On February 3, 2016, China’s State Administration for Industry and Commerce (“SAIC”) announced its first decision in 2016: SAIC’s Jiangxi provincial branch imposed penalties on 17 local insurance companies for concluding and implementing anticompetitive agreements to divide the casualty insurance market for construction projects in Jiangxi. The fines imposed in the case ranged from 5,934 ($902) yuan to 2,091,970 yuan ($317,979).
From 2009, the Jiangxi branches of China Life Insurance (“China Life”), Taikang Life Insurance (“Taikang”), Pinan Property and Casualty Insurance and other insurance companies concluded 2 agreements: “Coinsurance Agreement for Jiangxi Construction Projects Casualty Insurance” and “Coinsurance Agreement for Nanchang Construction Projects Casualty Insurance”. Within these agreements, the parties divided casualty insurance market by setting the market share and the insurance income share of each insurer in the given territory. For the territory of Nanchang city, Taikang was agreed to be the main insurer, which took up 31.5 % of the market share directly and supervised further 8% of the market share for any late comers for the cartel, while other insurance companies split the rest of the share. For the territory of Jiangxi Province except Nanchang, China Life was agreed to be the main insurer which took up 40% market share directly and supervised further 8% of the market share for any late comers for the cartel, while others split the rest. The agreements also provided that the insurance companies should not sell their products out of the given territory, and for the territory of Nanchang and other territories in Jiangxi Province, only Taikang and China Life as the main insurers may respectively issue insurance policy and charge premium to the clients for casualty insurance, i.e. other insurers were not allowed to undertake such insurance alone. During 2012, when the aforesaid agreements were about to expire, China Life Insurance and Taikang Life Insurance concluded another set of agreements bearing the same name with 16 other insurance companies to make similar arrangements.
Insurance industry has been one of most frequently penalized industry for the anti-monopoly enforcement agencies during recent years. According to published information, the National Development and Reform Commission (“NDRC”) announced 2 cases which imposed penalties on insurance companies for concluding horizontal anticompetitive agreements; and the above decision is the 2nd case which the SAIC has imposed penalties on insurance companies for the same reason after the SAIC penalized 4 insurance association for organizing insurers in achieving the same kind of agreements.
In the above insurance related cases, coinsurance has been used many times by the insurers in reaching horizontal anticompetitive agreements. As mentioned above, in this Jiangxi Insurance case, both agreements are named as coinsurance agreements. Coinsurance usually refers to the kind of arrangement where two or more insurers underwrite same risk and same incident for the same insurance subject together while the insured amount should not exceed the value of the insurance subject. Although coinsurance itself is legitimate form of business under many circumstances, insurers cannot escape Anti-monopoly Law’s (“AML”) jurisdiction simply by claiming that their business are operated together in the form of coinsurance.
A similar scenario in other industry would be competitors setting up a joint-venture, under which they agree to sell all their products together. The companies would not violate the AML simply because they set up a joint-venture. However, if they use the JV arrangement to engage in cartel behaviors, they would be subject to the scrutiny and punishment of the AML. For instance, if the JV is a sales company responsible for the distribution of the products of all the shareholders, who are also competitors in the market, the shareholders should be very careful about how they arrange the business of the JV. They should be refrained from fixing a uniform price of the products distributed through the JV, setting the maximum sales volume of the JV or designating territories or target customers for each of the shareholders. In sum, contrary to what some companies believe, using JV as a vehicle would not enable you to circumvent the law. What’s more, the arrangement may expose you to more severe antitrust obligation, especially considering that the concept “one single economic entity” has not been officially introduced into China.
Therefore, undertakings should be aware that certain business model or unique form of business in an industry can hardly serve as a life-saving straw when the undertakings are accused for concluding anticompetitive agreements. The veil of a shame coinsurance or JV arrangement can be easily pierced, because the AML enforcement authorities will look into the substance of the arrangement and the real intention behind it. Business operators should be mindful of the risk and should not misunderstand that business arrangement like coinsurance and JV would enable them to escape from AML punishment.