The past two decades have witnessed rapid growth in the Chinese insurance industry, which is presented as an average annualized growth rate of more than 15% in original premium income. Accompanying the high-speed development, various issues have also surfaced, such as intense sales competition, lax expense management, aggressive fund utilization and imbalanced corporate governance. As the institutional reform proposal of the State Council was passed during the Two Sessions in March 2023, the National Financial Regulatory Administration (“NFRA”), which is in charge of regulating the financial industry except the securities sector, has been established on the basis of China Banking and Insurance Regulatory Commission (“CBIRC”), which will not be retained.
Thereafter, the NFRA issued a series of policy documents to drive the reform of the insurance industry, aiming to give full play to the functions of the insurance industry as an economic shock absorber and social stabilizer. Among these documents, the Measures for the Administration of Insurance Sales Practices (hereinafter referred to as the “New Sales Regulations”), which focused on prominent issues in insurance sales practices, have regulated all coverage across all channels and processes; and the Notice on Regulating Insurance Products in Bank Agency Channels has initiated the reform of sales expenses. Additionally, in the press conference on statistics of the banking and insurance sectors in the third quarter, it announced that the “unified commission fees in reporting and underwriting” would be implemented overall. In 2023, the takeover of four insurance institutions previously controlled by Tomorrow Holding was successfully completed as scheduled, marking that China has entered a new stage of cautious and orderly risk disposal of high-risk institutions.
I. Key interpretation of the Measures for the Administration of Insurance Sales Practices
1. Background
Since the introduction of the marketing system in the 1990s, the Chinese insurance industry has experienced explosive growth, peaking at over 8 million individual insurance agents. Marketing has significantly contributed to the development of the Chinese insurance industry. Alongside the development of insurance marketing, problems like sales fraud and misleading practices also always exist despite repeated prohibitions, and the protection of consumer rights, including the right to information, choice, and fair transactions, has become a focal point of public concern. Every year, regulatory authorities have to deal with a large number of complaints caused by unregulated insurance sales.
Under such circumstances, the New Sales Regulations are promulgated to comprehensively regulate the insurance sales process, including pre-sale, sale, and after-sale activities, clarifying who can sell insurance products, how to sell insurance products and what obligations insurance institutions and insurance consumers should fulfill in the process of insurance sales, as well as the consequences of penalties for violations.
2. Key Points of the New Sales Regulations
With regard to the regulation of sales personnel, it is provided that institutions should be licensed, products should be numbered, and personnel should be certified. Insurance sales personnel include employees of insurance companies engaged in insurance sales, individual insurance agents and persons in other employment forms managed as sales personnel, personnel in insurance agencies involved in insurance agency practices, and insurance brokers engaged in insurance brokerage services.
With regard to the regulation of the sales process, insurance sales practices are categorized into pre-sale, sale, and after-sale activities. The key distinction between practices pre-sale and sale activities lies in whether the potential client of the insurance sales practices is specific and whether the insurance sales practices have entered the stage of communication and negotiation and making offers and acceptances for the specific content of the insurance contract.
With regard to the regulation of the appropriateness of insurance products, it implements four rules, namely, product classification, sales personnel classification, insurance purchase termination, and information preservation. Insurance companies are required to classify and grade their insurance products according to product complexity, premium burden level, policy benefit-risk level and other criteria. Insurance sales personnel are graded according to their professional knowledge, sales capabilities, integrity and conduct and, combined with insurance companies’ product classification management system, awarded with differentiated authorization based on various qualifications of sales capabilities so as to specify the insurance products that sales personnel at different levels can sell. During the sales process, if an insurance salesperson finds an insurance product unsuitable to a policyholder, the salesperson should advise the policyholder terminate the insurance purchase. Throughout the sales process, the policyholder shall sign or confirm, in writing or in other forms that can be preserved, documents such as declaration of insurance, reminder of insurance, explanation of clauses exempting or mitigating the insurer’s liabilities, as well as other relevant regulatory documents and materials.
With regard to the regulation of product information disclosure, insurance product terms and conditions and descriptions thereof are required to be disclosed on official online platforms. Product descriptions must emphasize key features, including the approval or filing names of the products used in terms and conditions, coverage scope, insurance period, clauses exempting or reducing insurer liability, and expected policy benefits.
