The Fog Clears for Foreign-invested Insurance Companies: More Detailed Implementing Rules Issued

There are a total of 47 articles in the Implementing Rules, which mainly focus on the establishment, termination and liquidation of foreign-invested insurance companies and their branch organizations. In particular, the Implementing Rules give essential provisions regarding the proportion of foreign investment and registered capital or the operational funds of foreign-invested insurance companies (Articles 3 to 6), requirements for a foreign applicant to set up a foreign-invested insurance company in China (Articles 7 to 11), documents and materials to be submitted for preliminary application for the establishment of a foreign-invested insurance company (Articles 12 to 18), documents and materials to be submitted together with the formal application form (Articles 19 to 25), requirements and materials to be submitted for the establishment of branch offices of foreign-invested insurance companies (Articles 27 to 34), termination and liquidation of foreign-invested insurance companies (Articles 35 to 41), and other issues including the interpretation of certain professional terms, calculation of time period, language and others (Articles 2, 26, 43 and 44).

The WTO and the Implementing Rules

China's accession commitments to the WTO are well reflected and included in the Implementing Rules. For example, one of China's accession commitments is that foreign-invested insurance companies shall be free from regional restrictions on their business operations within three years of China's accession to the WTO; that is, the regional restrictions on foreign-invested insurance companies shall be released before December 11 2004, as China became an official member of the WTO on December 11 2001. Therefore, in the Implementing Rules, foreign-invested insurance companies, just like domestically invested insurance companies, are free to set up branch offices to conduct insurance businesses anywhere as long as they meet the relevant requirements for the establishment of these offices. Moreover, some of the basic principles of the WTO, particularly the principles of transparency and national treatment, have also had a significant impact on the Implementing Rules.

More Details, More Transparency

The Implementing Rules give detailed provisions on many issues, especially those issues for which the Administrative Regulations lack clear stipulations. For example, according to Article 9 of the Administrative Regulations, one of the materials to be submitted for preliminary application for the establishment of a Sino-foreign equity joint venture insurance company is "relevant materials of the Chinese applicant", without any further information regarding the scope of the "relevant materials" or the qualification of the Chinese applicant. In the Implementing Rules, however, it is stated that the Chinese applicant shall meet four requirements (Article 16) unless otherwise stipulated by laws and regulations or otherwise approved by the State Council, and the relevant materials shall include the business licence (copy), articles of association of the company or enterprise, business structure, operational history, annual reports of the most recent three years and records of penalties received by the company in the most recent three years (Article 17 of the Implementing Rules). Generally speaking, the more specific and detailed the provisions are, the more transparent the regulation is, so that the relevant regulations can be better followed and carried out by the parties concerned, and the work of the insurance regulatory authorities will reflect better supervision of foreign-invested insurance companies.

National Treatment of Foreign-invested Insurance Companies

Arguably, the most important principle of the WTO is national treatment for foreign investors. The national treatment of foreign-invested insurance companies is best reflected in the provisions for the establishment of branch offices in the Implementing Rules. According to Article 14 of the Administrative Regulations, the CIRC is authorized to examine and approve the establishment of branch organizations of foreign-invested insurance companies in accordance with "relevant stipulations". The "relevant stipulations" mainly refer to Articles 27 to 34 of the Implementing Rules. These articles are almost identical to Articles 13 to 20 of the PRC Administration of Insurance Companies Provisions(保险公司管理规定), the basic statute for the administration of all domestically registered insurance companies, which was promulgated on May 13 2004 by the CIRC and effective June 15 2004. Thus, foreign-invested insurance companies and domestically invested insurance companies are subject to the same requirements and procedures for the establishment of their branch offices from June 15 2004 onwards.

Other Improvements

More Enforceable Provisions

As mentioned previously, the Administrative Regulations sometimes provide only vague principles for many issues regarding the administration and supervision of foreign-invested insurance companies. This may, on the one hand, allow parties some flexibility in interpreting the regulations, but on the other hand, it reduces the enforceability of the regulations. For example, the Administrative Regulations have specified the requirements for the applicants and the documents and materials to be submitted for the establishment of foreign-invested insurance companies without further detailed explanations of their actual contents. As such, applicants may sometimes wonder whether or not they are qualified to apply for the establishment of foreign-invested insurance companies and how they should prepare the necessary documents and materials for such application. Therefore, the insurance industry has been calling for more detailed provisions to guide their work in the application process. The promulgation of the Implementing Rules, with their detailed interpretation of the specific meanings of those requirements and the contents of the documents and materials to be submitted, are sure to greatly enhance the enforceability of the Administrative Regulations.

