Welcome to the latest edition of JT&N’s PRC Insurance Highlights News Alert, reporting recent regulatory developments in the PRC insurance sector. We welcome your comments, questions and feedback. To contact us please email: firstname.lastname@example.org
1.New Interpretations of the PRC Insurance Law by China’s Supreme People’s Court Released and Effective as of December 1, 2015
China's Supreme People's Court has promulgated its latest interpretations of the PRC Insurance Law, which took effect on December 1, 2015 (the “Effective Date”). The Supreme People's Court is the highest court in China and its interpretations of a law, generally speaking, are binding upon the lower courts of China. The interpretations mainly provide guidance on disputes over life and health insurance contracts. The interpretations, altogether twenty-five of them, generally reflect the Court’s attempt to further protect insurance consumers in China, including from insurance fraud and moral hazard. More specifically, the interpretations cover issues involving the forms, timing and effect of an insured’s consent, and change in such consent; existence and loss of an insurable interest under a life or health policy; duty of disclosure; juvenile policies; resumption of coverage of a policy in the situation of premium payment in installments; designation, determination of, and change in, beneficiaries; transfer of beneficiary’s rights; allocation of claimed funds as part of an insured’s estate; and other claim issues mainly under health or life policies. The above interpretations are applicable to cases which have not been finally adjudicated as of the Effective Date, including cases subject to appeal, or prior to the issuance of a final appellate decision.
2.C-ROSS to be Formally Launched in the First Quarter of 2016
On December 29, 2015, Chen Wenhui, Vice Chairman of CIRC, announced at a meeting with industry representatives that CIRC will formally launch China’s second generation solvency regulation system, known as the “China Risk Oriented Solvency System,” or “C-ROSS,” in the first quarter of 2016. The above being said, according to sources close to the market, different components of C-ROSS are likely to be implemented in stages, instead of all at once. Earlier, on February 13, 2015, CIRC had released the “Circular on Implementation of the China Risk Oriented Solvency System in the Transitional Period,” initiating the transition towards C-ROSS. During the transitional period, insurance companies are required to submit two separate solvency reports based respectively on the C-ROSS standard and its predecessor, known as “China’s First-Generation Solvency Regulatory System,” or “Solvency I.”
3.Draft Insurance Company Capital Replenishment Measures Open for Public Comment
On December 28, 2015, CIRC released for public comment the draft “Administrative Measures for Insurance Company Capital Replenishment,” with a public comment period that will close on February 15, 2016. If adopted, these measures will supersede the “Circular on Subordinated Convertible Bonds Issued by Listed Insurance Companies,” which was promulgated by CIRC on May 15, 2012. The draft measures are very similar in content with a prior draft version that CIRC released for public comment on November 6, 2014. The term “capital” in the draft measures refers to the financial resources of an insurance company that may be applied to offset losses during its operation or liquidation. The draft measures prescribe eight capital replenishment instruments and provide for detailed regulations governing each such type of instrument. The draft measures also permit insurance companies that satisfy prescribed conditions to “experiment with capital instrument innovation,” although the precise meaning of this phrase remains subject to further clarification by CIRC.
4.CIRC Seeks to Further Strengthen Insurance Investment Regulation
In December 2015, CIRC sequentially promulgated three documents aimed at strengthening its insurance investment regulation:
(i)On December 7, CIRC promulgated the “Guidance for the Internal Control of Insurance Funds (GICIF),” which instructs insurance holding companies, insurance companies, and insurance asset management companies to establish and maintain effective internal controls with respect to the usage and investment of insurance funds. CIRC also promulgated three detailed implementation guidelines in the form of “GICIF Applications.” “GICIF Application No. 1” governs bank deposits, “GICIF Application No. 2” governs fixed income investments, and “GICIF Application No. 3” governs stocks and stock funds. These guidelines replace the earlier “Guidelines on Controlling Risks in Investing Insurance Funds” promulgated by CIRC in April 2004.
(ii)On December 11, CIRC released the “Circular on Strengthening Prudential Supervision of Asset Allocation of Insurance Companies,” which seeks to control the risks arising from insurance company asset-liability mismatches and lack of liquidity. Compared with the guidelines mentioned above, this circular contains more specific and binding requirements under which insurance companies must undertake stress tests and report to CIRC results of such tests once the companies reach or exceed certain thresholds with respect to their investments or their liability conditions (of particular importance, excessive equity and real estate holdings).
