China in Action: WTO Implementation in the Insurance Sector Off to a Fast Start

By Donald J. Lewis, University of Hong Kong

The Chinese government has wasted little time in moving to reform its insurance regulatory regime as part of its current WTO implementation drive. The recently promulgated PRC Administration of Foreign-funded Insurance Companies Regulations (中华人民共和国外资保险公司管理条例) (Foreign-funded Companies Regulations), effective from February 2002, take China partly down the road towards WTO compliance with respect to the regulation of foreign-funded insurance companies. These new regulations should be read in conjunction with the China Insurance Regulatory Commission, Administration of Insurance Companies Provisions (the 2000 Insurance Companies Provisions), generally applicable to both domestic and foreign-funded insurance companies.

The new regulations may be viewed as part of a package of recently unveiled PRC insurance sector enactments, all of which become effective February 2002, including: Administration of Insurance Brokerages Provisions (Brokerages Provisions), Administration of Insurance Agencies Provisions (Insurance Agencies Provisions) and Administration of Insurance Assessors Provisions. The new Brokerages Provisions supplement, but do not replace, the 1999 People's Bank of China, Administration of Insurance Brokerages Provisions (Trial Implementation). It should be noted that the three new PRC insurance regulations apply to both domestic and foreign-funded insurance companies.

In accordance with the definition of "foreign-invested enterprises" in China's Schedule of Services Commitments,1 the Foreign-funded Companies Regulations specify the types of foreign-funded "insurance company" which may be approved for establishment in China by the China Insurance Regulatory Commission (CIRC): (i) an equity joint venture insurance company; (ii) a "foreign capital" insurance company (that is, a wholly foreign-owned insurance company); and (iii) a foreign insurance company branch within China.

It is remarkable, although in line with the tenor of the definition of "foreign-invested enterprises" in China's services schedule, that foreign insurance service suppliers may not apparently establish PRC companies limited by shares. This is to be contrasted with the situation for insurance brokerage houses under the new Brokerages Provisions and insurance agencies under the new Insurance Agencies Provisions. Insurance brokerages may be established as either a limited liability company or as a company limited by shares, pursuant to the PRC Company Law (中华人民共和国公司法). Insurance agencies have apparently even more of a choice: they may take the form of a partnership under the PRC, Partnership Enterprises Law, a limited liability company or a company limited by shares. It remains to be seen whether these alternate forms of business organization accrue to foreign-funded brokerages and agencies. Indeed, they probably do not: China is not obliged under the WTO General Agreement on Trade in Services (GATS) and its Schedule of Services Commitments to necessarily extend national treatment to foreign insurance or any other service suppliers with respect to forms of business establishment. In this regard, foreign investors in most of China's service sectors may only establish "foreign-invested enterprises", as defined in China's services schedule, in order to avail themselves of the many market access benefits arising from China's WTO accession. Companies limited by shares are not included within this definition of "foreign-invested enterprises" and are therefore not apparently eligible for any of the above-mentioned market access benefits.

In the event that foreign insurers, unlike their domestic Chinese counterparts, are not permitted to establish companies limited by shares,2 they may find themselves operating at a very distinct competitive disadvantage, particularly as regards equity financing, organizational structure and business operations. In particular, foreign-funded insurance companies, unlike Chinese domestic insurers, will be barred from listing on the Shenzhen and Shanghai stock exchanges. In this regard, it is noteworthy that the 2000 Insurance Companies Provisions, applicable to both domestic and foreign-funded insurers, specifically permit the establishment of companies limited by shares, including publicly listed companies.3 Thus domestic insurance companies are authorized to do what foreign-funded companies cannot do.

While it is understandable that China would seek to limit foreign access and thereby protect its nascent securities markets (in fact, this appears to have been the firm negotiating position of the MOFTEC-led team during the WTO accession process), it is nonetheless perplexing that US and EU negotiators let such an important concession apparently slip away, particularly given their aggressive positions on so many other issues. Many of the hard-fought WTO benefits in most service sectors are diminished as a result of this omission. A simple compromise solution to soften the blow considerably would have been at least to permit foreign service suppliers to establish "unlisted", as distinguished from "listed", companies limited by shares, an obvious distinction clearly delineated in the PRC Company Law (中华人民共和国公司法). 4

For foreign insurers, there is some consolation with respect to their inability to tap directly into the Shenzhen and Shanghai stock exchanges. In this regard, it should be noted that foreign-funded insurance companies (as defined above) apparently will be able to conduct open or closed securities investment fund management businesses on China's exchanges, pursuant to recent securities regulations promulgated by the CIRC 5 and with reference to China's WTO financial services commitments in the securities field.6 A securities investment fund management business, however, is subject to a host of restrictions, including a 33% cap on foreign equity upon accession, rising to 49% within three years.7 It would appear that the PRC government has been willing to grant foreign-funded insurers such indirect access to China's stock exchanges for larger policy reasons related to the role of insurance companies in providing financial support for China's fledgling social security system.

