Stricter Regulations for Resident Representative Organizations in China of Foreign Insurance Institutions

The new measures governing the establishment of representative organizations by foreign insurance institutions replace a similar set of measures promulgated only two years before. What are the key features of the new measures and why have they been brought into effect?




By Lü Guoming*, Dr. Xu Guojian & Pek-Siang Tee of Boss & Young.

The new Measures for the Administration of Resident Representative Orginizations in China of Foreign Insurance Institutions (2006 Measures),1 originally announced by the China Insurance Regulatory Commission (CIRC) on July 12 2006, became effective on September 1. On the same day, the old Measures for the Administration of Resident Representative Orginizations in China of Foreign Insurance Institutions (2004 Measures) were repealed after only one and a half years' implementation. Such a situation does not happen too often in the legislative history of the CIRC. Why amend the 2004 Measures so quickly? When asking for comments and suggestions on the draft amendments to the 2004 Measures, CIRC stated that the purpose for such amendments is to "strengthen and improve the administration and supervision of resident representative organizations in China of foreign insurance institutions".2 How do the 2006 Measures serve this purpose? To find out, we must look at the key differences between the 2004 Measures and the 2006 Measures.

Higher Threshold for Foreign Insurance Institutions

The most striking amendment to the 2004 Measures is the new requirement for applying institutions to establish a resident representative organization in China. However, in order to be permitted to do so, the company must have been in business for at least 20 years, in addition to having "good business performance".3 The 2006 Measures also interpret issues regarding the calculation of the years of conduct of insurance business by a foreign insurance institution.4

By adding this new requirement, the 2006 Measures set a much higher threshold for foreign insurance institutions seeking to establish a resident representative organization in China. The rationale seems to be that the more well-established a business is, the more stable and predictable its performance will be. If only applicants with good business performance are approved, the authorities will likely have an easier job of regulating them.

Enhancing Prudential Regulation

Another way the 2006 Measures create efficiency is by the prudential regulation of such representative organizations. This is expressly provided for in Article 8 of the 2006 Measures, which stipulates that the CIRC shall review the application in accordance with the principle of prudence. In addition, prudential regulation is also enhanced by the following amendments:

Material Required for Relevant Applications

First of all, the institution is required to submit two new documents - a feasibility and necessity study report regarding the establishment of the representative organization, and a declaration by the foreign insurance institution that the proposed chief representative has not been subject to penalties in his/her domicile country or region due to conduct of grave violations of laws and regulations in the three years prior to the application date.5

If the institution applies for a change of chief representative or general representative, or the name of a representative organization, the 2006 Measures stipulate that "other material prescribed by CIRC" shall be submitted.6 This addition is actually a "pocket clause" that gives the CIRC more administrative discretion and flexibility. Therefore, the CIRC may ask for more material from applicants depending on the specific circumstances, so as to regulate cases more effectively.

More Requirements for Employees of Representative Orginizations

The 2006 Measures state that "A general representative and a chief representative shall have the academic qualification, the industry experience and the work ability necessary for the performance of their functions."7 What is really new here is the requirement of "work ability", as the following paragraphs of the same Article merely repeat the provisions in the 2004 Measures regarding the specific requirements of academic qualification and industry experience. Having said that, one can also foresee new problems that may arise here. Work ability is something that is not as objective as academic qualification or industry experience and hence is very difficult to measure. What kind of work ability would be regarded as "necessary for the performance of their functions"? Moreover, how can such work ability be proven? With no answers to such questions provided in the 2006 Measures, this becomes a rather ambiguous provision. If there is no further clarification, one can only see the CIRC using its administrative discretion in the implementation of such a provision.

Regarding the prohibition of business activities by representative organizations and their employees, the 2006 Measures stipulate that "representative organizations and their employees shall not, in any manner whatsoever, conduct or engage in any business activities."8 Compared with its counterpart provision in the 2004 Measures, which stipulates that "representative organizations and their employees shall not sign any agreements or contracts with any legal or natural persons, which agreements or contracts may result in income for the representative organizations or the foreign insurance institutions they represent, nor shall they engage in any business activities"9, the provision in the 2006 Measures is much simpler yet provides a more comprehensive prohibition of any business activities.

