Regulating risk management

New Features

In general, the new Reinsurance Provisions are more detailed than the older version. A great example of this is the additional specific term definitions that Article 2 provides. Terms like “retrocession,” “treaty reinsurance,” and “facultative” reinsurance are all reinsurance terms that now have specific definitions under Chinese law. In addition, several other Articles contain more details to explain exactly how the CIRC expects insurers and reinsurers to handle their business, and what the CIRC wants to see in the reports and filings it receives from insurers and reinsurers. An example of how the CIRC expects insurers to handle their business can be seen by Article 10's requirements for the amount of risk each insurer should reinsure. In this Article, the CIRC makes clear that each year it expects insurers to establish the total amount of risk that it will retain across the entire company, and its expects insurer to establish the amount of risk it will retain in each of its risk units. The original Reinsurance Provisions simply stated that insurers needed to reinsure excess amounts of risk. Article 10 provides significantly more detail about the CIRC's expectations.

Article 15 of the new Reinsurance Provisions serves as an example of where the CIRC makes it clear in what form it expects an insurer to provide important information that could affect a reinsurance contract to a reinsurer. In the original Reinsurance Provisions Article 14, which is now Article 15 in the new measures, the insurer was only required to “inform” a reinsurer about important information that might have an affect on the reinsurance contracts the insurer has with a reinsurer when the reinsurer asked for that information. Article 15 of the new Reinsurance Provisions makes it clear that the insurer now has an affirmative obligation to provide the reinsurer important information that might be important to the insurer and reinsurer's reinsurance contracts, and Article 15 establishes that this important information must be provided to the reinsurer in writing.

Overall, there are 37 Articles in the new Reinsurance Provisions as opposed to 35 in the original. Though Articles 36 and 37 do not exist in the original Reinsurance Provisions they are actually just Articles 34 and 35 from the original with new Article numbers.

Deleted Articles

Article 11, which required insurers to offer, at least, half of the business that they are going to reinsure to two different Chinese reinsurers, is not part of the new Reinsurance Provisions. Moreover, this requirement has not been incorporated into any of the new measures' other Articles. In turn, under Chinese law this requirement no longer exists. Removing this Article from the new Reinsurance Provisions is extremely significant because prior to the new Reinsurance Provisions the CIRC appeared to be giving Chinese-based reinsurers regulatory preference over non-China based reinsurers by requiring insurers to offer their reinsurance business to, at least, two China-based reinsurers prior to offering it to international reinsurers. The new Reinsurance Provisions removes any assumption that there might be a regulatory preference for insurers to use China-based reinsurers over international reinsurers.

In addition, Article 13 of the original Reinsurance Provisions, which basically simply stated that the parties to a reinsurance contract need to adhere to the reinsurance contract and make all necessary payments in a timely manner, has also been removed. In the new Reinsurance Provisions, there is no longer an Article that specifically establishes that the parties to a reinsurance contract are required to adhere to the contract, however, the sentiment that this Article conveyed has been incorporated into the new Reinsurance Provisions makes slight changes to some of the other Articles in the regulation.

New Articles

Articles 12, 13, 14, 24, and 29 all create requirements that were not specifically listed in the original measures.

Article 12 establishes that an insurer must determine what each of its risk units will reinsure, and it must file this methodology for creating each risk unit with the CIRC by March 31 of each year. This methodology filing requirement did not exist in the original provisions.

Article 13 requires insurers to arrange their “catastrophic” reinsurance contracts reasonably and scientifically, and it must file its “catastrophic” reinsurance contracts with the CIRC by June 30 of each year. The CIRC might be requiring this filing because reinsuring earthquake, typhoon, and flood insurance contracts appears to be a regulatory priority based on the wording of Article 7. However, Article 13's requirement that these contracts be made in a scientific and reasonable manner almost seems aspirational in tone because the CIRC does not provide a clear definition of what a decision made in a reasonable and scientific manner will be like. This lack of a clear definition for 'scientific' and 'reasonable' likely means that the CIRC understands that there could be numerous methodologies to determine what is the best course of action for an insurer, and it does not want to force insurance companies to allocate risk in a specific way. Yet, the fact that the CIRC added this filing as a new requirement for insurers shows that, from a regulatory standpoint, the CIRC likely wants to keep track of how these “catastrophic” risks are being managed. Overall, it seems that the CIRC is willing to give leeway on this matter, and will determine whether or not an insurer has reasonably and scientifically managed this risk on a case by case basis.

