Ruling an expanding kingdom

1. They have continuously operated for no less than six years

2. They have been profitable in the last three years

3. They have net assets no less than one billion Rmb

4. They have total assets no less than 10 billion Rmb

All insurance companies that are controlled by the investors shall meet the following requirements:

1. Its solvency conditions are consistent with regulatory requirements

2. They have a sound corporate governance structure and internal control system

3. They have no record of serious violations of laws and regulations in the last three years

Insurance group companies' principal operations shall be equity investment and management. They may utilise self-owned capital to invest in insurance companies, insurance asset management companies, specialised insurance agencies, insurance brokerage agencies, insurance assessment institutions and other insurance-related businesses. Furthermore, within a strict confinement of investment ratio, insurance group companies may also invest in non-insurance financial enterprises, insurance-related non-financial enterprises and overseas entities. Details of the investment ratios are as follows:

CIRC officials explain that the strict restrictions on investment ratios are designed to “highlight insurance as major business and police investments”. The CIRC additionally stresses that the Measures regulate the equity investment of insurance group companies only. The Measures are not applicable to insurance group companies' financial investments, such as investments with insurance capitals.

With regards to corporate governance, the Measures clarify the functions of insurance group companies in managing and controlling strategic planning, human resources, financial accounting, information systems, brand culture and operations coordination. The Measures put special emphasis on the responsibilities of insurance group companies in managing and controlling compliance and risk management. In terms of capital management, the Measures require insurance group companies to set appropriate goals of capital adequacy ratios in order to ensure that subordinate insurance companies comply with regulatory requirements on solvency.

Impact of the Measures on foreign investment

China's burgeoning insurance market has consistently attracted the attention of foreign players. The Measures will have an impact on foreign investors seeking to enter the Chinese insurance business and existing foreign investors in the Chinese market alike.

Impact on foreign investors seeking to enter the Chinese insurance market

Firstly, foreign investors may establish their presence in multiple financial sectors by investing in insurance group companies. It's exceedingly difficult to acquire a licence of financial operation in China. Because of their nature, insurance group companies are holders of more than one financial licence. Therefore, foreign investors may operate in multiple financial sectors by virtue of making equity investments in insurance group companies.

Secondly, foreign investors may pick up investment opportunities in the set-up process of insurance group companies. According to the Measures, setting up insurance group companies can be effectuated by incorporating newly-created insurance group companies or converting existing insurance companies into insurance group companies. These processes present opportunities for foreign investors to make equity investments.

However, it should be heeded that the CIRC will not allow foreign investors to invest in two or more insurance companies that have identical scopes of business. Differently put, once foreign investors invest in insurance group companies, they are barred from investing in other insurance companies that compete with the insurance companies within the group. Therefore, foreign investors need to consider their growth strategies when deciding whether or not to invest in insurance group companies.

Thirdly, foreign investors are in a good position to share their experience in corporate governance and capital management with Chinese insurance group companies. Financial integration and insurance group operation are still a novelty in China. For Chinese insurance companies, the Measures' requirements on corporate governance and the capital management of insurance group companies constitute a substantial challenge. In contrast, foreign financial groups have accumulated extensive experience in these regards. They can provide valuable experience and technical assistance to Chinese insurance groups in terms of corporate governance, capital management and public listing.

Impact on existing foreign investors in the Chinese insurance market

Currently, several foreign companies have already entered the Chinese insurance market by virtue of setting up foreign insurance companies (including Sino-foreign joint venture insurance companies, foreign-funded insurance companies and branches of foreign insurance companies). The Measures may have a couple implications on existing foreign investors.

Firstly, the enhanced market concentration increases the difficulty of foreign insurance companies' operations in China. As insurance group companies take shape, the concentration rate of the Chinese insurance market is rapidly increasing. This creates greater competitive pressures on foreign insurance companies.

Secondly, foreign investors should take care to protect their own interests in investing in insurance group companies. At the moment, there are several foreign-invested Chinese insurance companies that are eligible for conversion into group companies. The conversions would involve key legal issues such as converting current shareholdings into shareholdings in the group companies, replenishing capital, corporate restructuring and amending articles of associations. These issues are relevant to corporate law, insurance law, contract law and regulation policies. Therefore, foreign investors are advised to seek advice from insurance lawyers and accountants.

Dr. Zhan Hao, Grandall Legal Group, Beijing