Both the 2004 Measures and the 2006 Measures require that the general representative or the chief representative shall ordinarily be resident at the representative organization to direct day-to-day work. But in the 2004 Measures, no specific resident time period is prescribed and the only requirement is that another person shall be designated to carry out the duties of the general representative or chief representative and a written report shall be submitted to the CIRC branch office at the locality if the general representative or chief representative is away from the representative organization continuously for more than one month. In the 2006 Measures, however, the general representative or the chief representative shall be at the representative organization for an accumulated period of not less than 240 days each year; he/she shall not be absent from the representative organization for a continuous period of more than 30 days, and if he/she is absent from the representative organization continuously for more than 14 days, he/she must designate another person to carry out his/her duties, and a written report must be submitted to the CIRC branch office at the locality.10

More Enforceable Provisions

In the 2004 Measures, a representative organization is required to settle in permanent office premises within three months of receiving the approval letter for the establishment of such representative organization. If the representative organization fails to settle in permanent office premises within such period, the original approval letter shall automatically become void.11 But how would the CIRC know whether or not a representative organization has settled in permanent office premises? If this provision is to be given practical implementation, great efforts must be made by the CIRC in tracking the whereabouts of the representative organization. This problem no longer exists in the 2006 Measures because the representative organization is also required to submit a written report regarding its settling in permanent office premises, including proof of industry and commerce registration, proof of the lawful right to use the office premises, the office premises' telephone number, facsimile number and the postal address, and the chief representative's mobile telephone number and email address. And if the written report is not submitted to the CIRC within three months of the receipt of the approval letter, the representative organization will be deemed to have not settled in permanent office premises, and the original approval letter shall automatically become void.12 By requiring the submission of a written report, the provision regarding the regulation of settlement into permanent office premises becomes much more enforceable.

Also, phrases with more specific meanings are preferred in the 2006 Measures for better enforcement. For example, regarding the qualifications of the employees of a representative organization, the phrase "no record of grave violations of laws and regulations" is used in the 2006 Measures instead of "clean record" (i.e. no record of bad conduct) in the 2004 Measures.13 Although some ambiguities may still exist in how the word "grave" should be interpreted, the phrase "violations of laws and regulations" is much more specific than "bad conduct".

Others

Compared with the 2004 Measures, there are also two new articles in the 2006 Measures, which are of great importance to the prudential regulation of representative organizations in China of foreign insurance institutions.

The first one is Article 31, which authorizes CIRC or its branch office at the locality to hold regulatory discussions with the general representative or the chief representative of a representative organization, point out the risks and request that an explanation be provided on the relevant issues according to regulatory requirements. This way, the insurance regulatory authorities may have more initiative in carrying out prudential regulation.

The second one is paragraph 2 of Article 39, which stipulates that, "if a representative organization has been subject to administrative penalties by CIRC or the CIRC branch office at the locality for three times or more, or the amount of its unlawful proceeds from engaging or participating in business activities in violation of law is significant, and there are grave consequences thereof, the CIRC may take such circumstances into consideration as part of the prudential conditions when examining the application by the foreign insurance institution it represents to establish a foreign-invested insurance company in China." Many foreign insurance companies establish representative organizations in China because a representative organization in China for more than two years is a necessary condition for a foreign insurance company to establish a foreign-invested insurance company in China.14 In other words, the purpose for establishing representative organizations in China for many foreign insurance institutions is to establish foreign-invested insurance companies in China. Therefore, if the performance of the representative organization plays a crucial role in the final establishment of a foreign-invested insurance company, as stated in this new provision, more attention will likely be given to the proper management of the representative organization. Without doubt, this will in turn help strengthen the administration and supervision of representative organizations.

Administrative Examination and Approval System

The administrative examination and approval system is mainly reflected in the following two aspects.

The first is the cancellation of a representative office. According to Articles 26 and 28 of the 2004 Measures, prior approval from the CIRC must be obtained to cancel a representative office. According to Article 27 of the 2006 Measures, however, only a written report submitted within 20 days from the date of cancellation, instead of prior approval from CIRC, is required.

