance Co., Ltd., Guofu Life Insurance Co., Ltd. However, those are all insurance companies who acquired the authorization of preparation before 2017.

In March 2019, CBIRC recovered its approval on preparation of the new entrants and allowed the preparation of the first foreign life pension insurance company, HengAn Standard Life Insurance Co., Ltd.

In the past few years, the insurance industry is also facing a digital innovation.

Artificial intelligence technology powers the further development of Chinese insurance industry and provide solutions to the pain points in the segments of customer service, underwriting, insurance product sales and claim settlement.

The Internet giants are speeding up in participation of insurance industry. By 2019, Alibaba, Tencent and JD have all obtain their insurance license. Other Internet companies have also made deployments in the insurance industry by combining user data traffic with distinct sales scenarios.

The digital innovation also challenging the current regulatory system. CBIRC published the Regulatory Measures on Internet Insurance (Draft) in October 2018, the Regulatory Measures starts to release the regional restrictions on cyber insurance, permits banking insurance agency to sell insurance on its own website, and issues detailed regulations on information disclosure and publication of cyber insurance, etc.

It is hard to predict which line of insurance will become market leaders. However, there is no question that cyber insurance will perform an important role in the insurance market. According to the Interim Measures for the Supervision of the Internet Insurance Business (currently effective) issued by the CBIRC, insurance companies can operate cyber insurance business in the following areas:

(1) personal accident injury insurance, term-life insurance and whole-life insurance;
(2) household property insurance, liability insurance, credit insurance and surety insurance insured for applicants or insurants personally;
(3) property insurance business which could achieve full services of sale, underwriting and settlement of claims independently and completely online; and
(4) other insurance stipulated by CBIRC.

Experts and Scholars are expecting the release of district restrictions on cyber dread disease insurance. However, in the Regulatory Measures on Internet Insurance (Draft) published by CBIRC in October 2018, cyber dread disease insurance is still excluded from being sold in districts, cities or provinces where the insurance company does not have any branches.