The China Insurance Industry: Key Updates and Trends Affecting Foreign Investment
February 16, 2018 | BY
Susan Mok &The China insurance industry has seen further opening-up and increased oversight.
Introduction
Foreign investment in China's insurance sector, like many sectors, is strictly controlled. Specific restrictions depend on the industry sub-segment, yielding a complex and evolving set of circumstances aimed at channeling foreign investment to promote national and industry requirements. Examples of established insurance investment regulation include: high standards for insurance industry investors; equity ownership limits; and a rigorous licensing process. Recently, new developments have emphasized the following topics:
- Expectation of further “opening up” of the China insurance industry to foreign investment
- Increased oversight by the China Insurance Regulatory Commission (CIRC)
- Strengthened national regulation over data protection and cybersecurity
Further Opening-up
Further opening-up of the insurance sector is deemed by the Chinese government to be in the interests of China and the China insurance industry. Noteworthy recent developments include the following:
- January 12, 2017: the State Council's Circular on Several Measures to Expand the Opening to the Outside World and Actively Utilize Foreign Investment (关于扩大对外开放积极利用外资若干措施的通知) announced an intention that restrictions imposed on foreign investments, including investments in insurance institutions, are intended to be further reduced.
- August 8, 2017: the State Council's Circular on Several Measures for the Promotion of the Growth of Foreign Investment (关于促进外资增长若干措施的通知) was promulgated, providing additional general direction and delegating a set of key objectives to relevant governmental authorities for implementation.
- September 5, 2017: a CIRC Vice Chairman and representatives of certain foreign-invested insurance companies met and discussed further opening-up of the industry.
- November 10, 2017: a Vice Finance Minister announced that foreign ownership limits in life insurance companies will increase from 50% to 51% in three years' time, and 100% foreign ownership will be permitted in five years' time.
Increased Oversight
Since 2016, CIRC has devoted increased emphasis on the oversight of insurance institutions from various aspects in order to better control insurance market risks. Selected highlights include:
- CIRC tightened oversight of insurance company shareholders, especially majority shareholders of domestic insurance companies and sources of their invested capital. In addition, CIRC tightened regulation over corporate governance. In the beginning of 2017, CIRC and its local bureaus conducted onsite inspections of shareholding and corporate governance, and issued regulatory letters via its website in October and November, identifying incidents of incompliance and requiring timely rectification.
- CIRC established additional restrictions over the sale of high-yield short-term universal insurance products and insurance company investment instruments. CIRC has promulgated various rules to control the sale of short-term universal products and insurance company investment instruments, and is encouraging insurance companies to develop more protection-oriented insurance products.
- The China Risk Oriented Solvency System (C-ROSS) was implemented by CIRC on January 1, 2016. Recently, on September 18, 2017, CIRC promulgated the Plan for the Second Phase of the Establishment of the China Risk Oriented Solvency System (偿二代二期工程建设方案), setting out general guidance with respect to the second phase of C-ROSS implementation, to be carried out the next three years, establishing general objectives and specific tasks and focusing, among other things, on further enhancement of the C-ROSS supervisory system. Subsequently, on October 20, CIRC published the revised Measures for the Administration of the Solvency of Insurance Companies (Draft for Comments) (保险公司偿付能力管理规定 (征求意见稿)), proposing to increase solvency standards to provide that an insurance company may only be deemed solvent when three criteria are met: (i) core solvency ratio not lower than 50%, (ii) comprehensive solvency ratio not lower than 100%, and (ii) a comprehensive risk rating of “B” or above. According to the current measures, effective from September 1, 2008, a company will be deemed solvent as long as its solvency ratio reaches 100%.
- On January 17, 2018, CIRC issued the Overall Plan for Winning the Tough Battle to Prevent and Resolve Major Risks in the Insurance Industry (打赢保险业防范化解重大风险攻坚战的总体方案), which sets a timeline of three years for combating specified risks in the Chinese insurance industry. The plan sets out three major tasks, i.e.: (i) preventing and resolving risks in major risk areas; (ii) resolutely punishing unlawful business operations; and (iii) enhancing rule-making in areas of weak regulation. The plan includes a number of specific tasks to be accomplished within the next three years, and assigns responsibility for accomplishment to relevant CIRC departments.
Strengthened National Regulation over Data Protection and Cybersecurity
The PRC Cybersecurity Law (中华人民共和国网络安全法), effective June 1, 2017, sets forth a number of high-level principles, including requirements of concern to foreign investors involving data localization and cross-border data transmission. Once enforceable against foreign insurance companies, these requirements may materially affect the existing business models of insurance companies, which often centralize data at an offshore location. As of yet, details necessary to determine specific obligations remain unclear. It is expected that implementation rules need to be promulgated which will establish specific insurance and reinsurance company obligations. However, it is uncertain when such implementation rules will be published. Until then, attendant uncertainties may increase insurance company compliance costs.
Conclusions
Indicators suggest that increased opportunities will open-up for foreign investment in an expanding Chinese insurance industry. However, to succeed in the Chinese insurance market, investors must remain alert and nimble, being accurately sensitive to the complex landscape of applicable regulation, and prepared to adjust and adapt appropriately to the ever-changing landscape.
*Jincheng Tongda & Neal was honored as the China Insurance Firm of the Year at the 2017 China Law & Practice Awards.
Elsie Shi, George Yu & John Bolin
Jincheng Tongda & Neal ¦ 金诚同达律师事务所
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