The China Insurance Regulatory Commission (CIRC) has been increasing its focus on financial risks in the insurance industry since 2016. Aggressive sales of high return products, asset-liability mismatch, ill-conceived acquisitions and risky asset investments, including overseas acquisitions, have all been highlighted in recent circulars to insurers and statements by officials.

Among other measures to mitigate these risks, the CIRC is acting to strengthen the shareholding structure of insurance companies. On December 29, 2016, it released the Measures for the Administration of Equity Interests in Insurance Companies (Draft Measures) for public consultation.

If adopted, the Draft Measures have the potential to affect M&A transactions in the Chinese insurance industry by broadening the types of permitted investors while simultaneously increasing the restrictions and conditions applicable to investors. Most importantly, the Draft Measures:

• expand the categories of investors that may become shareholders of insurance companies, but set maximum shareholding percentages for some;
• create new conditions and restrictions for PRC insurance companies investing in other domestic insurance companies;
• set financial qualification requirements for holders of 10% or more of the share capital of an insurance company, lowering the 15% threshold under existing regulations;
• increase the maximum permitted ownership of a single investor from 20% to 33.3% while significantly narrowing the exceptions to this rule;
• impose a three-year or two-year lock-up on promoters of insurance companies who hold a 20% or 10% equity interest, respectively;
• remove the requirement that investors must use their own funds to acquire an interest in an insurance company, thereby enabling debt financing and possibly other structured transactions;
• do not substantially change the regime for foreign investors in PRC insurance companies, other than applying the enhanced qualification requirements to them.

Insurance M&A regulation

The CIRC has adopted two sets of key regulations governing investment in domestic insurance companies (i.e. companies with no or less than 25% foreign investment). The Draft Measures are intended to supersede the CIRC's existing Measures for the Administration of Shareholding in Insurance Companies (Equity Measures), as supplemented by a CIRC notice issued in 2013 (2013 Circular) and amended in 2014.