Exploration

The Analysis on the Draft of New Amendments to the Insurance Law

2015-11-05

 

Beijing Deheng Law Offices   Jia Hui  Dong Chongyang 
                            

On October 14th, 2015, the Legislative Affairs Office of the State Council of the People's Republic of China promulgated the "Decision on Revising the Insurance Law of the People’s Republic of China (Draft for Comment)" (hereinafter referred to as the "Draft for Comment") and the explanation of the Draft for Comment drafted by China Insurance Regulatory Commission ("CIRC"), and sought for comments and suggestions from the public. In the Draft for Comment, 24 articles are added, 1 article is deleted, and 54 articles are modified based on the current Insurance Law of the People's Republic of China (hereinafter referred to as the "Current Insurance Law"); thus there will be 9 Chapters and 208 Articles altogether after the revision. The background of this revision is that the insurance industry inis currently undergoing a period of rapid development during which the potential risks become more complicated and some issues emerge, such as that the cost of violation of law is too low. Therefore, some provisions of the Current Insurance Law are no longer suitable for the development of the insurance industry, and need to be revised and perfected.

 

We find the highlights of the revision are as follows:

 

New Amendments

Contents

Analysis

20 days' cooling off period will be   added.

Article 48 of the Draft for Comment :

A cooling off period provision shall be   included in personal insurance contracts with an insurance period of more   than a year. An insurance applicant shall have the right to rescind an   insurance contract within the cooling off period and the insurer shall refund   all paid insurance premiums without delay.

The cooling off period shall initiate   from the date on which the applicant signs the insurance policy and shall   last no less than 20 days.

 

It highlights the tendency of regulation   on further protection of insurance consumers' rights and interests. The   minimum 20 days of cooling off period gives the insurance applicant an   opportunity to think it over and to consult with experts after the purchase   of the insurance policy, and it is beneficial to the reduction of the   disputes on insurance cancellation and consumer complaints.

Annuity insurance will be added to the   personal insurance business.

Article 96 of the Draft for Comment: annuity   insurance is added to the personal insurance business which already consists   of life insurance, health insurance, accidental injury insurance, etc. The   annuity insurance consists of corporate annuity insurance and occupational   annuity insurance, etc.

 

To conform with the reform on national   endowment insurance system, the goal is to establish and perfect the occupational   annuity insurance system, and to make the commercial insurance a significant   supplement to the endowment insurance system by taking advantage of the   extensive distribution of organizations of life insurance companies.

No more guarantee fund will be required   in the case that the existing guarantee fund reaches the amount of CNY 200   million.

Article 98 of the Draft for Comment: the   guarantee fund equalizing 10% of the total registered capital of the   insurance company shall be deposited into the bank designated by the   insurance regulatory authority of the State Council and can not be employed for   any purpose other than repayment of debt during the liquidation of the   company. In the event the guarantee fund deposited prescribed in the previous   paragraph reaches the amount of CNY 200 million, no more guarantee fund will   be required.

The goal is to moderately mitigate the   capital control and supervision so as to vitalize the capital utilization of   insurance companies. On account of the great capital demand of insurance   companiesit would   exert negative effects on the efficiency of the capital utilization of   insurance companies if the guarantee fund equalizing 20% of registered   capital is required to be deposited. The decrease in the guarantee fund would   help enhance the vitality of the capital utilization of insurance companies.

 

The "four times rule" of property  insurance will be abolished.

The Draft for Comment intends to abolish   the "four times rule" of Article 102 of the Current Insurance Law: the   self-retained insurance premium in the current year of a property insurance   company shall not exceed four times of the amount of its actual capital plus public   reserve funds.

This means it is no longer necessary for   the property insurance company to distribute to re-insurance companies the   part of insurance premium which exceeds four times of the amount of its   actual capital plus public reserve funds. A new supervision system named  "Solvency II" will be employed in the future.

 

 

A new supervision system named “Solvency II”   will be established.