Moreover, the Implementing Rules also provide specific definitions and interpretations of certain professional terms and provisions on the proportion of foreign investment and registered capital or operational funds of foreign-invested insurance companies, termination and liquidation of foreign-invested insurance companies, calculation of time period, language and others, which may contribute to an easier and more reliable implementation of the Administrative Regulations.

Consistency with Prior Regulations

According to the Administrative Regulations, the minimum registered capital amount of a foreign-invested insurance company is Rmb200 million. However, according to China's first regulations on foreign-invested insurance companies, the Administration of Foreign-invested Insurance Organizations in Shanghai Tentative Procedures (promulgated by the People's Bank of China in 1992), such amount is US$20 million, which is lower than that stipulated in the Administrative Regulations. Are foreign-invested insurance companies established prior to the effective date of the Administrative Regulations with a registered capital less than Rmb200 million required to make up any shortfall? No provision is made for this issue in the Administrative Regulations. Therefore, Article 4 of the Implementing Rules stipulates that "where, prior to the coming into effect of the Administrative Regulations, the registered capital or operational funds of the foreign-invested insurance company established within the territory of China has not attained Rmb200 million or the equivalent value of other freely convertible currency, any shortfall shall be made up within two years of the effective date of these Implementing Rules". The CIRC shall not approve any application for the development of new business where there is still a shortfall in the registered capital or working capital; as such, the registered capital of foreign-invested insurance companies established according to the former regulations is brought under the governance of the Administrative Regulations.

Possible Future Developments

Proportion of Foreign Investment in Joint Venture Non-life Insurance Companies

The Implementing Rules set down limitations on the proportion of foreign investment in joint venture life insurance companies, while no similar restriction is made regarding the proportion of foreign investment in joint venture property insurance companies. According to China's accession commitments to the WTO, foreign non-life insurance companies shall be allowed to establish wholly owned subsidiary insurance companies (wholly foreign-invested insurance companies) in China within two years of China's accession to the WTO. However, according to Article 2 of the Administrative Regulations, joint venture insurance companies and wholly foreign-invested insurance companies are two different forms of foreign-invested insurance companies. Hence, the question is: does the abovementioned accession commitment to the WTO inevitably lead to the conclusion that a foreign insurance company can invest in a joint venture non-life insurance company, and in any proportion? This issue needs to be further clarified by the CIRC.

Registered Capital or Operational Funds: Actual Paid-in Monetary Capital?

According to Article 5 of the Implementing Rules, the registered capital or operational funds of the foreign-invested insurance company shall be in the form of actual paid-in monetary funds. However, according to Article 6 of the Administrative Regulations, the minimum registered capital shall be in the form of actual paid-in monetary funds. These two articles may entail different situations in cases where a foreign-invested insurance company's registered capital exceeds the minimum registered capital (that is, Rmb200 million). The Administrative Regulations are promulgated by the State Council and the CIRC is only authorized to raise the amount of the minimum registered capital or operational funds of a foreign-invested insurance company based on its business scope and operational scale, according to the third paragraph of Article 7 of the Administrative Regulations. The Implementing Rules promulgated by the CIRC thus in fact alter, without due authorization, the stipulations of the Administrative Regulations promulgated by the State Council. Hence, will such a stipulation of the Implementing Rules be void, or will the stipulations of the Administrative Regulations be amended so that it is consistent with that of the Implementing Rules? This is a crucial question that must be resolved, and sooner rather than later.

Redundant Stipulations

Obviously, foreign-invested insurance companies are also insurance companies. Equally, the newly promulgated Administration of Insurance Companies Provisions are not merely intended for the regulation of domestically invested insurance companies. Therefore, there is no need for the Implementing Rules to repeat provisions that are similar to those of the Administration of Insurance Companies Provisions. Yet repetition of many provisions is included in the Implementing Rules. For example, provisions for the establishment of branch organizations of insurance companies (Articles 13 to 20 of the Administration of Insurance Companies Provisions) are almost identical to Articles 27 to 33 of the Implementing Rules. Why the authorities have given a restatement of prior stipulations entails a discussion of legislative drafting techniques in China, which we don't have space to conduct here. But it will be interesting to see in future to what degree the regulatory authorities streamline further clarifications of PRC insurance law so as to eliminate redundant statements and focus on the important addition and clarifications required, as we have discussed above.

Conclusion

Generally speaking, the promulgation of the Implementing Rules is of great importance to the insurance industry in China. They reflect China's accession commitments to the WTO and provide detailed and specific provisions for the regulation of foreign-invested insurance companies, which enhance the transparency of the regulatory process, so that a more sophisticated and rapid development of foreign-invested insurance companies under a more standardized regulation by the CIRC in accordance with the law can be expected.