The Foreign-funded Companies Regulations implement several of China's recently- announced WTO insurance sector commitments. The market access conditions for foreign insurance suppliers track those found in China's services schedule. According to Article 8, foreign insurers may establish foreign-funded insurance companies, provided they have: (i) more than 30 years' experience in the insurance business; 8 (ii) a representative office in China for over two years; and (iii) a total year-end net asset value of not less than US$5 billion in the year before the date of application.9 However, as predicted in last month's article in China Law and Practice, the new regulations go further than China's WTO commitments and impose additional conditions on foreign insurers (Article 8(4)-(7)). Such additional criteria are not particularly onerous and would appear more than justified under the so-called "prudential carve-out" exception of Article 2, Annex on Financial Services of GATS.

The Foreign-funded Companies Regulations (Article 7) also reiterate certain minimum capitalization requirements found in the 2000 Insurance Companies Provisions,10 but absent from China's WTO insurance commitments. As in the earlier regulations, the minimum registered capital of equity joint venture and wholly foreign-owned companies as well as the minimum operating capital of foreign-funded branches is Rmb200 million, of which the capital contribution of the foreign insurer should consist of foreign exchange. Save for the forex requirement, this capitalization standard is applied equally to both foreign and Chinese domestic insurance suppliers. Of some concern, however, is the vague and general proviso to the effect that the CIRC may increase the levels of minimum capitalization by reference to the scope of business and scale of operations of foreign-funded companies or branches. An abuse of administrative discretion by the CIRC in such circumstances could arguably constitute a GATS violation and rise to the level of a barrier to trade in services.11

The new Brokerages Provisions and Insurance Agencies Provisions also set forth minimum capitalization requirements. As noted above, it would appear likely that foreign-funded insurance brokerages and agencies may only take the form of limited liability companies. For an insurance brokerage established as a limited liability company, minimum capitalization is Rmb10 million,12 while for a similar insurance agency company the registered capital must be at least Rmb500,000. These are significantly lower thresholds than exist for PRC insurance companies. However, what is more startling is the gulf between such minimum capital requirements and the net asset value requirements for foreign parties seeking market access to establish, say, a foreign-funded brokerage in China. As set forth in China's Services Schedule, the net asset value of the foreign party seeking to establish a foreign-funded brokerage must be at least US$500 million (as of the date of accession)! Differences of this magnitude clearly make it easier for PRC domestic companies to gain and maintain market advantage with respect to such important insurance business activities.

The Foreign-funded Companies Regulations (Articles 9-12) provide for investment approval or licensing procedures modelled on those set forth in the 2000 Insurance Companies Provisions. Investment approval by the CIRC involves a two-stage process: an examination of the foreign insurer's qualifications, and after the initial application has been approved, a second approval of the documentation for the establishment of the foreign-funded insurance company. The timeframes for the standard completion of these approval procedures seem excessively long; the CIRC has up to six months to approve or deny the initial application. Successful applicants are then required to submit all establishment documentation within another year. After this formal submission, the CIRC has up to 60 days to provide its second and final approval. Such prolonged licensing procedures raise doubts about WTO compliance. The Working Party report on China's entry specifically expressed concerns over China's licensing practices in the field of services and, echoing Article VI(4) of GATS, stated: "China's licensing procedures...should not themselves act as a barrier to market access and should not be more trade restrictive than necessary." 13 Moreover, although it is heartening to see that the CIRC has adopted the procedural standard of providing reasons for the denial of initial license applications, as set forth in the Working Party report,14 there is no mechanism provided for either administrative or judicial review of such administrative action, to the extent that there may be issues of general application involved, as would appear to be required by the Protocol and Article VI of GATS.15

It is nonetheless reassuring to note that the Foreign-funded Companies Regulations (Article 15) have implemented China's WTO commitments with regard to master policy and large-scale commercial risk insurance.16 Approved insurance companies in the property and casualty business may provide such insurance coverage now, subject to the approval of the CIRC and compliance with unspecified "relevant regulations". As expected, the new regulations (Article 16) also maintain the dichotomy between life and non-life insurance businesses and provide that a foreign-funded insurance company may not engage in both lines of business. Reinsurance is also recognized (Article 17). Approved foreign-funded insurers are permitted to provide reinsurance for life and non-life businesses, including outward and inward reinsurance.