The second is the change from a representative office to a general representative office. Both the 2004 Measures and the 2006 Measures provide that a foreign insurance institution having two or more representative offices in China may designate one of these representative offices as its general representative office.15 However, the 2004 Measures are rather ambiguous about the procedures for the establishment of a general representative office under such circumstances. It seems that the representative office designated to be changed to a general representative office shall undergo an application and approval procedure similar to that for the establishment of a new representative office because "the procedure for the establishment of general representative offices shall be the same as that for the establishment of representative offices" (Article 12 of the 2004 Measures) and "the former representative office shall be automatically cancelled" where a representative office is approved to be changed to a general representative office (Article 31 of the 2004 Measures). It involves the establishment of a new general representative office and the cancellation of a former representative office, both of which shall comply with corresponding industry and commerce registration or deregistration procedures. In the 2006 Measures, however, the entire process is much simpler and clearer. According to Article 24 of the 2006 Measures, the change of a representative office to a general representative office in such circumstances involves merely a change of name, for which only a single industry and commerce alteration registration is required. The same is true when a general representative office is changed to a representative office.

Other Changes

Among the lesser amendments to the 2004 Measures, the following are the most noteworthy.

Firstly, according to Article 10 of the 2006 Measures, the name of a representative office shall contain, in the specified order, the following: "name of the domicile country or region of the foreign insurance institution", "name of the foreign insurance institution", "name of the city where it is located" and "representative office". The name of a general representative office shall contain, again in the specified order, the following: "name of the domicile country or region of the foreign insurance institution", "name of the foreign insurance institution" and "general representative office resident in China". The "name of the domicile country or region of the foreign insurance institution" was not required in the 2004 Measures.

Secondly, according to Article 44 of the 2006 Measures, material required to be submitted under the 2006 Measures shall be in Chinese. If the material provided by the domicile country or region of a foreign insurance institution are in a foreign language, a Chinese translation should be attached therewith. If there is inconsistency between the Chinese translation and the foreign language version, the Chinese translation will prevail. Although such provisions are common in other similar legislations, they are not included in the 2004 Measures. This would seem to be a further step taken by the CIRC to streamline the material and documents it receives, and to ensure consistency as far as differences in language are concerned.

Conclusion

In general, the CIRC must be applauded for attempting to simplify some of the procedures involved in its regulation of resident representative organizations in China of foreign insurance institutions. Some effort has also gone into further refining ambiguous language in the legislation. However, certain ambiguities still exist, to which we can only rely on interpretations by the CIRC on a case-by-case basis, at least until further reform of the legislation is undertaken.

The 2006 Measures are a much tighter and more compact piece of legislation than the 2004 Measures, the existing ambiguities notwithstanding, and this will no doubt be welcomed in China's insurance industry, in particular by foreign insurance players who are affected by the day-to-day practical aspects of such legislation.

Endnotes

* Lü Guoming, Juris Master, is also a lecturer of law at Jining Medical College.

1 According to Article 2 of the Measures, the term "representative organization" means a representative office or a general representative office of a foreign insurance institution approved to be established in China to conduct non-business activities such as liaison, market surveys and others.

2 This statement can be found on CIRC's official website: http://www.circ.gov.cn/Portal0/InfoModule_1149/27671.htm.

3 Item (2), Article 5 of the 2006 Measures.

Paragraphs 2 to 4, Article 5 ibid.

4 Items (7) and (9), Article 6 ibid.

5 Item (4) of Article 22 and Item (3) of Article 23 ibid.

6 Paragraph 1, Article 13 ibid.

7 Article 15 ibid.

8 Article 18 of the 2004 Measures.

9 Details as per Article 21 of the 2004 Measures and Article 18 of the 2006 Measures.

10 Paragraph 2, Article 10 of the 2004 Measures.

11 Article 9 of the 2006 Measures.

12 Article 15 of the 2004 Measures and Article 12 of the 2006 Measures.

13 According to Article 8 of the PRC Administration of Foreign-invested Insurance Companies Regulations.

14 Article 11 of the 2004 Measures and Article 24 of the 2006 Measures.