With regard to the regulation of reminded information during insurance sales, it is explicitly provided that, in the sale of products, insurance companies shall explicitly remind the information including but not limited to the main terms and conditions of insurance products, coverage scope, insurance period, premiums and payment methods, compensation limits, clauses exempting or reducing insurer’s liabilities, claim procedures, surrender and other fee deductions, cash value of life insurance, grace period, waiting period, and suspension and resumption of insurance contract effectiveness. In particular, it is pointed out that, with the consent of the policyholder, the content of the corresponding reminder can be reasonably simplified when the insured product has simple rights and obligations and the policyholder re-insures the same insurance from the same insurance company within three months.
With regard to the regulation of sales personnel departure and termination of cooperation with insurance intermediaries, insurance companies are required to clearly notify the policyholder or the insured within 30 days of the departure of the insurance salesperson or termination of cooperation with insurance intermediaries, the status of the insurance contract as well as the means of obtaining follow-up services. It explicitly prohibits actions that harm the policyholder’s legitimate interests, such as the encouragement of the surrender of the insurance policy.
3. Summary of the Impact of the New Sales Regulations
The New Sales Regulations, as coming into force on March 1, 2024, will have a significant impact on the current marketing system of insurance companies. The past approach of expansive manpower tactics is no longer suitable for consumers’ increasingly complex risk and wealth management needs. To remain competitive in the evolving market, insurance companies must steadfastly promote high-quality transformation and enhance the quality of sales personnel.
II Key Interpretation of the Requirement of Unified Commission Fees in Reporting and Underwriting
1. Background:
“Unified commission fees in reporting and underwriting” means the product pricing assumptions (including fee assumptions) reported by insurance companies to regulatory authorities for filing should be consistent with those implemented by insurance companies in their actual operation. Insurance companies should set rates in accordance with the rules, determine and report the value range and the rules for using commission fees, and pay the commission fees in accordance with the rules for using commission fees. The industry will also standardize the commission fee cap, which insurance companies are not allowed to exceed in any way.
In recent years, intense competition and lax expense management in the life insurance sector resulted in actual expenses exceeding those reported during product filing, thus forming “non-unified commission fees in reporting and underwriting”. This issue has not only disrupted market order but also become the root cause of problems like false expenses, false insurance, and false surrender, fostering an environment for “deceptive agent practices”, which has negatively impacted the industry’s high-quality development.
2. Key Points of Unified Commission Fees in Reporting and Underwriting
In August 2023, the NFRA issued the Notice on Regulating Insurance Products in Bank Agency Channels to promote “unified commission fees in reporting and underwriting” in the bancassurance channel, aiming to strengthen the management of insurance products in bank agency channels, impose strict constraints on actuarial assumptions for product design and implementation and enhance the management of expense authenticity. In October, the NFRA issued the Notice on Enhancing Management to Promote the Stable and Healthy Development of Life Insurance Business, according to which life insurance companies were required to design products fairly and reasonably, determine assumptions scientifically, and implement unified commission fees in reporting and underwriting strictly. In the press conference on statistics of the banking and insurance sectors in the third quarter, it was highlighted that, after the implementation of “unified commission fees in reporting and underwriting” in the bancassurance channel, the commission rates decreased by 30% compared with the previous rates, and therefore, the “unified commission fees in reporting and underwriting” would be comprehensively implemented across the entire industry next.
With respect to implementation details, insurance companies are required to price their products based on actual expenses, ensuring that fixed costs are accurately distributed within the pricing structure and no expenses other than commissions are paid directly or indirectly to the agency channel in the name of policy issuing fees, information fees, and so on.
3. Summary of the Impact of Implementing Unified Commission Fees in Reporting and Underwriting
The implementation of “unified commission fees in reporting and underwriting” has brought significant challenges to small- and medium-sized insurance companies that have smaller premiums with fixed costs that are unable to be diluted. In a scenario where sales expenses are similar, the products of small and medium-sized companies are not as cost-effective as those of large-sized counterparts, which is undoubtedly a huge blow to the small and medium-sized companies since they have long relied on cost-effectiveness to gain competitive advantage. Only by completely transforming, getting rid of cost-driven thinking, innovating product forms, and adapting sales channels realistically can they gain a foothold in the fiercely competitive environment.
