Careful steps in the bancassurance market

1. Reiterating that the employees of insurance companies shall not be stationed in bank branches. The CBRC issued the Notice on Further Strengthening the Sales Compliance and Risk Management of the Bancassurance Business of Commercial Banks in October of 2010 (关于进一步加强商业银行代理保险业务合规销售与风险管理的通知)(CBRC 2010 Notice) stated for the first time that the employees of insurance companies shall not be stationed in bank branches and the Guidelines reiterated this requirement.

2. Regulating the cooperation between banks and insurance companies and enhancing the stability of their cooperation relationship. The Guidelines require insurance companies and banks to choose their cooperation partner rationally and to determine the scope and amount of their cooperation partners reasonably. At the same time, the Guidelines require that the period of cooperation between a bank branch and an insurance company has to be for a continuous period of more than one year. It is worth noting that the CBRC 2010 Notice required that each branch of a commercial bank could cooperate with no more than three insurance companies, but the Guidelines have seemingly abandoned this restriction.

3. Regulating the management of bank and bancassurance employees' qualification and training. The Guidelines require that every branch of a commercial bank shall obtain the insurance agent licence before operating a bancassurance business and every bank's employee who sells insurance products shall obtain the Qualification Certificate for Insurance Agents. Bank employees who sell unit-linked insurance products shall have more than one year's experience selling insurance products and have received no less than 40 hours of special training. The insurance company's financial advisor of bancassurance shall also obtain the Qualification Certificate for Insurance Agents and must receive no less than 36 hours of training each year.

4. Strengthening management of agency fees and preventing the risk of commercial bribery. The Guidelines require insurance companies to pay the agency fees to second-level or above branches of banks uniformly through its first-level or above branches. If conditions mature, insurance companies shall pay the agency fees to the headquarters of commercial banks through their headquarters. Furthermore, an insurance company shall, according to the accounting rules, truthfully list and pay the agency fees to the commercial bank and cannot pay the agency fees without normal account records. The Guidelines prohibit insurance companies and their employees from giving the cooperative bank and bank employees any benefits in any form that are not included in cooperation contracts. It also prohibits banks or their employees from charging or asking insurance companies for any benefits that are not included in cooperation contracts.

5. Preventing misleading sales. The Guidelines clearly stipulate that bancassurance sales personnel shall not mix the sale of the insurance products with deposit and bank financial products. At the same time, the Guidelines require commercial banks to sell different insurance products in different areas in accordance with the complexity of insurance products. According to the Guidelines, unit-linked insurance products shall not be sold through bank teller counters.

The influence of the Guidelines on foreign insurance companies

For foreign insurance companies, the influence of the Guidelines shall be assessed from three aspects: short-term, medium-term and long-term.

Influence in the short-term: Bancassurance business will slow down to adapt to the new regulation

After the publication of the Guidelines, the bancassurance channel was restricted in many respects and therefore the speed of growth will likely slow down this year. In accordance with the premium collection statistics of the first two months of this year as published by CIRC, life insurance premiums collected in February 2011 was Rmb112.3 billion. This amount only accounted for 91.7% of the amount of premiums collected in January and the sequential growth rate was -8.28%. The CBRC 2010 Notice is considered to be one of the most important reasons for the decrease of bancassurance business.

After entering into China, foreign insurance companies usually choose to engage in bancassurance business as a point of breakthrough to increase premiums dramatically. So, the Guidelines shall have a significant influence on foreign insurance companies. It can be expected that the total premium collected by foreign insurance companies will decrease this year.

Influence in the medium-term: The cooperation relationship between insurance companies and banks shall turn into a long-term and regulated relationship

The Guidelines focused on the stability of the cooperation relationship between banks and insurance companies, and therefore the cooperation between them shall become a long-term and regulated relationship. In recent times in the Chinese insurance market, there is a trend that the number of insurance companies that are controlled by banks or have their stakes taken up by banks is increasing. Accompanied by the establishment of stake-holding relationships between banks and insurance companies, banks will provide their network resources to their affiliated insurance companies when they are choosing cooperative insurance companies. Therefore, it will be much more difficult for other insurance companies to cooperate with these banks. For example, relying on the Postal Savings Bank of China, the premium received in the first two months of this year by China Post Life reached Rmb1.07 billion and increased by 8410% compared to the same time of last year.

Apart from the few foreign insurance companies that are controlled by banks or their stakes held by banks, the cooperation relationship between foreign insurance companies and banks is not stable. Mostly, foreign insurance companies have to pay high agency fees to maintain and expand their bancassurance business. If the cooperation relationship becomes a long-term and stable relationship, some foreign insurance companies will be squeezed out of the market.

Influence in the long-term: The leading factor of competition of bancassurance will change from agency fees to products

The Guidelines have reiterated that the employees of insurance companies shall not be stationed in bank branches and emphasised the strengthening of the management of agency fees. In the long-term, the Guidelines will change the practice of insurance companies expanding their bancassurance business by paying high agency fees, and therefore the Guidelines will guide the leading factor of competition of bancassurance to change from agency fees to products. In addition, considering products will be sold by bank employees directly, bancassurance products need to be simplified and standardised.

Foreign insurance companies have long-term and abundant experience in the cooperation with banks abroad. Furthermore, accompanying long-term development, foreign insurance companies have developed an entire product system which is a suitable fit with the character of bancassurance. Foreign insurance companies may introduce their mature foreign experience to China and develop insurance products that are suitable for Chinese customers. So, from a long-term perspective, some foreign insurance companies can use their experience on products or sales models to obtain a competitive advantage in the bancassurance business.

Meanwhile, accompanying the decrease of agency fees, the profit margins of the bancassurance business will increase. If foreign insurance companies can utilise their competitive advantages in the bancassurance market, then bancassurance business can become a significant source of profit.

Dr. Zhan Hao, Grandall Legal Group, Beijing