Article 102 of Draft for Comment:

An insurance company shall maintain a   minimum solvency margin commensurate with the degree of risk it is exposed   to. An insurance company shall meet the following solvency requirements:

 

1. its core solvency margin ratio and its   consolidated solvency margin ratio shall meet the standards set by the   insurance regulatory authority under the State Council;

2. the excess of its real capital over   the minimum capital and the excess of its admitted assets over its ranking   liabilities shall not be less than the amount respectively set by the   insurance regulatory authority of  the   State Council;

3. the overall risk rating of the   insurance company shall meet the standard set by the insurance regulatory   authority of the State Council."


Article 103 of the Draft for Comment

"Insurance companies shall, in   accordance with the prescriptions of the insurance regulatory authority of   the State Council, adopt the management system of rating their actual capital   and divide their actual capital into core capital and supplementary capital   based on the loss absorption ability of the capital."

 

Article 104 of the Draft for CommentAn insurance company may issue   equity capital instruments, debt capital instruments, and other capital   instruments approved by the insurance regulatory authority of the State   Council to increase its solvency margin ratio, and the relevant regulation   shall be enacted by the same authority. In the event of public issuance of   capital instruments in the capital market, the Securities Law of the People's   Republic ofand other laws and regulations shall apply. The issuance of subordinated   debts by insurance companies shall be approved by the insurance regulatory   authority of the State Council.

Article 108 of the Draft for CommentInsurance companies shall enhance   the management in respect of the matching of insurance assets and   liabilities, and establish and perfect the comprehensive risk management   system of insurance capital.

 

Solvency II is the abbreviation of the   solvency supervision system. Compared with the first generation of the   solvency supervision system (Solvency ) , Solvency II adds the changes of modern accounting standard to   the risk hypothesis of company itself. It is a relatively comprehensive risk   judgment standard and the model is more complicated and sophisticated. 

  

The Draft for Comment not only   establishes Solvency II as a new supervision system by the prescription of   the Insurance Law, but also adds into the Insurance Law the capital rating   standard, calculating and evaluation standard, supplementation mechanism of   capital, etc. which are the core of Solvency II. Additionally, the   supervision and penalty mechanism for the incapability of insurance   companies’ solvency is also added. 

To increase forms of utilization of   insurance capital

Article 109 of the Draft for Comment

Insurance companies may utilize their   capital only in the following forms

1. Bank deposits;

2.Trade on negotiable securities such as   bonds, stocks, shares of securities investment funds, etc.;

3. Investment on equity shares;

4. Investment on insurance assets   management product;

5. Employment of financial derivatives   for the purpose of risk management;

6. Other forms of utilization of the   insurance capital prescribed by the State Council.

For substantial equity investment, or the   increase of the forms of application of insurance capital, the approval of   the insurance regulatory authority of the State Council is required.

 

The goal is to further increase the forms   of utilization of insurance capital in the form of allowing insurance capital   to invest in equity, insurance assets management products and financial   derivatives for the purpose of risk management. In practice, CIRC has   increased the forms of utilization of insurance capital in departmental rules   and regulations and normative documents. The revision affirms the practice   which has already been carried out at the legislative level and further   clarifies the regulatory guide of encouraging the innovative utilization of   insurance capital.  

To further intensify the supervision of   corporate governance.

Article 153, 154 and 155 of the Draft for   Comment prescribes that CIRC could employ enforcement tools and take actions   on insurance companies which have potential serious risks face insolvency, or  fail to meet corporate governance   requirements.

 

The goal is to supervise the insurance   company’s potential serious risk, solvency and corporate governance, which   might maintain the stability of the insurance market and insurance capital   efficiently.

To strengthen the supervision of   shareholders and actual controllers of   insurance companies.

Article 85 of the Draft for Comment   prescribes that change of any shareholder whose amount of capital   contribution accounts for 5% or more of the total capital of a limited   liability company, or change of any shareholder who holds 5% or more of the   shares of a corporation requires approval of the CIRC.

 

Article 167 prescribes that in the event   a shareholder of an insurance company feigns capital contribution, illegally   withdraws his contributed capital, or conducts other acts harmful to the   interests of the company, the insurance regulatory authority of the State   Council shall order him to make rectifications within a prescribed period. If   the violation is serious, insurance regulatory authority of the State Council   may restrict his shareholder rights and may order him to transfer his shares.


