On October 14th, 2015, the Legislative Affairs Office of the State Council of the People’s Republic of China promulgated the “Decision on Revising the Insurance Law of the People’s Republic of China (Draft for Comment)” (hereinafter referred to as the “Draft for Comment”) and the explanation of the Draft for Comment drafted by China Insurance Regulatory Commission (“CIRC”), and sought for comments and suggestions from the public. In the Draft for Comment, 24 articles are added, 1 article is deleted, and 54 articles are modified based on the current Insurance Law of the People’s Republic of China (hereinafter referred to as the “Current Insurance Law”); thus there will be 9 Chapters and 208 Articles altogether after the revision. The background of this revision is that the insurance industry in China is currently undergoing a period of rapid development during which the potential risks become more complicated and some issues emerge, such as that the cost of violation of law is too low. Therefore, some provisions of the Current Insurance Law are no longer suitable for the development of the insurance industry, and need to be revised and perfected.
We find the highlights of the revision are as follows:
20 days’ cooling off period will be added.
Article 48 of the Draft for Comment :
A cooling off period provision shall be included in personal insurance contracts with an insurance period of more than a year. An insurance applicant shall have the right to rescind an insurance contract within the cooling off period and the insurer shall refund all paid insurance premiums without delay.
The cooling off period shall initiate from the date on which the applicant signs the insurance policy and shall last no less than 20 days.
It highlights the tendency of regulation on further protection of insurance consumers’ rights and interests. The minimum 20 days of cooling off period gives the insurance applicant an opportunity to think it over and to consult with experts after the purchase of the insurance policy, and it is beneficial to the reduction of the disputes on insurance cancellation and consumer complaints.
Annuity insurance will be added to the personal insurance business.
Article 96 of the Draft for Comment: annuity insurance is added to the personal insurance business which already consists of life insurance, health insurance, accidental injury insurance, etc. The annuity insurance consists of corporate annuity insurance and occupational annuity insurance, etc.
To conform with the reform on national endowment insurance system, the goal is to establish and perfect the occupational annuity insurance system, and to make the commercial insurance a significant supplement to the endowment insurance system by taking advantage of the extensive distribution of organizations of life insurance companies.
No more guarantee fund will be required in the case that the existing guarantee fund reaches the amount of CNY 200 million.
Article 98 of the Draft for Comment: the guarantee fund equalizing 10% of the total registered capital of the insurance company shall be deposited into the bank designated by the insurance regulatory authority of the State Council and can not be employed for any purpose other than repayment of debt during the liquidation of the company. In the event the guarantee fund deposited prescribed in the previous paragraph reaches the amount of CNY 200 million, no more guarantee fund will be required.
The goal is to moderately mitigate the capital control and supervision so as to vitalize the capital utilization of insurance companies. On account of the great capital demand of insurance companies，it would exert negative effects on the efficiency of the capital utilization of insurance companies if the guarantee fund equalizing 20% of registered capital is required to be deposited. The decrease in the guarantee fund would help enhance the vitality of the capital utilization of insurance companies.
The “four times rule” of property insurance will be abolished.
The Draft for Comment intends to abolish the “four times rule” of Article 102 of the Current Insurance Law: the self-retained insurance premium in the current year of a property insurance company shall not exceed four times of the amount of its actual capital plus public reserve funds.
This means it is no longer necessary for the property insurance company to distribute to re-insurance companies the part of insurance premium which exceeds four times of the amount of its actual capital plus public reserve funds. A new supervision system named “Solvency II” will be employed in the future.
A new supervision system named “Solvency II” will be established.
Article 102 of Draft for Comment:
An insurance company shall maintain a minimum solvency margin commensurate with the degree of risk it is exposed to. An insurance company shall meet the following solvency requirements:
1. its core solvency margin ratio and its consolidated solvency margin ratio shall meet the standards set by the insurance regulatory authority under the State Council;
2. the excess of its real capital over the minimum capital and the excess of its admitted assets over its ranking liabilities shall not be less than the amount respectively set by the insurance regulatory authority of the State Council;
3. the overall risk rating of the insurance company shall meet the standard set by the insurance regulatory authority of the State Council."
Article 103 of the Draft for Comment：
"Insurance companies shall, in accordance with the prescriptions of the insurance regulatory authority of the State Council, adopt the management system of rating their actual capital and divide their actual capital into core capital and supplementary capital based on the loss absorption ability of the capital."
Article 104 of the Draft for Comment：An insurance company may issue equity capital instruments, debt capital instruments, and other capital instruments approved by the insurance regulatory authority of the State Council to increase its solvency margin ratio, and the relevant regulation shall be enacted by the same authority. In the event of public issuance of capital instruments in the capital market, the Securities Law of the People's Republic of China and other laws and regulations shall apply. The issuance of subordinated debts by insurance companies shall be approved by the insurance regulatory authority of the State Council."
Article 108 of the Draft for Comment：Insurance companies shall enhance the management in respect of the matching of insurance assets and liabilities, and establish and perfect the comprehensive risk management system of insurance capital.
Solvency II is the abbreviation of the solvency supervision system. Compared with the first generation of the solvency supervision system (Solvency Ⅰ) , Solvency II adds the changes of modern accounting standard to the risk hypothesis of company itself. It is a relatively comprehensive risk judgment standard and the model is more complicated and sophisticated.
