A long wait for a quick insurance fix

Since then, a lot has changed in China, and practitioners agree that an update to the law is long overdue.

“It's necessary to amend the insurance law for the purpose of keeping up with the development of the Chinese insurance market,” says Dr Zhan Hao of Grandall Legal Group.

“It is good to revise the law as it reflects the latest issues in the insurance industry since [the] 2002 version,” adds James Yao, chief legal officer with Ping An Insurance (Group) Company of China.

But doing this has not been an easy job for the government: it has had to balance the differing needs of both the insurance companies and their clients, the insurants. On top of that, the economic crisis which swept the world over the past year has brought more challenges. This has led to the appearance of some features which have surprised the industry.

“The first intention was different from the end,” says one senior in-house lawyer with a global insurance company.

When draft amendments were first discussed in 2004, it appeared the goal was mainly to update the parts of the law covering insurance companies' contracts with clients – the issues that had not been properly dealt with when China promulgated its 2002 law as part of its accession requirements for the World Trade Organisation. But with the 2009 version came several surprises. The senior in-house lawyer cites in particular the extra powers given to the insurance regulator and the addition of clauses allowing insurance funds to invest in the real estate market.

Although they are somewhat unexpected, and were perhaps rushed through to meet pressing economic demands, these additions are positive for insurers. However, they will need to tread carefully when it comes to making new types of investment of which they have limited experience.

Three pillars

Whether or not all the amendments have been well thought out, the 2009 update to the law has three main aims: to protect the rights and interests of insurants and beneficiaries, while also imposing stricter requirements on the insurers in relation to their claim processing activities; to reiterate the 2002 rules covering the administration of insurance companies; and to strengthen the regulation of the industry.

More customer protection

New provisions have been added to the law in order to protect insurants. Article 17, for example, requires insurers to “explain the provisions of the contract to the proposer”. In the next paragraph the insurer is told to provide a reminder to customers “sufficient to draw the attention of the proposer to the clauses in the insurance contract that exempt it from liability”. This must be explained orally or in writing, although the law does not expand on how an oral explanation can be verified in practice. This grey area is causing some concern among those trying to work out how to comply.

“It solves part of the problem … but do we have to video the process?” asks one in-house lawyer.

Timelines for processing of insurance claims have also been tightened under the new law, and some insurers do not welcome these changes.

“The new law has imposed higher obligation on the insurer,” says Rudi Cao, a director in the claims department of Sun Alliance Insurance China.

Articles 22, 23 and 24 lay down clear time limits for insurance companies, with one clause allowing companies to make only one request for additional documentation to support a claim.

“In the past, the insurance company [could] effectively delay the claim process by asking the insurant to provide additional documents again and again,” explains Luming Chen from Jones Day in Shanghai.

Article 23 also says that an insurer must render a determination on a claim “in a timely manner”, and within 30 days in complex circumstances. Payouts must happen within 10 days. If the insurer fails to follow the rules, it will have to compensate its customer.

There is flexibility in the law, though, as the same article allows companies to reserve the right to extend their timeline, providing this is written into the customer's contract. For some insurance companies, these timelines are nothing new, as they had already drawn up their own internal guidelines in advance of the revised insurance law in order to remain competitive: one in-house lawyer claims that her company's internal guidelines are already “better than in the new law”.

Extra protection of insurants – however well explained in the law or however well anticipated by insurance companies – is bound to increase the burden for insurers. Even when the provisions in the law are clear, the “actual daily practices are more complex and diversified” says one lawyer. For this reason, insurance lawyers and in-house specialists are reluctant to pass judgement on whether the new law has met its intended aims.

Another significant change in the law is the introduction of a non estoppel clause in Article 16. In the past, some insurance companies would issue a policy to bring in revenue, despite knowing that the insured person had a disease such as cancer, says Chen, for example.

“They still issued the policy and then refused to pay out on the basis that cancer is not insurable.”

The new clause prohibits the insurer from terminating the insurance contract if it “was aware that the proposer failed to provide truthful information” when entering into the contract.

“That's fair,” says one in-house counsel, “but we now have to review our operations to exercise the right approach.”

On a positive note, although the revised law's new requirement may be weighted toward the customers, this will have the effect of reducing disputes. Problems often arose under the previous law because it was very vague on the issue of how an insurer should explain any exclusion clause in a policy.

“Most China insurers were troubled by the degree, contents and means of explanation,” says Zhan. “Bold-faced clause … even video equipment was used by salesmen to explain the exclusion clause.”

Courts across the country offered significantly differing judgments on how valid these means of explanation were. (According to one lawyer, the Supreme People's Court attempted to issue a judicial interpretation on this matter, but failed because there was not enough consensus between judges.) Insurers were, in turn, confused by the burden of proof they faced in insurance disputes.

Help for insurers

The second main theme of the revised law is to allow insurance companies to expand the scope of their services and products, and invest their insurance proceeds more widely. This will help the industry to develop further.

As long as it is approved by the China Insurance Regulatory Commission (CIRC), an insurance company can engage in business including insurance for loss of property, credit insurance and guaranty insurance, short-term health insurance, and accidental injury insurance. Life insurance companies can also get involved in areas including accidental injury insurance, health insurance and traditional annuity insurance, subject to approval by the CIRC on a case-by-case basis.