(iii)On December 23, CIRC issued the “Information Disclosure Standard No. 3: Use of Funds of Insurance Companies in Acquisitions of Publicly Listed Company Stocks,” which governs disclosures by insurance companies with respect to their acquisitions of publicly listed company stocks. Pursuant to this rule, an insurance company must make standardized and detailed disclosures according to this rule, once the insurance company owns, by itself or together with its affiliates or a person acting in concert, 5% of a publicly listed company, and every time the insurance company further increases its holding by 5% or more in the same listed company. As prescribed by CIRC, this rule also applies if an acquisition triggers disclosure obligations in non-PRC jurisdictions.
In the accompanying media releases, CIRC noted that it will continue to transform the existing “soft” restrictions governing asset-liability management to “hard restrictions” under the framework of C-ROSS, and implement its supervision philosophy of “liberalizing the front end, controlling the back end.”
Note: CIRC Information Disclosure Standards No. 1 (regarding affiliated transactions) and No. 2 (regarding investment risk-control responsibility persons) were respectively promulgated in May 2014 and April 2015.
5.Draft Interim Measures for Insurance Fund Indirect Investment in Infrastructure Projects Open for Public Comment
On December 23, 2015, CIRC released for public comment the draft “Interim Administrative Measures for Insurance Fund Indirect Investment in Infrastructure Projects,” with a public comment period that will close on February 15, 2016. If adopted, these measures will supersede the current “Interim Administrative Measures for Insurance Fund Indirect Investment in Infrastructure Projects,” which were promulgated by CIRC on March 14, 2006. The draft measures apply to investment arrangements in which insurance companies, insurance group companies and insurance holding companies entrust their insurance funds to qualified trustees, who frame and invest such funds in infrastructure investment plans or structures, and manage or dispose of such assets in the interest of such insurance companies, insurance group companies and insurance holding companies. While the current measures prohibit a beneficiary or its affiliated party to act as a custodian of the entrusted assets, the new draft measures allow such appointment as long as the relationship is duly disclosed. The new draft measures require a trustee to set aside a risk reserve fund in an amount of not less than 10% of investment management fees to mitigate the potential loss of entrusted assets incurred by a trustee due to its violation of laws, breach of trust contract, or negligence of duty, etc.
6.Insurance Legal Entity Corporate Governance Evaluation Rule Released and Effective as of December 7, 2015
On December 7, 2015, CIRC released the “Measures for the Evaluation of Corporate Governance of Insurance Legal Entities (for Trial Implementation),” which became effective upon release. The purpose of the rule is to assess and improve the corporate governance of insurance legal entities. The rule applies to insurance companies, insurance holding companies and insurance asset management companies established in China. The rule instructs these insurance entities to conduct an annual self-evaluation in accordance with CIRC guidelines and submit the results to CIRC for verification together with its annual corporate governance report, which is due to CIRC not later than May 15th. CIRC will review the results and derive an overall evaluation that takes into account the insurance entity’s record of compliance with the laws and regulations. CIRC will then assign each insurance entity a rate of “good,” “qualified,” “watched” or “unqualified” and review such ratings on a quarterly basis. Depending on the assigned rating CIRC may implement an escalating set of supervisory measures with respect to the particular insurance entity. For insurance entities rated as “qualified,” CIRC may issue oral or written notices and request them to rectify deficiencies within a prescribed period. For insurance entities rated as “watched,” CIRC may, in addition, conduct on-site inspections, request them to prepare and submit improvement plans and replace under-performing managers. For insurance entities rated as “unqualified,” CIRC may take any supervisory measure CIRC considers necessary, up to and including a company take-over. The rule also stipulates a “yellow-card/red-card” scheme to encourage insurance entities to comply with CIRC instructions. Insurance entities would receive a “yellow card” and be rated as “watched” for failing to rectify in accordance with CIRC instructions in the first instance, and would receive a “red card” and be rated as “unqualified” for sustained weakness.