III. Completion of Risk Disposal of Four Insurance Institutions Previously Controlled by Tomorrow Holding
1. Background of the Takeover of Insurance Institutions Previously Controlled by Tomorrow Holding
In July 2020, the former CBIRC took over four insurance institutions previously controlled by Tomorrow Holding in accordance with the law, namely, Tianan Property Insurance, Huaxia Life Insurance, Tianan Life Insurance and E An Property & Casualty Insurance. Significant progress was made in the risk disposal of these four institutions during 2023. In May, the former CBIRC approved that BYD Automobile Industry Co., Ltd., a new energy vehicle company, can acquire 1 billion equity interests in E An Property & Casualty Insurance through transfer, achieving 100% shareholding, and E An Property & Casualty Insurance was renamed as BYD Property Insurance, which marked the successful completion of China’s first case of insurance company bankruptcy restructuring. In June, Zhonghui Life Insurance and its branches were granted approval to commence operations to take over the policy liabilities, effective assets, and all institutional outlets of Tianan Life Insurance in accordance with the law, so as to fulfill the obligations under insurance contracts fully. In July, Rui Life Insurance and its branches were granted approval to commence operations to take over the policy liabilities, effective assets, and all institutional outlets of Huaxia Life Insurance in accordance with the law, so as to fulfill the obligations under insurance contracts fully. In September, Shenneng Property Insurance was approved for the establishment, representing a significant step in the restructuring of Tianan Property Insurance.
2. Mainstream Approaches for Risk Disposal of Insurance Institutions
Subsequent to insurance institutions previously controlled by Tomorrow Holding, approaches for risk disposal of insurance institutions were mainly described below:
(1) Resumption of normal operation after compulsory capital increase
The typical case is Chang An Property & Casualty Insurance Co. Ltd. On December 17, 2018, the former CBIRC issued a CBIRC Regulatory Letter (Regulatory Letter [2018] No. 74) to Chang An Property & Casualty Insurance Co. Ltd (hereinafter referred to as “Chang An Insurance”) since its core solvency adequacy ratio and the comprehensive solvency adequacy ratio were both -41.50%, not satisfying the solvency criteria, and its comprehensive risk rating was categorized as D-level. The former CBIRC decided to legally order Chang An Insurance (a) to make more investments in capital and share increase; (b) to suspend new business (including direct insurance business and reinsurance ceded business) other than automobile and liability insurance together with its branches; and (c) stop opening additional branches.
In 2019, according to relevant publicly disclosed information, Chang An Insurance introduced a new investor to increase its capital and shares. As a result, the former CBIRC issued the Decision on Administrative Regulatory Measures ([2019] No. 2) on November 18, 2019, deciding to lift the regulatory measures on Chang An Insurance. At this point, Chang An Insurance improved its solvency by means of capital increase, resolving potential risks and exempting from the consequences of takeover.
(2) Continuing Operation After the Takeover
In 2006, the former CBIRC, through investigation, detected an embezzlement of RMB 13 billion by the former chairman of New China Life Insurance Co., Ltd. (“New China Life”) during his tenure of office. In 2007, the former CBIRC first utilized the Insurance Security Fund to acquire 38.815% equity interests in New China Life. In 2008, immediately after its establishment, the Insurance Security Fund Company took over the equity interests held by the Insurance Security Fund in New China Life for management. In 2009, the Insurance Security Fund Company transferred all of these equity interests to Central Huijin Investment Ltd. in a lump-sum transaction, thus successfully completing the smooth exit of the Insurance Security Fund and the risk disposal task of New China Life.
In 2007, China United Insurance Group Co., Ltd. (formerly known as China United Insurance Holding Co., Ltd., hereinafter referred to as “China United”) incurred a massive loss of RMB 6.4 billion. In 2010, the Insurance Security Fund, as entrusted by Xinjiang Production and Construction Corps State-owned Assets Supervision and Administration Commission and relevant shareholders, managed 75.13% equity interests they held in China United and exercised corresponding shareholder rights. In 2012, the Insurance Security Fund Company injected RMB 6 billion into China United to facilitate market-oriented restructuring and introduced the strategic investor China Eastern Asset Management Co., Ltd., who injected a capital of RMB 7.81 billion to address inadequate solvency. After a series of restructuring efforts, the Insurance Security Fund Company gradually achieved a premium exit by transferring its shares in China United from late 2015 to 2018.
(3) Liquidation of the Former Entity and Establishment of a New Entity After the Takeover
On 23 February 2018, the former CBIRC issued the Announcement of China Insurance Regulatory Commission on the Takeover of Anbang Insurance Group Co., Ltd. in accordance with the Law (CIRC Announcement [2018] No. 5), in which the former CBIRC decided to take over Anbang Insurance Group Co., Ltd. (“Anbang Group”) by establishing the takeover working group for Anbang Group together with the relevant institutions since Anbang Group operated in violation of the Insurance Law of the PRC and may seriously endanger its solvency.
