On April 22 2016 the China Insurance Regulatory Commission (CIRC) issued the Risk Alert on the Purchase of Insurance Policies by Domestic Residents in Hong Kong,(1) alerting mainland Chinese residents to related risks arising from the purchase of insurance policies in Hong Kong and requesting that mainland customers exercise prudence when purchasing such policies.
Before publication of the risk alert, the State Administration of Foreign Exchange (SAFE) – through a February 3 2016 Q&A session(2) and a March 22 2016 press conference(3) – had already reiterated the limit of $5,000 per transaction imposed on premium payments for overseas insurance policies through foreign-currency cards issued by domestic banks in point-of-sale machines. SAFE also prohibited cross-border payment of premiums for life insurance and insurance with returned premiums or returned profits. Before the Q&A and press conference, foreign exchange premium payments for all types of insurance were considered to be payments falling under foreign exchange current account items in accordance with the Classification and Code for Transactions of Foreign-related Payments 2014, enacted by SAFE on the basis of the sixth edition of the International Monetary Fund Balance of Payments and International Investment Position Manual; as such, they were administered in accordance with the principle of convertibility.
However, following the Q&A and press conference, life insurance and insurance with returned premiums or returned profits are now classified as foreign exchange capital items and thus administered according to the convertibility procedure,(4) meaning that they can no longer be paid into Hong Kong from the mainland. For medical insurance, casualty insurance and other insurance under foreign exchange current items, the old foreign exchange policy and practice remain unchanged.
The CIRC risk alert marks the third time this year that Chinese authorities have publicly taken a negative attitude towards the purchase of foreign insurance policies. This time, the CIRC has requested that mainland Chinese residents pay attention to the legal risks, foreign exchange risks and commercial risks involved in buying foreign insurance policies and exercise due caution in this regard.
Under the existing CIRC regulations, all marketing activities in which offshore policies are sold in mainland China are banned, including:
- product introductory or promotional meetings held in mainland China;
- insurance policy marketing activities carried out by operatives assigned to mainland China by overseas insurance institutions; and
- arranging for Chinese residents to take out insurance outside mainland China.
However, in accordance with the CIRC Reply on Issues Concerning the Crackdown on the Illegal Sale of Offshore Policies, it is completely legal for foreign-invested enterprises to voluntarily buy insurance services offered by overseas insurers for their foreign employees, and for foreigners living in China to voluntarily buy insurance services provided by overseas insurers. That said, the voluntary purchase of offshore policies by domestic residents is technically neither supported nor banned by the CIRC.
The risk alert requests that mainland residents travel to Hong Kong to sign contracts for Hong Kong insurance policies in person. If the Hong Kong policies are purchased in mainland China, they will be considered illegal 'underground' policies, protected neither by mainland nor Hong Kong law. The risk alert does not change the existing supervisory rules or impose new restrictions. However, through the risk alert the CIRC has explicitly expressed its negative attitude towards offshore insurance policies; as such, it should be considered – together with SAFE's previous Q&A and press conference – as a systematic declaration against offshore policies by the authorities.
Why have the authorities repeatedly stressed the existing regulations and issued new restrictions on the purchase of offshore policies over the past few months?
First, the government's foreign exchange reserves have declined rapidly. According to the statistics released by the People's Bank of China, in December 2015 China's foreign exchange reserves decreased by $107.9 billion to $3.33 trillion – the largest drop ever seen in a single month. Meanwhile, for the whole of 2015, the country's foreign exchange reserves shrank by $512.7 billion overall, bringing to a close the steady growth seen since 1992. If the downturn continues, the renminbi will face greater pressure to devalue. Under such severe circumstances, it can be taken as given that the People's Bank of China will take every possible measure to increase foreign exchange control.
Second, the large number of mainland residents purchasing policies in Hong Kong has raised concerns among mainland insurers. According to the statistics issued by the Hong Kong Office of the Commissioner of Insurance, premiums for new insurance policies purchased by mainland residents in Hong Kong in 2015 amounted to HK$31.6 billion, accounting for 24.2% of the total amount of premiums for new individual policies purchased last year (HK$130.9 billion). In comparison, such premiums amounted to HK$14.4 billion in 2014, HK$9.9 billion in 2012 and HK$4.4 billion in 2010. Mainland individuals with high net worth and high income levels are becoming increasingly important customers for Hong Kong insurers, giving mainland insurers reason to worry.
There is no doubt that the intention of the authorities in restricting the purchase of offshore policies is to guarantee national financial security and protect domestic customers. However, mainland insurers should examine more closely the underlying reasons for the popularity of these Hong Kong policies among mainland customers, as well as the aspects underpinning the success of Hong Kong-based insurers. Societal developments have led to a greater awareness of the benefits of insurance among the general population and market forces are set to force the hand of mainland insurers in carrying out reform; otherwise, high and mid-level customers will eventually take their business abroad.
For further information on this topic please contact Hao Zhan, Yibin Xia, Chen Jun or Zhou Yanghui at AnJie Law Firm by telephone (+86 10 8567 5988) or email (email@example.com, firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The AnJie Law Firm website can be accessed at www.anjielaw.com.?
(4) Article 3 of the Administrative Measures for Personal Foreign Exchange states:
"Personal foreign exchange business under current accounts shall be administered following the principle of convertibility, while that under capital accounts shall be administered according to the convertibility procedure."
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.