Another significant change in the law allows insurance companies to choose their reinsurer freely – they no longer have to use PRC reinsurers as a rule. They may also invest in the real estate market (which will be a boon for that struggling market, too). What's more, insurers have been given room to use new business structures, and are no longer limited to joint-stock or wholly state-owned structures.

“The ability of insurance companies to manage their funds in a broader way is a positive step,” says Guillaume Rougier-Brierre, a partner in Beijing office of Gide Loyrette Nouel, “although it is still subject to implementing rules and the provisions mainly cover domestic investment by PRC insurance companies.”

Significant gaps

Despite the many years spent on drafting and adjusting the revised law, and input from practitioners and specialists along the way, there are some significant omissions.

“Certain proposals which were strongly recommended and canvassed by insurance academics are still not found in the new law,” says Shanghai-based Clyde & Co partner Ik Wei Chong.

The principles of utmost good faith (a fundamental doctrine under common law, applied to many financial transactions, which requires both the buyer and seller to act honestly toward each other and to not mislead or withhold critical information from one another) and proximate cause (an event which is closely-enough related to an injury to be held as the cause of that injury) are not to be found in the amended law.

Part of the concept of utmost good faith is the policyholder's duty of disclosure: under English law, an insurance applicant must disclose to the insurer any facts that the insurer does not know. If the applicant failed to disclose anything, the insurer can void the contract.

Although, as mentioned earlier, the Chinese law also requires the policyholder to disclose information when he applies for insurance coverage, this duty of disclosure is limited to queries raised by the insurer.

“Such a provision is obviously more favourable to the insured,” says Chong.

As far as the lack of proximate cause in the revised insurance law is concerned, Chong says this is probably because the insurers could themselves include the relevant provisions in the insurance contracts

“The drafters of the revised Insurance Law may therefore feel that it is strictly not necessary to include [this doctrine] in the statute.”

Zhan highlights one other important omission.

“How to handle the case when the rights to cancel the insurance contracts or extend the contracts and the rights to appoint the beneficiary are in conflict among the insured, the insurer and the beneficiary is still a big problem,” he says.

Despite the presence of these important, and surprising, omissions, the consensus from practitioners is that the revised law “mainly meets its goals” and represents a positive step forward for the industry in China. A top-level law, issued by the State Council, by definition needs to be vague in parts and the Insurance Law is no exception. One lawyer says it should be viewed as a “general roadmap to suggest the future direction of the industry”.

Lawyers will be waiting for the Supreme People's Court to issue judicial interpretations, points out Chen, including on conflicts between the old and new laws, such as retroactive application of the new law. But it is the insurance regulator to which most eyes will turn.

“[The revised law] leaves much authority with the China Insurance Regulatory Commission for the drafting and promulgation of detailed rules and implementation measures with regards to each of the specific issues respectively,” says Rougier-Brierre (see below for details of six, just-released CIRC rules).

Here the story connects with the third main aim of the revision of the law – strengthening industry regulation. The new law has clearly given more power to the CIRC: it specifies new, clear sanctions, such as fines of up to Rmb100,000 for employing unqualified staff and up to Rmb1 million for representative offices of foreign insurers which illegally engage in insurance activities. As well as writing and amending practical regulations and investigating and dealing with undesirable activities, the CIRC must also oversee the day-to-day operation of insurance companies, monitor their solvency and approve changes in share ownership. But the Commission is relatively young – it was set up in 1999 – and generally acknowledged to be under-resourced. Despite this, lawyers appear confident that the regulator can rise to the occasion.

“There is reasonable expectation from the industry that they will have the adequate resources,” says Chen. “You have two competing interest groups – insurance companies and insurants. It does a pretty good job of balancing their needs.”

Everything rides on good interpretation

When the legislative process began several years ago, China's insurance law clearly needed refreshing: the 2002 law was old-fashioned and inadequate, and gave rise to considerable administrative and legal headaches for insurance companies while not properly protecting consumers. The new law, therefore, is a vast improvement. It seems, however, that several years of drafting could have produced a better result.

Perhaps the sudden arrival of the economic crisis is to blame; or perhaps it was the formidable task of balancing a diverse range of consumer and commercial needs which caused some problems. Whatever the reason, it is clear that all eyes will be on the courts and the regulator as judicial interpretations and more implementing regulations are published in the months ahead.

More investment options for insurers

The China Insurance Regulatory Commission has just issued several new sets of regulations on the investment of insurance proceeds:

• Circular on Regulating Stock Investments of Insurance Institutions (关于规范保险机构股票投资业务的通知);

• Circular on the Investment of Insurance Funds in Infrastructure Bond Investment Plans (关于保险资金投资基础设施债权投资计划的通知);

• Circular on Increasing the Bond Products in which Insurance Institutions May Invest (关于增加保险机构债券投资品种的通知);

• Guidelines for the Establishment of Infrastructure Bond Investment Plan Products (基础设施债权投资计划产品设立指引);

• Criteria in Respect of Stock Investment Management Capabilities of Insurance Companies (保险公司股票投资管理能力标准); and

• Criteria in Respect of Credit Risk Management Capabilities of Insurance Institutions (保险机构信用风险管理能力标准)

The laws were published on the Commission's website on April 7 2009, although their official publication dates are March 18 and 19.

Although the draft amended PRC Insurance Law opens the door for insurance companies to invest their insurance proceeds, it contains few details. Implementation rules such as these should help clarify matters.

The new regulations have been issued well in advance of the date on which the amended PRC Insurance Law will come into force (October 1 2009).