Bancassurance has been playing a rapidly increasing role in recent years in China as a sales channel for insurance products.
China Life Insurance Company, for instance, reported a 15.3% increase in total premium income in 2010, of which more than half of the total premiums were generated through bancassurance channels. Compared with the results of 2009, sales through bancassurance channels reportedly rose 82%.
Such increased business activity has led to a greater need for regulation and supervision. The regulators of both financial institutions and insurance companies have formulated a series of regulations and measures attempting to regulate and control the bancassurance business through standardising the relationship between the parties, regulating the resourcing and administration of departments and personnel carrying on the business and placing restrictions on agency fees.
Since November 2010, a number of circulars and guidelines have been issued by the China Insurance Regulatory Commission (CIRC) and the China Banking Regulatory Commission (CBRC), including:
- Circular on further strengthening of sales compliance and risk management of bancassurance business of commercial banks (CBRC Circular  No. 90 dated 1 November 2010) (CBRC Circular No. 90);
- Circular on strengthening the restructuring and improving the healthy development of banks acting for life insurance services (CIRC and CBRC Circular  No. 4 dated 13 January 2011) (CIRC/CBRC Circular No. 4);
- Guidelines for supervision of bancassurance services of commercial banks (CBRC and CIRC Circular  No. 10 dated 7 March 2011) (CIRC/CBRC Guidelines); and
- Draft regulations for supervision of entrustment of insurance agency business by insurance companies to financial institutions, issued by CIRC on 7 April 2011 (Draft Regulations).
Whilst the circulars and guidelines are now in force, the Draft Regulations are not yet law but were issued for public consultation with comments due by 27 April 2011.
Who do the regulations apply to?
The Circulars, Guidelines and Draft Regulations apply to insurance companies established pursuant to the approval of CIRC and financial institutions (excluding insurance companies) under the supervision of the financial regulatory authorities, such as banks and securities companies. CIRC/CBRC Circular No. 4 has a specific focus on life insurance companies and the sale through banks of life insurance products.
Which financial institutions may carry on bancassurance business?
Licensing requirements have been clarified and standardised. For a financial institution to be able to carry out insurance agency business, it must first obtain a licence from its regulatory authority, e.g. CBRC, authorising it to carry on insurance agency business. Subsequently, it must obtain an “Insurance Agency Business Operating Licence” from CIRC. The personnel within the financial institution actually carrying on insurance agency business must also obtain the relevant qualification from CIRC.
The Draft Regulations more specifically provide that a financial institution will be qualified to apply for an “Insurance Agency Business Operating Licence” from CIRC, if it satisfies the following conditions:
- 1.recognition by its regulatory authority that it is permitted to conduct insurance agency business;
- has the appropriate premises from which to conduct insurance agency business;
- personnel carrying on insurance agency business have obtained the relevant qualification from CIRC; and
- has in place sound and well-established systems regulating insurance agency business, such as systems to manage policies and insurance promotion materials, for collection of premiums and commission settlements, for training, compliance, dealing with complaints and emergency measures.
The Draft Regulations confirm the prohibition set out in CBRC Circular No. 90: the sale of insurance products in bank outlets must be carried out by employees of the financial institution who have obtained the relevant qualifications from CIRC and not by employees of the insurance company. That said, insurance companies must have qualified employees responsible for overseeing the bancassurance business, according to the CIRC/CBRC Guidelines.
The CIRC/CBRC Guidelines further stipulate that the insurance company and financial institution concerned must not have breached any regulatory rules in the past two years. The same rule has not been incorporated in the Draft Regulations.
Bancassurance business and agency contracts
The CIRC and CBRC have made clear through the series of regulations that a written agency contract must form the basis of all bancassurance business. Such agency contracts must set out clearly the insurance products involved, settlement methods for collecting of premiums by financial institutions on behalf of the insurance company, commission and payment method, training etc.
More importantly, agency contracts must set out clearly the duties and responsibilities of each party in relation to legal and regulatory compliance requirements and anti-money laundering measures. They must also provide for methods for handling complaints including dispute resolution mechanisms.
The Draft Regulations further establish that the relationship between the financial institution and insurance company is one of agency, and that the insurance company, as the principal, is bound by the acts of its agent carried out within the scope of the grant of authority. Even if the financial institution acts beyond its authorisation, or without authorisation including after the authority has been terminated, and enters into an insurance contract with a third party, the insurance company will still be bound if the insured or the policy holder has reasonable grounds to believe that the financial institution acted within its authority. The insurance company will only have recourse against the financial institution.
In general, the circulars and Draft Regulations set out several restrictions on the ways bancassurance business can be carried out. According to CBRC Circular No. 90, each bank outlet is limited to acting as agent for three insurance companies. However, this limitation is not repeated in CIRC/CBRC Circular No. 4, the CIRC/CBRC Guidelines or the Draft Regulations. The CIRC/CBRC Guidelines provide that commercial banks and insurers must choose partners according to their capabilities, whilst CIRC/CBRC Circular No. 4 provides that an agent bank may establish agency relationships with several insurance companies, the exact number of such relationships to be determined in accordance with its own abilities and risk management capabilities. The Draft Regulations require insurance companies to formulate standards for selecting bancassurance partners. The Draft Regulations do not seem to repeal CBRC Circular No. 90, so it would appear that, if left unchanged, commercial banks will have to comply with CBRC’s restriction that they may only sell the products of three insurers after the Draft Regulations have come into effect.
The Draft Regulations prohibit insurance companies and their staff from paying any commission or benefits other than those set out in the agency contracts to the agent financial institution. CIRC/CBRC Circular No. 4 goes into more detail by further providing that insurance companies are banned from paying cash, whilst the CIRC/CBRC Guidelines extend the ban to valuable securities, reimbursement of costs and travel expenses.
Another major restriction set out in the CIRC/CBRC Guidelines and CIRC/CBRC Circular No. 4 is that the agency agreement should generally be signed by the head offices of the insurance company and the bank, although upon authorisation from the head office, provincial and municipal level branch offices may sign agency contracts too. Consequently, payment of agency fees can only be settled at the head office level or at provincial or municipal branch office level.
In contrast, the Draft Regulations are silent on this matter. It is uncertain whether the rules set out in the CIRC/CBRC Circular and CIRC/CBRC Guidelines will remain of a complementary nature and remain in force after the enactment of the Draft Regulations or whether they will be repealed by the Draft Regulations.
Impact and expectations
This set of rules to further regulate the bancassurance business in China may slow down the bancassurance business in the short term, as financial institutions and insurance companies will require time to introduce measures to ensure compliance with these new rules. Further, it is anticipated that costs will go up for financial institutions and insurers as they will need to train the appropriate personnel and provide the appropriate venue for the business.
The positive side of the story is that the interests of insureds and policy holders will be better protected due to this further regulation. This will also lead to closer and better cooperation between and integration of insurance companies and financial institutions. However, due to the inconsistency between the different rules set out in different documents, further confusion may be created as to which rules are applicable to which players. It is yet to be seen whether the CIRC and CBRC will address those inconsistencies