On December 2, 2013, CIRC set out the Circular on the Supervision of Captive Insurance Companies (the Circular) which took immediate effect. This is the first official document in China to introduce the concept of captive insurance, regulate the establishment and management of captive insurers, and set out the supervisory approach to captive insurance firms.
According to the Circular, a captive insurer means an insurer invested solely by its parent or jointly by its parent and the controlled subsidiaries of such parent, providing property insurance, short-term health insurance and short-term accident insurance solely to its parent and (if applicable) the controlled subsidiaries.
A captive insurer can only be established if the following requirements, among others, are satisfied:
- the requirements for setting up a property insurer are met;
- the captive insurer’s registered capital is proportionate to the risks it has to cover;
- the shareholder(s) is a large scale company holding total assets of no less than RMB 100 billion;
- captive insurance is required by the shareholder(s) because of the industry it is involved in, for example, oil and railway industries.
Upon establishment, a captive insurer is allowed to carry out business at the jurisdictions where its parent company and/or the controlled subsidiaries of its parent company are located with or without setting up a branch. Unlike a general insurer, a captive insurer does not need to contribute to the statutory insurance protection fund. However, for a captive insurer whose solvency ratio is insufficient, CIRC has the right to require the captive insurer to increase its capital, with the captive insurer’s shareholder(s) responsible for ensuring the firm meets this requirement.
The Circular marks the regulatory response to the trend for multinational companies establishing captive insurers as a risk management tool, which has been implemented in overseas market for decades.