A stricter, but more equal game

Raising the threshold

Article 14 of the Measures is where one should look to find the most stringent requirements regarding the conditions for equity participation. When an overseas financial institution invests equity in an insurance company, it must meet the following conditions:

1. It must have a stable financial status.

2. It must have gained profits in the last three consecutive fiscal years.

3. Its total year-end assets in the previous year must be greater than US$2 billion.

4. Its long-term credit rating must be rated A or greater by an international rating institution over the last three years.

The above conditions have been significantly changed from prior requirements. With respect to investors' financial status, the previous stipulation of “profitable” now means “having gained profits in the last three consecutive fiscal years”. For assets, the requirement concerning proportion of “net assets amounting to more than 30% of total assets” has been changed to a requirement that “total year-end assets in the previous year must be greater than US$ 2 billion”.

In addition, the new requirements affect major shareholders. The Measures has defined major shareholders as either “holding 15% or more of an insurance company's equity” or “holding less than 15% of the equity but directly or indirectly in control of the insurance company”. These major shareholders must: (1) be able to make capital contributions continuously and have gained profits in the last three consecutive fiscal years; and (2) have robust financial strength and net assets of more than Rmb 200 million.

Relaxing of restrictive rules

1. Restriction on the proportion of ownership of a single shareholder

Before the enforcement of the Measures, a single shareholder's proportion of ownership could not exceed 10% of an insurance company's total shares. Now, however, according to Article 4 of the Measures, a single shareholder's (including affiliated parties) capital contribution or proportion of ownership cannot exceed 20% of the registered capital of an insurance company. Additionally, this provision and other articles do not restrict the proportion or ownership of foreign shareholders. Therefore, it can be said that the Measures has loosened restrictions on shareholders' ownership proportion and granted equal treatment to the shareholding ratios of both domestic and foreign shareholders.

Furthermore, Article 4 of the Measures grants the supervisory department discretionary power over the 20% ceiling. The CIRC may exempt major shareholders from the 20% restriction in accordance with the principles of adhering to strategic investment, optimising governance structure, avoiding horizontal competition, and maintaining stable and sound development.

Chinese-funded insurance companies, however, are regulated differently. The shareholding ratios of foreign shareholders cannot exceed 25% of the registered capital of such insurance companies. Otherwise, regulations regarding the administration of foreign insurance companies must be applied.

2. Examination and approval by the CIRC

According to articles 5 and 6 of the Interim Provisions on Making Equity Investment in Insurance Companies (向保险公司投资入股暂行规定), if Chinese-foreign joint ventures, Chinese-foreign cooperative enterprises, overseas corporations, or foreign-investment enterprises want to invest in insurance companies (except publicly listed insurance companies), the CIRC must first approve the investment.

Under articles 16 and 17 of the Measures, if an insurance company changes the capital contribution amount or number of the shareholders who hold 5% or more of the shares of a company (including those who offer to buy 5% or more of the shares of a listed insurance company), the CIRC must approve the changes. However, if shareholders change their contribution amount or hold less than 5% of the shares, then they need only comply with certain registration formalities.

3. Restrictions on banks and security institutions

According to Article 8 of the Interim Provisions on Making Equity Investments in Insurance Companies (向保险公司投资入股暂行规定), unless otherwise provided by laws, regulations, or approved by the State Council, banks and security institutions are not allowed to invest in insurance companies. However, after the China Banking Regulatory Commission issued the Measures for the Administration of Pilot Projects for the Investment by Commercial Banks in the Equity of Insurance Companies (商业银行投资保险公司股权试点管理办法) at the end of 2009, the Bank of Beijing, China Construction Bank, and other Chinese capital banks started to invest in insurance companies. The Measures has also removed restrictions on banks and security institutions in an effort to encourage reputable financial institutions to invest in insurance companies.

4. Restrictions on horizontal competition

According to article 3 of the Notice on Relevant Issues Concerning Regulating Chinese-Funded Insurance Companies' Absorption of Foreign Investment in Equity (关于规范中资保险公司吸收外资参股有关事项的通知), foreign insurance groups and companies that are approved to operate in Chinese insurance markets are not allowed to invest in Chinese-funded insurance companies.

The above regulation has been removed from the Measures, which allows foreign insurance groups and companies that are approved to operate in the Chinese market to invest in Chinese-funded insurance companies. However, article 5 of the Measures stipulates that where two or more insurance companies are controlled by the same institution or by each other, they cannot invest in conflicting or competing Chinese-funded insurance companies, unless approved by the CIRC. This is remarkable because it is the first time that the CIRC has restricted horizontal competition in the insurance market. Recently, ING and Metlife (two foreign-invested insurance companies) agreed on a double-licensing issue in the domestic insurance market.

In conclusion, the establishment strategy of the Measures provides for more legal supervision and gives discretion to supervisory authorities. The Measures is designed to follow regular market patterns and respect market decisions. That this regulation raises market access requirements and loosens limitations on sole capital stock is good for optimising management structures, avoiding cutthroat competition, and attracting reputable capital to the insurance industry. Additionally, the Measures treats domestic and overseas capital equally, which provides large-scale insurance companies with opportunities to attract international investors. As a result, foreign investors now have better opportunities for investment into China's insurance market.

Sun Jingliang, Pan Yanrong, and Zach Wortham, Wang Jing & Co, Shenzhen and Guangzhou