In early 2020, the former CBIRC, after the one-year extension of the takeover, decided to terminate the takeover of Anbang Group by issuing the Announcement of China Banking and Insurance Regulatory Commission on the Termination of the Takeover of Anbang Insurance Group Co., Ltd. in accordance with the Law. Thereafter, the former CBIRC devested non-controversial assets of Anbang Group and approved the establishment of Dajia Insurance Group Co., Ltd. to take over shares of Anbang Property Insurance Co. Ltd., Anbang Pension Insurance Co., Ltd. and Anbang Asset Management Co., Ltd. and the establishment of Dajia Property Insurance Co., Ltd. to take over the compliant insurance businesses of Anbang Property Insurance. Anbang Group and Anbang Property Insurance would be liquidated and canceled in accordance with the law.
(4) Business or Equity Transfer After Takeover:
Hexie Health was originally a health insurance subsidiary under Anbang Insurance Group. After the takeover of Anbang Group, the takeover working group utilized a market-oriented approach to dispose of the relatively high-quality assets by transferring the shares of Hexie Health during the disposal process of Anbang Group. On July 4, 2019, Hexie Health published the Information Disclosure Announcement on the Change of Shareholders on the website of the Insurance Association of China, stating that its shareholders, Anbang Group and Anbang Property Insurance, intended to transfer to new investors their equity interests in Hexie Health in whole. With this transfer, Hexie Health essentially completed its risk disposal task.
3. Risk Disposal Strategies for Insurance Institutions Previously Controlled by Tomorrow Holding
In the risk disposal of the four insurance institutions previously controlled by Tomorrow Holding, Huaxia Life Insurance and Tianan Life Insurance adopted an approach similar to that used for Anbang Insurance, involving the liquidation of the original entity and the establishment of a new entity, while Tianan Property Insurance adopted an approach similar to that used for Hexie Health, involving share transfer. However, the approach adopted by Tianan Property Insurance failed. Then, Shenneng Property Insurance was approved to be established by regulatory authorities, which was expected to take over the assets and liabilities of Tianan Property Insurance.
With respect to E An Property & Casualty Insurance, which has the smallest scale of the four insurance institutions previously controlled by Tomorrow Holding, it adopted a completely different approach to risk disposal involving bankruptcy restructuring. On June 29, 2022, the former CBIRC approved the bankruptcy restructuring of E An Property & Casualty Insurance in principle. In May 2023, the former CBIRC consecutively issued the Approval Concerning the Change of Shareholders of E An Property & Casualty Insurance Co., Ltd. and the Approval Concerning Matters Subsequent to Restructuring E An Property & Casualty Insurance Co., Ltd., according to which the former CBIRC agreed BYD Auto Industry Co., Ltd. acquired original equity interests of E An Property & Casualty Insurance held by its shareholders and became its sole shareholder, and E An Property & Casualty Insurance changed its name as Shenzhen BYD Property Insurance Co., Ltd. On May 24, 2023, the Beijing Financial Court issued an announcement ruling on the completion of the restructuring plan of E An Property & Casualty Insurance and the termination of the restructuring process. BYD, as the restructuring investor, paid a consideration of RMB 7 million for 100% equity interests of E An Property & Casualty Insurance from its seven former shareholders and provided more than RMB 500 million for debt repayment and net asset addition. At the same time, BYD also took over all employees of E An Property & Casualty Insurance and subsequently increased its capital by RMB 3 billion.
4. Summary of the Risk Disposal of Insurance Institutions Previously Controlled by Tomorrow Holding
Bankruptcy restructuring, distinct from other risk disposal approaches, primarily targets distressed enterprises with salvage value and possibility. It involves business reorganization and debt adjustment to overcome financial crises and resume operations. During the review of a restructuring application, people’s courts should determine whether the debtors have restructuring value and salvage possibility by assessing debtors’ asset status, technological processes, production and sales, industry prospects and other factors.
E An Property & Casualty Insurance, as one of the four internet insurance companies, has various advantages such as a flat management structure and asset-light strategy business model and a relatively small volume of its own assets and liabilities, which means it is possible to improve its solvency through limited investments. The bankruptcy restructuring of E An Property & Casualty Insurance, in addition to providing a pioneering approach in the Chinese insurance industry for the disposal of risky institutions through bankruptcy restructuring, has also set a positive example for risk disposal in the insurance sector, signifying Chinese insurance industry has entered a new stage of regulation.