The Draft for Comment not only establishes Solvency II as a new supervision system by the prescription of the Insurance Law, but also adds into the Insurance Law the capital rating standard, calculating and evaluation standard, supplementation mechanism of capital, etc. which are the core of Solvency II. Additionally, the supervision and penalty mechanism for the incapability of insurance companies’ solvency is also added.
To increase forms of utilization of insurance capital
Article 109 of the Draft for Comment：
Insurance companies may utilize their capital only in the following forms：
1. Bank deposits;
2.Trade on negotiable securities such as bonds, stocks, shares of securities investment funds, etc.;
3. Investment on equity shares;
4. Investment on insurance assets management product;
5. Employment of financial derivatives for the purpose of risk management;
6. Other forms of utilization of the insurance capital prescribed by the State Council.
For substantial equity investment, or the increase of the forms of application of insurance capital, the approval of the insurance regulatory authority of the State Council is required.
The goal is to further increase the forms of utilization of insurance capital in the form of allowing insurance capital to invest in equity, insurance assets management products and financial derivatives for the purpose of risk management. In practice, CIRC has increased the forms of utilization of insurance capital in departmental rules and regulations and normative documents. The revision affirms the practice which has already been carried out at the legislative level and further clarifies the regulatory guide of encouraging the innovative utilization of insurance capital.
To further intensify the supervision of corporate governance.
Article 153, 154 and 155 of the Draft for Comment prescribes that CIRC could employ enforcement tools and take actions on insurance companies which have potential serious risks， face insolvency, or fail to meet corporate governance requirements.
The goal is to supervise the insurance company’s potential serious risk, solvency and corporate governance, which might maintain the stability of the insurance market and insurance capital efficiently.
To strengthen the supervision of shareholders and actual controllers of insurance companies.
Article 85 of the Draft for Comment prescribes that change of any shareholder whose amount of capital contribution accounts for 5% or more of the total capital of a limited liability company, or change of any shareholder who holds 5% or more of the shares of a corporation requires approval of the CIRC.
Article 167 prescribes that in the event a shareholder of an insurance company feigns capital contribution, illegally withdraws his contributed capital, or conducts other acts harmful to the interests of the company, the insurance regulatory authority of the State Council shall order him to make rectifications within a prescribed period. If the violation is serious, insurance regulatory authority of the State Council may restrict his shareholder rights and may order him to transfer his shares.
Article 169：The CIRC could demand the shareholders and actual controllers of the insurance company to make explanations on material matters of the insurance company.
Article 171: The CIRC could investigate the bank account and account information of the shareholders and actual controllers of the insurance company.
Since there are significant numbers of mergers and acquisition transactions in the insurance market, the goal is to take more strict supervising measures on insurance company shareholders and actual controllers by legal means, in order to prevent unqualified investors to indirectly invest in the insurance company through acquisition of the insurance company’s existing shares.
To further regulate the business of the insurance industry
Article 124 of the Draft for Comment prescribes that insurance companies, insurance agents and brokers, and any other employees shall not: (i) promote or describe an insurance product in a misleading or factually incorrect way; (ii) fail to perform its obligations to pay indemnity or insurance benefits within the prescribed time period or the time period as agreed in the insurance contract. Otherwise, there shall be administrative penalty; and (iii) disclose, trade, or illegally provide to any third party any personal information of the policyholder or the insured.
The goal is to intensify the supervision of the insurance industry regarding the phenomena which are heavily criticized such as “misleading promotion”, “difficulty in settlement of claims”, “leakage of personal information of policyholder or insured” so as to highlight the supervision tendency of enhancing the protection of consumer rights and interests and to lay the legal foundation of protection of insurance consumers and construction of the system.
To intensify the penalty
Article 176 to 194 of the Draft for Comment.
Currently, the rapidly developing insurance market faces more complicated risk factors. The cost of violation for the entities in the market is low, and the supervisory methods prescribed by the Current Insurance Law are inadequate. Therefore, it is necessary to revise the Current Insurance Law and to intensify the penalty for the violation.
Article 176 to 194 of the Draft for Comment intensifies the penalty which will be 2 to 10 times than that of the Current Insurance Law generally. Most of the forfeit will be raised to more than CNY 100,000. The maximum fine also will be raised to as high as CNY 1 million to 3 million.
Laws and regulations may be promulgated therafter.
Article 107, 110, 119, 123, 137, 174, 202 and 207 of the Draft for Comment.
According to the Draft for Comment, the CIRC will enact and promulgate regulations on re-insurance, insurance assets management products, on-line insurance, management of assessors, dispute mediation system, insurance group companies, mutual insurances, etc. Meanwhile, the State Council will enact the regulation on Catastrophe Insurance System with the state financing support.
We could find that the revision shows the general idea and thinking of Chinese insurance administration authority. On one hand, it relaxes supervision, promotes innovation, and releases market force; on the other hand, it strengthens the legal enforcement towards illegal act with respect to insurance. Comparing the current Insurance Law with the Draft for Comment, we note that the Draft for Comment relaxes supervision, expands the investment range of insurance fund, adds clauses regarding corporate governance and risk control, enacts laws regarding “Solvency II” and increases punitive damages regarding illegal acts, etc. It is foreseeable that the revision of the current Insurance Law will promote the sustainable development of Chinese insurance market.