Article 14 is another provision that sets new standards that insurers should adhere to, but the directions the Article provides for how that standard should be met are very general. The Article establishes a general stipulation that an insurer must carefully select its reinsurance providers, but there is no clear definition for what 'careful' means. Yet, the CIRC's goal in requiring insurers “carefully” select reinsurers can be contemplated based on the rest of the Article's wording. In the rest of the clause, the CIRC states that all reinsurance arrangements must be created in accordance with the CIRC's regulations, and the reinsurance arrangements that an insurer enters with a reinsurer should be done according to CIRC regulations. Thus, it is probable the CIRC is saying it will consider the reinsurance companies an insurer chooses to enter reinsurance arrangements with to be “carefully” selected, and it will consider those reinsurance arrangements themselves to be “carefully” entered into if the insurer adheres to all of the CIRC's requirements for reinsurance arrangements, and the reinsurers the insurer chooses meet all of the CIRC's requirements for reinsurers.

Article 24 is a very important new Article for Chinese foreign-invested insurance companies. It establishes that when a foreign-invested insurance company enters a reinsurance contract with an affiliated enterprise it must report that contract to the CIRC within one month of the contract coming into effect. Moreover, Article 24 also establishes that when a foreign-invested insurance company enters a facultative reinsurance agreement with an affiliated enterprise during a calendar year, it must report that facultative agreement to the CIRC within the first month of the next quarter after it signs the agreement. Article 24 also requires that a foreign-invested insurance company keep statistics for how many reinsurance transactions it has with each of its affiliated enterprises. Furthermore, the CIRC requires the statistics for each affiliated enterprise be kept separately, meaning, an insurer must keep separate statistics for each of the affiliated enterprises it has reinsurance contracts with. Finally, Article 24 makes it clear that insurers must provide these statistics to the CIRC whenever it asks for them.

Article 29 creates a new duty for property insurance companies to provide the CIRC reports their reinsurance information within one week after the end of each quarter. No Article in the original version of the Reinsurance Provisions created this kind of requirement.

Other Significant Changes

Article 21, which was Article 20 in the original Reinsurance Provisions has one major addition. Article 21 contains a new clause that establishes an insurance broker must provide a reinsurer a written information disclosure on any information it knows about the underlying direct insurance contracts that are being reinsured or are going to be reinsured. This written information disclosure requirement did not exist in the old Article 20. However, one thing that is the same in the new measure as the old is the fact that the broker's duty to inform the reinsurer is not affirmative. The reinsurer must either ask the broker for the information it knows about the insurer and the direct insurance contracts, or the reinsurer must write the broker's duty to disclose the information to the reinsurer in the contract the reinsurer has with the broker.

Article 25, which is the old Article 23, has a new clause that clearly establishes that life insurers and reinsurers must hold enough funds in reserve to enable them to meet any obligations they have. Article 23 in the original Reinsurance Provisions established this as a general concept, but Article 25's new clause specifically applies this requirement to life insurers and reinsurers.

Article 28, which was Article 26 in the original, has been changed in many ways, but the basic concept remains the same. One major change is that the date the report is due has changed from March 30 each year to April 30 each year. Another major change is that Article 28 has added a new clause detailing what needs to be reported to the CIRC if a treaty reinsurance agreement is reached after April 30, and as part of this new clause, Article 28 establishes this report must be provided to the CIRC within one month of the agreement being executed.

Article 31, which used to be Article 28, is largely the same except that the clause specifically explains what exactly entails a “significant insurance claim” has been removed. The original version of the Reinsurance Provisions created a minimum renminbi amount that must be met in order for a life or property insurance claim to be considered major. Thus, the new provisions leave doubt at what will be considered a significant claim, but insurers still have the duty to report any major insurance claims and any reinsurance arrangements that cover that claim.

Finally, Article 34, which used to be Article 32, lowers the minimum fine that individuals can be fined for failing to adhere to the measures requirements from Rmb20,000 to Rmb10,000, however, the maximum fine remains Rmb100,000. As well, this Article adds a provision that allows for the CIRC to revoke individuals guilty of failing to adhere to the Reinsurance Provisions requirements, and it can ban a guilty person from involvement in the Chinese insurance industry for as long as it sees fit, up to the rest of an individual's life.

Yuan Min, Partner, and Kirby Carder, Foreign counsel, King & Wood, Beijing