Introduction to the PRC Insurance Law (Draft Amendment)

Completeness

Compared with the first transitional amendment made in order to satisfy the World Trade Organization's (WTO's) requirements, the Draft Amendment is more systematic, scientific and comprehensive.

The Draft Amendment has extended the application of insurance funds, establishes new approaches of shares, funds and immovable investments, improves the market exit mechanisms of insurance companies, and provides some supplemental provisions with regards to the cancellation and bankruptcy of insurance companies. It has also granted the insurance organizations with mutual or cooperative systems and states these are applicable to insurance business activities of such insurance organizations. The Draft Amendment has also improved the management of insurance agencies and regulates the qualifications and activities of insurance agencies, which have not been covered by the Insurance Law. Furthermore, it has set out the qualification requirements for senior management personnel and therefore made the requirements for establishment of insurance companies more rigorous.

Prospectiveness

With rapid development of the insurance industry and reform to the national pension, medical care and financial systems, the Insurance Law is outdated since, under this law, the business scope of insurance companies is limited to property insurance, life insurance and reinsurance businesses and insurance companies, which are prohibited from establishing an enterprise outside the insurance business sector. The Draft Amendment has authorised the insurance regulatory body of the State Council to review and approve the involvement of insurance companies in pension management business and “other business relating to insurance”. Meanwhile, it has removed certain provisions, including “the funds of insurance companies could be neither used for establishment of securities business institutions nor used for establishment of enterprises outside the insurance business sector”; this change could be considered a signal for the establishment of a mixed financial industry.

Reasonableness

The Insurance Law states that where an insurance company intends to carry out outward reinsurance division business, it should carry out such business with a domestic insurance company on a priority basis. The insurance regulatory body has the right to restrict or prohibit insurance companies from proceeding with outward reinsurance business with foreign insurance companies or taking on inward reinsurance business of foreign insurance companies. However, pursuant to the WTO commitments, the reinsurance market has started the commercial operation in 2006 and the cross-border reinsurance business is subject to the same rules as domestic reinsurance business. In addition, the Draft Amendment has deleted the provisions concerning the non-compliance of WTO commitments.

Protection

The Draft Amendment has strengthened the protection of the insured parties' interests through the clarification of the rights and obligations of parties to insurance activities. It has also incorporated a “no defence clause”, set out the detailed procedures of and imitation period for insurance companies' compensation, specified the standards for compensation calculation in relation to property insurance and regulated the date of insurance contract conclusion. All these amendments would enable the insured parties to receive more effective legal protection.

The Daft Amendment states “an insurance company shall not discharge the contract two years after the conclusion of a contract for the reason that the insured party fails to fulfill disclosure obligations”. Such “no defence clause” is, in particular, of importance in two aspects. First, it would prevent the abuse of powers on the part of insurance companies effectively, and secondly, it would force the insurers to review relevant information in a stricter manner before entering into a contract and ensure the credibility of an insurance contract.

Regulation

The Draft Amendment has strengthened the regulatory powers of relevant bodies in various aspects. In order to prevent risks, the Draft Amendment has retained the original regulatory provisions concerning the solvency of insurance companies and incorporated punitive provisions. Meanwhile, it has introduced the regulatory measures for the premium rates related to the solvency of insurance companies. For the purpose of enhancing the regulatory powers of the insurance regulatory authority, the Draft Amendment has granted the insurance regulatory authority new regulatory means and measures. It has also introduced the punitive provisions against newly unlawful activities and increased the liabilities of responsible persons extensively in order to assist the fulfillment of the role of insurance regulatory authority. Furthermore, the Draft Amendment sets out specific provisions in relation to the legal status and duties of the insurance associations as well as any relationship between the insurance associations and the insurance regulatory bodies.

The Draft Amendment will inevitably have significant effects on the development of the insurance industry. Please note that the positive effects of the Draft Amendment are not limited to the five aspects listed above; the purpose of this article is to raise the attention to the effects of the amendment to the Insurance Law.