7.New Internal Audit Rule Released and Effective as of December 7, 2015
On December 7, 2015, CIRC released the “Internal Audit Work Standard of Insurance Entities,” which became effective on the same day. The new internal audit rule supersedes the “Guidelines on Internal Audit of Insurance Companies (for Trial Implementation),” which were released by CIRC in 2007. Compared with the prior rule, the new rule covers not only insurance companies and insurance asset management companies, but also insurance holding companies, reinsurance companies and China branches of international reinsurers. The new internal audit rule revises the nomination procedures for the Chief Audit Officer. Under the prior rule, the Chief Audit Officer was nominated by the General Manager while, under the new rule, the Chief Audit Officer is nominated either by the Chairman of the Board of Directors or the Audit Committee. The qualification requirements for the Chief Audit Officer have also been revised. For example, with respect to financial experience, individuals with financial work experience of eight years or above are now eligible for appointment. Candidates for Chief Audit Officer must also satisfy the qualification requirements for senior managers as stipulated by CIRC. The new internal audit rule additionally specifies the minimum number of special internal audit professionals and their qualifications. Furthermore, the internal audit report submission deadline has been postponed from April 30th to May 15th.
8.Draft Compliance Rule Released
On December 3, 2015, CIRCreleased for public comment the draft “Circular on Improving ComplianceManagement Work” with a public comment period that closed on December 18,2015. If adopted, this rule will supersede the “Circular on theApplication of Insurance Companies Compliance Management Guidelines,” which wasissued by CIRC on April 18, 2008. The draft compliance rule revises thequalification requirements for the Chief Compliance Officer. Proficiencyin Chinese is no longer expressly required, and the experience requirement isrelaxed to include individuals with more than two years of experience as amanager in large and medium-sized enterprises or as an officer in governmentalagencies. Other qualification requirements for the Chief Compliance Officerhave been changed to be consistent with those for other senior managers asstipulated in the “Provisions on the Qualifications of Directors, Supervisorsand Senior Managers of Insurance Companies.” In addition, provincialbranches will be required to establish compliance departments.
9.Number of Non-Mandatory Auto Insurance Liberalization Regions Increased
On October 24, 2015, CIRC issued the “Circular on the Second Batch of Pilot Regions for Reform of Non-Mandatory Auto Insurance Premium Rate Administration,” announcing the expansion of the number of cities and provinces to be included in the pilot program for premium rate liberalization of non-mandatory auto insurance. The pilot CIRC bureau jurisdictions, which were announced in a CIRC circular titled “Work Plan for Deepening the Reform of Non-Mandatory Auto Insurance Premium Rate Management” on March 20, 2015, were originally comprised of Heilongjiang, Shandong, Qingdao, Guangxi, Shanxi and Chongqing. Effective January 1, 2016, Tianjin, Inner Mongolia, Jilin, Anhui, Henan, Hubei, Hunan, Guangdong, Sichuan, Qinghai, Ningxia and Xinjiang were added to the pilot program, tripling the total from six to eighteen of the thirty-six local CIRC bureaus.
10.Health Insurance Tax Deduction Pilot Program Kicked-Off
On November 27, 2015, the Ministry of Finance, the State Administration of Taxation and CIRC jointly issued the “Circular on Trial Implementation of the Individual Income Taxation Policy of Commercial Health Insurance in Selected Regions,” which took effect on January 1, 2016. The circular announces that thirty-one cities, including Beijing, Shanghai, Tianjin, Chongqing, most of the provincial capitals, and certain other cities, will be included in a pilot program in which taxpayers may claim individual income tax deduction against taxable income in an amount equal to the premium they pay for qualified commercial health insurance products, with a cap of RMB 2,400 per year. Preferential commercial health policies should be approved by CIRC and developed in accordance with the CIRC model policy terms, which were issued by CIRC on December 14, 2015 in the “Circular on Guideline Framework and Model Terms of Health Insurance Policies Qualified for Preferential Individual Income Taxation.”
11.New China Insurance Security Fund Co., Ltd. Measures Released and Effective as of December 14, 2015
On December 14, 2015, CIRC issued the “Administrative Measures for the China Insurance Security Fund Co., Ltd.,” which became effective upon release. The new measures supersede the “Interim Administrative Measures for the China Insurance Security Fund Co., Ltd.,” which were released by CIRC on July 7, 2009. The China Insurance Security Fund Co., Ltd. (“CISF”) was established in 2008 to manage and operate the China Insurance Security Fund, whose mission is to compensate consumers when an insurer is liquidated in order to cover shortfalls between the insolvent insurer’s assets and the insolvent insurer’s financial obligations to its customers. The new measures simplify CIRC’s supervision over CISF’s daily operations. For example, CISF is no longer required to obtain prior approval from CIRC in order to dismiss engaged intermediaries (such as accounting firms, asset appraisal firms, and law firms). Instead, CISF needs only to report to CIRC to explain the dismissal decisions. Additionally, the criteria governing investment were also adjusted to provide CISF with greater latitude in determining its investment portfolio.