On Friday, December 6, 2019, the Chinese Banking and Insurance Regulatory Commission (the “CBIRC”) (i) promulgated Detailed Rules for Implementing the Regulations Administering Foreign-Invested Insurance Companies in the PRC (the “Detailed Rules”), and (ii) issued a Notice Clarifying the Timeline to Cancel Foreign Equity Ratio Restrictions in Joint Venture Life Insurance Companies (the “Notice”). Both the Detailed Rules and the Notice significantly broaden the rights of qualified foreign investors to participate in the Chinese life insurance market by codifying a number of the announcements and statements that Chinese officials have made over the past 24 months. We outline and discuss below key parts of each of the Detailed Rules and the Notice.
- The CBIRC released the Detailed Rules within weeks after the State Council passed the amended Foreign-Invested Insurance Company Regulatory Rules on October 15, 2019 (the “2019 Amended Regulation”). The CBIRC’s expedited issuance of the Detailed Rules and the Notice indicates that China is desperate to fast-track the opening up of its life insurance market to foreign investment—which originally was not supposed to occur until sometime in 2023. Key provisions of the Detailed Rules and the Notice, among others, include:
- Foreign Shareholding Restrictions Eliminated
The Detailed Rules provide that qualified foreign investors may now hold up to 51% of a life insurance company, vs. the long-standing 50% cap. The Notice, however, provides that, effective January 1, 2020, foreign investment may be 100% in a life insurance company.1
Although the 51% ownership cap was originally supposed have been removed “as early as June 2018” (as announced by the People's Bank of China in April 2018), the complete removal of all equity caps for life insurance companies was not supposed to have occurred until 2021 (as stated in the NDRC/MOC Negative List published in June 2018). With the issuance of the Notice, however, the CBIRC has removed this restriction a full year earlier than most recently announced. Note: the first announcement actually stated that the equity cap would not be fully removed until 2023.
- Foreign Investor Qualifications and Pre-Conditions Relaxed
In addition to raising the equity threshold for qualified foreign investors in foreign-invested insurance companies (“FIC”), the Detailed Rules also remove some of the more onerous requirements/roadblocks that, heretofore, had seriously dampened investor enthusiasm in the Chinese life insurance market.
Specifically, investors had to meet certain minimum requirements and complete certain pre-conditions in order to qualify to either establish or acquire more than 25% of the equity in an FIC. These include a requirement that the investor must be an insurance company in its home country and, among others:
- have been in operation for more than 30 years, and
- established and operated a representative office in China for no less than two years before making the application.
The Detailed Rules have eliminated these two requirements—although the other original requirements still remain. Specifically, and in order to qualify, the investor must still be an insurance company in its home country and (including the following to be considered a “Qualified Investor”):
- have total assets of no less than USD $5 billion;
- be effectively regulated by its home country’s insurance regulatory body;
- satisfy the insurance company solvency standards in its home country (i.e., the insurance regulator in the investor’s home country must issue a certificate);
- obtain an approval from the insurance regulator in its home country to establish or invest in a FIC in China; and
- comply with any other conditions established by the CBIRC including, but not limited to:
- a reasonable corporate governance structure;
- a solid risk management system;
- a sound internal control system;
- an effective management information system; and
- good standing without any history of major violations of laws or regulations in its home country.
Thus, if an investor does not meet the foregoing minimum thresholds, it cannot apply to establish or acquire more than 24.9% of an FIC.
- Additional Requirements
In addition to the foregoing, the Detailed Rules also provide that:
- a Qualified Investor must either be the majority shareholder/investor (i.e., the party with the greatest percentage of equity in the FIC), or have the ability to significantly impact the FIC’s business operations; and
- the Qualified Investor may not sell/transfer its equity for a period of five years after the FIC’s establishment date or the date on which the Qualified Investor becomes the majority shareholder in the FIC through acquisition.
- Foreign Shareholding Restrictions Eliminated
- Rules for Establishing Branches (Life & Non-Life) Remain Unchanged
Under the 2019 Amended Regulation, the FIC must invest no less than RMB 200 million as working capital into a branch. The Detailed Rules provide that the FIC cannot withdraw this working capital at any time and that the branch may only operate within the CBIRC administrative area where it is located.
In addition to the foregoing key changes, we also note the following points covered in the Detailed Rules:
- The person appointed by a Qualified Investor to either establish or acquire an FIC must have: (i) a junior college degree or above; (ii) worked in the insurance industry or a related field for more than two years; and (iii) no criminal record.
- The Detailed Rules also apply, mutatis mutandis, to Qualified Investors from Hong Kong, Macau, or Taiwan.
The Detailed Rules now codify much of what we discussed regarding foreign investment into life insurance companies in China in our 2017 and 2018 China Insurance Year in Review and many of our newsflashes over the past several years. It is clear from the rules that China is continuing to reform and liberalize its financial services sector. The promulgation of the Detailed Rules by the end of 2019 is yet another milestone in China’s continued reform efforts in opening up its insurance industry to foreign investors, starting in 2017.
Readers are encouraged to contact Winston & Strawn’s China team with any questions regarding the content of this newsflash or any other matters related to changes to the Chinese regulatory environment for FICs or foreign investment into the insurance sector in general. We will continue to monitor these reforms and others in this sector and provide updates as and when they become available.