China Update

On May 21, 2010, the China Insurance Regulation Commission (CIRC) issued the amended Measures for the Administration of Reinsurance Business (“Reinsurance Measures”) which came into effect on July 1, 2010.

Under the old PRC Insurance Law, direct insurers in China were required to give priority to onshore reinsurers when ceding their reinsurance business. This statutory cession was further elaborated by the old Measures for the Administration of Reinsurance Business, which required a direct insurer in China to offer at least 50% of the reinsured risks to at least two onshore reinsurers in the first instance.  Only if such original offers to the onshore reinsurers have been declined could the above risks be offered to offshore foreign reinsurers.

The amended PRC Insurance Law (which is effective as of October 1, 2009) removed preferential treatment for domestic reinsurers, and in line with the amended PRC Insurance Law, the new Reinsurance Measures have abolished the statutory cession as well.  This will greatly expand the options available to insurers in China with regard to selection of reinsurers and will be especially beneficial to foreign reinsurers having entities in China.  According to approval results published by CIRC, CIRC approved 9 foreign-invested insurance companies (FIICs)  to cede reinsurance business to their offshore affiliated reinsurers in December, 2010 and another 11 FIICs in the first four months of 2011.

In spite of the fact that foreign reinsurers are likely to be the biggest beneficiary under the new Reinsurance Measures, CIRC has made it clear that it intends to scrutinize the reinsurance market more closely through requiring stricter disclosure of information relating to reinsurance business arrangements and imposing more severe penalties for violations.

Under the new Reinsurance Measures, a direct insurer is required to submit a copy of the reinsurance agreement to CIRC for record.  Information relating to renewal of reinsurance agreement, new reinsurance agreement, reinsurers and broker arrangement must be submitted to CIRC within one month after the contract takes effect.  Moreover, property and casualty insurance companies must establish a reporting system regarding their reinsurance businesses and file reports to CIRC on a quarterly basis.

The new Reinsurance Measures also impose harsh punishments on persons who fail to comply with the relevant requirements.  A person in violation of the Reinsurance Measures is not only subject to monetary penalties ranging from RMB 10,000 (US$1,538) to RMB100,000 (US$15,380), but also faces additional penalties such as disqualification from his or her position, revocation of his or her insuance practicing license and even permanent insurance practice restriction.