One final fascinating issue arises from a reading of the Foreign-Funded Companies Regulations in conjunction with the other new PRC insurance regulations. The Foreign-funded Companies Regulations (Article 38) state: "Where there is no provision in these regulations for the administration of foreign-funded insurance, the PRC, Insurance Law and other relevant laws, administrative regulations and national provisions shall apply." However, all three of the other PRC insurance enactments, issued earlier on November 16 2001 by the CIRC, provide in pertinent part17 that "where laws, administrative regulations and relevant international treaties to which China has acceded (italics added) have other provisions, those provisions shall apply".18 This latter provision, to be found in all three of the other new PRC insurance enactments, provides a legal basis for nothing less than the direct effect of WTO obligations and commitments in China. Such provision would appear to implement an express undertaking made by the representative of China in the Working Party report: to wit: "If administrative regulations, departmental rules or other measures were not in place within [the relevant] time frames, authorities would still honour China's obligations under the WTO Agreement and...Protocol." 19
Over the past two years, the question of the direct effect of China's WTO obligations and commitments has aroused serious controversy in Chinese law circles, with differing viewpoints even being expressed at the level of the PRC Supreme People's Court. From the foregoing, that debate does not appear to have been resolved. From a legal and practical perspective, it may indeed be possible to seek direct enforcement of WTO obligations and commitments before Chinese tribunals without reference to China's national laws. The WTO, if not all of its members, would undoubtedly applaud China's adoption of such a progressive stance.

Endnotes

1. Schedule of Specific Commitments on Services, Horizontal Commitments, p. 2. With reference to all service sectors, it is stated that "foreign-invested enterprises include foreign capital enterprises (also referred to as wholly foreign-owned enterprises) and joint venture enterprises....equity joint ventures and contractual joint ventures".
2. A possible alternative interpretation regarding the exclusion of companies limited by shares arises under certain Chinese WTO commitments with respect to financial services. For example, according to China's insurance services commitments: "A. Form of establishment...Within two years after China's accession, foreign non-life insurers will be permitted to establish as a wholly foreign-owned subsidiary; i.e., with no form of establishment restriction." Such provision could potentially support the availability of companies limited by shares at least for foreign-funded property and casualty insurance business in the future. See also Article XVI(2)(e), GATS. It seems clear from China's commitments in the banking sector that companies limited by shares may be established.
3. Article 26, Insurance Companies Administrative Provisions.
4. See Part III, PRC, Company Law.
5. China Insurance Regulatory Commission, Administration of Investment by Insurance Companies in Securities Investment Funds Tentative Procedures, promulgated on October 16 2000.
6. Schedule of Specific Commitments on Services, 7. Financial Services - Securities, p. 38.
7. Ibid.
8. See also Working Party report on the Accession of China (WPAC), VI. Policies Affecting Trade in Services, 4. Prior Experience Requirement for Establishment in Insurance Sector, p. 68.
9. See Schedule of Specific Commitments in Services, 7. Financial Services - All Insurance and Insurance-Related Services, p. 33.
10. Article 7, Insurance Companies Administrative Provisions.
11. China is required under the WTO Agreement and Protocol to maintain a uniform, impartial and reasonable trade administration. See Article VI(1) GATS and Article 2(A)2, Protocol.
12. Brokerages Provisions, Article 10(3); Insurance Agencies Provisions, Article 9(3).
13. WPAC, VI. Policies Affecting Trade in Services, 1. Licensing, Paragraph 307, p. 65.
14. Op.cit., Paragraph 308(g).
15. Protocol of Accession, Article 2(D)1, 2 - Judicial Review.
16. See WPAC, Paragraph 312(a) and (b), which provide comprehensive definitions of "master policy" and "large scale commercial risk", at pp 66-67.
17. Article 81, Brokerages Provisions; Article 81, Insurance Agencies Provisions; Article 78, Administration of Insurance Evaluation Provisions.
18. The legal basis for such provision is found in Article 142, PRC, Civil Law General Principles (promulgated April 1986 and effective January 1 1987).
19. WPAC, III. Framework for Making and Enforcing Policies, 1. Structure and Powers of the Government, Paragraph 68, p. 13.