Article 169The CIRC could demand the shareholders and actual controllers of   the insurance company to make explanations on material matters of the   insurance company.

  

Article 171: The CIRC could investigate the   bank account and account information of the shareholders and actual   controllers of the insurance company.

 

Since there are significant numbers of   mergers and acquisition transactions in the insurance market, the goal is to   take more strict supervising measures on insurance company shareholders and   actual controllers by legal means, in order to prevent unqualified investors   to indirectly invest in the insurance company through acquisition of the   insurance company’s existing shares.

To further regulate the business of the   insurance industry

 

Article 124 of the Draft for Comment   prescribes that insurance companies, insurance agents and brokers, and any   other employees shall not: (i) promote or describe an insurance product in a   misleading or factually incorrect way; (ii) fail to perform its obligations   to pay indemnity or insurance benefits within the prescribed time period or   the time period as agreed in the insurance contract. Otherwise, there shall   be administrative penalty; and (iii) disclose, trade, or illegally provide to   any third party any personal information of the policyholder or the insured.

 

The goal is to intensify the supervision   of the insurance industry regarding the phenomena which are heavily   criticized such as “misleading promotion”, “difficulty in settlement of   claims”, “leakage of personal information of policyholder or insured” so as   to highlight the supervision tendency of enhancing the protection of consumer   rights and interests and to lay the legal foundation of protection of   insurance consumers and construction of the system.

To intensify the penalty

Article 176 to 194 of the Draft for   Comment.

Currently, the rapidly developing   insurance market faces more complicated risk factors. The cost of violation   for the entities in the market is low, and the supervisory methods prescribed   by the Current Insurance Law are inadequate. Therefore, it is necessary to   revise the Current Insurance Law and to intensify the penalty for the   violation.
 

Article 176 to 194 of the Draft for   Comment intensifies the penalty which will be 2 to 10 times than that of the   Current Insurance Law generally.  Most   of the forfeit will be raised to more than CNY 100,000. The maximum fine also   will be raised to as high as CNY 1 million to 3 million.

Laws and regulations may be promulgated   thereafter.

Article 107, 110, 119, 123, 137, 174, 202   and 207 of the Draft for Comment.

According to the Draft for Comment, the CIRC   will enact and promulgate regulations on re-insurance, insurance assets   management products, on-line insurance, management of assessors, dispute   mediation system, insurance group companies, mutual insurances, etc.   Meanwhile, the State Council will enact the regulation on Catastrophe Insurance   System with the state financing support.

 

We could find that the revision shows the general idea and thinking of Chinese insurance administration authority. On one hand, it relaxes supervision, promotes innovation, and releases market force; on the other hand, it strengthens the legal enforcement towards illegal act with respect to insurance. Comparing the current Insurance Law with the Draft for Comment, we note that the Draft for Comment relaxes supervision, expands the investment range of insurance fund, adds clauses regarding corporate governance and risk control, enacts laws regarding “Solvency II” and increases punitive damages regarding illegal acts, etc. It is foreseeable that the revision of the current Insurance Law will promote the sustainable development of Chinese insurance market.

 

 

About the Author:

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Mr. Jia Hui, a partner lawyer of DeHeng Law Offices, with his main practice area on insurance and M&A, has a great deal of experiences on insurance area, among which including: providing legal consultancy services to a Zurich Insurance company on a director-liability insurance dispute with a Sino-foreign contractual enterprise, providing legal consultancy services to Taikoo for its third-party liability insurance claims and disputes with Chubb Insurance Company of the USA, providing legal consultancy services to China Life Reinsurance Company for its reinsurance contracts, providing legal opinions on Union Life Insurance’s major disease insurance claims and disputesdrafting an insurance manual for a foreign company to guide its treatment of insurance disputes in China, and providing legal consultancy services to a Chinese insurance company for its compliance management. Mr. Jia has lawyer licenses of both the New York State of theand of.

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