On August 25, 2019, CBIRC published and implemented the Measures for the Administration of Related Transactions of Insurance Companies (Measures). The Measures introduced the following paramount principles:
- the principles of “see-through” and substance over form were established; and
- insurers must establish policies to review and report transactions with related parties (Related Party Transactions) before, during and after such Related Party Transactions, in order to both boost insurers’ operational independence and prevent funnelling of interests between related parties.
A key takeaway from the Measures is that the CBIRC, when applying the “substance over form” principle, will not scrutinize only those types of Related Party Transactions that are explicitly set out in the Measures, but will attempt to assert jurisdiction over also such types of transactions that it considers as having the effect of a Related Party Transaction.
Related Parties and Related Party Transactions rigorously defined
The Measures rigorously defines the criteria for ascertainment of what constitutes a related party (Related Party). It defines Related Parties as persons in direct or indirect control or shareholding relationships. Thus, Related Party relationships exist between insurers and their controlling shareholders, parties acting in concert with the actual controlling persons of insurers, and family members having close relationship with the actual controlling persons. To better cover regulatory loopholes, the Measures contain catch-all clauses that empower CBIRC and Insurers to adopt a “substance over form” approach and deem any other parties as Related Parties if such parties could benefit from unilateral funnelling of interest from the insurer.
Related Party Transactions are also broadly defined to include the transfer of resources or obligations between insurers and their Related Parties, including investment/equity participation, use of funds, transfer of interests, insurance business, provision of goods or services, as well as other types of transactions deemed as Related Party Transactions by CBIRC based on the principle of substance over form.
The Measures clarify the method of calculation for transaction amounts of different types of Related Party Transactions, and set specific regulatory limits for transactions involving the use of insurance funds:
(1) the value of total investment by an insurer in all its Related Parties shall not exceed (a) 30% of its total assets or (b) the amount of net assets, in each case at the end of the previous year, whichever is lower;
(2) regarding the value of total investment by an insurer in unlisted equity securities, real estate assets, other financial assets and overseas investments, an insurer’s investment in all of its Related Parties shall not exceed 50% of the investment limit of each of the aforesaid type of assets;
(3) the total value of investment by an insurer in a single Related Party shall not exceed 15% of its total assets at the end of the previous year; and
(4) where an insurer invests in financial products, if the underlying assets involve the controlling shareholder of such insurer or any Related Party of the controlling shareholder, the insurer may not purchase more than 60% of all such financial products issued and outstanding.
For purposes of compliance with the above mentioned limits, the value of investment by an insurer and its controlled subsidiary(ies) must be calculated on a consolidated basis, where the principles of “see-through” and substance over form must be applied. Insurers are required to establish alert and control mechanisms to monitor the transaction value of Related Party Transactions and the relevant regulatory limits on a continual basis, and adjust their operational activities to ensure continuing compliance.
The internal control of Related Party Transactions
Insurers are required to adopt policies for the management of Related Party Transactions, including the rules for the identification, reporting, verification and information management of Related Parties, as well as the initiation, pricing, review, reporting, disclosure, and audit of Related Party Transactions and the accountability of individuals involved in them. Insurers’ boards of directors are required to set up a control committee in charge of the identification of and relationship management regarding Related Parties, and the management, review, approval and risk control of Related Party Transactions.
Reporting and disclosure of Related Party Transactions
Insurers are required to maintain information files of all of their Related Parties and update these every six months, and shall report to CBIRC at the end of June and December each year.
The directors, supervisors and senior management of insurers, and natural persons, legal persons or other institutions holding or controlling 5% or more of the equity stake of an insurer, are obligated to report to the insurer information about their own Related Parties.
Insurers are required to report to CBIRC quarterly their transactions with Related Parties and publish on their corporate website and other website recognized by CBIRC information regarding their Related Party Transactions. Further, major Related Party Transactions are required to be reported to CBIRC on a standalone basis, transaction by transaction.
The launch and implementation of the Measures were intended to streamline the regulatory principles and policies concerning the regulation of insurers’ Related Party Transactions, and were meant to tackle and prevent the funnelling of interests from insurers to Related Parties through non-compliant Related Party Transactions. Meanwhile, as insurers are subject to very stringent compliance requirements in managing their Related Party Transactions, they will need to set up sound internal policies and procedures to implement the relevant requirements to ensure compliance.